Of all EC countries, Greece had the largest fall in its headline inflation rate in the year to May 1992; the United Kingdom had the largest fall of the major EC countries.
I welcome that news. Is my right hon. Friend aware that producer output inflation is now down to 2·7 per cent? As that is the lowest figure since 1969, does he agree that it puts British industry in a strong position to emerge from the recession and to prove increasingly competitive in world markets?
My hon. Friend is absolutely right. Producer price inflation is a good forecast of the headline rate of inflation. My hon. Friend will be aware that the underlying rate of inflation—the retail prices index minus mortgage interest payments—has already fallen sharply recently. All that is good news for exports, for competitiveness and for recovery.
Does my hon. Friend realise that whatever the mixed feelings about the exchange rate mechanism, his answer shows what an effective weapon it is in the battle against inflation? At the same time, does it not provide a stable platform for smooth recovery, with no necessity to resort to the stop-go policies advocated by the Opposition?
There is no doubt that the exchange rate mechanism has been extremely effective in lowering inflation in those countries that are members of it. Furthermore, my hon. Friend makes the good point that if this country were ever to leave the ERM, we should still have to compete against countries with a low level of inflation gained from membership of the ERM. That is why we should stick with the discipline of the ERM, which we believe is good for recovery and will be good for the medium-term competitiveness of this country.
Does the right hon. Gentleman agree that he is talking a load of bilge when he claims a reduction in the inflation rate? Was not the high level that it reached a result of Conservative policies? Is it not nonsense for the Government to claim credit for bringing down the inflation rate when they were responsible for its rise?
The fallacy in the hon. Gentleman's approach is thinking that we can have growth in employment without an inflation rate equal to or better than that of our competitors. Britain is dependent upon trade. More than 30 per cent. of Britain's GDP is exported and imported. Britain cannot compete, cannot have growth in employment, unless it has a level of inflation equal to the best in the EC and among our major trading partners.
I agree with my right hon. Friend that the exchange rate mechanism is an external discipline bearing down on inflation, but is it not possible to legislate for internal independent bodies which can perform the same function? Bearing in mind the history of the Bretton Woods agreement, the gold standard and the sterling area, each of which collapsed for good reasons, does my right hon. Friend think that it may be prudent to have alternative domestic policies in place in case the same thing should happen to the ERM?
If my hon. Friend looks back at the period of fixed exhange rates, he will find that the inflation performance, not just of Britain but of many other countries, was a lot better than during the period of floating exchange rates. The ERM has a proven track record in reducing inflation. I repeat: even if we were not part of the ERM, we would have to compete with those countries that have succeeded the hard way in reducing inflation, and we must do that if we are to provide for small businesses, to provide for employment and to achieve growth in the future. That is the way the Germans and the French have done it. I do not know why my hon. Friends think that this country cannot succeed where other countries have.