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The noble Lord, Lord Shore, will perhaps not be surprised that I take a totally different view from the one he takes. I feel tempted to follow him in some of the arguments he has raised. He has discussed the Maastricht Treaty and the fundamental question of economic and monetary union; it is all part of his total rejection of the European Union in itself. For example, he cited the monstrosity of fines being imposed on a sovereign country when he knows perfectly well that it
I wish to point out what would be the consequences if this amendment were to be carried. It would mean that we should reject specifically what has been adopted by all the other member states as one of their goals. It is not as though we could then happily carry on minus monetary union, the only country specifically to have rejected it. It goes much further than the Leader of the Opposition is prepared to go because this amendment would exclude any possibility of us ever joining a monetary union whereas the Leader of the Opposition has ruled it out only for 10 years.
If this amendment were to be carried, its supporters would put us in a position where we should find ourselves increasingly at odds with the rest of our partners. For example, from time to time, if the pound were at a much lower rate than it is now, we should be accused of unfair competition. We should find ourselves at odds over a whole series of other measures. The amendment is designed, as no doubt the noble Lord, Lord Shore, would wish, to take us out of the European Union altogether. He wants us to set off in a totally different direction from our partners.
I do not wish to discuss the merits of the European Union. I do not wish to go as wide as that. I wish to state our position in relation to the Government. I welcome the fact that the Government have made very friendly noises about monetary union, and they have declared that in principle, if the circumstances are right, they wish to join a monetary union. But the difficulty about the Government's position--and where we on the Liberal Democrat Benches differ from the Government--is that they have still left an enormous area of uncertainty. They are asking industry to prepare, but there is still no absolute commitment that we shall join a monetary union. If industry is to be asked to spend hundreds of millions of pounds, as it would have to, to adapt to a euro, something which would probably have to be done some two years before we join and adopt the euro, then they must have a degree of certainty. They do not have that at present because a number of conditions have been put forward by the Government.
For example, let us look at the risk of a policy of uncertainty and the risk that it poses for the pound. Almost certainly, it will be a requirement of our membership that for two years the pound will have to be in a stable relationship with the euro. That poses great difficulties for us unless we pursue policies which ensure that the pound is much lower or unless we are able to negotiate that we can enter the ERM at a much lower central rate--something in the nature of 2.60 marks to the pound.
But in that period of instability, if there is no commitment, the pound will be extremely vulnerable. While the euro is established, the pound will be the only major European currency outside the euro. The European monetary area is quite likely to adopt a policy
In a position of benign neglect, as it were, in relation to the dollar, there may be considerable movements in international currencies. The pound could be particularly vulnerable to those movements and could be damaged. Therefore, uncertainty is a policy which carries very considerable dangers. We on this side of the Committee would like to see a much firmer commitment.
It is said that the question of timing is so difficult that we cannot commit ourselves. But far too much can be made of the problems of timing. For example, the Netherlands has been in a different economic cycle from Germany, although it has been tied in a monetary union with Germany for a considerable time. The Dutch economy has been expanding at a fast rate at a time when the German economy was stagnant. Incidentally, the main reason for that stagnation was the aftermath of unification when there were excessively high wage claims and when the Bundesbank followed a very restrictive and deflationary policy in order, so to speak, to punish the unions for being so irresponsible. The macro-economic policy has been the main reason for unemployment in Germany.
The Dutch followed a different policy. They have had a period of growth which has, in recent years, been at least as good as and, indeed, better than ours. The Dutch have managed to do that within a monetary union, although their cycle was different from that of Germany. Again, the low inflationary effects in a large monetary union are likely to be at least as important as a policy which is formed within a particular country.
Too much can be made of the fact that our interest rates are of different importance. Short-term interest rates matter much more in this country than they do in other member states. But the reason for that has been our past record of much higher inflation. If we had had the same record of low inflation as Germany or the Netherlands--or, indeed, of the other members of the core--we, too, would find that short-term interest rates would be much less important. We, too, would find that people would wish to take up their mortgages as fixed rate mortgages rather than as variable rate mortgages.
As I said, far too much can be made of those differences. If it is a question of timing, the chances of our timing coinciding exactly with the rate of expansion of Germany or France is not so great that one can look forward with any certainty to potential membership. I fear that the Government's projected timetable, which gives the impression that they would like to hold an election in the year 2001, with a referendum shortly afterwards, and then join by the year 2002 or 2003, may be very difficult to achieve. That is because of the uncertainty created at present by a lack of commitment and the impact that that would have on the pound.
Lord Howell of Guildford: It is a great pleasure to follow the noble Lord, Lord Shore, in debating the amendment, although I do not agree with everything that he said. Nevertheless, the noble Lord brings to the matter enormous experience and conviction. I was particularly struck by what he said about the stability pact. It is far from reassuring that the architects of Maastricht--and, indeed, of the Amsterdam Treaty--appeared to fail to foresee the need for a stability pact. The glaring fact that now looks so obvious--namely, that if you are going to try to construct a currency with one central monetary control but 11 or 12 fiscal controls and policies it will be an unstable affair and you will need an additional binding instrument to unify or at least harmonise fiscal policies--came very late in the day. It does not bode well for the construction of what must, in the interests of global financial stability, be a system that works--and I hope that it does--that this very obvious need for an additional mechanism was arrived at so extraordinarily late in the day. It meant that it had to be rammed in outside the treaty structure altogether, as the noble Lord reminded us.
I am also grateful that we are having this debate now because the timing is more than usually apposite. People talk as though the show will get on the road on 1st January 1999, eight or nine months from now. But, in fact, we have about six weeks left. At the end of that time, on 1st May, the decisions on the participants will be made and the decisions on the cross rates will be established. Indeed, for all intents and purposes, the single currency project will be inevitably under way. The attention of the international financial markets will tend to switch to those who are not actually betting against the whole thing collapsing--and that outside bet will, I suppose, remain in the minds of some speculators. Most of the financial markets will turn to the different longer-term interest rates and the different costs of the bonds being issued in the member state capitals. I believe that there will be considerable variety in that respect.
We can already see the effects of what is about to happen in six weeks' time on the other currencies, including our own. The noble Lord, Lord Taverne, spoke about the potential threat to, and the weakness of, the pound in that speculators might turn against it. I agree with the noble Lord that circumstances may change. However, just now it is the very opposite: the pound has turned into the safe haven currency, as people look uneasily at the continental systems, the lack of convergence and the obvious pushing of politics over economics, and come to the conclusion that the pound is the currency to buy. Indeed, for all I know, it is well above three deutschmarks again--miles above the level at which we were pushed out of the ERM because we were told it was far too high. I believe that that gives one a fair assessment of the value of some pundits' opinions on these matters. So it is all going forward very
There are those who have said that perhaps Helmut Kohl will be toppled by the new dynamic Gerhard Schroder, and so on, and that that will delay things. But that is an illusion; there will be no delay. I am reminded of the year 1914, although perhaps this is too dramatic a comparison. We are told that the armies began rolling, the troop trains moved and that it was then too late to stop the hideous events that followed. So, whether the events which follow now are hideous or good--and I hope that they are good and beneficial for us all--it is much too late to stop them. The troop trains have started rolling and cannot be stopped.
I should have thought that those who are really genuinely concerned to see a stable and prosperous Europe would focus upon the dangers that lie ahead now that the trains are rolling and now that we are on course for this ride. It will be a very bumpy ride; indeed, certainly for the first three years while the denominations of the separate currencies remain, though in theory they are all part of the one currency, and even beyond.
Why do I say that it will be a bumpy ride? The noble Baroness, Lady Williams, made a very good point; namely, that the Asian crisis is by no means over. We have not yet begun to see the full pain and impact of the Asian crisis on the world's financial system, nor the impact on the European economies, which will be considerable and very diverse because those economies are very diverse. It will also be extremely harmful to the general need for a steady recovery of the continental European economies in order to make the EMU process rise.
Incidentally, on the question of short-term interest rates--which I shall deal with in more detail in a moment--the idea that our interest rates could be down if only we had had a better inflation record in the past is absurd. The reason our interest rates are where they are is that we are at a high point in the business cycle and they need to be high in order to restrain the economy. It is possible that we are over the top of it now. Perhaps we will begin to see the effects of the Asian deflation and general turndown on our own economy and they can come down again. But that is why they are where they are, and that is why there is this obvious difference which cannot be just wished away. It is there. It is a reality in the nature of our different business cycles.
On top of the difficulties immediately ahead, we know for a fact that this is a political project. It is a very fine project with fine motives behind it, which we should always admire--the basic motive, obviously, being that of France and Germany never trying to destroy each other again. But that does not make it an optimal currency zone, however good the motives. It is not an optimal currency zone. It is not just a case of Americans such as Martin Feldstein and Milton Friedman pointing that out; we can see it for ourselves.
I always find it difficult to explain just how little labour mobility there is to some of my American friends. I use the following analogy. I beg the Committee's forgiveness for the exaggeration. A mummified body was dug up in the Cheddar Gorge, which dates back some 9,000 years. When the DNA was checked it turned out to be the same as that of a person living in a nearby village. That indicates that not much labour mobility has taken place in that part of Europe for the past 9,000 years. If that sounds exaggerated, it is usually effective in bringing home to our American friends the fact that there is little labour mobility in Europe.
The Governor of the Bank of England is wise on these matters. I heartily endorse and greatly welcome his reappointment. That was an excellent move on the part of the Government and the Prime Minister. The Governor has pointed out in many speeches that without labour mobility and without the ability to move short-term interest rates--as there will only be one which will have to suit the whole of this zone--there will be enormous tensions which will manifest themselves in other ways. If this all sounds a little general, let us be specific and consider the position of one or two countries in the next few months or in the first few months of 1999.
Let us consider Ireland. That country is undergoing a considerable property boom. There has been a 20 per cent. growth in money supply in the past year. There is the prospect of considerably higher inflation. Ireland's currency is probably undervalued and needs to be revalued to try to curb the rush into Ireland of capital flows. We all know what those capital flows can do, as our Asian friends have found out to their bitter cost. Ireland now needs to maintain its interest rates at a level not very different from ours. That would be the sensible thing to do. However, that is not the position that Ireland will be allowed to hold. It will have to reduce its interest rates dramatically over the next few months, and certainly by 1st January 1999 in order to qualify--assuming it is chosen, which I think will be the case--to join the system. What will happen? There will be the most enormous boom in Ireland. More money will rush in. We all know what follows boom; namely, bust. That is exactly what will happen to an economy that cannot use the normal levers to moderate and steer the economy at different times. That is a problem which is a direct result of attempting to centralise a single short-term interest rate on a non-optimal currency zone.
I suspect that the same kind of thing will happen in Spain, too. I believe it is quite likely that there will be a huge boom there followed by bust. Those of us who shrug our shoulders and say, "Well, so be it" should remember that when economies go badly wrong and politicians promise to lower unemployment but cannot
There is no real convergence among the continental economies. It is not just a question of Britain not being convergent; there is little convergence among even the economies which are the keenest to be up front and to be the first to join. I am glad that the British economy is standing aside from this. I believe that the Government's position on this matter is broadly right. With all due respect to the noble Baroness, Lady Symons of Vernham Dean, I do not think the position of the Government in practice is very different from the position of the previous government; namely, to look with great caution on this experiment--which everyone recognises to be a dangerous one--to hope it will work, but not to plunge in when we clearly have so few benefits to gain from doing so, and when our own position is so much more favourable than that of the main participants and leading members of this new scheme.
Even on the trade side it has to be remembered that most of our overseas earnings--well over 50 per cent.--come from outside the European Union members and outside the 11. If one adds both visible and invisible earnings together, the figure is considerably higher than 50 per cent. I believe that only 38 per cent. of our invisible earnings--which are just under half our total overseas export earnings--come from the European Union 15, and less than that from the 11. Therefore this is not really a natural area for us to consider at the moment. However, it may change. The whole thing may be such a rip-roaring success that the sheer lunar pull of it drags us in. But the idea that we shall lose out by being isolated--to use these loaded words--is, I think, the inverse of the truth.
We shall gain considerably from being able to stand aside from what will be a tricky and bumpy experiment. I declare an interest as I work in the City of London. Our vast financial system and the City of London will gain considerably from being able to operate--we are well equipped as it is--in the euro markets without being inside. Indeed we may well be in a more advantageous position just as we have been as regards the euro/dollar market. I am glad that we shall not go in at the moment. I believe that the Governor of the Bank of England is right to be cautious. Those who really want to see Europe stable and prosperous should be extremely cautious and guard carefully against the coming difficulties.
I noted what the noble Lord, Lord Taverne, said and I agree with him totally; namely, that we need to have stability in this country as regards policy. That must lead to the stability of the markets. The global markets are complex, fast moving and huge. One cannot play around in a mercurial way because of the consequences of that and the hammering that we would receive if we were to embark on such a risky approach. Matters are far developed. In May, under the British presidency, we shall see drawn up the list of aspiring countries to the euro zone. We shall know where we stand. The planning work will go ahead. Businesses will note all of that and they will establish their corporate plans in order to be able to react to all of that. That is just a few weeks away. In a few months the system will come into operation. That is such a short time. We are talking about a few months. For us to talk at this stage about tearing apart the treaty can be nothing short of wild and certainly mercurial.
As regards EMU, although the European central bank and the European system--the ESCB--does not fully exist, it is embryonic, its predecessor, the European Monetary Institute, is in place. I have good reason to believe that the policies are in position, in their plastic bags, ready to be endorsed by the new president and others who will serve on the ECB and the ESCB. We know that that will be Eddie George so far as concerns Britain. But all the preparation is done. One has to recognise that, although we shall not be in the first wave, the ramifications are there. We shall not be able to withdraw ourselves from its impact. Britain has to be aware that any wild reactions to the Amsterdam Treaty would not be acceptable.
My noble friend Lord McIntosh of Haringey covered this point at Question Time. My noble friend Lord Renton of Mount Harry asked a Question on preparations for the euro. My noble friend told the House in some detail about information published in leaflets, advisory meetings for businesses and so on. That work is going on now. It is already happening.
The amendment is not viable. It would not be sensible and I believe that it could damage the reputation of this good House if we were to suggest to the British public, and to the public in the remainder of the European
I rest my case there. If--heaven forbid!--this amendment were to go to a vote, I hope that Members of the Committee would wholeheartedly reject it.
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