I declare my interest with Commerzbank, which is declared in the Register of Members' Interests, and I took advice on the content of the debate before I sought it. Commerzbank is a German bank that already accounts in euros. The debate therefore does not specifically and directly affect the body in which I have a registered interest, but relates to the Government's policy to change the national currency, which would affect everyone who uses the pound. The Government specified that five tests must be completed before a referendum would be called. Their position used to be that we would join when we had satisfied all five.
In The Observer on
"There can only be a referendum if there's a government recommendation to join. There'll only be a recommendation to join if the five tests are met. If not, there won't be a referendum."
"The government will form a view on the basis of the economic assessment, so if you like, it's a political judgment on the basis of an economic assessment."
Gus O'Donnell was right when he said in The Times on
"Economics can never be clear and unambiguous. Ultimately it will be a political decision."
The waters were muddied further when the Chancellor said that the economic case must be clear and unambiguous. He put his party in an impossible situation that needs clarification. I have included the dates because Gus O'Donnell's statement came before the Chancellor reiterated that there could be a referendum only when the economic case was clear and unambiguous.
Today, we are trying to find out what the Government really mean. The problem is that the five economic tests are flawed and some members of the Government at last recognise that. I do not believe that the case for the euro can be made successfully, that restrictions on free markets will deliver greater economic success, or that the loss of the right to determine our interest rates will deliver greater stability. The loss of our right to make economic decisions is a loss of freedom and responsibility. It can never be dressed up as a long-term economic benefit. The decision is political and it is spin to suggest that the five economic tests could prove otherwise.
In support of my hon. Friend's contention, if he had nothing better to do on new year's eve, he might have heard the interview on BBC 1 news with the President of the European Commission, Romano Prodi. In response to a question about the launch of the euro and whether the project was political, he said with a smile:
"This is not economic. This is...a pure political process."
I did not hear Romano Prodi say that, but I agree with the gist of the message. The problem is that the five economic tests no longer make economic sense. The first test is convergence and it should be the most important. Cyclical convergence data suggest that our economy is more in tune with the United States than with the rest of Europe. The correlation of the cycles between the United States and the United Kingdom tends to be higher than between the United Kingdom and Germany.
Clearly, there has been almost no correlation between Britain's economic cycle and that of the eurozone in the past decade. The structural convergence differences are significant and have altered little since October 1997. There are many differences, of which a principal one is trade. The eurozone accounts for only 43 per cent. of British trade, and the figure of 60 per cent. that the Prime Minister mentioned is too optimistic. United Kingdom exports to the far east have grown twice as quickly as those of other EU members. High levels of home ownership make Britain more sensitive to interest rates. Britain's pension situation is the opposite of that of the rest of Europe. As the number of European pensioners grows, the problem gets worse. The economic tools for dealing with the pension debt could have a disastrous effect on Britain.
My hon. Friend makes a powerful point about different patterns of trade. The Prime Minister is considering the trade of goods: a more favourable comparison. Does my hon. Friend agree that the economic relationship that requires closer co-operation is mutual investment? Mutual investment is in evidence far more with the United States of America: we get little investment from Germany or France.
I agree with my right hon. Friend and one of the tests deals with investment.
The solutions to the pension debt are either an increase in taxation or higher inflation to erode its value. Either of those solutions would damage Britain. Britain is the only net exporter of oil in the European Union; therefore, its reaction to a shift in the price of oil is the opposite of other EU countries. That emphasises another problem: would including Britain in the euro destabilise the currency further? It may be worse for the euro than it is for us.
The second test is flexibility. Flexibility in the labour market and the tax system are needed, but the eurozone is deficient in both. Without added flexibility or the safety valve of currency movement, the single currency is effectively a straitjacket. Dr. Otmar Issing, the chief economist at the European central bank, described that lack of flexibility as an almost lethal threat to monetary union. The second test would be better if the onus was on the eurozone to make markets more flexible to compensate for the inflexibility of a single monetary policy. The flow of labour is not the same as that of capital, which can cross borders easily. Social, cultural and economic barriers remain. The Financial Times said that the EU has labour markets that are six times less mobile than those of the US.
The other crucial element of flexibility is in fiscal policy. About 45 per cent. of US federal taxes, which are 19 per cent. of GDP, are used to iron out imbalances. The EU budget is only 1.27 per cent. and has no structure for transferring money to compensate for the problems of monetary union, nor the political backing for it. Neither the eurozone nor Britain would be any more flexible than it was in 1997, when the tests were deemed to have been failed.
The hon. Gentleman mentions fiscal transfers that help iron out problems among different countries in the euro zone. Does he accept that fiscal transfer mechanisms will be retained in sovereign member states, which will help adjustment?
I hope that that may be the case, but it is not at the moment. It does not seem that it will be the case: there is no will or political backing for it.
The third test is investment, which was touched on by my right hon. Friend Mr. Redwood. Business investment as a share of GDP is higher than at any other time in the past 40 years. It is higher in the United Kingdom than in the US, France or Germany. We should think twice before undertaking a fundamental change in macro-economic policy: strong investment is dependent on macro-economic stability. The Government are forever boasting about the achievements of the independent Bank of England. Do they want to take credit for an independent central bank or its abolition? It would be replaced by a seat on the monetary policy committee in the European central bank.
The fourth test concerns the City, which shows few signs of struggling outside the eurozone. Its interests may be jeopardised by joining the euro. London is the largest centre for foreign exchange trading and the euro presents few problems. The number of EU financial institutions has increased from 238 in 1998 to 350 in 2001: an increase of about 50 per cent. The real threat to the City lies in membership of the euro. The UK position outside the eurozone is its strength, with less pressure for tax harmonisation. If the UK had been inside the eurozone, it might have given way on the withholding tax argument.
The fifth test is the effect on jobs and British prosperity as a whole. If we take the four previous tests together, it is clear that the euro is unlikely to promote higher growth stability and a lasting increase in jobs. It is impossible to make the case that joining the euro would have a clear unambiguous benefit; it would be easier to argue that it would have clear unambiguous costs.
Since the creation of the eurozone, there is no evidence that Britain's decision to remain outside has cost our economy any jobs, even in the manufacturing sector. The Government say that they are proud of our unemployment rate and low interest rates. On
"I can also report that manufacturing—despite the euro-sterling exchange rate—grew last year by 1.6 per cent. Manufacturing productivity grew by 4.4 per cent., manufacturing exports by 11.8 per cent., and it is to the credit of thousands of British companies that overall British exports grew by 7.4 per cent."—[Hansard, 7 March 2001; Vol. 364, c. 296.]
That puts in perspective manufacturers' claims that foreign exchange insurance is a significant cost to their competitiveness.
The arguments in favour of joining the euro are speckled with expressions such as "one market, one money" or "Britain will lose jobs and investment". That is clearly not the case. The political argument about lacking influence is probably the weakest. The concept of exchanging total control over our interest rates for a place on the European central bank monetary policy committee seems a bad bargain. The argument about making policy for our European neighbours instead of setting an example for them to follow is weak. It implies that any sensible suggestions will be ignored unless we are a member of that gang and that only by being a gang member will we have respect. What a childish and unworthy gamble to take with our nation's prosperity.
In a meeting with the Governor of the Bank of England, I asked why he did not intervene more in the currency markets to buy euros and sell sterling. He replied that although he was allowed to intervene, he did not feel that that was necessary. I also asked why, when buying the weak euro seemed a bargain and an investment that would make British goods more competitive, he showed a remarkable lack of confidence in the euro, which surprised and worried me. He wanted to know when it would strengthen and he is not alone.
A single currency is, as I said, an economic straitjacket. Although people may say that it is in the country's best economic interests, it cannot compete with free movements and free-floating international markets. The currency is a safety valve, allowing or forcing countries to adjust their economic situation safely. It also acts as a warning light and confidence indicator. The currency price is determined by people who are prepared to consider all the variables and to put their money where their mouth is. Efforts to curtail that activity consistently end in disaster. Every time that a Government try to improve on the free market, they lose, as in Argentina, where people pegged themselves to the US dollar, or in Britain when we were expelled from the ERM. We must learn from our mistakes and emulate countries such as Canada, which can live alongside its trading partners without adopting their currency.
The Government need to tell us the rate at which they want us to join. That would be far more useful than the five economic tests. It would give us a monetary target that would give clear guidance to businesses, letting them know what their longer-term competitiveness would be. Of course, one rate will not suit all businesses because one size never fits everyone. It cannot and will not fit all, whether we are talking about interest rates, exchange rates or even clothing. We should be asking ourselves, with all due diligence, not whether we are good enough to join the euro, but whether the euro is good enough for us to join and, all things considered, whether it would benefit from our joining. The answer is no.
With Germany fast approaching debt levels of about 3 per cent. of gross domestic product, I accept that there may be concern for the euro's long-term stability, so perhaps this is a good moment for the Government to bow out. The purpose of this debate is to get a clear view from the Government about how they intend to proceed with their referendum. As I showed, none of the five economic tests holds up to close inspection, and now that notes and coins have been introduced, what is holding the referendum back?
The criteria for calling the referendum are entirely political. They are based on a socialist dream of one enormous European state, perhaps founded on a natural dislike or distrust of America, or perhaps based on the communist theme of collectivism. The reasons for joining are no longer economic and never will be. As the ulterior motive is exposed, what is holding the Government back, apart from almost certain defeat?
Seriously, let us stop pretending that this single currency is a good idea and let us move on. If the Government will not abandon their determination to join, perhaps now is the time to step up to the plate. Call the referendum now. It is time to let the people have their say. Using a hard-headed assessment of Britain's economic interests, one is bound to conclude that Britain can never be guaranteed a long-term improved economic position through adopting the euro. Therefore, it is time to admit defeat and either call the referendum or throw in the towel and start dealing with the crisis in health and transport.
I congratulate Mr. Wiggin on securing this useful debate and on his excellent summary of the case against joining the euro. I was sitting with my head held desperately in my hands just to stop myself from nodding in agreement with most of what he said. The hypothesis on which he based his speech is accurate. Government policy on this issue is absolutely clear. I am, unusually for me, totally in agreement with it. It is a third way between the two extremes. One extreme is that we may go in but on the other hand we may not, and the other extreme is that we may not go in but on the other hand we may. Government policy sits right there in the middle, happily watching what is going on with vacuous good will, saying, "God bless her and all who ail in her."
I see no need to change that policy, particularly since we have now had that so-called great event, the arrival of the notes and coins of the single currency. It demands no great skill to fill thousands and thousands of ATMs with paper currency. I imagine that forgery would be fairly easy with new notes, but I am sure that the details will be kept quiet and we will only know whether prosecutions result after some time. Nor will we know immediately about the price hike that the new currency will obviously allow. People will round up prices. There will be an inflationary effect. It might necessitate an increase in interest rates in euroland, but we will not know that until the figures come out. The immediate consequences are non-existent. We are therefore left with the basic issues of why it may not work and why we should not think about joining it. There are three paramount reasons for that, apart from the arguments advanced by the hon. Member for Leominster.
First, there will be clear and strong political tensions in the coming year. Germany desperately needs a reduction in interest rates and perhaps a more competitive, that is to say lower, euro. France and Germany both have elections this year. Both will therefore press Mr. Duisenberg, the great deflator, to reduce interest rates and exude some confidence and happiness to the electorate. That will produce uncertainties and public arguments and pressures that will not be good for confidence in the euro. There is a possibility, therefore, that confidence will be affected and the euro will go down again. We must bear that in mind in the coming months.
Secondly, as the hon. Gentleman pointed out, the system does not include any machinery of redistribution, which it needs if it is to produce convergence. One interest rate cannot possibly cover the very different circumstances of the Irish, Spanish or German economies. The German economy is now in its third quarter of zero growth. It is technically in a recession. In that situation there has to be some means of redistribution to help the economies that are adversely affected by the single currency.
A nation state can redistribute about 40 per cent. of its gross domestic product to the regions, but that cannot be done in euroland, which suffers from a single economic policy. Only about 1.5 per cent. of Europe's GDP can be redistributed, and in the long term that will produce stresses and strains in the system, or even break it.
Thirdly, there is the problem of Maastricht's requirement and the stability pact. In a recession, Germany will be knocking close to the ceiling of 3 per cent. of GDP in the public sector deficit. It might well break through that ceiling this year, because as unemployment increases there is more social security spending and less tax revenue. The stability pact will therefore require sanctions. Will they be imposed? Germany wanted sanctions to ensure that budgetary integrity was maintained, but they would be a worrying blow to confidence and would affect world confidence in the euro.
We do not yet have solutions to those long-term problems, which I fear will produce difficulties for the euro. We need to sit back and wait and see what happens rather than rush to join the euro now, with the headlong enthusiasm of a bunch of impetuous Liberal Democrats.
The crucial, unspoken, issue is the sixth test—the Chancellor's codicil—or the exchange rates. At what exchange rate can we begin to envisage or talk about going in? It was confidential, but I can now reveal that I have a secret role in Government that is similar to Lord Birt's. I am coming out in support of Lord Birt because he has been unfairly and unnecessarily attacked for his role, which is similar to mine. I send periodic memos to the Chancellor, the Prime Minister and the Governor of the Bank of England advising them on economic policy. It is not so much blue sky thinking as grey North sea, or sludgy, thinking, which lacks Lord Birt's brilliance. However, my memorandums have much in common with Lord Birt's, in that they are never published and never read. My memos to my right hon. Friend the Chancellor emphasise the importance of the exchange rate issue, and my hon. Friend the Economic Secretary has replied to many of them. The replies are beautifully written and make interesting reading; I am having them set to music by Andrew Lloyd Webber. However, they do not respond to the crucial argument about the exchange rate.
Sterling is substantially over-valued, especially against the euro. We came out of the exchange rate mechanism because we could not maintain the relativity of DM2.95; the last exchange rate figure before the deutschmark disappeared was about DM3.20. The Liberal Democrats tell us that we went into the exchange rate mechanism, which they enthusiastically urged us to do, at an over-valued rate. I remember when Mr. Beith took large, enthusiastic, Liberal crowds into Downing street, where they chanted, "Move to the narrower bands now." They tell us that the exchange rate then was over-valued, but they wanted to lock us into that over-valuation of DM2.95 by moving to the narrower band.
The pound is over-valued. We can argue about whether that is due to a rise in the pound—in some respects it is—or to the 20 per cent. fall in the euro since it was inaugurated, which it has not yet made good. However, to go in at that exchange rate would damage our shrinking manufacturing base, set it in concrete and make this country permanently uncompetitive.
Therefore, we must know the rate at which we would consider going in and whether we can achieve it. The Government have made it absolutely clear that they will not manage sterling down to a competitive rate. If sterling fell, the Bank of England would be eager to intervene to put up interest rates to stop any further fall. It is a kind of doomsday scenario.
Has the hon. Gentleman seen recent press releases from the Commission—they appear to be authentic—that say that we would have to join the exchange rate mechanism and suffer penal servitude for two years before being admitted to the euro? Is there not an even stronger case that there would be automatic devices for deflating Britain when the Commission thought it right? Under the exchange rate mechanism, 4 million are out of work in Germany. How many will be out of work in Britain?
I am grateful for the right hon. Gentleman's intervention; his comments are correct. I have always assumed that, under treaty requirements, we would go in at the exchange rate and have to sustain relativity for two years before entry.
The exchange rate is far too high. It has been maintained for a long period, and there is no sign that it will come down; there is an insistence on market rates. Unless the other countries are desperate to get us in, it is unlikely—impossible—that they would give us a special deal. The question is insoluble. Until the Government think their way through it, there is no point in even talking about entry, referendums or the benefits and disadvantages of the euro. We cannot go in at the given exchange rate.
A further fact is illustrated by Anatole Kaletsky's article in The Times business news today. We are, and have been for some time, doing better outside the euro than those countries that are in it, yet the euro is supposed to bring advantages.
I am grateful for my hon. Friend's comments. I hope that his disloyalty does not bring retribution and that his true and irrefutable statement is not seen as criticism of Government policy. We should bear it in mind when we consider going in. My hon. Friend Mr. Allen has introduced a Bill to make the euro legal tender in this country, but he has not explained who would pay the exchange rate costs.
There is much fuss and hoo-hah about referendums, going in at an early date and expressing our enthusiasm for Europe. It gives the Liberal Democrats something useful to do, which is a valuable service; it takes them off the streets and away from paving stones. The newspapers have something to write about—I particularly admire the efforts of Polly Toynbee. Every time the euro is mentioned, out comes a huge gush of euro enthusiasm, and the media conspiracy is furthered. All that keeps my hon. Friends and I happily arguing the other side, but it is a total distraction from the real job of governing, which is to shape and build the strength of the British economy and to serve the purpose of the people. Membership of the euro would be deeply damaging to that process.
In my usual way, I have some friendly advice for the Government. They are in a hole: they would love to hold a referendum but think that they cannot win it, so they have hesitated to announce a referendum. They now suggest that the issue is one of economics, whereas their advisers occasionally let slip that it is not primarily about economics but big politics.
A single currency is, fundamentally, about who runs the country's economy and sets the rules. It is about which politicians and officials make which decisions. I compare joining the single currency to taking out a bank account with the neighbours. I get on pretty well with my neighbours and our relations are cordial, especially over Christmas and new year, when we exchange gifts and drinks. However, I do not feel that our relationship would be strengthened by pooling sovereignty—as it is inadequately described—and having a joint bank account. I would always be worried about whether they or I were putting more in and whether the overdraft was available when I needed it or they had already used it.
Would the right hon. Gentleman pool sovereignty with his neighbours on anything?
I would be very careful about pooling sovereignty. It is indivisible, and we either have or do not have it. It is better to keep it and conduct friendly negotiations and relations with people. I want to be friends with our partners in Europe. I want to trade and work jointly with them when it makes sense, but it is better to keep the main decisions in our own hands.
I should have said that I have declared my interests in the register.
The right hon. Gentleman is clear that he is not keen on giving away sovereignty on any issue. Would he advocate pulling out of the European Union, NATO or any international institution in which the UK has pooled sovereignty?
No, the hon. Gentleman misunderstands the point about negotiation, agreement and compromise-reaching with treaty proposals that make sense while keeping the right to make our own decisions, which is what NATO implies, and giving away our powers to make important decisions about our future, which is what the Liberal Democrats seem to think life is all about. I suppose that having been out of power for so long, they are casual about the powers that this country has to govern itself. Most of my electors are not casual about that. They elect people to the House and expect us to make decisions in their interest. They do not always get the overall team that they would like, but they know that they can have another go at a subsequent general election. They can hold the Government to account through the electoral process. What is the point of doing that if all the crucial decisions are taken elsewhere by unelected bureaucrats and officials?
Is not the crucial difference between the single currency and NATO that a country can withdraw from NATO, as the French have done in the past, whereas we could not withdraw from a single currency without the most catastrophic consequences? That fundamental difference totally escapes the Liberal Democrats.
That is right. Another powerful distinction is that NATO does not have a supreme court that judges the actions of Her Majesty's Government and this Parliament and tells us whether we are doing things correctly. NATO proceeds by agreement, and we do not have to send our forces to fight if we do not want to. NATO has been an amicable and successful treaty organisation since the second world war, and has done a lot to keep the peace in western Europe and the rest of the world. It has been a singular success story, which the EU has not yet proved to be, and is trying to take ever more power from us. The EU is probably best known for its common fisheries and agricultural policies. Many people in Britain feel that those policies have not worked in our interest and could have been improved.
I want to give the Government some advice. If they are serious that this is an economic issue to be judged by five economic tests, they can prove it with their actions. The Minister today, or the Chancellor shortly when he has prepared the ground, should tell us exactly how the tests will be assessed. Most of them could provide quantitative answers. Using the figures available, we could assess whether our growth rate is getting closer to or more distant from those of Germany and France, how our inflation rates are doing and how our financial services industry is faring outside the euro. We could assess how flexible our labour market is compared with those of Germany and France by examining, for example, unemployment figures and job placement rates.
Will the Government set out exactly how the tests will be judged, stop the pretence that the work is so secret and important that it can be done only by Treasury officials in private and give us a quarterly statement to bring us up to date on whether we are closer to or further away from meeting the five tests? I agree with my hon. Friend Mr. Wiggin, who said in his excellent opening speech that we are moving further away from meeting the tests, and closer in many major respects to the United States economy than to the German or French economies. If the Treasury disagrees, will it set out how the tests are to be judged and publish quarterly figures so we can assess the position?
Is not the need for a continuing assessment underlined by the verdict of PricewaterhouseCoopers that on no fewer than five counts—growth, output, unemployment, short-term interest rates and the current account—convergence is expected to be further away in 2002 than in 2001?
That is very likely: it is my understanding of the position. The European Union is also capable of carrying out the analysis, and has published some good reports that show how the British economy diverges, whereas others in euroland are coming closer together. The Government should explain how the tests are to be assessed and provide regular bulletins on how well we are doing.
The Government should also explain how current economic policy is designed to bring us closer to qualifying under the five economic tests. We have received no statement of principle from the Government. They tell us that their policy is to join the single currency, and that it will be achieved by moving closer to the euroland economies and satisfying the five tests. Will they please make a statement to explain how they are tailoring policy to achieve that?
My worry is that the Government are not doing anything because they are split. Some Ministers want never to join the single currency but are quiet about it in public; some are sceptical about joining; some are desperate to join as soon as possible at any rate and whatever the consequences; and some others, who were brilliantly described by Mr. Mitchell, will go along with whatever the Chancellor and the Prime Minister agree—if they ever do—and take a different view according to the twists, turns and spinning of the day. A wide spectrum of opinion exists within ministerial ranks, and an even wider one within the ranks of Labour Back Benchers.
The Government do not know what to do about the splits, so they pretend to settle the matter in private under the five economic tests in the hope that by some miracle the party will come together and present a political opportunity. My next piece of advice to the Government is that parties do not come together if divisions are allowed to carry on, but only when there is strong leadership, as we proved on the issue of the euro. We had far more difficulties as a party when, like the present Government, we did not take a clear view; we now have no problems because, under the previous and the present leader, we have adopted the clear position that we oppose joining the euro. Our party has come together, and the Government should offer some leadership to their own party and to the country on this crucial issue.
My next piece of advice mirrors what other participants in the debate have said. If we are going to buy something—even a pig in a poke—we should know its price, but we have not been told the price at which the Government want to buy the euro. It is the most crucial matter in the whole scheme. Why cannot the price be named when it is so critical?
When people from both ends of the political spectrum and the business community who urged the Conservative Government to enter the exchange rate mechanism discovered how bad it was, they often argued that it was because the rate was wrong. They did not say so when we entered the ERM: that was left to a minority inside the Government such as myself, but we were overridden by a huge consensus across the parties, in the media, among fashionable commentators and others who thought it was right to go in and did not worry about the price. If those people have learnt any lesson and now understand that the price was crucial, why are they not now saying that we must debate the price of entry into the euro as a first priority before we go any further with the scheme?
I fear that going in at the current rate would be damaging to large chunks of our manufacturing industry, which is already under pressure as a result of current interest rate and currency exchange rate levels and policy. If those conditions became permanent, it would be difficult to offer hope to such businesses. The Government should give us some information on what assessment they have made for a safe entry rate. Assuming that that safe entry rate is considerably lower than the current rate, they should then tell us how they plan to get there, and when they intend to enter the exchange rate mechanism.
It is quite clear that our European partners and the Commission believe that the treaty sets out very clearly that we have to join the exchange rate mechanism. If the Government are not of that view, will they tell Parliament when they intend to negotiate with our European partners and the Commission yet another special deal for Britain to allow us to enter without spending two years in the exchange rate mechanism? Would the Government at the same time negotiate the entry rate, because it would be of considerable interest to our partners? Although many people would like a lower exchange rate, many of our partners want to keep our rate very high, for obvious competitive reasons. When will the Government try to negotiate an entry rate?
I advise the Government, as a long-standing and consistent opponent of the exchange rate mechanism, inside and outside Government, that if they are serious about the euro, they should join the exchange rate mechanism, because it is clearly a very necessary preparation for a single currency. Although I believe that being in the exchange rate mechanism would be damaging, at least we could get out of it. If the Government have still not learnt the lesson, they should spend time in the exchange rate mechanism so that they discover that European currency schemes do not work for Britain. It may be better to do that than to go straight into the single currency and discover over a long period just how much damage it can do.
I do not believe that the Government are serious about holding a referendum. I do not believe that they will hold a referendum in this Parliament. I believe the referendum is entirely about politics. I think that Ministers across the Government are divided and hold a range of different views, which is exactly what happens when there is no consistent and clear leadership in favour of a particular policy.
We need to know the price of entry and when the Government are going into the exchange rate mechanism, and we need some sensible statements on how the economic tests will be judged. If the Government do none of those things, we will be right to conclude that they are not serious about this matter.
I am pleased to have the opportunity to speak in this debate, and I congratulate Mr. Wiggin on raising this important subject. I would also echo many of the points made by my hon. Friend Mr. Mitchell, who speaks so much sense. I hope that my right hon. Friend the Chancellor takes his advice to heart.
"Membership of the Euro is not inevitable".
That is a very good point. He also said that it would be judged on the economic criteria, which would not be fudged. He has even said that life outside the euro is possible. I would go further and suggest that life inside the euro will be uncertain and difficult. Indeed, I think it is a bus that we would do well to miss, because it is going in the wrong direction.
Another encouraging comment from this side of the political fence was from Commissioner Kinnock, who said that we do not need to make a decision for another five years. I do not mind when the decision is made, as long as we make the right decision.
The story of the eurozone so far is not a happy one. Despite all the europhoria, the euro has depreciated by 30 per cent. against the US dollar, which is hardly indicative of confidence. The eurozone has been performing poorly in economic terms, especially compared with the United Kingdom, which in spite of the relatively high value of our currency, has still been doing remarkably well. That suggests that there is more confidence in Britain than there is in the eurozone.
Let us look at Germany, which is the largest and most powerful economy in the eurozone, and the one that has to work if the eurozone is to succeed. Germany has had something like 1 per cent. growth this year—that is the present rate—and there is very high unemployment there. Chancellor Schroder is facing a difficult general election, which he may well lose as a result of Germany's failure to perform economically during his term of office. Chancellor Schroder initially said:
"Membership of the Euro will insulate against external economic shocks."
That is an interesting thought. More recently, he blamed Germany's poor economic performance on the US downturn. He cannot have it both ways: either the euro insulates the economy from what happens in the US, or it does not and the US can affect it.
Fixed exchange rates and single currency systems have inherent problems. There are difficulties in entering at the right exchange rate and it is difficult to maintain a single currency if different parts of the zone perform differently. If there is no scope for fiscal transfers and the other features that one would expect of an integrated economy, there will be differential economic growth throughout the eurozone, which will eventually lead to strain between member states.
When considering countries that have tried fixed exchange rate systems, or have tied their currency to another, Argentina springs to mind. This week it elected a president described as "left wing", which is comforting to me. He floated the peso, which devalued by 40 per cent. on the first day of trading. The alignment of the currency to the dollar was mistaken and had a terrible effect on the Argentinean economy. Argentina was one of the strongest economies not only in the Americas, but in the world. It is now on its knees.
Russia experienced serious problems when it fixed its currency at an over-valued rate against a hard currency. It began to recover only when the rouble was floated downwards. It was hardly an advert for capitalism that the Russian economy halved in the 10 years after the failure of communism. That was a disaster for the notion of a fixed exchange rate system.
More recently, Malaysia provided an example of good practice. During the problems in the far east several years ago, Malaysia was told by the International Monetary Fund and the World Bank not to devalue its currency. It ignored the IMF, imposed exchange controls, devalued its currency and bounced back in a year. It did what any sensible country would do: it managed its macro-economic criteria according to its economic needs. That did not damage the world economy because the collapse of Malaysia would not have helped the far east.
We have our own experiences of fixed exchange rate systems. One was the gold standard period of 1925 to 1931. It was Churchill's decision, but he was pushed by the economic establishment to appreciate the currency and adopt the gold standard. That led to the 1931 disaster, which had the unexpected effect of destroying the Labour Government. It was not a deep-laid plot, because the Conservatives had not anticipated that Labour Government. The devaluation after 1931 led to gradual recovery throughout the 1930s.
A more recent UK example is the exchange rate mechanism period: 1990 to 1992. Conservative Members may regret that because it was the major factor in destroying the Conservative Government's credibility, which led to Labour's victory in 1997. I was pleased about that, but it was not sensible economics. The significant depreciation after that gave an enormous kick to the economy, which has grown steadily since. The enormous growth that took place after that depreciation allowed us to sustain a high exchange rate. If the UK entered the eurozone at the present exchange rate, we could have a 1931 or 1992 on our hands, but this time there would be no escape route.
Exchange rates are significant. When I was growing up, Germany was cited as the economic miracle of the post-war era. At school, everyone complained of the low value of the deutschmark that gave the Germans an unfair advantage. Germany used that advantage for several decades to build up its economy. That was deliberate because the west wanted to ensure that West Germany succeeded economically so that the communists could not point the finger at a failing economy. The difference in performance compared with East Germany was obvious to everyone, and eventually led to reunification.
Reunification was interesting because again there was an exchange rate problem. One ostmark was exchanged for one deutschmark, which was a massive over-valuation of the East German currency that led to the East German economy being almost annihilated overnight. The problem was overcome by vast fiscal transfers from wealthy West Germany that had built up surpluses during the economic miracle. There was no problem because it was a single country that had the possibility of massive fiscal transfers. The eurozone is not in that position.
The hon. Gentleman has mentioned Germany several times. An implication of the single currency is that it will eventually lead to a single taxation system. Only a few weeks ago, Hans Eichel, the German Finance Minister, argued for a single taxation system throughout the eurozone. Does the hon. Gentleman believe that a single European taxation system would be in the interests of the United Kingdom if we were part of it?
I understand that our Government, and many others, argue that there will be no single taxation system. Only this week, my hon. Friend the Economic Secretary said that we would not harmonise duties, let alone income tax or other forms of taxation, and I support her argument. Even if taxes were harmonised, that would not necessarily provide scope for the vast fiscal transfers that would also be needed. Tax can be one way, but we must have a universal tax and benefits system. The McDougal report suggested that regional transfers might have to be multiplied by 14 or 15 before fiscal transfers were sufficient. The question is whether the rich zones will tolerate multiplying regional transfers by 15 and having a universal tax and benefits system so that rich Germans or French people pay taxes for poor Welsh people. That is not on the cards, but it might cause some political stress in some richer countries.
"The German economy fails to improve, but Euro-area interest rates cannot be pushed too far down, because of relative buoyancy in the rest of the Eurozone. Pressure mounts on the German government to boost its economy through tax cuts and spending increases funded by increased borrowing. The European Commission and the ECB join together to lobby for a strict application of the provisions of the Stability and Growth Pact. German public opinion turns against the idea of Europe."
He went on to suggest that as a result, we might lose a referendum, which would seriously damage the credibility of the euro, and eventually the people of Europe would turn against the idea. I believe that we are in the early stage of that scenario, and I applaud the recent caution of the Prime Minister and the Chancellor towards our possible entry into the eurozone.
I hope to bring some balance to the debate. I appear to be in a time warp to the 1970s, when the Labour party constantly tore itself apart over whether we should be involved in Europe. The situation is the same today, although there appears to be unity among hon. Members on both sides of the Chamber. It is important that we look at where we are and understand that several problems must be addressed. That is why the economic tests must be examined, as they have been this morning, and why a referendum is essential. If we have a referendum, we can have that debate in public. Informed debate is essential. We seem to be forgetting that, on
There was not unanimity across Europe, and people were concerned. A young Spanish man is living in my home at the moment, and he was saying before Christmas that his mother and father, who have businesses in a small village in north Spain, were concerned about the transition to the euro. He believed that they would continue to use their national currency. He went home for three weeks and came back with the message that there was no problem because of the preparation that had been done. That is one of my concerns. If we wait and only talk about whether to enter the euro, rather than making the proper preparation, we will be left behind the rest of Europe, and we cannot afford that.
In my brief contribution, I want to emphasis the benefits that exist in Europe. Some of the comments from the official Opposition were a bit rich. They have claimed that every Budget over the past four years was the wrong way to go and would lead to recession and job losses. I have heard that story continually from them, and the opposite is true. We have low interest rates and unemployment levels, and we have growth. We should note also that the Financial Times yesterday had the results of a MORI poll, which had surveyed the 500 leading businesses in the UK, showing a one-third increase in support for joining the euro, up to 59 per cent. of those top businesses.
We must have a balanced debate. I do not think that we have had that this morning, and I urge the Government to examine seriously the preparation for the euro, based on the need to move forward. When the arguments are put, we can win a referendum.
I congratulate Mr. Wiggin on securing the debate. Given that this is the first chance that the House has had to debate the subject since the recess and the momentous events of
I thank particularly Mr. Tynan for beginning to restore some balance. As I sat here listening to today's speeches, it was as if
We should celebrate that success in this Parliament and send a message of congratulations to our continental partners. I hear laughter from the Conservative Benches. I thought that the Conservatives were now wishing the project well, and I was pleased to see their leader doing just that, and welcoming the success of the changeover. I hope that Conservative Members will continue that message, because it is in our interest that the process succeeds. I know that some Eurosceptics believe that it is in their interest for it to fail, but
This debate focuses on Government policy on the single currency, and there are some interesting issues. As I understand it, the Government have said that they are in favour in principle, and that there are five tests with which they will make an assessment within two years of the last general election. There will then be a referendum and in the meantime, they are making preparations. That is Government policy in a nutshell. It is good that they are in favour in principle—it is nice to see that they have one principle. I just hope to see efforts made towards enacting that principle, which would be a start of sorts.
However, as we all know, the five tests—convergence, flexibility, investment and the effects on the City and on jobs—are a fig leaf to keep the Government and the Labour party together on these rocky political waters until they decide that it is politically right to join.
I believe that the Liberal party, unlike the Government, did some interesting work on entry rates and concluded that we should enter at a considerably lower rate against the euro than the current 62p. What rate has the hon. Gentleman in mind and how would we get there? How would we need to change economic policy to reach an entry rate that the Liberal party would think acceptable?
I am grateful for that intervention; I shall deal in some detail during my remarks with the right hon. Gentleman's points. He is right in referring to the report entitled "Britain's Adoption of the Euro" from the expert commission established by my right hon. Friend the leader of the Liberal Democrats. It had various eminent economists, former members of the MPC and people such as Martin Weale from the National Institute of Economic and Social Research, Richard Portes and John Williamson. He is a leading macro-economic expert on exchange rates and the inventor of one of the three main economic theories on exchange rates—fundamental equilibrium exchange rates.
The commission produced a long and detailed report, which dealt with the issue under discussion. It suggested the rate of 1.45 euros to the pound, which is significantly lower than the current rate of 1.62. It also said, however, that if relative productivity trends changed in the meantime, there might be a case for a slightly higher rate. My colleagues and I agree with the substance of the report. I believe that such a rate would be competitive and would enable us to enter the single currency successfully. Clearly, however, the rate has to be negotiated, and I shall come to that point in due course.
Let me focus on the Government's tests, because they are a bit of a smokescreen. Publications from Her Majesty's Treasury will no doubt try to make out that the tests are terribly important, but the reality is that most of them have been met, more or less, and it is difficult to get clear measurements for them anyway. That is why the Government have to set up a process to work out how to make the assessment. If the tests were obvious and easy to quantify, there would not have to be such a long process to work out how to do the assessment. However, as the right hon. Gentleman and other hon. Members have said, the problem with the five tests is that they miss out the key test—the test of the exchange rate.
A debate about what would be a sustainable exchange rate is needed, and the Government have a duty to lead it. The hon. Member for Great Grimsby has been an ardent fan of promoting such a discussion over many years. I have been involved with economic debates in and outside the House in which he has mentioned the exchange rate and the need to devalue. He has argued for devaluation from three or four different exchange rates over that time. It should always go down in the hon. Gentleman's view, but that argument could be valid in particular circumstances. The key is how we go about generating a consensus in the wider economic establishment and the markets about what would be a sustainable long-term exchange rate for the country. We have seen no leadership on that from the Government, which is a huge omission.
I argued for a competitive exchange rate—that was the essence of my argument—not a process of continuous devaluation. The real question is not the Government's position but how the Liberal Democrats propose that we reach their exchange rate of 1.45. Should we intervene in markets or should there be a process of benign neglect? If the country signifies that it wants to enter, will the rate suddenly fall to the requisite level, because the force is with the Liberals?
The hon. Gentleman makes a good point, and I have two points in answer. First, if the markets believe that a consensus is emerging in this country and with our European partners about a certain rate, there will be a certain glide path in the markets as they underpin a particular rate with credibility that Britain will join. We saw that with the lira when the Italian Government decided to join in 1996. It was interesting that for a few days after the Labour Government were re-elected, the markets assumed that there would be a greater commitment to joining the single currency and the pound depreciated quite substantially. The Treasury and the Bank of England had to talk up the pound, saying that there was no intention to join within the next few years, that the five tests would be difficult and that the British people must be persuaded. There was a concerted effort to shift the markets back.
That makes my point for me: if the markets think that Britain is going to join they realise that we cannot join at the current rate. As the hon. Member for Great Grimsby argued, it is overvalued. The markets will help us do the job if they believe that there is a credible commitment to joining. The hon. Gentleman is also right to say that policy changes are needed. One of this Government's problems is that by not enunciating that key test—the test of the exchange rate—they are not giving any direction to policy to try to bring about convergence to a long-term sustainable exchange rate. That is a huge omission.
The hon. Gentleman raises some interesting points. He now proposes a devaluation of about 11 per cent. from today's level. Given that about a third of the things we buy in the shops are imported or are influenced by import prices, he is looking at an inflation of 4 per cent. as a direct result of the devaluation. Under the present rules, the Bank of England would have to hike interest rates to stop that happening. Would he want to override the Bank of England rules to allow the inflation?
As the right hon. Gentleman would no doubt agree, it is possible to depreciate exchange rates without inflationary consequences, as happened when we left the exchange rate mechanism. It does not follow that depreciation immediately results in higher prices because that is, using the economist's term, ceteris paribus. I thought that the right hon. Gentleman said in his opening remarks that the pound was overvalued. It should therefore follow—
I congratulate my hon. Friend Mr. Wiggin on securing the debate and on his clinical dissection of the Government's policy. I thank everyone who took part, but I pay particular tribute to Mr. Mitchell, who made a characteristically coruscating speech, to my right hon. Friend Mr. Redwood and to Mr. Hopkins, whose prospects for advancement have not been greatly assisted today, but whose reputation for sound sense and personal integrity now stands at an all-time high.
Ministers in all parts of the Government are arguing like ferrets in a sack not about whether to abolish our national currency—they are agreed about that—but about when to do so and why. The debate got under way early in the new year. On
"that it is possible to run a sort of parallel currency economy".
The next day his right hon. Friend the Foreign Secretary disowned him, saying:
"I just ask people to calm down."
The former Foreign Secretary, who has been feeling somewhat sore of late, obviously could not resist joining the fray. The Leader of the House, Mr. Cook, declared on
"If we want to continue with that very strong powerful leading role within the European Union it is going to be more challenging to do that if we are outside the inner club".
"I am convinced that Great Britain can be an essential partner, if we wish, a leading partner in Europe on fundamental issues such as defence, economic reforms, protecting the environment and other matters."
He said that entry into the euro is "another issue altogether". The internecine conflict raging at the heart of the Government is unedifying to observers and undignified for participants but, above all, it is a betrayal of the people on an issue of vital national importance.
I want to be fair to the Government. Let us start with the Chancellor's declaration of the Government's position on the European single currency:
"To sum up, we believe that, in principle, British membership of a successful single currency would be beneficial to Britain and Europe; the key factor is whether the economic benefits of joining for business and industry are clear and unambiguous."—[Hansard, 27 October 1997; Vol. 299, c. 588.]
The problem with the position that he articulated four years and three months ago is that it has been shot to pieces by the head of macro-economics at the Treasury, who is the director of the assessment team charged with determining whether the five criteria have been met. Gus O'Donnell famously—perhaps infamously, depending on one's point of view—said:
"Economics can never be clear and unambiguous."
In such circumstances, the best and most honourable course for the Prime Minister, who has stuck to the absurd "clear and unambiguous" line for the past four years, would be to give up the unequal struggle. He would earn brownie points by acknowledging that the policy of the past four and a half years is rudderless and that it has been comprehensively discredited; it was based on a false premise. He could drop any further plans to take Britain into the euro. He could apologise for wasting people's time and withdraw from the fray.
An expression springs to mind about pigs flying. Hell would freeze over before the Prime Minister treated us to such a refreshing outburst of candour. However, we must ask why a clear and unambiguous case on economic grounds cannot be made for British membership of the euro. The explanation relates to the essence of the euro. The euro is not only about the seamless, or otherwise, introduction of notes and coins but about who sets the interest rate for members of the eurozone. The Governor of the Bank of England, Sir Eddie George, who is a respected authority, said on the BBC World Service "World Business Report" on
"The risk is that single interest rates, which has to go with the single currency, is not going to be appropriate for all the member countries at the same time."
Two weeks earlier, on
"a disadvantage and a special risk".
We do not have to gaze into a crystal ball when we can read the book.
The hon. Gentleman is almost always correct, and this occasion is not an exception. He anticipated my comments. The European Commission undertook a report in 2001 on the European economy. Chapter 2 devotes a substantial section to the difficulties. Specifically, it reports on page 69 that no fewer than seven member states have suffered excessive demand pressures. It refers to the particular circumstances of Germany and France and their need for lower interest rates.
We have already heard of the danger that the European Commission will insist on British membership of the exchange rate mechanism as a prerequisite for entry to the single currency. We should listen to and heed the European Commission's report, which states:
"Monetary conditions in a single member state can be inappropriate considering the cyclical conditions, as the single euro-area interest rate may not be in line with the individual needs."
It then goes on, rather prosaically, but helpfully, to point out that
"for individual member states, the creation of a single currency area implies the loss of monetary adjustment mechanisms in response to economic shocks."
In straightforward terms, what does that mean? It means that if the economy was in a mess, we could not cut interest rates to reflect the domestic circumstances. We know the desperate damage that can be done because we know about the repossessions, bankruptcies and loss of jobs that occurred in our own economy when we were in the temporary but horrendous straitjacket of the exchange rate mechanism. To go from that to permanent incarceration in what my right hon. Friend Mr. Hague legendarily described as a burning building with no exits does not seem to be indicative of much common sense in the Government.
How can we have the same interest rate policy as Germany with its 4 million people unemployed and Holland with its inflation touching 5 per cent? It is so transparently absurd that only an extraordinarily clever and sophisticated person could fail to see this obvious point. It leads one to the conclusion that the euro is not really about economics but about politics.
I said that the best course was for the Prime Minister to withdraw and not go forward with the project. The other option would be simply to say, "Yes, I am hell-bent on dragging Britain into the euro with a cost I cannot calculate, for a benefit that I cannot enumerate, and at a risk to the self-government of the country that I dare not admit. But I want to get on with my partners, I fancy being President of the European Commission, and I am going to try and cajole, bully, brow-beat and harangue the British people into accepting the project."
It is time that we ceased to have a Government policy mired in contradiction, deception, humbug and superficial thinking. We are owed an explanation of what the Government are really about. The place for that explanation is here, the time for it is now. I look forward, with eager anticipation and bated breath for the response of the Minister.
I am delighted to be here again with you, Mr. O'Hara, in the Chair for this very important Adjournment debate. I congratulate Mr. Wiggin on securing the debate. It is interesting to note that the new intake of Conservative Members of Parliament are just as preoccupied with Europe as the older hands. I thought that the public had already made a judgment on the Conservatives' attitudes to Europe not just once, but twice, but it is very useful to have this debate.
I should put on the record, in a nutshell, the Government's policy towards the single currency. The Government's policy on the membership of the single currency remains as set out by the Chancellor of the Exchequer in October 1997, and as restated by the Prime Minister in February 1999:
"In principle, the Government are in favour of UK membership of EMU. In practice, the economic conditions must be right. The determining factor underpinning any Government decision on membership of the single currency is the national economic interest, and whether the economic case for joining is clear and unambiguous. If it is, there is no constitutional bar to joining."
As the Chancellor said in his October 1997 statement:
"the five economic tests will define whether a clear and unambiguous case can be made."
The Government are, of course, committed to carrying out a comprehensive and rigorous assessment of those economic tests. We will not, under any circumstances, take any risks with our hard-won economic stability. I note with interest that the hon. Member for Leominster first argued that the economic tests were flawed and then used them as more or less the entire content of his speech. I take that to mean that he agrees with Government policy on the five tests that they are the appropriate tools to carry out an assessment. I am not terribly surprised. The IMF, an independent commentator, stated in its 2001 report on the UK economy that the five tests were
"consistent with the economic considerations which would be important for the decision to join a monetary union."
The IMF made it clear that the five tests were the appropriate way of making the assessment. I am about to explore those tests in greater detail and to explain, in response to Mr. Redwood, how we intend to carry them out.
The first of the five tests is sustainable conversion between Britain and the economies of the single currency. The second is whether there is sufficient flexibility to cope with economic change. The third is the effect on investment, the fourth the impact on our financial services industry, and the fifth the effect on employment. The Chancellor has said that the Treasury will complete an assessment of the five tests within two years of the start of this Parliament. The assessment has not yet started, but the necessary preliminary analysis—technical work necessary to allow us to undertake the assessment as promised—is under way.
The right hon. Member for Wokingham asked how the tests would be carried out. As he knows, the preliminary work that will underlie and inform the assessment is already under way. The scope of the preliminary technical work was set out in the 1997 assessment. Although new developments have occurred since then, the underlying issues to be analysed remain the same, and the five tests remain unchanged.
Can the Minister tell us when she expects the initial work on assessment to be completed?
That would be premature. Important issues have to be gone through to ensure that we have the right framework to underpin any assessment. As I said, the analysis will be comprehensive and rigorous.
The Minister has maintained this morning that the Chancellor's policy—that the outcome depends on analysis of the five tests—is paramount. Will she explain the recent comment of the chairman of the Labour party that, as economists rarely agree, the economics do not really matter, so it is ultimately a political decision? Who is correct and what is Labour policy?
The hon. Gentleman will be interested to know that the Chancellor and the Prime Minister are completely at one about Labour policy on the single currency—we are in favour, in principle, of joining monetary union, but we must, in practice, meet the five economic tests. I am about to explain how we intend to carry out those tests and how our preliminary work will inform our assessment.
The hon. Gentleman should allow me to expand my point.
The preliminary and technical work will update our analysis of the cyclical behaviour of the UK economy relative to the euro area. It will assess relative responses to economic shocks, the mechanisms by which product, labour and capital markets adjust and how well and quickly they work. Other relevant considerations are the impact of the single currency on the costs and availability of capital, macro-economic stability, the stability of the real effect of exchange rate and the location, quality and quantity of investment. The effect of the single currency on financial services, including the changes in the sector that have occurred in the UK and the euro area since 1997, and its impact on trade, competition and productivity are also relevant.
That list is by no means exhaustive, as preliminary work continues to evolve to take account of the latest technical research and analysis. More detail is provided in the Treasury note issued in November last year, which deals with the content and timing of the preliminary and technical work. Hon. Members will find a copy in the Library.
I can tell the right hon. Member for Wokingham that the Government have no intention of providing a running commentary on either the preliminary work or the five tests. The assessment will be carried out within the first two years of this Parliament, which is what the Government are committed to. It does not make sense to try to update that information daily, weekly or monthly.
I am sorry to contradict the Minister, but it is evident that members of the Government are giving a running commentary on the process. Barely a day goes by without members of the Government contradicting each other in public. Perhaps she should have a word with her colleagues. We are greatly amused by their running commentary.
The hon. Gentleman is wrong. No one in the Government has given a running commentary on the five tests. I shall respond to the points made about them, especially about the level of the exchange rate, if hon. Members will allow me to do so.
The Government said that the exchange rate at which sterling would enter the single currency must be consistent with economic fundamentals in the United Kingdom and compatible with sustainable convergence between the UK and other euro area economies. It is not a sixth test; that is the Government's policy, which we have set out. The Government believe, as several European Councils have recognised, that what matters for a stable economic exchange rate, are sound economic fundamentals. The Luxembourg Council stated in December 1997 that
"in general, exchange rates should be seen as the outcome of all other economic polices."
That is why I fundamentally disagree with the Liberal Democrat spokesman, Mr. Davey. The Government should not try artificially to massage down the level of the exchange rate, which is properly the outcome of sound economic fundamentals. That is why we put in place measures such as the new fiscal rules, the monetary framework and the independence of the Bank of England.
It may pre-empt the question that the right hon. Member for Wokingham is about to ask when I say that the Government have no intention of rejoining the exchange rate mechanism—
I am certainly not going to give a running commentary on the level of the exchange rate, or on any of our economic assessments. As I said, the best and soundest way to determine a strong exchange rate consistent with economic fundamentals is as the outcome of other sound economic policies. I give way for the last time to the hon. Gentleman.
In the light of what the Minister said about there not being a running commentary on the policy on the euro, my sound advice to her is that she should watch her back and reflect on who is now sitting behind her.
I shall not take any notice of the hon. Gentleman on that matter. Our policy is clear.
My hon. Friends the Members for Great Grimsby (Mr. Mitchell) and for Luton, North (Mr. Hopkins) raised the issues of pension liabilities and the stability pact. I greatly enjoyed my hon. Friends' speeches, which I found most entertaining. British taxpayers will not make payments to the Community and to other member states to pay for other countries' pension liabilities, whether or not we join the euro. Rules on excessive deficits and on the stability and growth pact mean that participating member states will not be able to finance their pension liabilities through economic borrowing; they will have to cut spending or raise contributions. There is no bail-out option for countries that do not take the appropriate action to reform their economies and to ensure that they have a sustainable fiscal position. I do not want to start a discussion about the situation of other countries, but we will play our part in the debate in Europe on the sensible interpretation of the stability and growth pact.
As time is short, I shall again set out our position: in principle, we are clearly in favour of joining the euro, but in practice the five economic tests must be met before the Government take a decision. The Cabinet will make a recommendation to Government, who will put the decision to the people. The final decision will be determined in a referendum of the British people.