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Earl Russell: My Lords, the Minister may be glad to hear that on this occasion I believe that he has succeeded in doing something which is not controversial, which may save us a little time. However, I hope he will forgive me for mentioning, extremely briefly, one business matter about which he may wish to talk further in the future. I have given him notice of this point.
I have today just put down a Motion in "no day named" to move to resolve that the proposed sale of DSS benefit offices shall not proceed until the House is satisfied that adequate arrangements are in place to preserve ministerial accountability for the delivery of benefits.
I hate introducing business late in July, but if the Secretary of State bowls at my middle stump I have to play a stroke, even if it is the last ball of the day. So I hope that the Minister can assure me that no decision on this matter will be taken until the usual channels have had a chance to consider it. I know that he cannot anticipate the decision of the usual channels, but if he can tell me that no decision will be taken until the autumn when the usual channels are flowing again, that would be all I could legitimately ask him.
On these regulations, I agree entirely with what the noble Baroness, Lady Turner of Camden, said about their complexity. I believe that there is unanimity in the House about the need for and propriety of insisting upon proper audited accounts. But if noble Lords look at the schedule of the regulations, they will see that they are pretty complicated. There are specific headings according to which the accounts must be divided. If I know anything about accounting material, which is not much, it is that it never divides quite according to the headings under which it is meant to divide.
I agree with what the noble Baroness said about training. I hope that the Minister can also assure us that this method of dividing the material has been a matter of the fullest consultation with the industry, and will continue to be so.
I accept entirely the Minister's explanation of the borrowing limit of the Pensions Compensation Board. I should be glad to know if he can tell me how the figure of £15 million was arrived at. Why not £12 million? Why not £18 million? No doubt there was a reason, but I should like to hear it.
On the contracted-out regulation, I must declare an interest, since, if I do not encounter the proverbial bus, I hope to benefit from them in due course. Having said that, I have nothing further to say about them.
Lord Mackay of Ardbrecknish: My Lords, I am grateful to the noble Baroness, Lady Turner of Camden and the noble Earl, Lord Russell, for the welcome that they have given to the regulations. They are as familiar as I am with the debate we had on the Pensions Bill. We have all been over these matters on a number of occasions.
I say, first, to the noble Earl, that there has been considerable consultation with the industry not just on these three regulations but on all the other regulations that we are bringing forward. Indeed, there are usually two sets of consultations. There is an initial one, and then we pretty well always put out another consultation when we have come to a decision in the light of the previous one, just to ensure that we have the position right, because these are important issues. This is an important industry, and we want to take it along with us.
I know, as the noble Baroness pointed out, that there are a number of suggestions going around that we are over-regulating in this field. Although she did not use the figure, I have been accused of producing 1,000 pages of regulations. I sent my officials off to have a count, and I am told that we have managed to achieve 400, which is an increase on roughly 300. However, in my defence let me say that many of those pages will not be in the least relevant for many schemes because it will depend upon which kind of scheme is being operated. Many pages in the regulations deal with matters such as the winding up of schemes, which fortunately does not happen often, and therefore the great majority of schemes will not have to get to grips with them. It is not quite as bad as has been suggested.
I am as keen as the noble Baroness to see employers continue to run schemes, and to start new schemes. It is not an either/or situation. Both employer led schemes and personal pensions have important parts to play because not everyone can get into an employer's pension scheme, because not all employers run them. I want to underline the point that we are keen to see employers' pension schemes continue. The last thing we want to do is to give employers the feeling that they are being so over-regulated that they would rather not bother to continue to run their schemes. We are at one on that.
The noble Baroness--not to my surprise, I may say--brought up the subject of training for trustees. We had a considerable debate on that subject. We differed on whether there should be mandatory training. As I recall it, my view on the matter prevailed, and we do not have mandatory training. However, we have provision for people to have adequate time off their work for training. There are a number of training schemes available. We have gone a long way towards ensuring that people can have training by having paid time off their work in order to do their training. We believe that that is important.
Just a fortnight ago I addressed a northern pensions conference at Newcastle. The bulk of the audience was drawn from the trades unions and people who are involved in being trustees. So a great deal of work is being done on the subject, and I am sure we all welcome that.
I was asked whether £15 million for compensation was the right level. I suppose my answer is, how long is a piece of string? It was the illustrative estimate made for the Pensions Act compliance cost assessment. We arrived at it by looking at the number and size of the compensatable events that might occur on average in each year over a 20-year period. We made adjustments for any recovery of assets that we might hope to achieve.
We hope that the actual cost will be much lower, particularly in the first year or two of the scheme, as the reduction in assets must have taken place after April 1997. Of course we cannot rule out that the board might at some stage have to meet a significant claim, and to do so quickly, if pensions in payment are to continue. So that is how we arrived at the figure.
Earl Russell: My Lords, before the Minister sits down, it would be for the convenience of the House, since it is due to rise so soon, if he could give me a rather more precise answer than merely noting what
Lord Mackay of Ardbrecknish: My Lords, I always like to be helpful but I am in some difficulty because I shall be straying not only a mile or two but many miles from the regulations. Perhaps I may recommend that the noble Earl discovers what I said today on "The World at One" about the timetable of the project. He will then understand that not a great deal will have happened by the time the House returns.
The noble Lord said: My Lords, I have never been so delighted to move a Motion either in this House or in the other place. I wish to begin by thanking the members of my sub-committee for their help and support in the preparation of the report. I am grateful to them and to members of the Select Committee too. Perhaps I may welcome in advance the maiden speaker, the noble Lord, Lord Sheppard of Didgemere. We all look forward to hearing his speech today.
I will not bore your Lordships by reading out the terms of reference for debate. They are clearly set out in paragraph 3 of the introduction. The terms of reference do not ask whether there should be an economic and monetary union but what would be the consequences for us whether we are in or out. We believe that that is probably the most important subject which needs to be discussed at the moment.
I am sorry that we did not go into the main issue of whether or not we should join because personally--and I emphasise "personally"--I should have liked to have said a number of things. For example, I should have liked to have said that this week's ministerial resignation was irrelevant to the serious questions that we raised in our report. Even having read the Minister's document, I still believe that his resignation is irrelevant to the points that we raised.
I should also have liked to have said--I could not because it was outside the terms of reference, but I shall say it nevertheless--how much I regret the damage done to our influence by the so-called "beef war". Perhaps I may say to my noble friend on the Front Bench that I regret my Front Bench's support for that so-called war. I found it humiliating to see a British Foreign Secretary treated by all 14 other member states as a kind of petulant child. It embarrassed me and it should have embarrassed many others. I do not believe that it helped to achieve the good will that we shall need in our negotiations with the Community.
I emphasise that that is my own view and has nothing to do with the terms of reference. However, in my view we will have no influence outside an economic and monetary union if seven or eight member states decide to join. It would be in our own interest to join as soon as we have a sustainable convergence within the Maastricht Treaty. I say that despite misgivings about the way in which the European Central Bank might work.
Perhaps I may re-emphasise that those are not the views of the committee but they are my views. Having briefly upset members of my committee and perhaps others by being slightly controversial, I shall turn to the terms of reference. Volume II, which contains the evidence, was mixed--and I put it no higher than that. That may be understandable because, for example, we had evidence from the noble and learned Lord, Lord Howe of Aberavon, and the noble Lords, Lord Jenkins and Lord Tebbit. Your Lordships will not be too surprised that the evidence that we received was mixed. Perhaps I may say in passing that the evidence was excellent on all sides, whether one agreed with it or not. In the interests of time I propose to deal only with our conclusions, which are set out in Part 5.
Perhaps, in fairness to two members of my committee, I may say that although it may appear that there was unanimity, there were a large number of amendments but none was pressed to a vote. Your Lordships will not be surprised to learn that many of them came from my noble friend Lord Bruce of Donington and the noble Lord, Lord Boardman. I am happy to say that, after debate, they decided not to press their amendments to a vote. I and all members of my
We received a memo from the Chancellor dated 15th July in which he referred to a memorandum dated 5th December. In fact, that was the date on which he gave evidence to us. Apparently, there was a small error on the part of the Treasury because the memorandum to which it referred was dated 13th November. Whatever the dates, I was extremely disappointed in the Chancellor's memorandum. To say "disappointed" is putting it mildly. I can assume only that it was perhaps written by some "kids" in the Treasury! I do not know, but it is a most disappointing memorandum and during the course of my remarks I propose to raise some of the omissions. I hope that the Minister will be able to reply to that at the end of the debate.
I believe that the noble Lord, Lord Mackay of Ardbrecknish, should be entitled to overtime. Working for the Department of Social Security and the Treasury must be a burden for him. If as a result of pressure from me he does not receive overtime I hope that someone else will consider the proposal.
The first question we raised at paragraph 112 was whether EMU will go ahead at all and, if so, when. We believe that there is a political momentum for it to go ahead on 1st January 1999. I should be interested to know whether the Government agree because that was not in the memorandum.
The crucial next question, which appears in paragraph 113, is which countries are likely to join? The committee believed that there would not be a start unless France and Germany joined. Indeed, a number of others might not meet the convergence criteria set out in the Maastricht Treaty. A great deal will depend on whether there is a looser or stricter interpretation of the convergence criteria. We do not yet know what will be the case but perhaps the Government do. I hate to pile questions on the Minister. I do not ask him as a Minister in the Department of Social Security but I ask him as a temporary Minister in the Treasury whether he will give us the Treasury's view on these matters.
We then asked in paragraphs 114 to 116 whether EMU will work well. There are three main issues for the "ins". The first issue is whether and how quickly the European Central Bank will establish credibility comparable to that of the Bundesbank. Secondly, how well will EMU cope with the high or differing levels of unemployment and with asymmetric shocks? Thirdly, to what extent will EMU lead to further constraints on national taxation and public expenditure? Incidentally, as regards those two issues--that is to say, the tax and the spending argument--I should emphasise that they will remain matters for national governments, whether for the "ins" or the "outs". Of course, the "ins" will need to keep within the convergence criteria.
Next is the question of unemployment to which we refer at paragraph 117. We believe that EMU is neither deflationary nor likely to reduce unemployment. It will depend on whether the European Central Bank can achieve price stability and whether national governments can achieve a high level of employment. Both objectives are enshrined in the treaty. Again, I should be interested to know whether the Government agree with that conclusion which we reached.
Next, and perhaps the most important issue for an "out" is the implications for the single market, for that is the most important benefit to the UK. That is referred to at paragraphs 119 to 123. If we are out, how should we be affected? Discrimination itself would be illegal and the Commission has indicated that it would act to prevent such discrimination. On the other hand, as we point out, simple delaying tactics would be more difficult to prevent; that is, covert discrimination, to which we refer at paragraph 120. Again, I should like to know what the Government have in mind to do in those circumstances if they agree with our conclusions.
The risks to the single market seem to the committee to be greatest in two circumstances. The first is where there is real exchange rate instability between the "ins" and the "outs"; and for the "outs", the best defence would be to achieve sustainable convergence. Indeed, the Minister who is to reply to the debate said that in answer to a question which I raised last week. He said that the Government would seek to achieve sustainable convergence. But of course, if we have that sustainable convergence, by remaining out, we should relinquish the greater influence which would be available to us if we were within EMU.
The second area where the single market would find itself in difficulties is where member states meet the criteria but are unwilling to join. That may apply to the UK. I say "may" because whereas at one time it looked as though we were certain to meet the Maastricht convergence criteria, given the levels of our PSBR as set out in the recent summer economic report, it is now no longer quite so certain. Again, I should be interested to have the Minister's comments on that.
Trade with the rest of the world is a very important matter for us. If the UK stays out of EMU, would we be affected by the extent to which EMU influences general competitiveness? It is very important that we should know what is likely to happen in those circumstances. In paragraphs 124 to 127, we refer to possible shifts in market preference, particularly at paragraph 127. We are happy to see that there has been some very useful and excellent inward investment recently. But in the event, that would be influenced by perceived stability of the economic environment compared with the Euro area.
Clearly one factor would be an assessment by investors of the likelihood of barriers and obstacles against the UK if we are outside. We cannot be confident that there will be no such obstacles. Indeed, recently Iain Vallance, the chairman of BT, said that retaliation is definitely on the cards and there are enough people talking about it already. Again, I should be interested to know what is the Minister's view on that matter.
As regards the City, the committee believes that it will remain an international financial centre whether we are in or out. But either way, it will very much depend on the City being well prepared for all eventualities.
I turn now to the implications for the exchange rate, which are set out at paragraphs 128 to 131 of the report. If the UK is out, much depends on whether we join a new exchange rate mechanism, if there is one. In discussion, it has been called ERM2. It is not easy to see what will happen if there is an ERM2. If there are narrow bands, that would clearly invite a challenge from the market. If there are wide bands, it would have little practical effect. Therefore, we clearly do not know whether or not there will be a second ERM. In his memorandum to which I have referred, the Chancellor said that there would be an ERM but membership would be voluntary. We have already been told that the Prime Minister was not inclined to join an ERM again after the trouble he had before. But whatever happens, it is vital that the markets believe in exchange rate stability between ourselves, if we are out, and the rest of the European market. There would have to be a recognition that we did not have it in mind to devalue on a regular basis. We were told by a senior Treasury official that of course devaluation is not a free lunch. We were of course aware of that but he confirmed it for us. It seemed to the committee that the best way to avoid having a fear of devaluation on our part, if we were out, would be by achieving the sustainable convergence to which I referred earlier.
The next item to which we referred in our report is at paragraphs 132 to 134; that is, the implications for the European Union budget. After EMU, the pressure to increase fiscal transfers between the "ins", or from the "ins" to the "outs", would be considerable, but there would be little chance of that happening in our view because it would be resisted both by the Commission and member states who are net contributors to the European Union budget. There would also be other constraints because of the very small size of the European Union budget in relation to national budgets, and bearing in mind that that European Union budget can be increased only by a unanimous vote of the Council. Again, I should welcome the Minister's views on that.
I turn next to the implications for institutional arrangements set out at paragraphs 135 to 138 of the report. I doubt, and the committee doubted, whether the Waigel proposals for automatic sanctions would be acceptable to anyone. Certainly they would not apply to the "outs" in any event. I should be glad to hear the Minister confirm that that is the Government's view.
As regards the informal and political implications which are referred to at paragraph 139, if we decide to opt out, future relations between the UK and the rest of the European Union will depend on whether there is a climate which is friendly and not bitter--something to which I referred earlier. We believe that it is in the UK's interests that a decision to "wait and see" should be seen as a genuine postponement and not as a disguised final rejection of economic and monetary union. That is a most important matter and, again, I should welcome the Minister's view on that.
I turn now to enlargement as set out in paragraph 140 of the report where the committee states that EMU and enlargement are not alternatives; one is not conditional on the other. Each should be "treated on its merits". Again, I would welcome the Minister's response. Then there is the question of qualification for later entry which the committee set out in paragraphs 142 and 143. Of course, it is possible that the "ins" might have it in mind to risk setting in front of us greater hurdles, thus making membership of ERM2 a condition of adherence to any fiscal stability pact that they decide upon. Again, I would welcome the Minister's view as to whether such hurdles are likely to be set for us.
Finally, policy preparations, if we do not join, are set out in paragraphs 144 and 145. They relate to how credible our monetary policy would be. Unless credibility is achieved in that respect, it was made quite clear to us in evidence that interest rates would be higher. We thought that at least the Bank of England could be responsible for price stability, and that the case for independence needed to be examined as soon as possible. Again, I would welcome the views of the Minister.
In paragraphs 146 and 147 of our report we refer to the technical preparations, whether or not we join at the outset. I am pleased to see from paragraph (3) of the Government's memorandum that they are committed to being fully involved. Yet, while they want to remain fully involved, they are not prepared to do much about it. The City needs to prepare now for the introduction of EMU, and a widespread perception needs to be established of the need for co-ordination through a national body. The Government are unwilling to set up such a body, but it is good to see that the Bank of England is at least aiming to provide a necessary degree of co-ordination. It is important to the City that that progress should be kept under review. I have given what I believe to be a brief summary of our conclusions. Indeed, I hope and believe that it is a balanced report which will be acceptable to your Lordships.
Lord Howe of Aberavon: My Lords, I am sure that I speak for the whole House when I express my gratitude to the noble Lord, Lord Barnett, for his chairmanship of the committee and his lucid presentation of the report. I should also like to thank the
The noble Lord, Lord Barnett, went a little way, but not too far, towards disavowing the unanimity of the report. It is important that such a broad spread of opinion was able to reach at least two very important conclusions. The first is that for certain key economies within the Union EMU is now moving from a dream to a probability with far-reaching implications for this country whether we are in or out. There should be small wonder at that when one reflects that almost two-thirds of our trade is now conducted with fellow Union members.
The second important conclusion of the report is that it is overwhelmingly in this country's interests actively to prepare for that eventuality coming to pass. We need first to influence the shape of the system which is likely to emerge. We must ensure that our voice is heard, and the committee clearly endorsed that view. In fact, during the past year alone, we have been able--thanks to the Government's commitment to that effect--to make vital contributions to the debate. The "ins" and "outs" issue with which the committee was concerned is on the agenda. We have ensured by government participation that ERM 2, if it happens, will remain voluntary. We have secured a commitment that EMU does not justify the more active Community budget. So participation has already had an effect.
Moreover, the committee says quite plainly that we need to prepare for the impact of the Euro on our own economic and industrial future and, above all, on the future of our financial service industry. The committee is also quite right to say in paragraph 127 of the report that,
Before I say anything more about the future, perhaps I may reflect for a few moments on the other observation made by the committee; namely, that the debate has been characterised for far too long more by,
At one time the gold standard achieved that aim. For more than a quarter of a century Bretton Woods went a long way towards achieving it. It is no surprise that, within five years of the collapse of Bretton Woods, Arthur Burns--not a very Keynesian character--was calling for a return towards a rule of law for international monetary relationships; and that, in less than 10 years, President Giscard d'Estaing, Chancellor Helmut Schmidt and the then president of the
People sometimes forget that the manifesto on which Conservative candidates fought the European elections in 1979--a manifesto agreed at the time with the then Prime Minister and myself--contained the following passage:
For me it is almost the greatest sadness of my life that our failure to fulfil that commitment in what I think were the right circumstances in 1985 and the decision five years later to do so in wholly inappropriate circumstances were perhaps the most far-reaching errors--indeed, apart from the poll tax, perhaps almost the only errors--of the Administration in which I served under the leadership of my noble friend Lady Thatcher. Had we been effective participants in the system as we had promised we would be, at least three more far-reaching hazards might have been averted.
First, I believe that we would have avoided the hugely damaging humiliation for this country--and, indeed, for Her Majesty's Government--of Black Wednesday. Secondly, we would have avoided the wider damage done that day to the effectiveness and credibility of the European monetary system. Thirdly, had we been long-term participants in the system, we might well have prevented the premature rigidity of the Delors plan for a move to a single currency which has to some extent overshadowed the debate ever since.
Even so, the fact which the committee now brings firmly to our attention is that--despite those setbacks, which have done so much to undermine our national self-confidence--the probability is that our partners will go ahead with the establishment of EMU and that the Euro is more likely than not to come into existence. As the committee points out, in those circumstances we will not be able to escape the proximity of the Euro zone within the European Union market. Yet, it seems quite possible, that we shall not be a part of it.
The truth is that here, too, in a phrase beloved by my noble friend Lady Thatcher, if that happens, we shall not be able to "buck the market". Everyone will proclaim, as the noble Lord has rightly done--and, indeed, as Eurosceptics do as loudly as any--that if, in those circumstances, confidence in our economy is to be maintained, we shall need to do at least as well as our neighbours in avoiding inflation and devaluation (still more the charge of competitive devaluation, with all the risks of retaliation that that might imply). The committee spells out those consequences very clearly in paragraphs 122 and 138. I quote especially from the latter paragraph which states that,
For myself I have little doubt that if EMU survives, it would soon be seen to be to the national disadvantage not to belong; and that if we are seen to have excluded ourselves from it virtually for good, it would be gravely damaging to our national interests--economic and political alike. I leave the economic arguments for another day. But, politically, if the G7 (as it now is; the G5 as it used to be) becomes in effect the G3, what strength would our voice have in those hugely important global economic debates for the future? The Chancellor was right to point out to the committee that, in all sorts of decisions in the European Union we will no longer have the same weight as we now have. If we are not effectively "in", the effect on inward investment would be damaging in the end. I subscribe entirely to the Prime Minister's commitment to make Britain the enterprise centre of Europe. However, "enterprise centre of Europe" is a phrase divisible into two halves: "enterprise" certainly--the Government have been achieving a great deal of that; and the other half is "centre of Europe". One cannot have one without the other. One cannot be the enterprise centre of Europe and yet not part of Europe. I suspect that Lucky Goldstar's £2 billion investment in South Wales might well have not come to Wales had Britain not been an effective player in the European Union.
Even so, it is all too likely that we shall postpone a decision on this as on so many other issues. In those circumstances, if our country is to have any chance of avoiding the grave risk of discrimination, to which the noble Lord referred, then the tone of voice, the manner and the duration of our self-exclusion are critically important. I think that the most important practical recommendation of the committee is at paragraph 139 which states:
One conclusion is surely manifest from this: that a decision to announce now that Britain had excluded for the duration of the next Parliament, still less for any longer time, the very possibility of joining EMU would be calculated to inflict grave damage on Britain's standing within the European Union for all purposes--by no means confined to the economic.
Lord Jenkins of Hillhead: My Lords, it is a pleasure to follow the powerfully argued and impressive speech of the noble and learned Lord, Lord Howe of Aberavon. I believe that this is a good report, and I congratulate the noble Lord, Lord Barnett, and his colleagues on having produced it. I am glad that we are debating the issue before we disperse tomorrow for three months.
As the noble Lord, Lord Barnett, said, it does not give a sharp "in or out" answer. That would have been difficult even with a unanimous report. However, it advances the argument in a number of important ways. First, it moves forward from that typical and facile British assumption of a few years ago that a single currency was all Cloud-cuckoo-land and would never happen. As we have made the same mistake with every European initiative for 46 years now, one might have thought that we would have begun to learn that things actually happen. But until recently there was precious little indication that that was so, and least of all from the Prime Minister, who quite a short time ago used some extreme language about the fantasy of a European currency.
The assumption now is that there will be an EMU on time, at the beginning of 1999, with the five core countries of Germany, France and the three Benelux countries participating--I do not believe that it can occur without them--with probably three or four others as well. I refer to Austria, Finland, perhaps Sweden, and very likely Ireland. Italy will be mortified at not being for the first time a founder member and will make it at the earliest possible moment. So will Spain and Portugal.
Therefore, all of those who are not in from day one will be in the category now being called in Brussels the "pre-ins". That disposes of the second British fallacy in this field: that there is a role waiting for us as captain of the refuseniks. The divide will not be between those in and those out, but between those on the one hand who
The bitterness will not in itself arise merely from our not joining. The other countries are used to that. They may even, I am afraid, welcome it, in particular given how quickly we messed up the ERM, which had worked perfectly well for 11½ years before we joined it. It certainly did so. I apologise. The noble Lord, Lord Bruce of Donington, merely coughs. I had thought that he was dissenting. I misunderstood the sounds which came from him.
There are three possible dangers of exacerbation. One is the thought that we are not merely standing sceptically on the sidelines, of which we have made a habit, but are actively encouraging the failure of the single currency. To be frank, we have been close to that position during past years and it could be dangerous if we continue with it in the future.
Secondly, it will be dangerous if we try to prevent other countries making arrangements in which we have no intention of participating but which we nonetheless try to obstruct in regard to those other countries.
Thirdly, it will be dangerous if we pursue a maverick exchange rate policy from outside and try constantly to gain unfair advantage by competitive devaluation. I do not see that as likely. In future circumstances, I doubt whether we will have the energy to pursue a maverick or wrecking exchange rate policy. I see our position then as being much more like people in a small boat in the wash of a big liner, trying hard not to be seasick. Without question, we will find much speculation diverted to us in those circumstances.
We should also realise that the single market cannot be complete or even secure with separate and fluctuating currencies. As the single currency becomes a battlefield, a religious war within the Conservative Party, so we tend to forget the practical issues and advantages involved in a single currency. Being generally inclined to talk in macro or even theoretical terms, perhaps I may give two specific concrete examples.
A few months ago I received a private cheque to settle a small private debt. It was drawn on a Paris bank and made out not in French francs but in sterling for £151.50. I paid it into my bank in the normal way and received a credit for £134. In other words, a turn of £17.50 or 12 per cent. was taken on that simple transaction between two of the major countries. Noble Lords may suggest that I should change the bank, but I suspect the result would be the same. When I wrote to the bank protesting, I said that while I thought the charge was scandalous I would nevertheless pay it with a certain amount of satisfaction because I would make good use of it in the argument about a single currency.
The other example is in a different field. I have been involved in setting up an Anglo-French scholarship scheme in which the retiring British ambassador in Paris has taken a leading role; I am chairman of the trustees. As we were setting up the initial orders, a question arose as to payments for the British scholarship holders going to study in France. It was first proposed that payment should be made in French francs on a yearly basis. It was then proposed that that should be changed to sterling on a termly basis, and the number of terms in a year does not matter. We suddenly realised that it could make an enormous difference. The recipient would have no idea what he would receive in French francs; there could be a swing--such as we have had in the past few years--of 20 per cent. on the money available. That is typical of the uncertainty which is involved and will persist if we are outside the single currency.
There are other practical consequences. In my view, an interesting picture emerges from the report and the evidence to the Select Committee. It is the detail of how, if we stay out, we could minimise the practical dangers which I found fascinating. First, could the City of London continue to function effectively as an international financial centre? Probably yes, provided it reconciled itself to doing a substantial and growing proportion of its business in Euros rather than sterling. That is not a splendid vindication of the proud independence of sterling.
Secondly, could we keep interest rates within striking distance of those within the single currency area? At the time when evidence was taken on that, the difference between London and Frankfurt or Paris was about 1.6 per cent. in favour of Frankfurt or Paris and against London. The answer given was: yes, we possibly could, provided we shadowed the money and exchange rate policy of the European Central Bank as closely as was humanly possible. Again, that is hardly a striking advertisement for unfettered sovereignty outside. In other words, if one is in, one follows the policy with a share in determining it; out, one follows the same policy without any say in forming it.
I end on a wider consideration. Europe, I fear, has largely written off the present Government. It expects nothing from them. The Chancellor of the Exchequer is personally rightly respected in ECOFIN, but that is about it. I agree with Mr. Heathcoat-Amory, whose method of resigning does not exactly command confidence, that the present relationship is not working. It causes the maximum of irritation with the minimum of results. However, the fact that the Government have been written off does not necessarily mean that Britain has been written off. It means that the first six months in the life of a new government will be a crucial and dangerous time for Britain's relations with Europe.
I echo some of the points made by the noble and learned Lord, Lord Howe. Hopes of a constructive British role have been disappointed too often. They were there after the referendum of 1975, but three years later we were the only country to stay out of the ERM. The
Should there be yet a fourth wave of disappointment under a new government, then I fear that, whether we like it or not, we will come to an effective parting of the ways. I do not believe that we will be asked to leave, although during the BSE dispute such thoughts were undoubtedly beginning to surface. I believe that what will then happen in the fourth wave of disappointment is that a new clubhouse will begin to be erected alongside the old. The most important activities will be conducted in the new clubhouse, which we shall not be asked to join. Our danger in Europe has always been not an excess of realism, as we like to believe, but a lack of it, based on a consistent over-estimate of how essential we are. Not the least value of the report is that it dispels some of that miasma of illusion.
This House, not for the first time, has the opportunity of debating a difficult and controversial subject reasonably and objectively, whereas elsewhere it tends to generate much more heat than light. We must be deeply grateful to the noble Lord, Lord Barnett, for initiating the debate, for the manner in which he introduced it and, above all, for the report prepared under his chairmanship which is our subject tonight. I had the privilege of participating in the preparation of the report and I pay tribute to the masterly manner in which the noble Lord conducted our inquiry. He showed unfailing good sense and unfailing good temper. Firmness combined with gentleness were the characteristics with which he guided us through the thickets of issues that confronted us.
The noble Lord in introducing the subject emphasised the terms of reference of the report and of the debate. He drew a distinction between concluding whether a European monetary union is desirable--whether if it came about one should join it--and if one were created between a number of members of the European Union, what would be the consequences for the insiders and the outsiders.
It is perfectly true that those are two distinct subjects. However, as the noble Lord himself demonstrated, as did the noble and learned Lord, Lord Howe of Aberavon, and the noble Lord, Lord Jenkins of Hillhead, it is extremely difficult to treat these two subjects separately even though they are distinct. The preconceptions--dare I say the prejudices?--one has
Reference was made to the witnesses. We examined a very large number: men of great authority and in positions of great responsibility, and many men of great experience of economic and financial matters. Noble Lords will form their own view about the balance of the evidence that is now available. I believe that the balance clearly points in the direction that the outsiders will fare badly compared to the insiders. However, others may take a different view. Indeed, I would go further. This is not a subject, alas, in which expert opinion can give us absolutely sure guidance. These issues cannot be weighed in an apothecary's scale. Many cannot even be quantified at all. They are inevitably matters of probability and, without detracting in any way from the eminence of our witnesses, we must each form our view on probabilities.
The first and most important probability to assess is: will there be, on 1st January 1999 or thereabouts, an attempt by some members of the European Union to start the process of creating an economic and monetary union between them which within a relatively short time will lead to a common currency between them? The committee's answer is quite unequivocal: for planning purposes the only safe assumption to make is, yes, there will be one. It is not quite possible at the moment, although the noble Lord, Lord Jenkins of Hillhead, attempted to do so, to say exactly who will be members of the first wave of that incipient economic and monetary union. There will be five. There will be France, Germany, and the Benelux countries, despite certain current difficulties in Belgium. There will be Austria; probably Finland; there may well be Ireland; and, as the noble Lord, Lord Jenkins, mentioned, there will be Sweden and possibly Norway. Denmark will almost certainly wish to be an early member. However, it is committed to a referendum which in all probability it cannot hold until about the third stage of economic and monetary union.
Italy is an interesting case. In some quarters in this country Italy has been, as it were, selected as the most likely ally for the United Kingdom in adopting a more reluctant attitude. Indeed, I believe attempts have been made to woo Italy to adopt exactly that position. It so happened that I was in Rome last week and had the opportunity to discuss this matter with a number of leading figures in that country. I assure your Lordships that that is a total misjudgment of the Italian situation. Italy, under its present government led by Romano Prodi, is determined to adopt its traditional role of being in the forefront of European integration. It will certainly wish to become a member of a monetary and economic union as quickly as it can. It talks about doing so within 12 months of the start of the economic and monetary union by some countries. I believe it is even prepared to contemplate the revival in some form of an exchange rate mechanism as a preparation for monetary union, even though it is now uncertain how much that will be required as a precondition for participation. At any rate,
Alas, it does not look as though the United Kingdom will be in the first wave, and perhaps it will not be a candidate in the relatively near future. Therefore, the immediate question arises: what is the consequence of that position for the United Kingdom should a monetary union, as the committee believes, come into being? The witnesses are divided on that question. To use the Shakespearian phrase, some have been "laying their flattering unction" on this matter to themselves and arguing about the strength of the City and so on.
My own feeling is, as the committee has insisted, that much will depend on the political and psychological climate in which the separation of the "ins" and "outs" takes place. I believe that despite the huffing and puffing in some quarters, it is very unlikely that this separation will take place in a climate of bitterness, let alone hostility. It is much more likely--although alas one cannot be certain--to be some kind of a diplomatic fudge, a matter of "wait and see", I hope more positive than negative as the committee has pointed out, and that therefore there will not be that absolute parting of the ways which many fear and which I certainly believe would be very disadvantageous to the United Kingdom economically and politically, as the noble and learned Lord, Lord Howe, pointed out.
Even if that is the case, we have to consider very carefully what are the real consequences in economic terms. Much has already been said about that, and I shall be very brief. The committee spent a great deal of time debating the question of discrimination between the "ins" and "outs". I believe that that is not a very serious issue. Overt discrimination is clearly out of the question, because it would be illegal. I do not believe that covert discrimination is likely to be a very serious problem. What will, however, be a serious problem is market preferences. After all, the flows of trade and industry internationally, particularly nowadays, are not especially dependent on what is permitted and what is not permitted. We were told by many members of our committee, as well as by witnesses who were all highly experienced in international trade and industry--and we know the old proverb, "Kissing goes by favour"--that they believe that there will gradually emerge a certain preference on the part of those within the monetary union for each other, particularly with the globalisation of markets that is now taking place. So I believe that even the great achievement of the single market, although it will not be overtly impaired in any way by the creation of a partial monetary union between some members of the European Union, will nevertheless not be working out entirely to our favour.
Then there is the question of the Euro and the financial transactions following from it. I do not know whether it is realised everywhere, but already today the volume of transactions in currency and money markets, particularly in the more modern products of swaps and derivatives of all kinds, in deutschmarks and French francs is already extremely high. There is every
As regards the City, I have now worked there for 30 years after two other careers, and I am the last person in the world not to recognise its strength. Obviously, its history over the last 100 or 200 years has shown some blemishes, but its position today, its efficiency, its strength, its integrity, and its status in the world is extremely high. There is no doubt that the attempts by other markets such as Frankfurt, Amsterdam, Milan and Paris to displace the City have so far not been successful. Today the City is still far and away the outstanding European financial centre.
But even that situation is not absolutely secure. The advantages which the City enjoys at the moment can be duplicated, especially under modern forms of telecommunications, in many other centres. Once a Euro area is created, and the Euro has every chance of becoming a strong currency which will play an extremely important part in world markets, one cannot be absolutely sure that the City's position will remain totally unimpaired.
As the noble Lord, Lord Barnett, and the other two speakers who have already spoken have gone somewhat beyond the strict terms of reference for this debate, may I also, if your Lordships will bear with me for a moment, go a little further and conclude in a slightly more personal vein?
I have had the opportunity for over half a century now of watching very closely the development of our relations with our European neighbours, particularly in the economic field, but inevitably also in the political field. Looking back on the situation, it is a sad and sorry tale. There have been a number of particular and specific errors, which I readily admit are much easier to identify now than they were at the time that they were committed, starting with the strains even in the Marshall Plan, when we were leaning very heavily on our wartime alliance with the United States, when that country was already urging us, begging us, to take the lead in the integration movement in Europe.
Then we went on with the refusal to join in the coal and steel community. I happen to know something about that because I was one of two observers deputed to watch the progress of that. Then came the attempt to find some alternative to the common market, the withdrawal of our observer from the Messina negotiations, and the frantic search for alternatives, which have left the landscape littered with international institutional debris, some of which is not even remembered nowadays, such as EFTA. Who talks about EFTA nowadays?
Finally, came the great act of courage under Harold Macmillan when we attempted to join what was then still the common market. That was frustrated. I feel that our continuing ambivalence, quite apart from the attitude of General de Gaulle, had something to do with the fact that we did not succeed and had to wait another 10 years under Ted Heath to join the common market. Since then the history has been a pretty chequered one. We did not join the European monetary system completely, as the noble and learned Lord, Lord Howe of Aberavon, has mentioned. We refused to join the exchange rate mechanism, and when we belatedly did so, we did so apparently without adequate consultation, perhaps without any consultation with our partners, and at an absurdly and unrealistically high exchange rate. When we finally had to leave the exchange rate mechanism, I am afraid that in some quarters we tended to blame the system rather than the fact that we had entered it at an extremely high exchange rate.
What is particularly puzzling in this situation is that in monetary matters, in matters of financial and monetary arrangements, we should show this reluctance to accept leadership, which has been within our grasp right through the whole of the post-war period. Why we should do that in monetary matters is totally incomprehensible. After all, I believe that our own financial and monetary arrangements and our banking system have the oldest history in the western world. Possibly Italy could compete with us in some respects. Certainly we have a history stretching over 300 years in this matter. We have a literature of analysis in monetary matters which is incomparably the greatest in the world. We had, to our credit, a leading part in the setting up of the post-war monetary and financial arrangements under Bretton Woods, and yet this is precisely an area in which we have shown the greatest reluctance to accept the leadership in Europe which, as I said, we could have had all along.
The Prime Minister has said repeatedly that he wishes this country to be at the heart of Europe. I have no doubt that this is his genuine wish, but I fear that with the policies which we have been pursuing we are likely to end up at a very different part of the anatomy.
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