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The Maastricht treaty set out the convergence criteria for entry into the eurozone. I cannot say that my party is proud of the treaty overall, but we are certainly proud of the opt-out from the economic and monetary union that we insisted on. Without that, our economy would have been even more bust than it actually is, but I shall return to that in a minute. The UK does not currently meet the convergence criteria as the ECB, in a statement of the blindingly obvious, pointed out this month. We have an unstable and weak currency, wildly fluctuating inflation and, as we debated earlier this week, we fail spectacularly the tests of the general government budget deficit being below 3 per cent and gross general government debt being below 60 per cent.
Lord Lea of Crondall: My Lords, quite apart from the fact that there is a very good analysis by William Buiter in his booklet, which I hope that the noble Baroness will read, surely, it cannot be argued on the one hand that we have a fluctuating currency, which is why we are not tucked in as a suburb of Frankfurt, while on the other refusing to contemplate being in such a position.
Baroness Noakes: My Lords, the noble Lord will be aware that we need a stable currency as one of the preconditions to enter into the eurozone. I was merely making the point that we are far from being ready to even contemplate entry should we want to. I was also making the point that we would fail not only on the grounds of inflation and currency, we would also fail on the test of the Maastricht criteria in relation to the budget deficit and in relation to Government debt.
In the forecast horizon set out in the PBR up to 2014, we never get back within those parameters. It would be a big surprise, and extraordinarily stupid of the eurozone, if the UK was invited to join the economic and monetary union for many years yet. Even if we temporarily converged with the eurozone economies, it is unlikely to be sustainable because our economy is more linked to the dollar than to the euroas the analyses of our trade showand we trade more outside the eurozone than within it. That has been a consistent pattern and those features are unlikely to change when we emerge from this recession.
So, I hope that the issue of joining the euro is firmly off the agenda for the current Government. If, as I fervently hope, my party forms the next Government it will most certainly be off the agenda for as long as we hold power, as my noble friend Lord Sheikh has already said. That leaves the question of whether we would have been better off in the current recession if we had joined the eurozone at the outset. President Barroso told French radio that some British politicians had told him that Britain would have been better off had we been in. There are perhaps no prizes for guessing which newly ennobled Secretary of State he was referring to.
We are clear on this question too. The one-size-fits-all interest rate policy would have fuelled an even bigger boom than the current Prime Minister engineered. It follows that the ensuing bust would have been even greater and would have made our recession look like a teddy bears' picnic. What we see in Ireland would have been magnified many times over. We had a very lucky escape by not being in the euro.
One of the things that the Labour Government got right over the past 10 years was to keep us out of the economic and monetary union, and I hope that the Minister will confirm this evening that there is no practical prospect of us joining in the near future. But in the unlikely event that some crazy integrationists in Europe, and indeed in our own country, get together to try to lure us in, I hope that the Minister, despite the calls we have heard today, will reaffirm the Governments commitment to holding a referendum in order that the British people can decide.
The Financial Services Secretary to the Treasury (Lord Myners): My Lords, I congratulate the noble Lord, Lord Dykes, on securing the debate today on the prospects for the United Kingdoms membership of the single currency. I also thank him for his kind and yet undeserved opening remarks about me. He is a true hero to his cause. There is no risk of a veil of omerta being pulled over the euro while the noble Lord is here to lead the debate and the cause. His Question asks whether the Government,
Such an analysis would amount to a reassessment of the five tests. We have heard a number of interesting and well-informed points and I welcome the breadth of discussion and the interest expressed. I will do my best to address all the points raised, and I shall start by outlining the Governments approach to membership of the single currency and the five tests assessment that was made in 2003.
The Governments policy on membership of the single currency is unchanged.It remains as set out by the previous Chancellor in his Statement to the House of Commons in October 1997, and again in the Chancellors Statement on the five tests assessment in June 2003. The determining factors underminingI am sorryunderpinning any government decision on membership of the single currency is the national economicinterest and whether the economic case for joining is clear and unambiguous, as set out by the famous five economic tests.
When the five tests were last assessed in 2003, the Treasury found that a clear and unambiguous case for UK membership of EMU was not made and that a decision to join at that time would not be in the national economic interest. In the event of a future assessment supporting UK entry to the euro, this decision will be takenhere I answer the question posed by the noble Baroness, Lady Noakesonly if the Government andParliament agree that it would be in the UKs best interests. The UK would then join the euro if the public voted yes in a referendum.
The five tests remain the foundation for determining whether the economic case for joining is clear and unambiguous. They relate to sustainable convergence between Britain and the economies of the euro area; whether there is sufficient flexibility to cope with economic change; the effect on investment; the impact on our financial services industry; and whether it is good for employment. The 2003 assessment found that the only test that was fully met was the test relating to the financial services industry. For the test on sustainable convergence to be met, it was determined that further improvement would be required in regards to the convergence of business cycles and economic structures. In regards to the flexibility test, it was found that while considerable progress had been made to reform labour, product and capital markets in both the UK and the euro area, more remained to be done. Finally, the assessment found that both the test on the effect on investment and the test on whether euro membership would be good for employment would be met if we achieved sustainable and durable convergence. The conclusion to the 2003 assessment of the five economic tests was that,
Following the 2003 assessment of the five tests, a reform agenda was established which would contribute to achieving sustainable and durable convergence, which was right for Britains economic interests. I shall come back to that point in a moment when I refer to the observations of my noble friend Lord Lea.
The 2008 Budget reported on the progress of the Governments reform agenda. It set out measures to address supply and demand in the housing market and measures to enhance the flexibility of labour, product and capital markets. These measures will contribute to achieving sustainable and durable convergence in due course.
Since mid-2007, the worlds economies have been hit by major global shocks. This is a global problem which started in the United States of America and then spread across the rest of the world, infecting banks in almost every major jurisdiction. The UK has been no exception. As the Pre-Budget Report set out, short- and medium-term growth prospects in the UK remain subject to exceptional uncertainty, and exchange rates have been displaying high levels of volatility, which is of course to be expected in todays economic climate and financial market shocks.
In the light of recent events, some commentators are questioning whether the UK downturn would have been less severe had we joined the euro in 2003. Based on the 2003 assessment, we know that there are both advantages and disadvantages of being outside the euro area. We also know that the key for assessing whether it is in the national economic interests for the UK to join the single currency is whether there is sustainable and durable convergence.
In regard to the current crisis, it is clear that being a member of the euro area would not have been a panacea. Like the rest of the world, the eurozone has been affected by crisis. Based on the European
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As I said, this is a global crisis that will require a global solution, and the UK will continue to work closely with partners to maintain a co-ordinated approach to secure solutions. The European Union is a vital partner in these matters and the European economic recovery plan is a bold step in taking co-ordinated action to respond to the crisis and the economic downturn to the benefit of citizens in the UK, the EU and internationally.
It is the Governments policy to consider annually whether to undertake a new assessment of the five tests. While the Government did not propose a euro assessment to be initiated at the time of Budget 2008, the Treasury will again review the situation at Budget 2009. At any stage, a new assessment of the five tests would require a full and vigorous appraisal to arrive at an informed conclusion. These considerations will extend far beyond the current value or volatility of sterling and other implications of the current crisis. Sustainable and durable convergence is the key pre-condition for realising the potential benefits that euro membership offers.
The development of the UK economy following the introduction of the Governments monetary and fiscal policy frameworks since 1997 shows how stability has provided the foundation for long-term improvement in the UKs economic performance. This demonstrates why the Governments decision on euro membership focuses on what is right for the UK economy in the long-term. I think, therefore, that the heart of my answer to the noble Lord, Lord Dykes, is that it is a matter of timing. The Governments policy is to seek to join the euro, but only when they believe that the conditions are right.
I have read with great interest the booklet 10 Years of the Euro, to which my noble friend Lord Lea and the noble Lord, Lord Taverne, referred. The then Chancellor of the Exchequer said in 1998, in an article or a speech reported in the booklet, that it was appropriate not to wait and see but to prepare and decide. That is precisely where we are. We continue, as a Government, to follow policies designed to secure convergence and to achieve the satisfaction of the five tests.
The matter of timing is extraordinarily difficult. As the noble Lord, Lord Sheikh, said, 10 years is not a long time in the history of currencies. Getting this judgment right is critical because, once it has been made and a decision to apply has been accepted, we are then into the euro at the rate of exchange fixed at that time, and we are in for ever. This is not a decision that can be taken after anything less than the most thorough analysis, national debate, full consideration by Parliament and full support from the nation, as secured by a referendum.
The noble Lord, Lord Dykes, referred to the risk of the pound and contrasted it with euro-denominated bonds. I remind noble Lords that the credit rating agency Standard & Poors recently reaffirmed sterling as an AAA long-term and A1 short-term credit rating in the United Kingdom, its highest ratings. Those have also been endorsed by the other two major rating agencies, Moodys and Fitch. As Standard & Poors said, the status of the British pound sterling as a major global funding currency, combined with strong demand for long-dated gilts by domestic institutional investors, is expected to provide funding flexibility for the UK Government during the heavy sovereign issuance expected to flood international debt markets in 2009.
I should like to pick up a point on fluctuations in the exchange markets. Were the UK to join the single currency at any time, it would seek to lock in at a sustainable exchange rate consistent with the long-term trend valuation of the pound against the euro. This would make adjustment to the new currency as smooth as possible and reduce the risk of a negative impact on inflation or growth. The question of when to join the euro rests on far more than simply the current value of sterling. There may be a certain elegance in saying that, if we join at parity, that would make it simpler for people to understand, but the decision is of far greater significance than that.
Lord Lea of Crondall: My Lords, I was not contending that it is simply a matter of elegance, though there would be the advantage that people could understand it. Much of industry thinks that parity or thereabouts may well be a sustainable rate.
The noble Lord, Lord Sheikh, who has a distinguished career in finance, asked me to clear up this mess and state the Governments policy after the confusion of recent weeks. I am pushed to understand the confusion of recent weeks to which he referred; indeed, if I see confusion at all, it is possibly on the Conservative Front Benches with the arrival of Mr Kenneth Clarke. However, I hope that my comments, which have restated the Governments policy on the euro for the past 10 years, will have set aside any anxiety or confusion that he may have. Those comments were confirmed by the noble Lord, Lord Taverne, in his observation that the Government are clearly committed to joining the euro at the right time and according to the right circumstances.
The noble Lord, Lord Newby, made a typical contribution. I admire his ability to distil complex issues into straightforward and logical statements. He serves his party well in summarising its position on the euro, and where he finesses his partys formal position compared with that of his noble friend, he does so with elegance and some conviction. I was delighted to hear him refer to the status of Ireland and the Irish economy. I have no doubt that he will speak to his colleague, the noble Lord, Lord Oakeshott of Seagrove Bay, who clearly has a different view about the economy of Ireland.
The noble Lord, Lord Newby, said that we were losing our ability to influence European institutions by not being in the euro. I recollect that the noble Lord, Lord Taverne, made similar observations. There is no reason why our voice will not be heard in Europe because we are not a member of the euro. The ECOFIN council takes decisions on economic and financial matters, and all the EUs 27 member states are members of it. There is a smaller group that meets to discuss matters relating to the euro, but it is informal, and ECOFIN and the European Council, of which we are a full member, take decisions. It is quite clear that the
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The noble Baroness, Lady Noakes, clearly stated her partys position, echoing the views of her colleague, the noble Lord, Lord Sheikh. We had another little digression about a bust economy, and I do not doubt that if we had been allowed more time we would have heard about the broken society, as the Conservative Party takes joy in the problems that the global and UK economies face. However, at the heart of her observations was an acknowledgement of the importance of convergence regardless of the conclusions that one draws; that is, that if one is going to join the euro, convergence is critical. That is at the heart of the five tests. While the noble Baroness and I may disagree on where one is likely to end, we are in agreement on the importance of the tests and processes.
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