Economic Policy

Part of Prayers – in the House of Commons at 5:10 pm on 24 September 1992.

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Photo of Mr John Watts Mr John Watts , Slough 5:10, 24 September 1992

The right hon. Member for Yeovil (Mr. Ashdown) argued that we might have been better able to withstand last week's pressure on sterling if we had had an independent central bank and the House did not have the right to determine whether Britain joins a single currency. He did not describe any measures that were not already available to the Bank of England last week. My right hon. Friend the Chancellor was not reluctant to sanction massive intervention in the markets or substantial increases in interest rates to protect the parity of the pound. There were no other measures that an independent Bank of England could have taken.

The right hon. Member for Yeovil argued that the markets were in some way expressing their doubts about whether Britain intended to stay in the ERM and on course for economic and monetary union. If that is true, what have the markets been commenting on in the past week with regard to the lira and the French franc? Are there doubts about whether France wishes to remain in the ERM or whether it is committed to economic and monetary union? I suggest to the right hon. Gentleman that the markets were commenting on the clear reluctance of the Bundesbank ultimately to be involved in a single currency and on its doubts about whether, with the current policy stance in Germany that is being dictated by domestic concerns—in my view, rightly so—the ERM parities for any of the other currencies were sustainable.

By reaffirming the fundamentals of economic policy, my right hon. Friend the Prime Minister helped to remove some of the obscuring fog that has surrounded the conduct of policy recently, in particular by emphasising the importance of a policy to drive down inflation. The policy that has been pursued since 1988—when interest rates were raised to an appropriate level to counter inflation that has built up from an inappropriately low interest rate policy and when we were following the deutschmark outside the ERM—has brought about a substantial improvement in inflation.

It is a matter of record that I have never been an enthusiast of the exchange rate mechanism. I declined to go through the Lobby to support the motion in the name of my right hon. and noble Friend Baroness Thatcher to approve the Government's decision to enter. None the less, I acknowledge that the first 12 months of our membership helped to reduce interest rates without stoking up inflation. In October 1990, the great imperative was to reduce interest rates because of the growing recession without causing a serious sterling crisis and a run on the pound. That was made possible only by our joining the ERM. As inflation at that time was much higher, the inflationary pressures that would have flowed from a weakened currency would have added to our inflationary difficulties. Therefore, although I have never been an ERM enthusiast, I acknowledge that, during that period, our membership assisted policy, the central aim always having been to get inflation under control.

For about the past eight months, our membership of the ERM has constrained our ability to reduce interest rates in order to stimulate the economy, which has increasingly become the greater imperative. I have found among my constituents a sense of relief that we are no longer bound by our commitment to the ERM.

There has been much crowing from the Opposition—understandably so—about what has been described as a major U-turn in Government economic policy. Opposition Members will not be surprised to learn that I analyse the situation slightly differently. If my right hon. Friend the Chancellor, being aware that the Italian Government intended to devalue the lira, had said, "Let us devalue the pound now," that would have been a U-turn in policy and it would have undermined the credibility of any policy that the Government pursue in the future. But my right hon. Friend did not do that; he stood by the commitment that he, the Prime Minister and the Government have consistently made to seek to maintain our position within the ERM and to take whatever measures are necessary to achieve that objective. Intervention in the markets ultimately did not succeed in steadying the pound and the sanctioning of two rises in interest rates did not succeed in securing stability for the pound.

Those measures were taken against the background of a whispering campaign—whispers in double forte—by the Bundesbank that the pound and other currencies within the system should be devalued. That reinforcement of sentiments already present in the market built up irresistable pressures. I therefore view the decision that my right hon. Friends took not as a U-turn in policy but as a sensible and pragmatic position to adopt. If one is facing a wall, it is not sensible to bang one's head against it; one turns around and finds another way out of the problem.

The Leader of the Opposition seemed to offer a two-part solution to recent events, the first part of which was the oft-rejected Labour package of spending more taxpayers' money and borrowing a great deal more money. [interruption.] Yes, borrowing and spending a great deal more than my right hon. Friend the Chancellor has planned to spend or borrow. Such a policy has been rejected by British people in successive general elections. I hope, without intending any personal malice, that the right hon. Member for Islwyn (Mr. Kinnock) does not have the opportunity, by an appointment to the European Commission, to introduce through the European back door policies that have been rejected twice by the British electorate when put forward by the Labour party under his leadership.

The other part of the Leader of the Opposition's approach is what I would describe as "bier and wurst with the Bundesbank". The argument goes that everything would have been fine if the Governor of the Bank of England and my right hon. Friend the Chancellor had got together with the Germans and asked them nicely if they would agree to a general reduction of interest rates. There should also have been a general realignment of rates within the ERM.

That approach was clearly doomed to failure before anyone even thought of trying it. While it is perfectly fair to be beastly to the Germans and the Bundesbank for a whispering campaign to undermine sterling, it is not valid to criticise German policy by suggesting that Germany adopt policies inappropriate to the needs of its domestic economy and its great need to get on top 'of the inflationary pressures there. It would do nothing to strengthen the economies of the European Community if the motor economy, the German one, took steps that would weaken itself, especially with reference to inflation.