The Rt. Hon. Sir John Major KG CH

Prime Minister of Great Britain and Northern Ireland 1990-1997

1990Chancellor (1989-1990)

Mr Major’s Exchange Rate Mechanism Statement – 15 October 1990

The text of Mr Major’s Exchange Rate Mechanism Statement, made on 15th October 1990 in the House of Commons.

The Chancellor of the Exchequer (Mr. John Major) I should like to make a statement about sterling’s entry to the exchange rate mechanism of the European monetary system, which took effect on Monday, 8 October.

Sterling now has a fixed central rate against each of the other currencies in the ERM. The entry rate is set against the ecu and translates to a central rate against the deutschmark of DM 2.95. That was marginally above the market level when the decision to enter was announced on Friday, 5 October and is a little below the current market rate.

Sterling is able to move by a maximum of 6 per cent. above or below the central rates. Our choice of the wider 6 per cent. margins is intended to allow sterling to settle into the system, and follows recent precedent. In due course, we will move to the narrow band of 2¼ per cent. margins. The terms of entry we have agreed with our partners are those that we sought.

The Government have long made it clear that sterling would enter the exchange rate mechanism during stage 1 of economic and monetary union, which began in July. It has now done do, at the earliest appropriate time. I would like to explain how our decision fits into the Government’s wider economic strategy.

It has become abundantly clear that policy is now reducing inflationary pressures in the economy. Monetary growth on all measures has fallen sharply, and the growth of narrow money is within its target range. The growth of demand has slowed. Although the rise in oil prices will continue to feed through for a while, the prospect is for a substantial reduction in inflation over the coming year. That will be so both in absolute terms and in relation to inflation in other European countries. It was for those reasons that we felt able to reduce interest rates by 1 per cent.

A firm exchange rate is a vital part of our policy to maintain tight monetary conditions in order to reduce inflation. As I have repeatedly made clear, membership of the exchange rate mechanism will be an additional discipline for the United Kingdom economy. In no sense is it a soft option. Monetary policy will remain tight. I must emphasise that I will not make a further reduction in interest rates until I am sure that it is safe and prudent to do so.

Membership has important implications for British companies and their employees. They must contain their costs. If they fail to do so, they will not be bailed out by a devaluation of the currency. That is the key message for those engaged in pay bargaining this autumn and subsequently.

But in addition to acting as a discipline on costs, membership of the exchange rate mechanism offers significant benefits for British industry. It will help to provide greater stability of exchange rates with our main trading partners and thus the certainty that business needs to plan for the future. It will also make Britain even more attractive for inward investment.

Although entry to the narrow band of the exchange rate mechanism will fulfil our obligations under stage 1 of economic and monetary union, it does not imply any change in our opposition to the imposition of a single currency. In the intergovernmental conference in December, we shall continue to argue against that plan and for the proposals that I first set out in June. As the House knows, they propose an evolutionary and market-based approach, based on the creation of a new European monetary fund and a common currency – the hard ecu.

In summary, the mechanism has a proven record of success over recent years in producing greater stability of exchange rates and lower inflation. The Government believe that Britain too will benefit from membership. The exchange rate mechanism will reinforce our counter-inflationary policies, help to provide the stability and certainty that industry needs, and set the right framework for a resumption of soundly based and non-inflationary growth. I commend entry to the House.

Mr. John Smith (Monklands, East) As the Chancellor is aware, the Labour party welcomes the decision that sterling should join the exchange rate mechanism, not least because of the potential benefit that a more stable exchange rate could bring to the process of Britain’s much-needed economic recovery. However, it will not of itself lead Britain out of the economic cul-de-sac of high and rising inflation, recession, increasing unemployment and serious balance of payments deficits to which the Government’s policies have led.

I want to ask the Chancellor first about the celebrated Madrid conditions into which the Prime Minister entered in June 1989, and which she reported to the House formally on 29 June last year. At that time, the Prime Minister was in no doubt that the rate of inflation was too high for Britain to enter the exchange rate mechanism. In a reply to a question from my right hon. Friend the Leader of the Opposition, she said: On the exchange rate mechanism, our promise has been that we would go in when the time was right. I” – note, “I” – put conditions on that and made it much clearer that when those conditions were met we should be able to go in. One condition depends on us, which is that we get inflation well down”. Earlier, she said:

we must first get our inflation down.” – [Official Report, 29 June 1989; Vol. 155, c. 1111, 1110.] Every time that she has been asked since then, the Prime Minister has repeated the condition. In July 1989, inflation was to be “significantly lower”. The Chancellor said on 26 March this year: we wish to see inflation fall before we enter the mechanism.” – [Official Report, 26 March 1990; Vol. 170, c. 117.] Only two weeks ago, the Prime Minister was reported as saying in Switzerland:

The Madrid conditions won’t be changed and they include getting inflation nearer the European average. The Prime Minister’s role is crucial – she invented the Madrid conditions. They were not imposed on her by other members of the European Community. The present Chancellor was not in Madrid when these conditions were suggested by the Prime Minister, and neither was his predecessor, the former Chancellor. It was the Prime Minister herself, assisted by the then Foreign Secretary, who is now Leader of the House, and who accompanied her to the Madrid summit. Sadly, his views do not seem to coincide with those of the Prime Minister or of the present Chancellor.

But if the condition is clear – and it could hardly be made more clear – that inflation had to be reduced before we entered the exchange rate mechanism, it is equally clear that it has not been fulfilled. Headline inflation in June 1989 was 8.3 per cent. and is now 10.9 per cent. If we take inflation on the basis that the Chancellor likes to take it – by excluding completely mortgage rates and the poll tax, which is a favourable estimate from the Government’s point of view – then, it was 5.8 per cent. and now, it is 7.9 per cent.

I ask the Chancellor to explain why there has been such a humiliating U-turn by the Prime Minister who was the inventor of the Madrid conditions and is now their arch-destroyer. Is it not simply because the Government, due to their appalling mismanagement of our economy, have been forced to concede that they could not achieve the inflation target which they had set for themselves?

Why does not the Chancellor admit this in his statement to the House, on television and elsewhere? Why does not the Prime Minister – whose role is so crucial in this affair that she must take part in the debate which we hope to have in the House – admit it? If our parliamentary accountability is as important as she frequently claims in this context, why is she reluctant to take part in the debate? Is it not because she would find it impossible to justify the abandonment of a commitment that she made to the House on 29 June last year?

Would not the Chancellor have been wiser to admit that our economy is in dire trouble, rather than to pretend, as he did once again today, that all would soon be well and to claim, as he did on Channel 4 television on the day of his announcement, that at that time there was an ideal conjunction of events Ideal, when inflation was twice as high as that in the rest of the countries in the exchange rate mechanism? Ideal, when the economic consequences of the Gulf crisis are quite unknown? If these conditions were ideal, what were the Government waiting for during all the years when inflation was low and during all the years when there was no Gulf crisis?

Does the Chancellor not understand that nonsense like this not only fuels scepticism in the markets and elsewhere, but fosters downright incredulity about statements by Ministers? Is is not clear that the Government, baulked and cornered by their economic failure, have joined the exchange rate mechanism as a last resort?

Now that Britain has joined, will the Chancellor give us his estimate of the consequences for our economy? I hope that he will answer these questions directly. Given our serious balance of payments problems, is it his judgment that the rate at which we agreed to join is sustainable? What is his estimate of the effect on the balance of payments over the period ahead? Will the balance of payments deficit be progressively reduced? Is he satisfied that the arrangements through the central banks under the Basle-Nyborg agreements will be adequate to sustain the management of a currency as widely traded as sterling? Why did he not seek a strengthening of regional policy in the Community as one means of helping to bridge the gap between countries with more successful economies and countries, such as Britain, which are in difficulties?

Finally, I wish to ask the Chancellor – [Interruption].

Mr. Speaker Order.

Mr. Smith This is an extremely important matter of economic and political policy, and the Government should not complain when they are asked questions by an Opposition whose function it is to do precisely that. The questions that I want to ask the Chancellor flow from how economic policy is to be directed now that we are subject to the disciplines of the ERM.

First, is it not clear that, between now and the next election, responsible economic management will not permit cuts both in interest rates and in personal income tax? To build confidence over the period ahead, will the Chancellor today rule out the possibility of personal income tax cuts before the general election as too wildly irresponsible to be seriously contemplated by any sensible Government? Does he not yet understand that, in the new situation, the supply side policies advocated by this side of the House are even more crucial? Unless we end the debilitating neglect of trading, the collapse of regional policy and the failure to advance new technology – in short, unless we adopt an industrial strategy – is it not clear that we shall not succeed within the ERM, just as we have failed outside it?

Mr. Major I am grateful to the right hon. and learned Member for Monklands, East (Mr. Smith) for his initial welcome for our decision. We both agree that it is the right decision for the British economy. He spent so much time on the Madrid conditions because he knows that we are right to enter the mechanism. As recently as a few weeks ago, he said: We believe that we should enter the ERM at an early date. The Government agree with him, and we have done so.

Several conditions were set out in Madrid. The first concerned the abolition of exchange controls, which is substantially completed. The second related to the single market, and the majority of the measures are now concluded and more are in hand. The third related to progress on financial services, which is also nearly concluded. The fourth was progress on competition policy, on which the Commission, on this at least is acting firmly. The only remaining condition was the need for inflation convergence, and it is now clear that we are moving away from divergence in inflation to convergence in inflation. [Interruption]. If the hon. Gentlemen listen longer, they will learn a little more.

The right hon. and learned Gentleman then asked why we were waiting for a conjunction of events and what they might be. We were waiting essentially for three events: first, the right market conditions and the right market rate, and that we had; secondly, a clear indication that monetary aggregates were coming into line, and that they have; thirdly, signs in the real economy of close and certain disinflation, and that we had. The combination of those factors made this the right time to enter the mechanism.

The right hon. and learned Gentleman asked about the consequences for the economy. The first and most certain consequence is that entry of the ERM will reinforce monetary policy and help us push inflation lower, which is our central policy aim. He asked whether the rate was sustainable, and I share his view that that is an important question. I am confident that a central rate of DM2.95 is sustainable, for a series of reasons which I will set out now, if the House will do me the courtesy of listening.

First, DM2.95 is the average inflation-adjusted real rate of the past decade. It is the recent market rate and, as a number of analysts have pointed out, the pound’s purchasing power parity – in essence, the rate at which the prices of our goods would be equal to the prices of German goods – is above DM2.95. Three analysts have calculated it specially: one at DM3.30, one at DM3.19 and one at DM2.95. Similarly, as the right hon. and learned Gentleman may know, the International Monetary Fund has released figures that suggest that industry will be competitive at DM2.95.

Mr. Ron Leighton (Newham, North-East) When has it ever been right?

Mr. Major When has the hon. Gentleman ever been right?

I understand the concern that underlies the question. The truth is that the trade gap is the result of domestic demand outstripping supply and not an uncompetitive exchange rate. That is the reality of what has happened.

The right hon. and learned Gentleman’s next question concerned the central banks. I am content that the central bank agreement is satisfactory and I think that the right hon. and learned Gentleman is aware of that. I did not regard stronger regional policies as necessary or negotiable in my discussions with my partners in Europe.

On the responsibility for future economic management, the right hon. and learned Gentleman referred to the possibility of interest rate cuts and tax cuts. I made clear a few moments ago the position on interest rate cuts. Tax cuts are a matter for the Budget and not before.

Mr. Terence Higgins (Worthing) My right hon. Friend the Chancellor is reported to have said that a remark by Mr. Delors that we joined the ERM in order to slow down EMU is “rather rum”. Is that not a good description of Mr. Delors’s position, given that we have been in the lead in implementing the single market and that my right hon. Friend’s proposals for a hard ecu are a far more practical, effective and better way forward than Mr. Delors’s proposals for stages 2 and 3?

Mr. Major I am grateful to my right hon. Friend for those remarks. I agree entirely. The hard ecu moves us in the direction of a market-led approach, which I believe is the only sustainable way forward.

Mr. James Molyneaux (Lagan Valley) As Parliament – both sides of the House of Commons – has rendered itself impotent on these matters, is it not imperative that there should be no further erosion of Britain’s position until the electorate have been consulted at a general election?

Mr. Major With respect to the right hon. Gentleman, I do not agree with his underlying premise.

Sir William Clark (Croydon, South) Now that the euphoria of the markets has subsided, will my right hon. Friend re-emphasise that joining the ERM is not a soft option, and that it is essential for us to keep tight monetary control? Does he agree that there has been a wide welcome for the fact that we do not agree with a single currency and that at the new meetings the hard ecu suggestion will be put forward?

Mr. Major I certainly agree with my right hon. Friend’s final point, and I confirm it. I think that the euphoria of the markets was overdone both before and immediately after entry and, in some cases, the gloom is now being overdone. Entry into the exchange rate mechanism is an additional discipline to underpin monetary policy. It is that and no more.

Mr. Peter Shore (Bethnal Green and Stepney) The Chancellor will be aware that this is one of the most serious decisions affecting the jobs and livelihoods of millions of people in this country. He maintains that he has got the right exchange rate. That view is not shared by the vast majority of experts, academics and others in this country.

I shall ask two questions. First, if it turns out that the right hon. Gentleman is wrong on this vital matter, what powers does he have left to change the exchange rate now that it has been agreed with the ERM? Secondly, now that we are part of the ERM, taking account of all he said about tighter discipline, will he spell out what average increase in earnings in the United Kingdom is compatible with retaining what competitiveness we have already?

Mr. Major On the final point, it depends on the individual company and the individual company’s productivity. On the substantive – [Interruption]. It is the question of averages that has got this country into so much trouble over the past 20 years. On the right hon. Gentleman’s central point of jobs and livelihoods, the most important thing for jobs and livelihoods in the future is, first, to obtain a firm downward pressure on inflation and, secondly, to keep it. That is the central reason for entering the exchange rate mechanism.

On whether the rate is sustainable, I set out in some detail the arguments in favour of that a few moments ago. As to what opportunities will arise in the unlikely event of the right hon. Gentleman’s next premise being correct, we intend to stay within the bands to which we have committed ourselves. That was the purpose of setting the bands in the first place.

Mr. William Cash (Stafford) Does my right hon. Friend agree that the acid test is to ensure that the British economy is as competitive as possible, and in doing so to remind the right hon. and learned Member for Monklands, East (Mr. Smith) that the views and expressions of Mr. Tuffin, in repudiating any attempt to hold down wages, are a prescription for our not being competitive? Furthermore, does he agree that the views of Mr. Sam Brittan in the Financial Times that he hopes that British monetary policy will be made in Berlin must be repudiated?

Mr. Major As my hon. Friend says, the wages round is important. Wage settlements above that which is affordable would have a short-term effect on inflation but a far more fundamental effect on the number of jobs in the economy. That, essentially, is the message that employers and employees must grasp when deciding what increases should be. As my hon. Friends know, we have committed ourselves to stay within the bands that we have set and we shall use monetary policy for that purpose.

Mr. Alan Beith (Berwick-upon-Tweed) Does the Chancellor recognise that inflation and interest rates would have been lower in this country in the past year if we had been in the exchange rate mechanism a year or more earlier, when Labour opposed it as strongly as the Prime Minister? Will he explain how he and the Prime Minister can continue to talk about tax cuts when the fiscal policy that may need to operate inside the exchange rate mechanism could require him to increase taxes in some circumstances? Does he rule that out? As the Prime Minister’s objections to joining the exchange rate mechanism before inflation was down to the level of our partners have been blown away like confetti in a gale, may we hope that her objections to a single currency and a more independent European central bank will go the same way?

Mr. Major On the last point, I think the hon. Gentleman is unlikely to see that, and I think that he is unlikely to see that among my right hon. and hon. Friends either. On his first proposition, that inflation would have been lower if we had been in the exchange rate mechanism, if the conditions had been there for us to have been in the exchange rate mechanism, the hon. Gentleman might have been right, because the inflationary record of countries within the exchange rate mechanism is better than those not in it. The conditions for entry were not present. A year or so ago, monetary aggregates were not falling and the real economy was not slowing. We were heading for a position where inflation was going up, not down. Clearly, one could not have entered then.

Mr. Teddy Taylor (Southend, East) Does the Chancellor recall that, when his predecessor joined informally, we had significant reductions in interest rates and inflation for several months, but a period of regular increases in interest rates to the present savage levels after that period of joy? That was apparently because Britain is almost unique in Europe in having a chronic balance of trade deficit with the EEC. Was not this confirmed by Hoare Govett, which has just published a splendid paper suggesting of the initial good news:

As with all magic, it is hocus pocus – and would be unlikely to last for more than a year. If by any chance my right hon. Friend, who has our great respect, and the Government are wrong and such critics are right, what powers are available to the Government to do anything? Can we withdraw from the ERM? Can we realign the currency ourselves; or will we be stuck with a situation in which interest rates go up and down all the time depending on our relationship with the deutschmark?

Mr. Major With great respect to my hon. Friend, the concerns that he expressed were expressed in a number of countries when they entered the exchange rate mechanism in earlier years, and subsequent events have shown that those concerns were not justified. I reiterate: those countries that have been within the exchange rate mechanism and have kept to the admittedly difficult disciplines of the exchange rate mechanism have had a better inflation record over a period than we have. I wish this country to have that better inflation record – for British industry, British commerce and the British consumer. That is why I believe that it is right for us to enter and why I believe that the move will be successful.

Mr. Robert Sheldon (Ashton-under-Lyne) I accept the need for entry, so that we are not excluded from influencing developments within the Community, but is the Chancellor aware that, of itself, entry at an over-valuation will do nothing for our balance of payments, nothing for manufacturing industry, nothing to help us to get more skills in our enterprises and nothing for investment? Is he aware that what he has produced is just a panacea – a panacea of hope and nothing else?

Mr. Major The right hon. Gentleman’s question is based entirely on a false premise. I am the last person who needs telling that entry into the ERM is not a panacea, because it was I who coined that phrase a year ago.

Mr. David Howell Will my right hon. Friend accept that he took the decision that the pound should enter the ERM with considerable skill, and that he deserves warm congratulations on that, even though we shall have a tough struggle to keep the pound where it is? Entry into the ERM ends a long period during which the pound has been kicked around the exchange rate market like a football, and we should be thankful for that.

Does my right hon. Friend recognise that, if the ERM discipline is to work, we shall require much stronger monetary methods and techniques than we have had in the past – techniques of the kind that he and his colleagues were considering back in January? Will he undertake to pursue methods of strengthening our monetary control in this country – including reviewing, and possibly strengthening, the status of our own central monetary authority, the Bank of England?

Mr. Major I am grateful to my right hon. Friend for his remarks about our entry into the exchange rate mechanism. We are certainly clear in our minds that we need to ensure that monetary policy is a safe and secure discipline, and I shall certainly continue to do whatever I can to ensure that it is.

Mr. Nigel Spearing (Newham, South) Does the Chancellor agree that when he uses the word “discipline” he means “decisions taken elsewhere”? And is it not a fact that a nation entering a fixed or near-rigid exchange rate mechanism with a heavy and persistent balance of trade deficit ceases to be a nation of that characteristic and, in the end, becomes a depressed area of a new economic nation?

Mr. Major When I use the term “discipline” I mean no devaluation and no constant descent into the easy option. In the 1990s, we cannot afford the easy option and, we are determined not to have it.

Sir Peter Hordern (Horsham) May I congratulate my right hon. Friend on providing a much-needed extra discipline for the control of inflation, and on putting an end to the widespread perception that wage costs could continue to increase for ever and that we could continue to be bailed out by a declining currency? I also congratulate my right hon. Friend on climbing into the driver’s cab of that notorious gravy train, the European Commission, with the prospect of putting an end to Mr. Delors’s ambitions.

Mr. Major I am grateful to my hon. Friend for his comments about our entry into the exchange rate mechanism, and I share the views that he has expressed about it. On economic and monetary union, I share my hon. Friend’s concern about the destination for which some in the European Community are heading at present. I believe that our proposals represent the right way to proceed, and we shall argue for them very strongly indeed in the intergovernmental conference.

Mr. Leighton Is the Chancellor aware that pegging sterling at nearly DM3 to the pound is virtually equivalent to signing the death warrant of British manufacturing industry? Is he aware that it is a crazy, stupid and misguided policy? I prophesy that he has it wrong and that the pound will not stay at DM2.95.

Is the right hon. Gentleman also aware that going into the ERM makes absolutely no sense if we do not want stages 2 and 3 of the Delors plan? I am glad that the Prime Minister is paying attention, because she blusters, huffs and puffs, but in the end always gives way. That is what she has done again.

Mr. Major I did not notice my right hon. Friend the Prime Minister giving way and accepting the European budget which the Labour party left us in 1979.

With regard to competitiveness, I have a good deal more confidence in British industry than do Opposition Members. I simply do not understand why Opposition Members persistently talk down the capacity of our industry to compete.

Mr. Michael Grylls (Surrey, North-West) Does not my right hon. Friend agree that the tightening of money since mid-1988 has done a good job – no one can ever say again that high interest rates do not work in bearing down on inflation – and that that is why he took his decision on the ERM last week? Does not my right hon. Friend also agree that the Opposition’s policy of trying always to suggest an alternative to high interest rates, such as discredited credit controls, proves again that the Opposition are wrong?

Mr. Major I entirely agree. Our inflationary problem was substantially the result of the dramatic growth of demand. Monetary policy has brought that growth of demand down and will increasingly bring down inflation.

Dr. David Owen (Plymouth, Devonport) Can we assume that the Government are opposed only to the imposition of a single currency and that they would go along with an optional single currency? Is not such flexibility over monetary union essential if we are to enlarge, as I think we must, to include Czechoslovakia, Hungary and Poland? By insisting on a single currency for everyone, we are effectively ensuring that the European Community will remain only a 12-member Community.

Mr. Major On the second point, I entirely agree with the right hon. Gentleman. We believe that it is in the longer-term interests of Europe to ensure that the Community of 12 can become a larger Community to admit the increasingly emergent democracies in eastern Europe. We would be wise to do nothing to inhibit their entry at a later stage by decisions taken at an early stage.

An imposed single currency is not only difficult in terms of the concerns of the House of Commons, with which I have full agreement, but also has real economic dangers for many European nations and we will continue to make those plain. For that reason, we believe that the market-led hard ecu approach is right.

Mr. Ian Taylor (Esher) Does my right hon. Friend share my dismay about the fact that the right hon. and learned Member for Monklands, East (Mr. Smith) appeared to judge only one criterion of the level of inflation – the RPI – when a much better guide to the trend is the tightening of monetary aggregates? Will my right hon. Friend take credit for taking sterling into the exchange rate mechanism at the earliest possible time when it was clear that monetary aggregates would lead to declining inflation?

Will he also repeat and underline the fact that, on a purchasing power parity basis, the DM2.95 central rate will not render British industry uncompetitive and that British industry must now take that rate into account when judging future costs and wage rounds?

Mr. Major On purchasing power parity, my hon. Friend is entirely right. I quoted some figures earlier which are a clear illustration of that. I am grateful for my hon. Friend’s earlier remarks.

Mr. Giles Radice (Durham, North) Despite the potential advantages of joining the ERM, is not the trouble with the Government’s decision of 5 October the fact that it was taken at the wrong time, for the wrong reasons and at the wrong rate? In view of all the suspicions and concerns of our Community partners, would it not be good for the Government to say that they intend to be a bona fide member of the exchange rate mechanism and that they intend to take a constructive attitude at the intergovernmental conference in November?

Mr. Major We will take a constructive line at the intergovernmental conference in November, but a constructive line for the future of Europe does not necessarily mean agreeing to each and every plan that may be promoted by one part of the European Community. A constructive line may well mean standing up for British interests and what we see as the long-term interests of Europe. I give the hon. Gentleman an undertaking that we will do that. We will certainly be bona fide members of the exchange rate mechanism. I made it clear today that, as soon as it is appropriate, we will move to the narrow bands. I do not share the hon. Gentleman’s view that it was the wrong time to enter. I believe that it was the right time to enter, and that is why I did so.

Mr. Ian Stewart (Herefordshire, North) Will my right hon. Friend confirm that it was his view that it was appropriate for a first reduction in interest rates to be made which led to his decision to enter the ERM at that time, and not the other way round, as has been generally suggested against his momentous decision? Despite the constraints of the EMS in future, can he assure us that he will do his best not to be pressed into any reductions in interest rates unless and until he judges that they are appropriate in the light of domestic economic and monetary circumstances?

Mr. Major I certainly confirm the latter point. On the first of the important points that my right hon. Friend made, I think that it was the right time to cut interest rates and to enter the exchange rate mechanism. Indeed, the monetary conditions – first, the fact that narrow money is in its target range; secondly, the fact that broad money growth has fallen every single month since January; and thirdly, the fact that bank lending is now decelerating and the indications that one can see of the flat housing market and other matters in the real economy – were classic signs that interest rates needed to be cut by 1 per cent.

I also felt that it was the right time to enter the mechanism. I also had to bear in mind the fact that, since an interest rate cut was clearly justified, if it had preceded entry, it might have been seen as an attempt to drive the exchange rate down in advance of entry or, alternatively, a signal that we were not going to enter for some time. Both of those would have caused market turbulence. Fortunately, it was the right time to do both, and we did.

Mr. Harry Ewing (Falkirk, East) Is the Chancellor aware that it ill becomes Conservative Members who apparently cannot survive on £26,500 a year to lecture the workers of this country about the need to accept low wage increases in the present pay round? May I be the third hon. Member to ask the Chancellor – on two or three occasions, he has mentioned devaluing the currency – to spell out to the House and the country what powers are available to correct his own mistake if he has got it wrong? If he refuses to explain that, we can only assume that he has left himself without any power.

Mr. Major On the hon. Gentleman’s first point, the requirement to spell out clearly the implications of unaffordable pay increases is clear. If people do not know that avoidably large wage increases will cost jobs, they may then negotiate wage increases that would create unemployment, and nobody wishes to do so.

On the second point, I do not accept the hon. Gentleman’s premise that we have gone in either at the wrong time or at the wrong rate, and events will bear that out.

Mr. Anthony Nelson (Chichester) I congratulate my right hon. Friend on the most welcome statement that he has made today. Does he agree that most people in this country, in addition to lower mortgage interest rates, want to be paid and to save in a currency which is strong, stable and valuable? Does my right hon. Friend agree that, having taken the momentous decision to join the exchange rate mechanism, we have taken a most important step towards economic and monetary union from which there can be no turning back?

Mr. Major I am grateful to my hon. Friend for his kind remarks about our entry into the exchange rate mechanism. The exchange rate mechanism will play a significant part in assisting other aspects of policy to bring down the rate of inflation so that savings will have a secure value. I entirely share my hon. Friend’s view on that matter. I do not necessarily draw the same conclusion about future developments towards monetary union.

Mr. Ted Rowlands (Merthyr Tydfil and Rhymney) If it is such a favourable exchange rate, does the Chancellor now expect a favourable balance of trade, particularly with West Germany?

Mr. Major As I have pointed out on several occasions during the past few moments, the purchasing power parity rate, which is what matters, is more favourable than many other people have yet considered. If the hon. Gentleman will wait and see, events will give him his answer.

Mr. Quentin Davies (Stamford and Spalding) I congratulate the Chancellor on his momentous decision. Does he agree that this is the first time since the Labour devaluation in 1967 that British industry faces the disciplines of a regime of credibly stable exchange rates? It is also absolutely clear from this afternoon’s proceedings that the Labour party remains at heart a party of devaluationists. The vital thing is for both sides of British industry to take on board the full enormous importance of the changed circumstances that they now face.

Mr. Major It could not be put more clearly, and I entirely agree with my hon. Friend.

Mr. Jim Sillars (Glasgow, Govan) Does the Chancellor recall quoting the experiences of other countries entering the ERM? Does he agree that it is a fair parallel to cite the French experience – another weak currency like our own – on entering the ERM? Is it not the case that the French had not only to maintain very high interest rates and introduce credit controls, but to tighten their fiscal policy? Why does the Chancellor think that he can get away with a very loose fiscal policy, when the French had to tighten theirs?

Mr. Major I think that the hon. Gentleman is overlooking several facts. First, we have a very tight fiscal policy and fiscal surplus, which the French did not; secondly, we have put in place a whole series of supply side improvements, but the French have not; thirdly, they have a socialist Government pursuing socialist policies and we have not.

Mr. Hugh Dykes (Harrow, East) Is my right hon. Friend aware that his decision 10 days ago has been almost universally welcomed in this country? It is a significant step forward, as is his reminder yet again today that the eventual single currency will be reached by agreement, not imposition, which is, after all, the Community habit and was at the specific request of Heads of Government when they asked Mr. Delors to draw up the plans.

Mr. Major I am grateful to my hon. Friend for his support on those matters, which I greatly welcome.

Ms. Clare Short (Birmingham, Ladywood) Is not the truth about the timing and level of our entry to the ERM the short-term interests of the Conservative party? The Chancellor thinks that, via an overvalued exchange rate, he will buy, for a short time, a cut in inflation and the stability to cut interest rates. After the election has been called, we shall see a terrible recession because the exchange rate is overvalued. Surely the danger for the Chancellor is that the markets have read all this, and that therefore the pound will drop in value. He will not get his desired outcome – the cut in interest rates – as the whole strategy will blow up in his face. That will be the price he pays for acting in the interests of the Tory party rather than the British economy.

Mr. Major The hon. Lady and her party should not judge us by their standards. Entry into the ERM is not about short-term advantages and long-term costs – in reality it is almost precisely the reverse. There will be short-term restrictions on policy in return for the long-term advantage of lower inflation. That is the right way to proceed.

Mr. George Walden (Buckingham) May I congratulate my right hon. Friend on making it clear in his speeches, notably at the party conference, that the success or otherwise of the ERM ultimately depends on self-discipline within the economy? I note his hope, his appeal and his wish for lower wage rates. Will he also make it clear to the country that there must be no resurgence of the bloated house prices that played such a large part in our inflation in the first place if this policy is to succeed?

Mr. Major I absolutely share the views that my hon. Friend has expressed. The way in which house prices took off a couple of years ago added significantly to our difficulties – they took off after the election, so they did not help us win – and they represented a considerable complication in policy.

My hon. Friend is entirely right as well in what he says about wage rates, which should apply to management as well as the work force.

Mr. Doug Hoyle (Warrington, North) Will not the Chancellor admit that, despite his brave words, British manufacturing industry is not competitive, at almost DM3 to the pound? If it is not competitive, what will the result be? In the early 1980s, the Government destroyed almost 30 per cent. of British manufacturing industry, now the rest of British industry will also go down the plughole because of the Chancellor’s folly, dictated not by reliance on economic strategy but by political expediency.

Mr. Major The hon. Gentleman may feel that, but if he does, he is wrong. In addition, I do not agree with his remarks about competitiveness. I reiterate my point that the size of the trade gap – which I have publicly stated I regret – is essentially the result of excess demand over our capacity to supply at home, no lack of competitiveness. That is why our export performance has been so good.

Mr. Ivan Lawrence (Burton) Will my right hon Friend acknowledge that, necessary and commendable as entry into the ERM may be, there is nevertheless widespread concern in the country that it will inevitably lead not only to economic and monetary union but to a form of single currency and centralised banking control, and of control over our economy and taxation policies that will take away this nation’s national sovereignty and replace it with the elements of a European super-federal state? Will he make it absolutely clear that under no circumstances will the Government’s policies end at that destination?

Mr. Major I am happy to tell my hon. and learned Friend that I see no prospect of us moving towards a federal state.

Mr. Graham Allen (Nottingham, North) Does ERM mean exchange rate mechanism of election rigging manoeuvre? Will the Chancellor explain clearly and simply to the House what mechanism exists to devalue the pound within the ERM?

Mr. Major I will tell the hon. Gentleman precisely what ERM means – it means an assistance towards low inflation. I am not contemplating devaluation, which is the traditional policy of Opposition parties, not a Conservative Government.

Mr. Andrew Rowe (Mid-Kent) My right hon. Friend is of course aware that the belated conversion of the Labour party’s Front Bench spokesmen to welcoming membership of the European Community reflects their hope that by doing so they will belong to a socialist Europe. Does he accept that, although many of us welcome the fact that we are being moved closer to Europe, we wish to see a Conservative Europe and welcome his latest manoeuvre because it gives us a voice in the central policies of the European Community?

Mr. Major I am grateful to my hon. Friend. What has become crystal clear during this questioning, to a greater extent than I imagined, is that the Opposition are split on the issue of the exchange rate mechanism. Their Front Bench spokesmen want to go in, but their Back Benchers are already asking how to come out – that is how split they are.

Several Hon. Members rose –

Mr. Speaker Order. I have to have regard for the subsequent business, an important debate on financial services and the European market, in which some hon. Members now standing wish to participate. I shall take three more questions from each side and then we must move on.

Ms. Joyce Quin (Gateshead, East) Is the Chancellor aware that a document that the House will be considering shortly – the Government’s official response to the report of the Select Committee on Trade and Industry on the EC and financial services – clearly states that ERM entry will be considered only when the level of United Kingdom inflation is significantly lower. In view of that statement, will the Chancellor admit that, for political reasons, the Government have made a complete about-turn?

Mr. Major That is a very charming attempt, but I will not. The relevant factor is not the historic inflation rate when we were not in the exchange rate mechanism but what the inflation rate will be when we are in the exchange rate mechanism.

Mr. Edward Leigh (Gainsborough and Horncastle) Does my right hon. Friend agree that membership of the ERM makes sense to a Government committed to national economic sovereignty only if it is seen not so much as a cosy support system but as a measure of fiscal rectitude equivalent to the old gold standard? In that sense, what hope would there be for any Government who retained membership of the ERM but pursued policies of high spending, borrowing and taxation, and low interest rates, as a Labour Government would? Would not that send the pound not so much floating as crashing through the floorboards?

Mr. Major That, of course, crisply put by my hon. Friend, is why Opposition Back Benchers hate the idea of the exchange rate mechanism and would never, in practice, have let a Labour Government enter and, in the unlikely event of a Labour Government coming to power, they would seek to bring them out. I hope that the markets and our colleagues in Europe understand that.

Mr. Robert Litherland (Manchester, Central) The Chancellor puts great emphasis on self-discipline. If voluntary wage restraint did not come up to his expectations, however, would he ever consider a wage freeze?

Mr. Major I do not think that the experience of wage freezes in the past 20 years – under Governments of both major parties – has been at all satisfactory, and I do not envisage our taking such action. The reason why I set out so clearly the importance of the wage round is that the sooner that it is clearly understood by both sides of industry that it is necessary for wage increases to be only those that are affordable, the less will be the impact in the form of job losses.

Mr. Graham Riddick (Colne Valley) Does my right hon. Friend agree that one of the more distasteful aspects of the whole ERM debate has been the way in which Mr. Jacques Delors has been saying that the inevitable next step is a single currency whether Britain likes it or not? Will my right hon. Friend confirm once again that the inevitable next step is no such thing, and that the present Government will not be dictated to by this Brussels bureaucrat?

Mr. Major I am happy to reiterate to my hon. Friend that we are not at all in favour of stage 3 of the Delors plan, and that we intend to pursue very fiercely our own plans for a market-led approach.

Mr. Win Griffiths (Bridgend) Everyone knows that the Government have been thinking about joining the exchange rate mechanism for 11 years, and that they have been looking into it particularly deeply during the past five. Given this amazing conjunction of events, and the Chancellor’s emphasis on the reduction in inflation, can he tell us the expected rate of inflation on a quarterly basis until October next year, and also what estimate has been made of the rate of unemployment in the same period?

Mr. Major I shall do that in the Autumn Statement – as is traditional – at some stage in November; the precise date is as yet unclear.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak) Does my right hon. Friend accept that many of us were disappointed by the rather churlish response of the right hon. and learned Member for Monklands, East (Mr. Smith) – for whom many of us have considerable regard – when my right hon. Friend has done precisely what was asked of him only a week ago, by reducing interest rates and joining the ERM? Is this because the Opposition have recognised – it has been brought home to them – that what we must have are the same kind of wage increases, in relation to productivity, as other European countries; and that, if Rover and Ford car workers ask for 13 per cent. when Benz and Volkswagen workers are asking for 3 per cent., there is no way in which that can prove successful, whoever are in office?

Mr. Major My hon. Friend is smack on the button: I entirely agree. I confess, however, to feeling some sympathy for the right hon. and learned Member for Monklands, East. It is not easy to try to ride two horses in that circus.