I had intended to be in my place at the opening of the debate and I apologise to the House for the fact that a massive blockage on the motorway prevented me from being so.
This is a debate in which passions run high, but I should stress that I in no way blame that event on the exchange rate mechanism. No one's passions run higher on this issue than those of the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore), who has all the zeal of the newly converted.
The Chancellor was right to join the ERM. He was right to join it when he did, and I even go so far as to say that the rate at which he joined was not at all inappropriate, because the economic situation as it was developing, where we had undoubtedly had an increase in inflationary pressures as a result of the reaction to the 1987 stock exchange crash and so on, had clearly reached a point where the interest rate that my right hon. Friends had rightly applied would have had an impact and made the economy turn.
As the Treasury and Civil Service Select Committee pointed out, official Government forecasts invariably underestimate the size of a turning point, and in every successive cycle they have done so even more. There was a real danger—there may still be one—of recession. The Chancellor was therefore faced with a clear dilemma. If he had reacted to that possibility by cutting interest rates, the exchange rate would have collapsed and the effect on inflation would have been disastrous. The combination that he developed—of reducing the interest rate while at the same time taking us into the ERM—has got us out of the dilemma that he was facing. That is an important point which needs to be stressed.
The decision was the right one and it has not only a tactical advantage but a considerable strategic advantage. I believe profoundly that it is right to join the ERM but that it would be a massive mistake to go along the Delors road towards a single currency, and I shall say why in a moment.
We have joined the ERM and that increases our credibility in Europe. Mr. Delors sought to say that we were joining in order to prevent the making of any further progress, but I do not believe that that is so. However, it increases our credibility, and that is important in the negotiations that are about to take place in the context of the further development of monetary union.
As I have said at Question Time, the Chancellor of the Exchequer described Mr. Delors' idea that we were joining to stop things as rather rum. That was an apposite description—or perhaps "mot juste" would be the expression to apply to Mr. Delors. None the less, it is not right. We are clearly far better Europeans in many respects than the other members of the EC. However, there are some considerable dangers in joining the ERM.
I believe that the downward trend in inflation will be perpetuated, as the Chancellor has said, but once we are using interest rates to keep within the ERM we must give up any idea that we will establish a clear downward trend on interest rates. All kinds of random events may affect the exchange rate and require us to alter interest rates. That is a necessary consequence of the fact that we have joined the ERM. From a political point of view, that is a real problem.
A further problem is that it is possible that those in international markets will not view the Opposition's rather uncosted programmes in as favourable a light as those of the Government. Therefore, if there seems to be any real possibility of a Labour Government—there was not at the time of the last election—that in itself will exert a downward pressure on the exchange rate and an upward pressure on interest rates, unless the threat of a Labour Government is such that we are forced to change the parity within the ERM. That is a danger which should be brought out.
In addition, we have the problem of inflationary pressures from wage settlements. There are already substantial downward pressures of that kind. But we must remember, I am almost inclined to say, dear old Harold Wilson's remark about one man's wage increase being another man's job. Like many of his cliches, it was a relevant and important statement of fact which, without using those exact words, we need to get over.
My other main point arises from the Chancellor's Mansion house speech. In the context of the ERM, my right hon. Friend remarked:
Some commentators have suggested that interest rates are, in some sense, allocated to maintaining the exchange rate and are therefore not available to help achieve other objectives. They argue therefore that in consequence membership will require more active fiscal policy.
That is profoundly true. If one uses interest rates to control the exchange rate, it is necessary to have an alternative means of operating domestic policy. On many occasions, the two operate in the same direction. One may need both high interest rates and a tight fiscal policy. But sometimes one might need to use the interest rate to affect the exchange rate when the domestic economy requires something rather different.
The Treasury and Civil Service Committee's report on last year's Budget remarked:
The Chancellor pointed out that, if inflationary pressures were reflected by the position of sterling in the mechanism, interest rates will be used to sustain an attack on inflation. But this would only be possible at a time when the inflationary pressures had become sufficiently clear to be reflected in the exchange rate. There may be times, as happened in 1987, when interest rates were lowered to keep the level of sterling down when they might have been raised to prevent the development of inflationary pressure.
It is not always the case that the needs of the exchange rate are the same as those of the domestic economy.
My right hon. Friend the Chancellor said also in his Mansion house speech:
I have no doubt that it would be a huge mistake to return to frequent mini-budgets and fiscal fine-tuning. It is not necessary, its effects are not wholly predictable, and, in my limited experience, one Autumn Statement and one Budget a year are quite sufficient!
I am sure that we would all say, "Hear, hear" to that. Nevertheless, if the interest rate is allocated to fixing the exchange rate, fiscal policy may be needed to manage the domestic economy.
It is not only a question of fine tuning. One cannot avoid fine tuning by having an annual Budget. If there were a need for fiscal measures in October of any year, for example, it would be foolish to wait until the next Budget before introducing them.
Some years ago the Procedure Committee suggested an annual tax management Bill and a separate Bill concerned with managing the economy. In that context, I have almost come to the reverse conclusion. Perhaps there should be an annual tax management Bill at the time of the Budget, and another Budget as may be necessary for economic management at whatever time of the year may be appropriate. However, I agree entirely with my right hon. Friend the Chancellor that there should not necessarily be more than one a year.
My final point arises from the speech of the hon. Member for Hackney, South and Shoreditch in relation to a single currency. We simply have not got over the fundamental argument against a single currency. Many members of the public think that it is an attractive idea, and would avoid having to switch from one currency to another as one travelled around Europe. However, if we go for a single currency ahead of a high degree of economic integration in Europe, we shall be giving up the most important means of adjusting for differential changes over its geographical area—whether they relate to labour, capital, fuel, or other costs. The effect on unemployment in various regions of the European economy could be very serious.
I do not believe, as the hon. Member for Hackney, South and Shoreditch suggested, that a massive European fund would be the answer. Our own experience in this country, over a much smaller geographical area, does not suggest that such funds are effective. Moreover, there is no guarantee that the money would be transferred. We might enter into a single currency system and then find that, as a result of increased costs in Spain, there was a consequential effect on unemployment. There is no guarantee that everyone else in Europe would cough up to bail out the Spanish. Such a situation would give rise to enormous political pressures. For proof of that, we have only to remember what happened on a small but disastrous scale in relation to the CAP negotiations.
I believe that my right hon. Friend the Chancellor of the Exchequer is right to take Britain into the exchange rate mechanism, and I shall support him in the Lobby this evening.