European Community (Developments)

Part of the debate – in the House of Commons at 4:50 pm on 11 June 1990.

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Photo of Mr David Howell Mr David Howell , Guildford 4:50, 11 June 1990

The Select Committee on Foreign Affairs will be grateful to my right hon. Friend the Secretary of State for Foreign and Commonwealth Affairs for his kind references to its recent report on the Single European Act. The report was not just about that Act, although the Committee concluded that it had a considerably greater institutional impact on the Community's development, and on Britain's place in it, than many prophesied or assured the House at the time.

The Committee also examined other major institutional pressures building up in the Community and the way in which they are now forcing themselves to the fore, demanding a complete reassessment of the Community both internally and externally in respect of its relations with the rest of the world—as well as a reappraisal of our national position within the European Community. It is the United Kingdom's responses to those enormous pressures and changes—which are fast building up, and have come to a head even since the report was published —that I want to address in three respects.

The first concerns German unification. The report is not about German unification but deals with its impact on the European Community—which we recognise will be considerable. It will also be very rapid. The view has been expressed that the German reunification process will proceed in an orderly way, perhaps fulfilled and completed next year, and synchronised with the question of the external security status of the greater united Germany in the new European architecture being resolved.

I do not think that any of that will work out. On the contrary, the full economic and monetary union of the two Germanies will take place in a few weeks' time, on 2 July. That will require not only changes involving the currency and the full circulation of the deutschmark through Eastern and Western Germany and the setting up of Bundesbank branches in the East German Lander, but a total submerging of East Germany's legal, technical, taxation and social systems, as well as of its governmental systems, into those of the Federal Republic.

We shall see not only economic and monetary union but a very rapid move beyond that, to full political union —possibly before the end of this year. It is certainly my impression, and that of some of my right hon. and hon. Friends who visited Bonn since writing the report, that Chancellor Kohl and the Bonn coalition are determined to achieve, in addition to economic union on 2 July, full political union of the greater Germany by Christmas—certainly before the current German Parliament ends on 13 January next year.

Any illusions that we may have that German unification will wait for our considerations of how to change and reform the Community, or until we work out how to achieve a wider security system in Europe that will keep the Soviets happy, should be dispelled. Things will not fall into a neat pattern in that way.

The process of German unification will place enormous stress on the Community, both internally and externally. The external strains are not really the main subject of the debate, although they have been touched on by my right hon. Friend the Secretary of State and by the right hon. Member for Manchester, Gorton (Mr. Kaufman). They raise the question of Mr. Gorbachev's position and that of Soviet troops in eastern Germany. There must be a connection between the Germans' desperate hurry to achieve full unification, and quickly, and the obvious inclination of the Moscow policy makers suddenly to discover all sorts of difficulties and reasons why they should delay withdrawing their troops from eastern Europe.

I do not want to spend too much time on that aspect, but my own view is that my right hon. Friend the Secretary of State and policy makers in the west should not spend too much time worrying about Mr. Gorbachev's position, and nor should they take too seriously his apparent attempt to bargain with his army of 320,000 people stranded in East Germany, together with about 180,000 Soviet dependents, in quite nice barracks there.

The question whether or not those forces should be withdrawn, and of whether or not that situation should be used by Mr. Gorbachev not merely for reforming NATO, as no doubt we want to do, but for changing NATO in ways that he wants, into an entirely different security structure, should not be taken at all seriously. Of course we want to reform NATO, but there is no hurry.

We should do that in our own way, in our own time, and not be fazed and compelled into a false timetable either by German impatience for unity—which is utterly understandable and will not stop or be resisted—or by Soviet propositions and fears that must be pacified and bought off by changes to NATO or even by huge bribes to finance the continuation of those unhappy troops in East Germany, or to finance their return to the Soviet Union if they are not to remain in East Germany.

Those are the external issues affecting the Community caused by the move to German reunification, and no doubt we shall debate them further in the months ahead. However, it would be sad if we found ourselves diluting NATO at the diktat of Soviet policy instead of reforming NATO in the way that we want, on the basis of its past success in protecting European peace.

The internal strains caused by East Germany joining fully the greater German republic and therefore automatically the treaty of Rome and the European Community will also be considerable. We can already see the first signs of those strains. They arise on the financial side, by virtue of the fact that East Germany is a bankrupt state and will require billions and billions of deutschmarks to get it up and running again. That will place an enormous strain on the German money supply, monetary system and budget. Some gargantuan figures have already been spelt out as to what the Federal Republic thinks it will have to find from extra borrowing and revenues to finance a reasonably smooth transition—although probably it will not be very smooth at all—from East Germany's rundown, centralised economy to it being a proper part of a free market economy.

The effect will be to place strain on the deutschmark, on the currencies of Europe, and on the European monetary system. Pressures may also come from the Bundesbank —I do not know whether they will be resisted—to raise German interest rates, without wanting all the other western countries to follow. There will also be pressures on German inflation generally.

After 2 July, we shall be heading for a period of considerable turbulence in the European monetary system. It is no surprise to me that the governor of the Bundesbank has been saying, in effect, "For heaven's sake, if we have this problem to handle in the next few months, we can do without the additional problem of sterling trying to join the exchange rate mechanism as well." He has said that more than once, and that worries me. I am one of those —not everyone is—who would like to see the pound have a context in the exchange rate mechanism and a proper policy for sterling that will give it some stability. There is a possibility that our opportunity to do that will slip by. We have taken no action so far.

Now I imagine that my right hon. Friend's plan is to get into the exchange rate mechanism. Then, when the delegates sit at the conference table at the proposed intergovernmental conference on monetary union in December, they will be able to say that we have reached stage 1 and are members of the ERM, and can therefore discuss further stages towards monetary union, why we do not agree with Delors stages 2 and 3 and some other ideas. I am concerned that their plan could be upset by the views that the governor of the Bundesbank is pressing, because he and the Germans will have different priorities during the next few months—to achieve German economic and monetary union in a stable and orderly fashion without creating too much inflationary pressure.