Economic and Monetary Union

Part of the debate – in the House of Commons at 5:43 pm on 24th January 1991.

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Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Public Accounts Committee 5:43 pm, 24th January 1991

The right hon. Member for Hertfordshire, North (Mr. Stewart) spoke about the wide differences in the Community—a point with which I shall deal later.

The only justification for the hard ecu was that it allowed the Government to avoid making a hard choice. It was a way to avoid saying no. I welcomed that development, as I thought that it was wrong for the country to be in a minority of one with 11 others against it. That is not diplomacy or good sense. That creates enemies where one does not need to create enemies. The Treasury's brilliant idea was to present this as an alternative. It is not an alternative, it is nonsense, but I hope that it will serve its purpose and bring about what I hope will come eventually—a greater realisation of the problems of the EMU.

Removing the right to change the value of one's currency is an act of extreme importance. In the post-war years, we saw two important changes of our currency. The Labour party may be a little paranoid about such a move, because it came in in 1949 and 1967. The first was a result of the war and the second was the result of the Barber boom. It was the Labour Government who had to deal with the consequences of those. Faced with such impossible situations, a devaluation became necessary.

The trouble with devaluation is the delay. It takes a long time before people realise the inevitability of it. Devaluation is not the only solution, but it is a valuable weapon. The first devaluation in 1949 was most successful. The devaluation from $4 to the pound to $2·40 to the pound led to the benefits that we enjoyed throughout the 1950s. So good were the benefits that we were able to ignore the Messina conference, because we were sure of the enormous advantages that we had. It ended with the "never had it so good" years of Harold Macmillan. Much the same happened in 1967. After the boom years, we were once more in a balance of payments crisis and once again, the decision was deferred.

Devaluation is of particular importance to manufacturing industry, something that I hold dear because my constituency has one of the largest manufacturing sectors of all constituencies. It consists almost entirely of small firms, but these are of enormous importance to the country, as they are in Germany, Japan and other countries.

Devaluation helps exports and reduces imports but, most importantly, it helps manufacturing exports and discourages manufacturing imports. Nobody can deny that it has inflationary consequences, but there is a time lag before those come through. That is a little shorter now but, during that period, something can be done if there is good sense in Government. The City and the Bank of England do not like devaluation; nor do those who like a strong pound, because of the foreign investment opportunities that it provides. Such opportunities are not necessarily to the advantage of our country.

In deciding the issue between industry and the City in favour of the City, the Government have lost a useful ally —the Confederation of British Industry. The CBI once promised a bare-knuckle fight to defend manufacturing industry, but many of the members of the CBI are now in service industries and industries that benefit from the strong pound. The Government should look again at the needs of manufacturing industry. Some Governments have favoured industry and, although they have been few and far between, I am happy to say that they have always been Labour Governments.

The price has to be paid. Once one decides to go for a high exchange rate, which is what we have now, and to have EMU or ERM, which presupposes a fairly high value for the pound, one is left with the problem of industry, with the result that industry is told not to increase pay to compensate for price changes. In the days of the previous Prime Minister, the Government used to say that pay demands did not matter. They thought that money supply would provide the answer. They were soon disabused and learned reality. It is not long before we heard the exhortation that is the main principle of reducing inflation now—keep pay demands down. Of course I have nothing against exhortation. It does no particular harm, but neither does it do much good. It is not a policy in itself. Eventually it is seen to be inadequate, and other policies are looked for.

There are two ways of looking at EMU. One is to obtain some stability in currency markets. I am in favour of stability. There would be a lot to be said for the level of the pound against other currencies remaining pretty stable over a long period, until it became unsupportable, resulting in considerable devaluation or, possibly, revaluation. During that period one could have some very competitive pricing because people would not have to take into account the risks of devaluation or revaluation. There would be great advantage in that. One could compare it with what happens when there are more frequent changes in the value of currency, resulting in greater cost to both exporters and importers. I argue that the Bretton Woods period was very useful. But it could not last. Eventually adjustments of that kind are going to have to be made, but they will not be possible under EMU.