Orders of the Day — Economic and Monetary Union

Part of the debate – in the House of Commons at 6:10 pm on 30th April 1998.

Alert me about debates like this

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury) 6:10 pm, 30th April 1998

No, unfortunately not—according to the Government's game plan.

Let us start with the decision itself, and let us be honest about the balance of the argument. No one is suggesting that, on day two of the single currency, we shall all be cleaning our teeth in champagne. There will be up-front costs of introducing the new currency.

Not many people spend their time travelling through the 15 countries of the EU, changing their money back and forth into different currencies until bank charges gobble up 50 per cent. of their cash, and that is not the core issue. However, in the view of the Liberal Democrat party, the long-term gains of joining the single currency will be far greater than the short-term costs.

A single currency will help our firms to trade, by reducing risks and instability, and membership of the single currency will almost certainly mean lower interest rates in Britain—probably, between 1 and 2 per cent. lower than would otherwise be the case. That is worth, very practically, between £300 and £600 a year to the average mortgage payer; thousands—if not millions—of pounds a year to businesses; and billions of pounds to taxpayers as a result of lower debt charges. The single currency is also likely to bring gains from greater price competition, lower transaction costs and higher inward investment.

What action should we be taking now to prepare Britain for the single currency? The first move should be an early referendum, in this Parliament, because a change of such magnitude should be made only with the explicit approval of the people, and because, without a clear decision—this is fundamental—no proper planning can be done by business or Government. People will not spend hundreds of billions of pounds to prepare for something that they are not sure will happen, or—if it does—when it will happen.

Once a referendum has been fought and won, the Government need to promote a series of "docking proposals" to ensure that the single currency can be introduced successfully. The Government's first step must be to comply with the conditions for joining the single currency. Some of those are essentially technical, such as longer terms of appointment for Bank of England officials. However, the most fundamental point is that a period of exchange rate stability is likely to be necessary before an irrevocable locking of exchange rates.

However, I contend that, once the decision to join is taken, that task would become far easier than it would be now. Markets would immediately bring down United Kingdom interest rates, and sterling would converge towards a likely monetary union joining level. We have had evidence of that in the markets.

Therefore, given the political commitment to join, and wide bands of acceptable fluctuation, there is no reason why Britain should have any difficulty in stabilising the pound at an acceptable level before entry.

Fiscal policy would have to operate in relation to monetary policy in order to converge UK and euro interest rates, so that, at the moment of docking, they were at broadly the same level. That is the convergence which we need to secure. To facilitate that process, the Government should now provide for half-yearly convergence reports, which I suggest should be jointly presented to the Treasury Select Committee by the Treasury and the Bank of England.

What about our economy within the single currency? Is there enough flexibility within the single currency area to make EMU work effectively? I believe that the fears have been much exaggerated by the critics, who draw attention—I heard one of them shout from the Back Benches—to disparities in unemployment within Europe, and decry the loss of national monetary flexibility. In Britain, however, unemployment rates range from some 0.9 per cent.—in the Wokingham constituency, interestingly—to more than 18 per cent. in inner Birmingham.

Presumably, the logic of the red-blooded, Euro-sceptic, right hon. Member for Wokingham (Mr. Redwood) would lead to different currencies and monetary policies within the United Kingdom. Perhaps the right hon. Gentleman has moved on from his fantasies about becoming the 51st state of the USA, which seems to be his ambition, and will be pushing for a central bank of Berkshire, which could set an interest rate perfectly attuned to the local economy. That, I fear, is the logic of his position.

There are actions that we could take to introduce greater flexibility. First, we could make our economy slightly less sensitive to interest rate changes by encouraging a move to fixed-rate mortgages of, let us say, 10 to 15-year duration. Secondly, we need to consider a larger role for fiscal policy as an economic stabiliser—something that has fallen out of fashion as a result of some poor recent economic management and the political fixation about lower taxation. What if we could frame a better fiscal stabiliser, not by taxing people more but by, let us say, varying contribution rates to a compulsory pension scheme, or varying tax reliefs on existing pension schemes?

Thirdly, we could facilitate labour mobility through pension portability and the mutual recognition of qualifications. Finally, we should be doing more to shape monetary union in our own interests. We should be arguing for more fiscal flexibility for countries with responsible amounts of public debt, such as the UK. We should also press for a European central bank that is more accountable to the people of Europe through the European Parliament.

While others design and build, as they are doing this weekend, Britain dithers on the touchline. While we delay, we are being left out of key economic decisions that will be taken by the Euro X committee, and ultimately by the central bank. Those decisions will directly affect our domestic rates of interest and exchange rates, but no British representative will have any influence on them.

If the Government are, in principle, in favour of joining monetary union, are they not aware of the enormous risk of delaying entry and leaving its timetable so vague and imprecise? I suspect that the Chancellor's attempt to build stability at home and win economic influence abroad is undermined by a Prime Minister with his eyes too much on the latest opinion polls and too little on the main chance for Britain. Being a populist Prime Minister certainly makes him popular, but it may also make him duck the leadership decisions that are necessary to bring about the right results for the United Kingdom.

If the Chancellor wants to secure the economic stability to which he says he is committed, he should knock on his Downing street neighbour's door and insist on reopening the Government's single currency policy immediately.

The sad fact is that the Government have got themselves into this position by accident. We all know that the Chancellor's preferred position was to take an early decision on entry; but that was unfortunately leaked to the Financial Times, with consequential effects on the markets which clearly demonstrated what the benefits would be. As a result, an embarrassed Government sent Charlie Whelan round to the Red Lion pub with his mobile phone, to have a pint of beer and to spin the argument in the opposite direction. The Chancellor then came to the House and gave us his economic tests—and his decision that we would not decide on entry within the lifetime of this Parliament.

Once monetary union is established, it will become more apparent as each day goes by that Britain's interests demand a decision in this Parliament. A Government who fail to take that decision will have failed the British people and the British national interest.