Exchange Rate Mechanism

Part of the debate – in the House of Commons at 8:38 pm on 23rd October 1990.

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Photo of Mr Win Griffiths Mr Win Griffiths , Bridgend 8:38 pm, 23rd October 1990

Today's debate has been widely drawn, although the motion and amendments clearly focus on the exchange rate mechanism. We see that the Government are expecting the House to congratulate them on going into the exchange rate mechanism when they did and at the rate they did. It seems that the Government are using what might now be described as the Baker gambit—when they have to say something that is ludicrous, they make their claim as preposterous as possible in the hope that everybody will be diverted from what is really happening.

Entry into the exchange rate mechanism had nothing whatsoever to do with the long-term economic future of this country, with the prosperity of most of the population and with the ability of most of the adult population who want work to get that work. Entry had everything to do with the Government's desire to create economic conditions for between six and nine months which would enable them to go to the country with a faint prospect of winning an election.

There is no doubt that the Madrid conditions were well and truly ditched by the Cabinet. I do not know about the Prime Minister herself. From her inability to speak today, it seems that she was probably dragged, kicking and screaming, into this agreement, and only acceded to it with the promise of a 1 per cent. cut in interest rates to dangle before the Conservative party conference. Perhaps the Government were and are hoping that, as a result of entry into the exchange rate mechanism, they will be able to cut interest rates further and that inflation will take a dramatic downward turn.

The whole basis of entry into the mechanism at this time was Treasury forecasts. I do not know how many forecasts the Treasury have made, but the one chosen by the Chancellor predicts a significant decline in interest rates, to a point where they will be roughly in line with the Community average of 4 or 5 per cent., at some time next year I assume, although that is not entirely clear.

If we study the Chancellor's forecasting record in the past few years at Budget time and compare his forecasts with the rate of inflation at the end of the year, we find that it overran the estimate by 65 per cent. in 1988, by 36 per cent. in 1989 and this year it will probably be about 40 per cent. above the forecast rate. What confidence can we have about such a momentous decision as entry into the exchange rate mechanism if it is based on a predicted rate of inflation which, judging by the record of the past few years, will still leave us about 45 or 50 per cent. above the Community average, which is considered desirable?

The truth is that the teasing had to stop in October. Throughout 1990 the Government relied on dangling the possibility of entry into the exchange rate mechanism before the financial markets to keep the pound high without having further to increase interest rates which were already at a record high. This decision was the last desperate throw of the gambler's dice by the Government to try to win the next election—not to try to strengthen the economy.

What is the state of the economy? It is such that a balance of trade deficit of £845 million can be heralded as a triumph by the Government.

Today the British chambers of commerce quarterly survey reveals that, apart from a minor but welcome exception in the north-east, manufacturing industry throughout the country is forecasting a decline in orders. More companies are forecasting a decline than an increase, and the decline averages 11 per cent. in the country as a whole.

Even more important is the fact that companies employing more than 500 people are forecasting that employment prospects next year are likely to go down by 20 per cent. The service sector is forecasting an increase of only 3 per cent. whereas last winter it was forecasting a 14 per cent. increase.

The economy is undoubtedly in deep difficulties. Our high interest rates are a commentary on the weakness of the British economy when compared with that of most other countries. Now we have been reduced to saying that the main purpose behind joining the exchange rate mechanism was to try to bear down on wage costs in the economy to make our industry more competitive. Those fair words from the Chancellor and the Secretary of State for Employment must be seen against the background of company directors getting salary increases 3 and 4 per cent. above the average that most workers are receiving. Almost without exception, salary increases for the highest paid directors are in the stratosphere compared with what their workers are getting. For example, the top directors of Barclays bank got more than a 47 per cent. increase in their pay, but the lowest paid staff got a 10 per cent. increase—these figures are from the September 1990 bargaining report.

Blue Circle's directors got a 17·3 per cent. increase, whereas their lowest paid workers got 8·5 per cent. There are one or two honourable exceptions, including two companies that operate successfully in my constituency. The directors of Sony, the television manufacturer, took a 6·8 per cent. increase in pay—if only the rest of British industry had followed that lead—and their lowest paid workers got a 9 per cent. increase. The same can be said about Ford, where the top directors got 8·2 per cent., and the lowest-paid workers got 10·2 per cent. However, the general picture is that highly paid directors get large increases, but the rest of the work force generally gets an increase below the rate of inflation.

My right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) rightly expressed his anxiety about employment prospects in Britain as a result of entry into the ERM at such an exchange rate. In a perfect world we would not like to start from this position. Given Government policies, there can be no comfort for unemployed people now, because they are not likely to get jobs, and, under these conditions for entry, many people who are employed are likely to become unemployed.

It was most unkind and unfair of my right hon. Friend to undermine the argument put forward by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith), which formed the basis of our amendment to the motion. Yes, we want to be in the exchange rate mechanism, but it is essential that other policies are tied in to help Britain become more competitive. We need more investment in research and in skill training. We need a better educated work force and an improved infrastructure because, without improved infrastructure and better regional policy, peripheral regions will suffer. That is why it is desirable to follow our policies now that we are in the ERM.

Some hon. Members spoke about dangers of the sovereignty of Parliament. For the last decade and at any time when there is a large Government majority, the concept of the sovereignty of Parliament is meaningless. We can talk about the sovereignty of the Government but certainly not about the sovereignty of Parliament. Hon. Members were also worried about getting tied into a single currency, independent central banks and economic and monetary union. Sovereignty is not totally independent and free standing. It is indivisible across the European Community and even there it cannot stand on its own because world events, such as the Gulf crisis, can undermine the sovereignty of nations to do as they will. They must respond to new situations.

The problem can also be solved by making the institutions of the Community more democratic. That can be done by giving up the practice of the only law-making institution in the democratic world being allowed to hold its meetings in secret. I am talking about the Council of Ministers becoming open to the public. We can take steps to ensure that the European Parliament has more of a role in the Community's legislative process. We can also ensure that the House has more of a role. In this case, as in many others, the House was not consulted and not allowed to vote. Britain joined the ERM during the recess and immediately before the Conservative party conference, and the Government joined it in order to allow embarrassed Cabinet Ministers off the hook.

Doubts were expressed about the concept of an independent central bank for Europe. Those are misplaced doubts because, as my hon. Friend the Member for Hackney, South and Shoreditch (Mr. Sedgemore) said, in the last resort the bank is not independent. He cited the example of the one-for-one rate between the deutschmark and the ostmark on the unification of Germany. Herr Pal did not want that to happen, but Herr Kohl told him about the urgent political necessity for it. The Bundesbank may now have to reshape some of its policies, but it will still attempt to make sure that inflation in Germany does not run away.

Some hon. Members have looked into a future of economic and monetary union but that is not the purpose of the debate. There is no point in wringing our hands and saying that we do not want to be a part of this process when we are members of the club in which the process is evolving. We have to play a positive role by setting out what we believe are the necessary conditions as the process gets under way and is undoubtedly achieved.

We enter the ERM when the exchange rate was DM2·95. I shall not speculate about what might have been a better rate, but I shall deal with the relationship between the exchange rate and inflation and our export performance. At this time last year I asked the House of Commons research department to look into the relationship between the exchange rate and inflation. It looked at the period from 1975 to 1989. In a letter I was told: I found no significant evidence of the expected relationship between a change in the exchange rate and the retail price index in any of the following five months. That is, the five months during which there was a change in the value of the pound on the foreign exchange markets. The letter goes on: Within this five month period less than 6 per cent. of the variation in the inflation rate was attributable to the change in the exchange rate index. The evidence seems to show that, on the whole, manufacturers and the economy absorb much of the impact of a change in the exchange rate. I also asked about competitiveness and changes in the exchange rate and was told: However, for the small exchange rate falls that have taken place there is evidence of a gain to competitives for a year or two. Certainly there is overwhelming evidence of a considerable loss to competitiveness after the pound rose so high for 1979–82. The message is that we should have gone in at a slightly lower rate. That would not have had a great impact on inflation and would have helped our competitiveness. If the Government were to follow the policies in our amendment, we would have a much healthier and a more prosperous economy rather than the disaster for which we are heading.