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Baroness Noakes: My Lords, I thank my noble friend Lady Blatch for her support and the Minister for his reply. The difference between the Government and ourselves is straightforward. The noble and learned Lord sees whether the individuals are living together and in a caring relationship as the critical criteria. We say that proximity in the context of extended family relations is the critical event in triggering the relationship.

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As to the non-family relationships in Clause 30(4), the Minister referred to a continuing relationship after an au pair had left his or her employment. If the relationship with the young person who was capable of being abused had built up during that time, which is what grooming is all about, it would fall outside the clause. That concerns us.

We agree with the noble and learned Lord on the need for a measured and balanced approach but we see that occurring in slightly different places. I shall consider further the Minister's response and beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 102 and 103 not moved.]

Lord Falconer of Thoroton moved Amendments Nos. 103A and 103B:


    Page 15, line 29, after "cousins," insert—


"( ) one of them is or has been the other's stepbrother or stepsister,"
Page 15, line 30, after first "parent" insert "or present or former foster parent"

On Question, amendments agreed to.

[Amendments Nos. 104 and 105 not moved.]

Lord Falconer of Thoroton moved Amendment No. 105A:


    Page 16, line 3, at end insert—


"( ) "stepbrother" and "stepsister" include the child of a parent's partner"

On Question, amendment agreed to.

Economic and Monetary Union

4.2 p.m.

Lord McIntosh of Haringey: My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

    "With permission Mr Speaker, for many decades governments formed from both sides of this House have made the case for Britain's engagement in the European Union. And it is right that at every point we show that every decision we make on Europe is made in Britain's national economic interest.

    "So today I will, first, set out the economic context for the euro decision; secondly, the case in principle, in the national economic interest, for membership of the euro; thirdly, the detailed conclusions of our assessment; and finally, the policy changes that our country must now make.

    "Let me start with the economic context. Since 1997 every economic decision of this Government has been designed to build and then entrench stability in order to achieve for Britain high and sustainable levels of employment and growth.

    "The commitment to put stability first led us to adopt a new fiscal and monetary regime, to make the Bank of England independent, to cut debt

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    substantially; it has given us low inflation, low interest rates and low unemployment; and it is this commitment to long-term stability, growth and employment that is the foundation of our decisions today.

    "Central to the pursuit of stability, growth and employment by governments of both parties has been our membership of the European Union. Our assessment shows that Britain's trade with the European Union has grown from just over 40 per cent of our total trade in 1973, when we joined, to 55 per cent today. And membership of the European Union is central to stability, growth and employment for another reason.

    "Just as Britain benefits from being part of Europe, so too Britain stands to benefit from an enlarged Europe that is more integrated into the global economy—with globalisation increasingly moving Europe away from an exclusive trade bloc to a Europe that has to look outwards, not least to the United States of America—a Europe which, to meet global competition, has to liberalise and reform.

    "So, in addition to our decisions on the euro, we today make proposals that, by reducing tariffs and regulatory and competition barriers to EU-US trade will fulfil our objective of a fully effective transatlantic economic partnership between Europe and the USA. And following the joint declaration by all EU Finance Ministers placing, for the first time, labour market flexibility and structural economic reform at the heart of the new European economic policy guidelines, the Government will later this week publish our further proposals for economic reform in Europe.

    "I have no doubt that an enlarged Europe pursuing—like Britain—economic reform, and—like Britain—modernising monetary and fiscal policies, will be conducive to British stability, growth and employment; and around this, I believe that a modern pro-European consensus in Britain can be built.

    "It is in this context—with stability the foundation, with membership of the European Union central to our economy—that we must decide whether joining the euro now is in the national economic interest. It is a decision of far-reaching consequence indeed and—because it is irreversible—one of the most momentous economic decisions our country has to take, and one that must contribute to the attainment of stability, growth and employment.

    "When in 1997 I set out the Government's position on the euro, I listed the potential benefits for Britain of a successful single currency in transparency of costs, currency stability, trade and long-term interest rates. The detailed work set out in the background papers published today allows us to set out those benefits with even greater precision.

    "The first benefit is lower transaction costs for business and consumers. We estimate these as worth around 0.1 to 0.2 per cent of GDP—1 billion a year. The gain is greater for smaller companies and

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    the gain is permanent. The second is diminished exchange rate volatility, with gains for both large and small companies, especially in the manufacturing sector, with again potentially the greatest gains for smaller companies.

    "The third benefit is greater cross-border trade and thus the potential for increased commerce and growth. Our assessment makes clear that, with the advent of the single currency, trade within the euro area has already expanded and that, with Britain in the euro, British trade with the euro area could increase substantially—perhaps to the extent of 50 per cent over 30 years.

    "Next, interest rates. For 30 or 40 years continental Europe has been able to combine stability with consistently lower interest rates than in Britain, to the benefit of business and of course home owners. Indeed, over the past 30 years interest rates in Britain have had to be, on average, 3 per cent higher than in Germany. With Britain in the euro, business could benefit through greater access to a more integrated European capital market. And if, on the basis of sustained and durable convergence, we could lock in stability for the long term, then business could see a cut in the cost of borrowing on a sustainable basis, with a long-term boost to cross- border investment flows and foreign direct investment in the UK.

    "So I can today confirm the principled case. Our view that membership in a successful single currency would be of benefit to the British people as well as to Europe is strengthened by the results of our assessment.

    "While we argue the case in principle for joining, there are those who rule out joining the euro for ever as a matter of dogma—even if it were shown to be in the best economic interests of the country. That cannot be right for the future of Britain. The Government's view is that if the economic case is clear and unambiguous, then the constitutional issue, while a factor in the decision, should not be a barrier to entry.

    "My conclusion is that if, on the basis of the five economic tests, membership of the euro is shown as good for sustaining British jobs, business and future prosperity, then it is economically right and in the national interest to join. Indeed, our assessment on trade and output is that inside the euro, UK national income could rise over a 30-year period by between 5 and 9 per cent—boosting, subject to convergence, potential output and national wealth by up to one quarter percentage point a year, worth up to 3 billion a year, delivering higher living standards and lower prices for consumers and households.

    "Just as there are risks of joining before a clear and unambiguous case has been demonstrated, so too there are risks in delaying the potential benefits once sustainable and durable convergence has been achieved. So from the assessment that we have done, I have no doubt, first, about the potential benefits to Britain and the British people of joining; secondly,

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    the potential risks of delaying the benefits of joining; and thirdly, the advantages inside the euro area of greater influence over policy towards the euro and thus Europe.

    "Provided that the crucial tests are met concerning the British economy, it is our intention to join. If, on the basis of the five tests, we can make a clear and unambiguous case, then this Government's view is that it is in the national interest to recommend to the British people to vote yes in a referendum to join the single currency. In short, if the economics are right for Britain, we should join.

    "So let me turn to the conditions that have to be met if we are to secure the potential benefits of the euro. We must be sure that there is cyclical and structural convergence between Britain and the euro area, and the flexibility to withstand stresses and strains. Indeed, the more flexibility in the economy the easier it is to tackle problems that arise from the divergence of business cycles.

    "Sustainable convergence means the British economy can live on a permanent basis with euro area interest rates, able to advance our objectives of high and stable levels of growth and employment and sustained and stable funding of our schools, hospitals and other public services. The flexibility required is—as I said in 1997—sufficient flexibility, sufficient to be able to adjust our economy quickly to any shocks that arise so that we do not put at risk these objectives.

    "So it is my duty to demonstrate in detail, whether we have secured for Britain: convergence; that is, compatibility with our European partners that is sustainable—the first test; sufficient flexibility—the second test; and can affirm conclusively and confidently to the British people that the potential benefits for investment, financial services and employment, growth and trade—the other three tests—can indeed be realised.

    "The five tests are our stability guarantee: to meet them would ensure that we will not put at risk our economy or our public services. With the tests met, Britain in the euro can enjoy the benefits I have outlined—greater trade, investment and employment. If we entered with the tests not met at the wrong exchange rate then—just as with the ERM in 1992—we could see unemployment rise, public service investment fall and growth stall. The discipline of the five tests is to ensure there will be no repeat of the experience of the ERM when Britain joined at the wrong rate and at the wrong time without either convergence or flexibility and the potential benefits could not be realised.

    "In our 1997 assessment we took the view that a period of stability was required to ensure that business cycles and structures converged sustainably and durably. We concluded that UK interest rates were higher than in the euro area and remained higher because of structural differences, particularly in the housing market. The new assessment we publish today also shows that, because of a lack of convergence with

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    the euro area, joining in 1999—as some in this House advocated—would not have secured the stability inside the single currency that we have enjoyed outside it.

    "Cutting interest rates substantially to join the euro below the level that would have been right for Britain in the short-term, and joining at an exchange rate that was too high for the long-term, could have locked us into another cycle of stop-go economics. But I can tell the House that the consistent polices we have pursued since 1997—an independent central bank; new fiscal rules; lower debt; housing market reform; and greater flexibility in labour, capital and product markets, including an independent Competition Commission—have contributed to meeting quite comfortably the Maastricht criteria for nominal convergence—in a better position than some current members were in 1997 and even are now—but are also leading towards the sustainable convergence and greater flexibility required by the five tests.

    "We can report that since 1997 there has been significant progress in achieving cyclical convergence. The short-term interest rate divergence between Britain and the euro area has fallen from 4 percentage points to 1.75 percentage points. Long-term interest rates have virtually converged today at around 4 per cent. Over the past six years there has been a weaker euro and a stronger pound. And the inflation rate has been on average 1.1 per cent below the euro zone average for the past three years. Over recent months the euro exchange rate has strengthened against sterling and the dollar and we are today publishing an independent study examining the sustainable level for sterling reflecting economic fundamentals.

    "The issue at the present time is, however, being sure that there is structural convergence that is sustainable for the long-term; and we also have to be sure that, if real interest rates or business cycles do diverge, Britain will have the necessary flexibility to sustain stability, growth and employment. We do not know whether or how shocks will occur but there are risks for the UK. Let me give the House two specific examples—one from housing, one of inflation generally—of how in the new circumstances we would need to respond.

    "Take the challenge of an inflation rise particular to Britain from, say, the housing market. For a 1 per cent rise in British inflation, the British interest rate would, other things being equal, tend to rise by 1.5 per cent. The real interest rate; that is, the interest rate after taking account of inflation, would therefore rise by 0.5 per cent as we brought inflation under control and back to its target. Inside EMU, Britain's economy would be one fifth of the euro area economy.

    "A 1 per cent inflation rise specific to the UK which would, today, lead to a British interest rate rise of around 1.5 per cent would lead to a euro-area interest rate rise of about a third of a per cent—a real interest rate fall for the UK of around two-thirds of

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    a per cent. As a result, real interest rates for Britain which ought to increase could actually decline. And it is for this reason that, inside the euro, governments need other forms of flexibility. And, if inside the euro Britain's inflation rose faster than that of the euro area, Britain would suffer a loss of competitiveness. So to restore lost competitiveness a period of higher inflation than the euro area would have to be followed by a period of inflation lower than the rest of the euro area.

    "These two examples show why it is important to learn the lessons not just from the experience of the euro area but also from how the states and regions adjust flexibly in the United States monetary union. In other words we must be sure of sustainable convergence and that if business cycles do diverge or shocks arise Britain has the price and wage flexibility—and fiscal flexibility—to ensure stability. Our assessment finds that obstacles to convergence do not lie in the provision of small business finance or large company finance where in fact overall, on business finance, the UK economy is found to be not more interest rate sensitive than others.

    "The issue in housing, where we are more interest rate sensitive, is not the attainment of identical market structures with other countries—all countries have unique features of their market—but the fact that to deliver stability in Britain the combination of house price inflation and volatility, and the impact of both on consumption, has generally led to interest rates higher than in other countries.

    "Indeed most stop-go problems that Britain has suffered in the past 50 years have been led or influenced by the housing market. The volatility of the housing market and the potential for higher inflation is a problem for stability that we are determined to do more to address to produce greater stability and reduce the risks of inflation irrespective of the decision on the euro.

    "Because Britain has experienced difficulty in balancing housing supply and demand, we propose to build upon and extend the reforms already announced by the Deputy Prime Minister in respect of planning and supply including simpler planning guidance, speeding up decisions, reserve powers to call in applications and the case for binding local plans. Having asked Kate Barker to conduct a review of issues underlying the lack of supply and responsiveness of housing in the UK, we will bring forward further proposals in the pre-Budget report and Budget on how we can produce greater stability in our housing market.

    "And because Britain has had a different system of housing finance—just 7 per cent of mortgages in the UK are at long-term fixed rates—we are learning the lessons from other countries; for example, in America they securitise long-term fixed rate mortgages. An independent review is now examining the structure of mortgage finance including the case for, and how we can help the development of, the long-term fixed rate mortgage

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    market in the UK. So further housing market reforms will be put in place over the coming year; reforms right in any event for the British economy; reforms that will help ensure that, by having a reduced propensity to house price inflation, stability can be further entrenched.

    "It is right to consider a further change that is right in itself and will foster convergence—a new target for domestic inflation. The advantage of the current indicator of inflation—RPI"—is that it is known; well understood; and has served us well. The advantage, however, of the internationally recognised index of consumer prices—HICP—is that it is a better measure, will improve the quality of our target, is in line with best international practice and is used by every other G7 nation but Japan, and by our neighbours in Europe.

    "I turn from issues of convergence to issues of flexibility. To strike the right balance between fairness and flexibility in pursuit of full employment, we have introduced a minimum wage and a new tax credit system which guarantees a national minimum income for single persons and couples over 25 and families. So no-one need fear that when they move jobs or move areas, they will lose national income guarantees.

    "With this national framework for fairness in place, it makes sense to recognise that a more considered approach to local and regional conditions in pay offers the best route to full employment. In addition, in the south east, where professionals have benefited from London weighting and other arrangements, many lower-paid workers have missed out. So in future we plan to publish data on regional prices and inflation. Remits for pay review bodies and for the public sector including the Civil Service will, within their nationally determined frameworks, include a stronger local and regional dimension; and the reform of housing benefit will remove disincentives to work or to move. These measures, which will be put in place over the coming year, can make Britain, with already the lowest unemployment of the main industrialised countries and 1.5 million more jobs than 1997, the most employment friendly country in the world.

    "The other form of flexibility is fiscal flexibility. And because of our history of stop-go, prudence dictates a cautious approach.

    "Some countries have proposed new domestic procedures for faster and more effective adjustment of their fiscal policies in the euro area. In the principles we have applied to British monetary policy, to ensure stability and flexibility we have insisted on clear symmetrical rules, well-understood procedures and enhanced transparency.

    "Central to this is the open letter system—a means of dealing with potential pressures. To promote stability and flexibility in future, the same principles should be applied to any new arrangements for British fiscal policy inside EMU.

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    So to ensure stability inside the euro area we will consult on the case for an open letter system on fiscal policy and a new and additional fiscal rule. We propose a regular fiscal stability report, published on a pre-announced timetable to Parliament, ensuring that fiscal decisions are fully transparent and accountable and made by Parliament; an assessment in it of the gap between actual and trend output in the economy; and when actual output materially diverged from its trend, an open letter sent by the Treasury to Parliament setting out the Government's response. In this way, in EMU, the principles underpinning our monetary policy regime, which has been successful in delivering stability, would be mirrored in a similar fiscal policy regime.

    "So let me give the conclusions on each of the five tests, the full details of which—the benefits and the challenges—are set out in the Treasury's assessment and the 18 accompanying documents, which cover in an open and full way all aspects of economic policy and all of which are now available for open public debate.

    "On convergence, on long-term interest rates we have made significant progress in lowering inflation expectations and establishing a platform of stability. There are grounds too for optimism about increasing compatibility of business cycles and market structures. Today interest rates which were 4 per cent above those of the euro area are now 1.75 per cent higher. Structural differences remain that could pose a risk to stability unless addressed, which they are by the proposals I will put forward today.

    "On flexibility, the assessment shows that considerable progress has been made to reform markets in the UK and euro area. Flexibility—right in itself for every economy—has improved in the British and European economies. And the more flexibility in the economy the easier it is to deal with problems when cycles diverge and the better it is for our competitiveness. Yet, as the persistence of volatility in inflation rates within the euro area demonstrates, we cannot be certain that there is as yet sufficient flexibility to deal with the possible stresses. It is for these reasons that we are making structural reforms that will bring increased flexibility.

    "On investment, the assessment shows that inside the euro there will be new opportunities for investment, in particular foreign direct investment. And at all times, by continuing to maintain macroeconomic stability and encouraging flexibility, the Government will continue to ensure that the UK retains our position as a magnet for foreign direct investment. We have taken particular account of the views, the qualitative evidence, from Japanese, other Asian, American and European investors, many of whom have said membership would be beneficial and is important to them. There can be confidence that, on the basis of sustainable and durable convergence, a

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    successfully operating EMU and UK membership of it on the right terms would boost investment and FDI over the longer term.

    "On financial services, the assessment shows that in or out of the euro UK financial services, wholesale and retail, are and will remain competitive. Future integration of financial markets inside the euro could promote the kind of diversity, flexibility and risk diversification seen in the capital markets of the USA, making it easier for a more flexible Britain to win business throughout the euro area.

    "On employment, stability and growth—the fifth test—the potential benefits in increased trade and competition and then higher long-term levels of output and employment are significant. Without sustainable convergence and sufficient flexibility, we would not realise the potential benefits for stability, jobs and investment.

    "It is because we will never put stability at risk that the tests we set were and are indeed high ones; namely, to show a clear and unambiguous case for British membership. So we conclude the financial services test is met. We still have to meet the two tests of sustainable convergence and flexibility. Subject to the achievement of sustainable convergence and sufficient flexibility, the tests for investment and employment would be met.

    "So I am today announcing major reforms right for the British economy, reforms which will be implemented over the next year and will greatly assist the process of achieving sustainable and durable convergence and the flexibility necessary for Britain to succeed sustainably within the euro zone and realise its potential for trade and investment.

    "Under Bank of England legislation it is my duty to set the inflation target. I have written to the Governor of the Bank of England today stating that subject to confirmation at the time of the pre-Budget report I intend to change the inflation target at that time. The inflation target for Britain will be set on the consumer prices definition. I can confirm that pensions and benefits and index-linked gilts will be calculated on exactly the same basis as now. We have said throughout that we do not believe it necessary or right to rejoin the ERM.

    "I am asking by the time of the pre-Budget report for interim reports on the step changes we need in the planning and supply of housing and on the market for long-term fixed rate mortgages. I am today publishing for consultation our proposals for a new system within EMU of fiscal reporting to Parliament. As part of radical reforms at a national, regional and local level, I propose that by next year almost all pay remits for public sector bodies will include a regional or local pay dimension. And we will publish six-monthly reports on trends and progress in flexibility in labour, product and capital markets.

    "At this particularly uncertain time for the world economy—with adjustments only recently in the exchange rate—and when we do not know the

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    future path of growth and inflation rates in Britain and Europe, it is right prior to the point of transition, and in the light of progress, to consider both the exchange rate and the balance of monetary and fiscal policy.

    "We will also continue to pursue our objective of a stability and growth pact that takes into account the economic cycle, debt sustainability and public investment, and seek reform of the European Central Bank. It is also important that we resolve the uncertainties over the European convention and we will continue to pursue our objective of tax competition and reject tax harmonisation in Europe. We will report back on progress in all these areas of reform in the Budget next year.

    "It is this resolve to implement far reaching reforms in our economy that is the practical and best expression of our intent. It is a reform agenda—right for Britain's economic interest and right to help meet the five tests; a reform agenda on which I believe there is a realistic prospect of making significant progress over the next year.

    "The Government believe that the implementation of these reforms, right in themselves, would help towards sustainable and durable convergence and flexibility so that we can, within the euro area, achieve high and stable levels of growth and employment and deliver our objectives for public services.

    "We will report on progress in the Budget next year. We can then consider the extent of progress and determine whether on the basis of it we make a further Treasury assessment of the five tests which, if positive next year, would allow us at that time to put the issue before the British people in a referendum.

    "I can announce the publication of the draft Referendum Bill this autumn; the introduction of further paving legislation for additional departmental allocations for preparations; the publication today of the full and complete version of the British national changeover plan setting out the possible timetable for a changeover, the management of it, the impact on consumers, business, financial services, the voluntary sector and the public sector.

    "I propose Scottish, Welsh and Northern Irish preparation committees that will examine local, regional and sectoral preparations. I am also asking representatives from consumer organisations, local authorities, the voluntary sector and the regional development agencies to join the Standing Committee on Euro Preparations.

    "I will publish a detailed report on euro preparations within government, the public sector and across the economy this autumn. I will shortly be issuing guidance to local authorities on preparations, and from the publication of the changeover plan will come a period of information and discussion in each region and nation of the country, including in each constituency.

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    "So in this Statement we strengthen our commitment to and support for the principle of joining the euro, showing that the gains to the country and to our businesses are greater than anticipated. We have shown how financial services would benefit from membership of the euro. We have shown how, with sustainable convergence and flexibility, investment can benefit from membership of the euro. We have shown how, with convergence and flexibility, employment can benefit from membership of the euro. We have shown the critical importance of achieving sustainable and durable convergence and I have announced major reforms to be implemented immediately and over the next year.

    "At all times we have and will put stability and the national economic interest first.

    "We have set out the real benefits to Britain of membership of the single currency; shown that with the achievement of sustainable convergence and flexibility all five tests could and can be met; and laid down the concrete and practical steps which we will follow; radical steps which set out a new direction for reform; steps which set out the clear path ahead for Britain.

    "And with a programme of European economic reform benefiting Britain, I believe a modern long-term and deep seated pro-European consensus in Britain about Britain's role in Europe and Europe's role in the world can and will be built. I commend the Statement to the House".

    My Lords, that concludes the Statement.

4.21 p.m.

Lord Saatchi: My Lords, I thank the Minister and the usual channels for arranging for our House to hear this historic Statement promptly. Having looked through the documents this morning, I would like to begin by paying my respects to Gus O'Donnell and his foot soldiers at the Treasury, for a work of outstanding scholarship for which they deserve great respect. It is a pity that the same cannot be said for their generals.

As noble Lords have just heard, today the Government ran away from a referendum on joining the euro. We should ask ourselves how they got into this demeaning position. They convinced themselves—and thought that they could convince us—of two flawed propositions, both of which have unravelled today.

First, they said that the economic questions could be settled by their five tests. They tried to imbue their tests with the aura of scientific objectivity, but the public, being shrewd, reject that. That is why people are resolutely unmoved by the outcome of these tests. Only 2.4 per cent of them believe that today's decision about the euro is based on the tests. Seventy-eight per cent say that the tests are,


    "A smokescreen for a political decision".

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People have worked out that these tests were not devised in a laboratory by men in white coats with microscopes. So even after 2,000 pages of heroic Treasury effort, there are profound economic questions that remain.

Let us consider the governing framework of the euro, the stability and growth pact. The Economist described this pact as,


    "The single best argument against joining the euro".

The European Central Bank says that our state-funded health care system is incompatible with this pact. Is this why Bill Morris of the transport union says that it is,


    "Hello euro, goodbye NHS"?

Perhaps this loss of control may not matter, we would still have control of our tax policy except for Europe's new constitution. As even Mr Hain, the Minister for Europe, now agrees:


    "The articles put forward could remove rights of member states to determine their own tax system".

Loss of control of monetary policy, loss of control of fiscal policy, is that what people want? Many other questions remain and perhaps the Minister could address some of them in his response.

Why has the euro not helped euro-zone GDP growth, which is lower than ours since the euro was introduced? Why is unemployment in France and Germany double ours? Why is Germany in official recession? Why is France in breach of its borrowing limits? What of investment? President Chirac lamented,


    "The decline over several years of the ability of France to attract foreign capital".

Why, when the euro-zone was supposed to attract capital? Why have 600,000 public sector workers taken to the streets of Paris to protest at the reduction in their state pension? Is that what the Government are running away from?

Consider what the Chancellor described as the most critical of the five tests: convergence. Does not the Government's own assessment of UK business cycles published today, conclude in paragraph 9.2 that we are more converged with the US than with Europe? Does not Mervyn King, the next governor of the Bank of England, say that the delay needed for a scientific answer to this could be 200 or 300 years?

The tests were given a great task, but they proved unequal to the performance of it. They had an inauspicious birth, in the back of a taxi in Washington, and today an ignominious death. Not many will mourn their passing. The post mortem will show that the cause of death was an excessive burden placed on their backs. They tried to take the weight of "science" on their shoulders and collapsed under the strain.

They could not deliver a clear and unambiguous answer for joining the euro this year, and they never will—so ending for ever the proposition, if anyone ever believed it, that the Government's five economic tests were as robust as the tests of physics.

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The five tests having failed: what will we have now? Incredibly, according to the Statement that we have just heard, more tests. There is going to be a review of the mortgage market; reports on regional pay; consideration of a new inflation index; consultation about the wording of a Bill. There is even to be a report on the planning application process.

Perhaps I may turn to the Government's second flawed proposition—that our role in Europe is just about economics. The French and German governments now make it crystal clear—and one must acknowledge their honesty and consistency—that their aim is to create a big country called Europe to rival a big country called America. That is what Valery Giscard D'Estaing means when he describes his dream for Europe:


    "It will be respected and listened to as a political power that will speak as an equal with the largest powers on the planet".

Consider Jean-Claude Trichet, the governor of the Bank of France. He spelled it out years ago for all to hear when he said,


    "Monetary union is the essential precondition for political union".

Romani Prodi, the President of the EU, says it now. He wants,


    "A single government for all countries who share the money".

Our own Chris Patten confirms that. He said this week,


    "The EU is a fundamentally political project, partly accomplished through economic means".

Only our Government, either through naivety or deceit, makes the doomed attempt to say that our future in Europe is just about money. But the public have worked out, as poll after poll demonstrates, that these are not just matters of economics and, even if they were, the Government's tests are not reliable because they are not scientific.

In the face of that double defeat for their European policy, the Cabinet have staged their humiliating retreat today. The order went out from the Prime Minister, sauve qui peut, so they ran for the hills without a single shot being fired. Their decision: no referendum on the euro; their reason: fear of public opinion.

Today, when the Chancellor delivered his euro Statement in another place, it was he who read the words, but they were dictated by fear. The Government are running away from the people. But that is a race you can never win.

4.28 p.m

Lord Newby: My Lords, it is almost six years since the Chancellor first enunciated the famous five tests, since when there has been almost a Trappist silence from the Government about the issues raised by the tests and a complete failure to discuss the merits and demerits of euro membership.

Now, on virtually the last possible day within the Government's own deadline, like wanderers in the desert come upon a verdant oasis, we now have a surfeit of information, as indigestible as it is impressive.

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The process followed by the Government has been highly unsatisfactory. There is absolutely no reason why all today's background material could not have been made available to the public when it went to Ministers. There is no reason why individual studies could not have been published when they were completed. There is absolutely no excuse for the fact that many of the issues being raised as significant virtually for the first time now by the Chancellor, could not have been examined and debated several years ago.

I take two examples from the great pile of documents which, of course, I have read in full already. As regards the United States as a monetary union, that could be a chapter in a textbook. When were the submissions from leading academics on EMU received and what is there which is particularly interesting or sensitive about them which means that that document, along with everything else in my box, could not have been published at the time it was completed? These documents have not all been written within the past month or two; some have been sitting in the Treasury for months. Frankly, it is an abuse of the public process to dump them on us this morning and expect us to have made any sense of them by this afternoon.

Further, in my view it is an abuse of process that the Statement is available to Opposition Front Bench spokesmen only in part and only very much at the last minute. This is another facet of the Chancellor's character which we have come to know and to regret. Can the Minister tell us when we will have a chance substantively to debate these matters in the House once we have had time to read the documentation?

Our view is that the tests have effectively been met and that the sixth, unspoken, key test—namely, the exchange rate—is now at a level which will certainly not preclude locking our currency into the euro-zone and joining it.

We also know—some of these issues, but not all, are reflected in the Chancellor's documentation—that our failure to join the euro-zone has already led to less inward investment, to significant transaction and other costs to UK business, to higher consumer prices than in the euro-zone, to higher mortgages, and to a loss of political influence in Europe, not least because our finance Minister is excluded from meetings of the euro-zone.

The key question out of all of this, however, is: does today's announcement really represent a decision by the Government to move actively towards euro membership? Or are we to drift along, as we have in recent years, waiting to see how far the convergence and other criteria are met? How far do the various commitments made by the Chancellor in today's Statement differ from his Statement in 1997 when he said, "The time for indecision is over; the period for practical preparation has begun", and then stopped doing anything about the issue?

There are a number of questions which I hope the Minister may be able to help us with. What is the timetable, not just for publishing the draft Bill on

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the euro referendum, but for getting it on to the statute book? Why would anyone believe that the publication of today's national changeover plan should require them to spend a very significant amount of money preparing for euro membership? The banks in particular are faced with huge costs if they are to make their systems compatible with euro membership. Having had a very quick, cursory look at the national changeover plan, there is nothing in it that would give me the assurance, as a senior bank executive, to start taking the action needed.

On the question of moving to the harmonised index of consumer prices, I am fascinated to hear that the Chancellor believes that it is a better measure than RPI". It raises the question why we have not done anything about it up to now. Can the Minister tell us whether changing the basis for measuring inflation, as opposed to changing the target, would require an amendment to the Bank of England Act and, if so, what the timetable for that will be?

On convergence and volatility in inflation rates, presumably the Chancellor has in mind countries such as Ireland, which saw a big increase in inflation when they joined the euro and have subsequently seen that level of inflation fall. Can the Minister tell us how the Chancellor would propose to influence decisions by Ireland and other euro-zone members to bring about the lack of volatility in inflation that he believes so desirable?

Similarly, the Statement refers to changes in the way the ECB operates. Given that we are not in the euro-zone, how in practice does the Chancellor intend to persuade the ECB to change its procedures?

What is new about boom and bust in the UK housing market which is at all relevant to the euro? We have seen cycles of boom and bust in this country for many decades. What will the Chancellor be able to do in practice over the next 12 months—the time which he has set himself—effectively to persuade anyone that boom and bust in housing in this country is a thing of the past?

When the Chancellor says that he wishes to campaign to unite Britain around a pro-Europe consensus—a sentiment with which I completely agree—one wonders what he has been doing over the last six years. He has done absolutely nothing to persuade Britain and the electorate to unite around a pro-Europe consensus. Indeed, if he believes that a pro-Europe consensus is a possibility, he clearly has never listened to a debate in your Lordship's House, even if he believes he can coerce his own Members.

Finally, when will the five tests be reassessed? The Statement holds out the possibility but, frankly, there is still considerable scope for confusion. If I were a captain of industry—an unlikely possibility—I would not feel that today's Statement had given me any certainty at all in terms of my own planning.

The publication of the Government's euro assessment is long overdue. What it means for Britain's relationship with the EU and for the timing of any decision on euro membership remains opaque.

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The Chancellor has used relatively warm words about the potential benefit of eventual euro membership. If he and the Government really do plan to campaign for a positive engagement in the EU and for active measures to bring about euro membership, he will have full support from these Benches. Given his track record and today's announcement, however, we remain to be convinced.

4.35 p.m.

Lord McIntosh of Haringey: My Lords, I am grateful to both noble Lords for the serious way in which they have approached this important statement. I am accustomed to the "lucky dip" quotations of the noble Lord, Lord Saatchi. I notice the way that he wanders not only around Europe and the world in search of quotes, but also wanders around in time. I would like to plot them on a time-versus-distance chart to see whether any correlation exists between them. The noble Lords, Lord Saatchi and Lord Newby, having read the 18 documents, are familiar with the concept in which I am indulging.

The noble Lord, Lord Saatchi, started by saying that there were two flawed propositions behind the Government's approach: the first that economic issues were resolved by the five tests; the second, although it came much later and was difficult to put in its context, that the decisions about our role in Europe were matters for economics rather than for politics. I sympathise with him, having had the weekend to read these documents. I think that when he has had the time to read them in more detail he will appreciate that the five economic tests have indeed been at the core of the Government's thinking on economic and monetary union and have suffused the way in which we have approached the matter and the conclusions we have drawn.

If the noble Lord reads the Statement again afterwards, I think that he will see that it does—as does the assessment volume—involve the most serious bringing together of economic thinking on these matters ever, so far as I know. I am not aware that any other country has adopted the same rigorous procedures. He will see that, in particular, the issues of convergence and of flexibility have been critical to our thinking. They have been critical not only to our assessment of the position as of June 2003, but our assessment of what we now have to do about it. What is missing from the comments that have been made is an understanding of the extent to which this Statement marks a sea change.

I remind the House of what the Chancellor said in the Statement. He said that in the Budget there will be a decision whether to make a further Treasury assessment of the five tests which, if positive next year, would allow us at that time to put the issue before the British people in a referendum. We have not said that before. It is very significant. We have not defined convergence as clearly as we have now. I understand the difficulty that people experience in accepting that economists can express a view which is clear and unambiguous, but when Mervyn King is quoted as saying that convergence will take 300 years to

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determine, what he is talking about is theoretical complete convergence, whereas what we are talking about in relation to convergence is compatibility between business cycles and economic structures. Convergence does not mean that all economies are the same; it means that the direction in which they are moving is compatible. I refer to what the noble Lord, Lord Saatchi, said about the claimed weakness of the economies of the euro-zone. It is desirable—the assessment shows this—when moving towards membership of the euro to do so from a position of strength.

That brings me to what the noble Lord, Lord Newby, said. He implied—although he did not express it as clearly as he sometimes has in the past—that we ought to have joined in 1999. There is perhaps greater recognition now that although there would have been some advantages in joining earlier, in particular in terms of the influence we would have exercised over decision-making in the euro-zone, the loss of stability involved—stability has been the huge achievement of the Chancellor over the past six years—meant that it was not worthwhile doing so. My concluding remark to the noble Lord, Lord Saatchi, is that the Chancellor has put stability first throughout the period we are discussing. He did so in 1997 in his Statement on the euro and in the way he has conducted the economic policy of this country in the intervening period. That has been a huge success.

The noble Lord, Lord Newby, asked why we did not publish the reports as they became available. I do not know when they became available. However, in reading as much I could within a concentrated time frame I wrote down the points with which I agreed and the points with which I disagreed within a matter of hours. If I had done that over a period of months I believe that my opinions would have veered to and fro. I would have wanted to ask at that time—but could not have done so—what the Treasury thought about the different views expressed in the EMU studies. It is right to publish the EMU studies together with the Treasury assessment not just for market reasons but also for intellectual reasons. As the noble Lord, Lord Newby, knows, debate in the House is not a matter for me but for the usual channels.

I have said I acknowledge that the fact that we did not join at the beginning has already resulted in losses for us. Of course that is the case. There are figures illustrating the loss of foreign direct investment. There are no figures for the loss of influence involved but it is self-evident. However, that does not mean that it is not right for us now to be making what I believe is a step change in policy on the matter. We are no longer saying that we shall see what the five tests produce; we are saying that the Government are going all out to see to it that the five tests are met. We are also saying—the Statement indicates this very clearly—that the Statement and the Government's policy strengthen the Government's commitment to, and support for, the principle of joining the euro. That is where we stand.

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4.44 p.m.

Lord Clinton-Davis: My Lords, does my noble friend agree that what has been said on behalf of the Conservative Opposition today indicates not only their prescription that we should never join the euro but also that we should not be part of the European Union at all? Does my noble friend agree that that is a prescription for utter defeat? Does he also agree that there is a difficulty in retaining and deploying our influence in the EU against what has been said? Will the Chancellor of the Exchequer take specific steps to ensure that members of the EU, and potential members of the EU, understand our position and test that as it is only through cross-examination that they will understand what our case is?


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