Exchange Rate Mechanism

Part of the debate – in the House of Commons at 6:43 pm on 23rd October 1990.

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Photo of Mr William Clark Mr William Clark , Croydon South 6:43 pm, 23rd October 1990

We have heard some very good speeches. I am sure that everyone enjoyed that of my right hon. Friend the Member for Blaby (Mr. Lawson). Like other Conservative Members, and, probably, Opposition Members, I am sorry that he is to leave politics at the end of the current Session.

The right hon. Member for Bethnal Green and Stepney (Mr. Shore) castigated his Front Benchers with great aplomb. His argument was very persuasive, but, as he has always made clear his opposition to the Common Market, the ERM was for him a purely incidental element. My right hon. Friend the Member for Shropshire, North (Mr. Biffen) entertained the House with an excellent fighting speech, although I am bound to say that I did not agree with any of it.

Some time ago the Government made a commitment to enter the ERM when the conditions were right. Three conditions were cited: exchange control, the value of sterling, and, of course, inflation. The other Common Market countries have effectively abolished exchange control; the value of sterling has been fixed at DM2·95. As for inflation, we must remember that, while our current inflation rate is 10·9 per cent., the underlying rate—according to the formula used by our Common Market partners—is 8·3 per cent. The latest average Common Market rate is between 5 per cent. and 5·5 per cent. Surely it is wrong for us to compare our 10·9 per cent. only with the German inflation rate.

Presumably all hon. Members accept that, as a result of the Government's economic strategy under both the present Chancellor and his predecessor—the imposition of tight monetary control—inflation has shown a downward trend. If we refer to the money aggregates, whether we take sterling M0 or sterling M4, we must recognise the fall that has taken place over the past seven months. I am convinced that the Governnment's policy is working. Although the inflation rate may rise next month because of the rise in oil prices caused by the Gulf crisis, I am certain that it will start to fall rapidly next year, and will soon reach the Common Market average. It should not be forgotten that the other Common Market countries are also suffering from the oil price rise, and that their retail price indices are also affected.

Having accepted the premise that our inflation policy is working, we should consider what our position will be now that we are members of the ERM. There is still a good deal of work to be done. There is a certain amount of flexibility in the 6 per cent. band, which I hope will come down to 2·5 per cent. in due course; but we shall continue to suffer from the lack of competitiveness from which we have been suffering for some time.

I did not entirely understand the attitude of the right hon. Member for Bethnal Green and Stepney towards full employment. No one owes each and every other person a job; we must live in the real world. It was, I feel, rather churlish of the right hon. Gentleman not to mention that, although we still do not have full employment, more people are in work today than were in work 10 or 11 years ago.

Another thing that I find disconcerting is the tendency—particularly noticeable among Opposition Members and in some sections of the press—to talk down the British economy, as though it were bankrupt. Credit is not given for increased production, employment and investment both in this country and overseas. Of the 50 top-performing companies in Europe, 28 are British. That is not a bad record.

What we should worry about is the unit labour cost. Of course, everyone wants the largest possible wage increase, but for some time it has erroneously been thought that the retail prices index—which is, as we know, a false inflation rate when compared with other European rates—is the automatic starting point in wage negotiations. Workers are therefore asking for 10·9 per cent. pay increases.

Clearly the only way in which companies in manufacturing industry—and, indeed, service industry—can stay in business is by being competitive. We have been down that road before, and in many cases we have priced ourselves out of the market and, therefore, out of jobs.

There is much talk about Britain being isolated. I do not object to that; indeed, we have been isolated before. Hon. Members will remember that we were isolated in the war, but we soldiered on. We were isolated in our attitude to the common agricultural policy, but it came right in the end. My right hon. Friend the Chancellor should ignore the criticism about isolation and concentrate on the hard ecu. Graham Bishop, the financial adviser to Salornon Brothers, wrote a good article on 12 October, and I commend it to the House. He says about the hard ecu that, whether one is investing or selling abroad, in order to have stability the component parts of the ecu should be frozen for three, four or five years so that there is some sort of horizon or limit on which business men can depend.

I do not agree with stages 2 and 3; we must see how stage 1 turns out. We cannot blindly run into stages 2 and 3—that must depend on the evolution of the market over the years. I do not doubt that the right hon. and learned Member for Monklands, East (Mr. Smith) will refer to credit controls in his speech. We have already been down that road. I cannot understand how we could possibly impose credit controls on, for example, Chase Manhattan bank. How do we persuade a Swiss bank to make a deposit ratio change? If we impose that sort of exchange control, businesses will go to foreign banks. We will be cutting off our nose.

As my right hon. Friend the Chancellor said, ERM is not a soft option; it is another weapon in the Treasury's armoury. The prime objective of that economic strategy is to squeeze inflation out of the economy. Inflation is the bugbear of any society, whether third world, western world or any other. It erodes savings and hits hard on the saver. It is especially hard on those with small incomes. Joining the ERM is not a soft option for the Chancellor and we must soldier on. I am sure that I speak for most of my hon. Friends in wishing our right hon. Friend every good fortune in his December meetings.