The Rt. Hon. Sir John Major KG CH

Prime Minister of Great Britain and Northern Ireland 1990-1997

1989Chancellor (1989-1990)

Mr Major’s Comments During the Economic and Monetary Union Debate – 2 November 1989

The text of Mr Major’s comments during the Economic and Monetary Union debate, made on 2nd November 1989 in the House of Commons.

Mr. Speaker We have had a late start and a large number of right hon. and hon. Members want to participate. I must put a 10-minute limit on speeches between 7 and 9 o’clock, but I implore hon. Members who are called before that to bear that limit in mind because I greatly regret that, if not, few Members are likely to be called today.

The Chancellor of the Exchequer (Mr. John Major) I greatly welcome this opportunity for a debate on economic and monetary union in the European Community. This is an important occasion and one on which the Government are particularly keen to hear the views of the House. The idea of moving towards economic and monetary union in the Community is not new. It has a long history. As long ago as 1970, a report by Mr. Pierre Werner, then Prime Minister of Luxembourg, made detailed proposals for progressing to economic and monetary union. He proposed transferring major economic policy decisions to Community level, adopting a single currency and setting up a single central bank. The Community endorsed those proposals in 1972 and agreed that full EMU would be achieved by December 1980 at the latest.

After that endorsement, other events intervened and nothing much came of the Werner proposals. They were, in practice, buried. Nevertheless throughout the 1970s the Community continued to endorse the principle of progressing towards economic and monetary union. It was reaffirmed again at the European Council in Brussels in 1977, and the objective of the progressive realisation of EMU is recalled also in the Single European Act of 1986. It has since been reaffirmed again at the European Councils of Hanover and Madrid. There is thus a long-standing commitment to the objective of the progressive realisation of EMU. But there is no universal view of what EMU means or what it entails; or when it should be achieved. That is the issue before us now.

One definition was offered in the Delors report, which was published in April this year. The Governor of the Bank of England, a member of the Delors committee, explained its approach to the Treasury and Civil Service Select Committee in May. It devoted itself very much to how economic and monetary union might be achieved, rather than whether or when. We took the view that whether or when was a matter for political leaders”. The Delors report – which was a report from a group of technical monetary experts – was considered by the European Council in Madrid in June. The Council agreed then to adopt the first stage of its proposals, and to set in hand further preparatory work on developments beyond that stage.

The Council of Finance Ministers and the General Affairs Council are now engaged in that further work. My right hon. Friend the Foreign Secretary will be attending a meeting of the General Affairs Council next Monday at which economic and monetary union will be on the agenda. It will then be the central subject for discussion at the ecofin Council on Monday 13 November, when I will present a paper setting out the British Government’s view. Copies of this have been placed in the Library of the House and put in the Vote Office. Following the ecofin discussion it will again be discussed in December at the European Council. So this debate is a timely opportunity for the House to express its views as we prepare for those important discussions.

As I said a moment ago, there is no agreed definition of what actually constitutes economic and monetary union, but there is a large measure of agreement among all member states about what we want to achieve. We seek price stability, and currency stability. We want to achieve a single market, with free movement of people, services, and goods, free movement of capital, and equal access to capital and financial services for all citizens and businesses in the Community.

We want those things for practical reasons: because they will make our businesses and industries stronger and more flexible as they compete in world markets; because they will enable our economies to grow; and because they will bring higher living standards, and greater choice.

There is no real controversy about these objectives either in the Community or in the House. The disagreement lies elsewhere. It is about the means by which we move towards them.

There is a fundamental question that determines the positions in this debate. It is this: do we want to start moving towards a federal Europe, with all that implies, or do we instead concentrate on developing a yet closer partnership, of individual nation states, and achieve in that way the objectives upon which we are all agreed?

It will be no surprise to the House that this Government favour the latter approach. It harnesses the strength of our national traditions and political structures. It builds on the policies – the liberal, free market policies – that we have followed both here and in Europe, and which have brought success; and it respects both parliamentary accountability and the diversity of member states. In essence, it takes the sting and controversy out of moving to our shared aims. It is this approach that we have adopted to the debate on EMU, and the Delors report.

Mr. Tony Benn (Chesterfield) The Chancellor referred to parliamentary accountability. Will he confirm that in practice, when he or other Ministers go to the Council of Ministers or when such an agreement is reached, it is made under the royal prerogative of treaty making and is not subject to previous or subsequent enactments by the House of Commons? Therefore, to speak of parliamentary accountability in that context is to mislead those who are listening intently to this debate.

Mr. Major There is certainly no intention to mislead. In essence, we are talking about significant changes which are proposed in the Delors report and which would have far wider significance than most of the previous ones. It is that issue, and the extent to which the House retains its control over monetary and economic matters, that concerns me and to which I shall turn in detail later.

We have already agreed to implement stage I of the Delors prescription. The elements of this are familiar to the House. They include establishing a genuinely single market in goods, services, and capital; the strengthening of competition policy; and the development of co-ordination of member states’ economic and monetary policies. The Commission’s proposals for revised co-ordination arrangements are among the documents listed for our debate today.

Stage 1 of course, also requires all Community currencies to join the exchange rate mechanism of the European monetary system on the same terms. This we shall do, as I told the House on Tuesday, when the level of United Kingdom inflation is significantly lower, when there is capital liberalisation in the Community, and when real progress has been made towards completion of the single market, freedom of financial services and strengthened competition policy.

Our position on stage 1 is clear and constructive, and we are committed to it, but we part company with the Delors recipe on the next steps. Let us be clear at the outset what the report proposes: permanently fixed exchange rates; a single Community currency; binding central rules on national budgetary policies; and a European system of central banks, with sole responsibility for formulating and implementing Community monetary and exchange rate policy. The Government – and, I suspect, the overwhelming majority of this House – have very great difficulty with these proposals.

We do not believe that Community rules on the use of national budget deficits are either necessary or desirable. They are unnecessary because monetary unions can and do tolerate diversity of budgetary positions. That is true in nearly all existing federal states. It is markets which impose a discipline and prevent deficits from getting too far out of line. On the desirability of binding rules, I can do no better than quote the conclusion of the Select Committee on the Treasury and Civil Service, chaired by my right hon. Friend the Member for Worthing (Mr. Higgins): The power of the House of Commons over the centuries has depended fundamentally on the control of money, both taxation and expenditure. This would be jeopardised by t he form of monetary union proposed by the Delors Report which would involve central undemocratic direction from within Europe of domestic budgetary policies. I agree unreservedly with that judgment by the Select Committee, and I hope that our partners in Europe recognise the seriousness of this issue to us. It is fundamental to our parliamentary constitution and practice, and is not a matter which can be bargained away or cast aside.

The Delors proposals for increased regional and structural aid also seem to us to be misconceived. There must, of course, be greater opportunities for the living standards of the less prosperous regions to rise. No one denies that. Indeed, the Community’s structural funds are already being doubled in the five years between 1988 and 1993 for precisely that reason. But there is no reason whatever to believe that a route to economic and monetary union that relies primarily on the operation of the market – rather than primarily on Government intervention – would harm the less prosperous areas. I believe the reverse to be the case.

Thirdly, the Delors report’s proposals on monetary union are unacceptable, for monetary policy is at the very heart of macroeconomic policy and the proposals in the report make no provision for accountability for monetary policy to national Governments or national Parliaments. Yet the electorate would still hold Governments and national authorities responsible for their economic well-being, and rightly so.

Moreover, there would be no effective means of bringing the central banking system to account for any failings – and there can be no guarantees that it would pursue successful anti-inflationary policies, whatever the treaty might require. Indeed, by eliminating competition between monetary policies, it seems likely that the proposals would lead to harmonisation not on the best inflation performance but on the average.

Mr. A. J. Beith (Berwick-upon-Tweed) The Chancellor is inviting the House and the country to accept an alternative proposal set out in this document, which is an invitation to a race that the Bundesbank would be almost certain to win – to an independent central bank of the sort favoured by his predecessor.

Mr. Major If the hon. Gentleman will bear with me for a few moments, I shall turn in detail to our proposals, which may be of some interest to him

In short, the Government’s fundamental objection to the Delors approach beyond stage 1 is that its prescription for economic and monetary union centralises power. It relies on administrative fiat and institutional change. It skates over vital issues of political accountability. Changes in economic and monetary arrangements must reflect real changes in economic behaviour in the market place and they must work with the grain of the market and not against it. In our view, the Delors route is quite simply the wrong way for the future development of Europe. But there is a better way to meet our agreed objectives.

The better way is set out in the paper that I laid before the House earlier today. It proposes an alternative approach, an evolutionary approach, to economic and monetary union. It represents the contribution that we promised to the debate within the Community.

We start from three principles: first, the overriding objective of price stability – that is clearly desirable; secondly, increasing the influence of markets and competition, which builds directly on the single market proposals already accepted throughout the Community; and thirdly, retaining national control over economic policy-making to the maximum extent possible, which fully reflects the principle of subsidiarity to which the Community rightly attaches such importance.

Recent debate in Europe seems to leap over the main work that we currently face to contemplate the many steps necessary for stage 1 of the Delors report. That is unwise, because stage I is a massive enterprise in itself. It will have very far-reaching consequences for all our economies and a profound effect on monetary policy and it will give a significant impulse to economic convergence.

Stage 1 means establishing a genuinely single market in capital movements and removing all exchange controls. A timetable has been agreed, starting with France and Italy by next summer. We of course are 10 years down that track. We welcome the commitment by others to follow suit, and the sooner the better.

Secondly, stage 1 means completing the single market. That is a huge task, and it is the dominant priority for the Community between now and 1992. Nearly half the legislative programme has been agreed, and the United Kingdom’s influence in formulating that programme has been very great indeed. But there are tough issues still to be resolved, and, of course, all member states must then implement the directives agreed. On this, the record of this country is significantly better than that of many of the proponents of a great leap forward on monetary union. By any standard, we have one of the best records in Europe – and we should never be afraid to say so.

Thirdly, stage 1 means strengthening Community competition policy. A single market must necessarily have a level playing field. That patently does not exist when one large member state gives about eight times as much subsidy to manufacturing industry as does the United Kingdom. The Commission has powers to tackle this. It must use them, and not delay doing so.

More generally, the completion of the single market will progressively increase freedom of trade in all goods and services, and freedom of movement of capital and labour. Regulations and technical barriers will be drastically reduced; industries will be restructured; businesses will become more efficient and consumers will benefit. So while we consider the Delors prescription for what should happen after stage 1, let us not overlook the crucial importance of stage 1 itself, and the firm and enduring United Kingdom commitment to its early implementation.

All this has a particular importance for monetary policy, for stage 1 will create powerful pressures on member states to adopt low-inflation policies. With the removal of exchange controls and the creation of a single financial area, the capital markets will react more speedily and directly when they fear that a country is not operating sufficiently sound monetary policies. That will prove to be a powerful discipline. Greater stability of prices will in turn lead inevitably to greater stability of exchange rates. All this will be achieved not through centralised regulation and direction, but directly through the market. It achieves the desirable aims of the Delors report without the Delors apparatus.

We need to build on this. Our paper proposes that we should take the market approach of stage 1 forward to its logical conclusion rather than switching in mid-stream to a bureaucratic and centralised plan. Even after the current single market programme is complete, market forces will be muted by a number of unnecessary restrictions. For example, some countries control too strictly the investments of their savings institutions, or forbid the issues of foreign currency debt by their residents, or the purchase of their Government debt by overseas residents. Our proposal is that, as a priority after 1992, all restrictions of this kind should be examined and, where possible, removed, so that the competition between currencies and, therefore, between monetary policies is further sharpened.

This is not, as some people suggest, a matter of paying for a pint of beer at one’s local with Italian lira or Greek drachma. Such a parody is to trivialise an important debate. The proposal is quite straightforward and entirely practical. It is to do away with unnecessary restrictions on individuals or firms doing business in whatever currency best suits the two parties. It is not a matter of compelling either party to use a particular currency: the aim is to reduce restrictions limiting their joint freedom of choice, thus enabling currencies to compete.

Mr. Anthony Nelson (Chichester) Like all hon. Members, I am trying to listen carefully and to understand what my right hon. Friend is proposing. I put it to him that the Government paper of today is restating what his predecessor, my right hon. Friend the Member for Blaby (Mr. Lawson), put forward during the summer at the Antibes meeting of Community Finance Ministers, which I understand was rejected out of hand –

Mr. Major indicated dissent.

Mr. Nelson If I am wrong, I should be delighted to hear so. As the proposal essentially involves the use of all currencies in member states, surely the tendency will be for prominence to be given to the lowest inflation currency within the system, if this ever comes to pass? That would be to the advantage of the deutschmark and might well be to the prejudice of sterling.

Mr. Major My hon. Friend is mistaken to suggest that my right hon. Friend’s proposals were universally rejected at Antibes – that is by no means so. This is a significant development of what was initially trailed at Antibes, and if my hon. Friend continues to listen he will see the areas to which it has been extended. As for the deutschmark, the whole purpose and intention of what underpins this is to provide a system under which nations will seek low inflation policies. That will most certainly ensure and affect the monetary behaviour of each of the currencies in the system. It may be that at any one time a particular currency dominates, but the market will ensure that that dominance will not necessarily be perpetual.

Mr. Benn Assuming that all the conditions that the Chancellor has set out were met, could he now relate that to his claim to uphold parliamentary accountability? Is he not saying that he wants the market instead of some Brussels structure to control all Governments here? Is he not also saying that in future no political party could come to power on a manifesto that included exchange control and varying the currency, because once such a Government were elected a decision taken by this Parliament – if it went through on the Chancellor’s basis – would tie all future Parliaments and would make it illegal for political parties to come forward and be elected using instruments that the Chancellor’s mechanism would exclude?

Mr. Major I do not think that that follows in precisely the way that the right hon. Gentleman has in mind. Of course in strict terms an incoming Government are sovereign. That is a matter for the House and nothing that I am proposing changes that basic and essential feature of the House of Commons.

With competing currencies, the pressure under the system that we propose will be for Community monetary policies to harmonise at the level of the best. That will inevitably strengthen the process of convergence on price and exchange rate stability. Realignments should therefore, become rarer, fluctuations within the bands of the exchange rate mechanism should become smaller, and we could eventually see a system of more or less fixed exchange rates. With the minimal exchange rate uncertainty and reduced costs of switching between currencies, our approach will lead to a multi-currency solution with interchangeable Community currencies. In that way we would achieve a practical monetary union as a result of a gradual evolutionary process, but without disruptive constitutional change. In our judgment that is the right way forward.

Mr. Edward Leigh (Gainsborough and Horncastle) Would my right hon. Friend care to comment on a concept arising from competing currencies, which is that efficient British farmers would be able to compete more effectively than hitherto with their continental counterparts in a more open market once monetary compensatory amounts and other artificial exchange mechanisms had been abolished? Is that not a progressive market solution to what hitherto has been an intractable European problem?

Mr. Major On that point my hon. Friend is almost undoubtedly right. I welcome the pamphlet to which I know my hon. Friend has contributed. It has also reached the conclusion that competing currencies are the right way forward in terms of the future development of Europe.

I should like to deal with one argument for a single currency which I know has attractions for some in the House and beyond. Many people say that a single currency would reduce transaction costs for business men and travellers in the Community. Of course, that must be right. By definition, transaction costs must be reduced if there is one currency rather than 12, but we need to consider at what price and at what risk that convenience is bought. By going for one currency, enormous faith is placed in the ability of the European system of central banks to keep inflation down. Much safer in our view is our approach which maintains national monetary policies and allows currencies to compete to provide the non-inflationary anchor in the European monetary system.

That apart, there is the lack of political accountability to national electorates of a European system of central banks to which I have already referred. I suspect, too, that the requirement to abolish the pound and the franc would be deeply unpopular both in this and in other countries when electorates appreciated what was intended.

In any event, there can be no doubt that as the single market develops the costs of changing between the Community currencies will be reduced as a result of technological improvements and increased competition between banks. Our market approach is intended to encourage just that process.

There are those who would seek to portray the United Kingdom’s advocacy of a step-by-step approach to economic and monetary union as foot dragging. I emphatically reject that view. We advocate an evolutionary approach, but not because it is slow. It would not be slow. There is no reason whatever to suppose that it would be any slower than the controversial Delors route. The merit of our approach is that it is evolutionary and practical. It is also robust – more robust than the Delors approach, which courts great risks, needlessly in my view, by proposing that decisions should be taken on the next stage of the process before we have had a chance to assess the outcome of the first stage.

Mr. Ian Taylor (Esher) I am sure that my right hon. Friend is not alone in what he is saying. I have here a letter from the Board of Economic Advisers to the Federal German Ministry of Economic Affairs. It states: Informal co-ordination of economic policies through market forces shall have priority over formal ex-ante co-ordination by European bodies. It also says: There is no need for an early commencement of negotiations to modify the Treaty as required by the Delors report. That shows that my hon. Friend has a powerful ally in the German Government.

Mr. Major I am grateful to my hon. Friend for that view. I recall that Professor David Currie, a former economic adviser to the Labour party, has also broadly endorsed the approach that I commend to the House. Plainly, we have very compelling support.

Mr. John Smith (Monklands, East) Do I understand the Chancellor of the Exchequer to be saying that Professor Currie advocated the competing currencies theory which the Chancellor has been putting to the House?

Mr. Major A recent paper that I saw the other day by Professor Currie broadly endorses the approach that the House has in front of it. If the right hon. and learned Gentleman cares to read that, he will find that that is the case.

Our view is gaining ground in terms of the report to which my hon. Friend the Member for Esher (Mr. Taylor) referred and it is gaining ground elsewhere in the academic world.

I categorically assure the House that we have no intention of being swept into unwise and premature decisions. The Delors report is important but it is not definitive. As the Madrid council agreed, it is a basis for consideration. It was also agreed that more work was needed. That work must be thorough and very well considered. It must not be rushed because the future development of Europe is of enormous significance.

I hope that it will be clear to the House and, equally important, clear to our partners in Europe that it is our policy to play a central and constructive part in the debate on economic and monetary union in the European Community. Our commitment to its objectives is just as strong and just as deep as that of any of our European partners. Britain is playing a full part in Europe and we intend that to continue. I commend our approach to the House.