Exchange Rate Mechanism

Part of the debate – in the House of Commons at 3:38 pm on 15th October 1990.

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Photo of Mr John Smith Mr John Smith , Monklands East 3:38 pm, 15th October 1990

As the Chancellor is aware, the Labour party welcomes the decision that sterling should join the exchange rate mechanism, not least because of the potential benefit that a more stable exchange rate could bring to the process of Britain's much-needed economic recovery. However, it will not of itself lead Britain out of the economic cul-de-sac of high and rising inflation, recession, increasing unemployment and serious balance of payments deficits to which the Government's policies have led.

I want to ask the Chancellor first about the celebrated Madrid conditions into which the Prime Minister entered in June 1989, and which she reported to the House formally on 29 June last year. At that time, the Prime Minister was in no doubt that the rate of inflation was too high for Britain to enter the exchange rate mechanism. In a reply to a question from my right hon. Friend the Leader of the Opposition, she said: On the exchange rate mechanism, our promise has been that we would go in when the time was right. I"— note, "I"— put conditions on that and made it much clearer that when those conditions were met we should be able to go in. One condition depends on us, which is that we get inflation well down". Earlier, she said:

we must first get our inflation down."—[Official Report, 29 June 1989; Vol. 155, c. 1111, 1110.] Every time that she has been asked since then, the Prime Minister has repeated the condition. In July 1989, inflation was to be "significantly lower". The Chancellor said on 26 March this year: we wish to see inflation fall before we enter the mechanism."—[Official Report, 26 March 1990; Vol. 170, c. 117.] Only two weeks ago, the Prime Minister was reported as saying in Switzerland:

The Madrid conditions won't be changed and they include getting inflation nearer the European average. The Prime Minister's role is crucial—she invented the Madrid conditions. They were not imposed on her by other members of the European Community. The present Chancellor was not in Madrid when these conditions were suggested by the Prime Minister, and neither was his predecessor, the former Chancellor. It was the Prime Minister herself, assisted by the then Foreign Secretary, who is now Leader of the House, and who accompanied her to the Madrid summit. Sadly, his views do not seem to coincide with those of the Prime Minister or of the present Chancellor.

But if the condition is clear—and it could hardly be made more clear—that inflation had to be reduced before we entered the exchange rate mechanism, it is equally clear that it has not been fulfilled. Headline inflation in June 1989 was 8·3 per cent. and is now 10·9 per cent. If we take inflation on the basis that the Chancellor likes to take it—by excluding completely mortgage rates and the poll tax, which is a favourable estimate from the Government's point of view—then, it was 5·8 per cent. and now, it is 7·9 per cent.

I ask the Chancellor to explain why there has been such a humiliating U-turn by the Prime Minister who was the inventor of the Madrid conditions and is now their arch-destroyer. Is it not simply because the Government, due to their appalling mismanagement of our economy, have been forced to concede that they could not achieve the inflation target which they had set for themselves?

Why does not the Chancellor admit this in his statement to the House, on television and elsewhere? Why does not the Prime Minister—whose role is so crucial in this affair that she must take part in the debate which we hope to have in the House—admit it? If our parliamentary accountability is as important as she frequently claims in this context, why is she reluctant to take part in the debate? Is it not because she would find it impossible to justify the abandonment of a commitment that she made to the House on 29 June last year?

Would not the Chancellor have been wiser to admit that our economy is in dire trouble, rather than to pretend, as he did once again today, that all would soon be well and to claim, as he did on Channel 4 television on the day of his announcement, that at that time there was an ideal conjunction of events Ideal, when inflation was twice as high as that in the rest of the countries in the exchange rate mechanism? Ideal, when the economic consequences of the Gulf crisis are quite unknown? If these conditions were ideal, what were the Government waiting for during all the years when inflation was low and during all the years when there was no Gulf crisis?

Does the Chancellor not understand that nonsense like this not only fuels scepticism in the markets and elsewhere, but fosters downright incredulity about statements by Ministers? Is is not clear that the Government, baulked and cornered by their economic failure, have joined the exchange rate mechanism as a last resort?

Now that Britain has joined, will the Chancellor give us his estimate of the consequences for our economy? I hope that he will answer these questions directly. Given our serious balance of payments problems, is it his judgment that the rate at which we agreed to join is sustainable? What is his estimate of the effect on the balance of payments over the period ahead? Will the balance of payments deficit be progressively reduced? Is he satisfied that the arrangements through the central banks under the Basle-Nyborg agreements will be adequate to sustain the management of a currency as widely traded as sterling? Why did he not seek a strengthening of regional policy in the Community as one means of helping to bridge the gap between countries with more successful economies and countries, such as Britain, which are in difficulties?

Finally, I wish to ask the Chancellor—[Interruption.]