Mr Major’s Commons Statement Following Ejection from the ERM – 24 September 1992
Below is the text of Mr Major’s statement to the House of Commons on 24th September 1992 following ejection from the ERM.
PRIME MINISTER:
I beg to move,
That this House expresses its support for the economic policy of Her Majesty’s Government.
Following the developments in the foreign exchange markets over the past weeks, I thought it right to recall Parliament to debate the present position. The essential conditions for Britain’s economic success are low inflation, low taxes, free trade and freedom from excessive state interference. I am happy to reaffirm those principles today. The Government stand for a low-inflation, low-tax economy–and so, I believe, do the British people. That is why, five months ago, they made their choice and we sit here and the Labour party sits on the Opposition Benches.
We joined the exchange rate mechanism in 1990 to help to bring down the rate of inflation in this country. British industry supported us in that decision; indeed, it urged us to join believing that, on balance, it would help to stabilise exchange rates, bring down inflation and bring down interest rates from the high British level, which then applied, to the much lower European levels. Of course, during the period of our membership, interest rates fell from 15 to 10 per cent.
I congratulate industry on its magnificent response in the battle against inflation. I know that it has not been easy, but, against a difficult background, exports have risen to record levels, costs have been controlled and productivity has soared. It was not just industry which supported entry into the ERM–so did commerce, the City, most trade unions, the TUC and the Opposition parties in this House. The Leader of the Opposition, whom I warmly welcome to his new responsibilities, was consistent in his support of the exchange rate mechanism. When we joined it, the right hon. and learned Gentleman supported us, and agreed. When I announced the exchange rate central figure the right hon. and learned Gentleman was generous enough to agree. When, last week, I said that we needed reforms because of the fault lines that had become apparent, the right hon. and learned Gentleman agreed that reform was needed. I congratulate him on his consistency, even though on this issue the House has been not just a debating Chamber but an echo chamber.
Now, of course, we hear most loudly from those people who were critics of the exchange rate mechanism. They come from all sides and every party. My right hon. Friend Lord Tebbit, I understand, says that the Government were, I think the expression is, “dragged in” by the then Chancellor. Now we all know my right hon. Friend Lord Tebbit. He is an old friend to us all. I admire him as a man of great courage, a fighter, a bruiser. He likes to bite your ankles, even if you are not walking up his pathway. Yet even my right hon. Friend Lord Tebbit lost many battles with my formidable predecessor. Despite this, according to Lord Tebbit, even my formidable predecessor, whose convictions and firmness of purpose are everywhere admired, was somehow dragged into the exchange rate mechanism by her new Chancellor. Ah, yes, I remember it well.
Since we joined the exchange rate mechanism we have brought inflation, which was rising to 11 per cent., down to nearly 3.5 per cent., and falling. That is an achievement for which my right hon. Friend the Chancellor of the Exchequer deserves to be warmly congratulated, so let me do so and let me say this : I take full responsibility for the actions and policies of my Chancellor. In the exceptional circumstances of last week, we were obliged to suspend our membership of the exchange rate mechanism. In the circumstances, there was no choice. No mechanism could have survived the market’s attack on the scale that occurred last Wednesday. One after another–not just sterling–the currencies of Europe came under fire. We need to see that against the background of events world wide : a referendum in France, whose outcome was in doubt, and great economic difficulties in Germany where interest rate levels were at their highest level for a decade. Those strains were increased by a slowdown across Europe and the falling exchange rate of the dollar. That speculative attack turned first to the lira, which was forced to devalue and subsequently to step outside the exchange rate mechanism.
It created havoc beyond the exchange rate mechanism–in the Scandinavian countries, where overnight interest rates in Sweden touched 500 per cent. The market, encouraged by injudicious comments about realignment which should never have been made, then turned on sterling. In such circumstances, there could be only one response : to defend the pound with foreign exchange reserves and then to raise interest rates. That is what we did, but the severity of the attack compelled us to leave the mechanism. Other currencies, too, have come under attack and suffered varying degrees of damage. I do not wish to understate the consequences of this event.
Let me turn first to the exchange rate mechanism itself. I do not see that we could readily return to the mechanism without dealing with the problems that have been thrown up in the past fortnight. These need careful examination and consideration before we can decide whether such a mechanism can be made to work to the benefit of all its members. Some fundamentalists say that it cannot. Other fundamentalists say we should pop straight back in.
Let me say bluntly to the House that I have no intention of being bound to either course without a proper examination of where future British interests lie. My expectation is that co-operation is a better way, if it can be seen to be adequate, and no one should doubt that we will examine carefully whether a reformed mechanism can be made to work. But I do not believe that we shall be able to go back into the mechanism soon, or into the same mechanism that we left last week. My right hon. Friend the Chancellor of the Exchequer has already made our criticisms very clear to other European Finance Ministers, and I will be doing so at the European summit next month. But inside or outside the exchange rate mechanism, the Government’s economic policy must retain the same objectives. Our ambitions to bring inflation down steadily but surely during the lifetime of this Parliament were spelled out in the last Budget, and that remains our strategy. Thus far, our anti-inflation strategy has succeeded more spectacularly than anyone in the Opposition ever believed possible. Outside the exchange rate mechanism, the conduct of monetary policy cannot, indeed should not, be exactly the same. We must have regard to a range of indicators of monetary conditions to make sure that our objectives on inflation in particular are not at risk. These will include our existing narrow money target, the behaviour of broad money and asset prices and, of course, the exchange rate. Nobody should believe that a floating exchange rate is a free meal, always allowing interest rates to fall to a very low level.
Mr. Alex Salmond (Banff and Buchan) : The Prime Minister spoke about fault lines in the exchange rate mechanism. When did he first discover them? Did his Chancellor, who we now understand is a long-term sceptic of the ERM, ever inform the Prime Minister of his doubts, and if so, when?
The Prime Minister : The speculative attack on sterling was of a size and scale that we have not seen for beyond a quarter of a century. I do not believe that any mechanism would have been able to withstand the size and scale of that. But I believe that there are other areas within the exchange rate mechanism where reform could have made it a more credible instrument for use last week. We shall discuss that with our European partners and others.
Mr. Stuart Bell (Middlesbrough) rose —
The Prime Minister : I shall give way later.
Interest rates elsewhere in Europe have been driven up this summer, particularly by the strains in Germany.
Indeed, in the last 10 days of turbulence in the mechanism, interest rates have risen in Greece, Italy, Sweden and France. In Spain they have not only devalued but have effectively reintroduced exchange controls. Ireland, too, this morning reintroduced exchange controls. Since we stood aside from that turbulence, it has been possible to reduce base rates by a full percentage point this week, and the benefit to business and to home owners will help strengthen economic recovery.
But interest rates alone will not achieve the non-inflationary growth that we need in this country, and that point needs to be understood. That depends even more crucially on keeping firm control of public expenditure. The Government’s new system of control will allow money to be directed towards priorities, while we keep strictly within the overall limits laid down for the growth of public expenditure as a whole.
In essence, the Government have set an upper limit to expenditure and will divide resources between priorities in the public expenditure round. That contrasts with the previous system of individual bids that were added up at the end of individual negotiations. It is a fundamentally different system of controlling public expenditure. It is tough and will be tough, but it is necessary and is an important component part of overall economic strategy.
Mr. Stuart Randall (Kingston upon Hull, West) : Will the Prime Minister give the House some idea of the likely time scale for reforming the exchange rate mechanism? Will it be Christmas or in three of four years’ time?
The Prime Minister : Reform self-evidently depends on negotiation with all the other members of the mechanism. At this stage, nobody can say how long that will take. As I said a few moments ago, given the turbulence that has existed–not least the money supply figures announced in Germany yesterday–I would not expect our return to any mechanism, and certainly not the same mechanism, to be in the near future. I do not believe that that will be practicable, and I must make that clear.
Mr. Tony Benn (Chesterfield) : The Prime Minister is speaking as President of the European Council, not just as Prime Minister of Great Britain. He has repeatedly told us that his object is that we should be at the heart of Europe. Will he please explain how allowing speculators to determine our currency, German banks to determine our interest rates and French voters to determine the future of the Maastricht treaty puts this country at the heart of Europe? Is it not clear that the British, like the Danish, Irish and French, are entitled to determine what is essentially a political matter, although in a debate dressed up as an economic debate?
The Prime Minister : I will turn directly to the question of Britain’s place in Europe in detail in a few moments. On the question of speculation, it is certainly within the memory of the right hon. Gentleman that, whether inside the mechanism or outside, inside the European Community or outside, sterling has been subjected to speculative attacks on many occasions in the past. The exchange rate mechanism offered an extra line of defence, although not a complete defence; as we have seen, and as we have always known, there could be no total and complete defence.
Sir Teddy Taylor (Southend, East) : To avoid any possible misunderstanding, will the Prime Minister say whether it is the Government’s intention to seek to rejoin a fixed exchange rate system?
The Prime Minister : I have explained to the House twice that we shall examine whether a system can be made credible. When we have finished that examination, we shall make our decision.
Mr. Bell : Will the Prime Minister give way?
The Prime Minister : I will give way to the hon. Gentleman, and then I shall make some progress.
Mr. Bell : The Prime Minister is announcing what appears to be a very important and significant change of policy : we are moving away from the external discipline of the exchange rate mechanism and the deutschmark as an anchor to our policy of getting inflation down to an internal discipline. Are we still shadowing the deutschmark, and will there be a wages control policy for public sector employees?
The Prime Minister : I announced to the House–for I think it has a right to know–how we shall conduct economic policy while we are not in the exchange rate mechanism. It is essential that the House is aware of how we shall conduct policy. I have said that we shall examine the practicality of returning to a reformed exchange rate mechanism and make a judgment on whether that is a workable system and then whether to join. We shall certainly undertake those negotiations.
I turn now–
Mr. Nicholas Budgen (Wolverhampton, South-West) : Will my right hon. Friend give way?
Hon. Members : Give way!
Madam Speaker : Order. The Prime Minister has made it clear that he wants to make a little progress.
The Prime Minister : I give way to my hon. Friend.
Mr. Budgen : I am sure that my right hon. Friend will agree that we have been discussing the details and fundamentals of the exchange rate mechanism for very many years in this House. Will he please explain to the House what are the new details that have caught him out so unexpectedly that he requires guidance on them before he can tell the House whether he intends to go back into the mechanism?
The Prime Minister : My hon. Friend has a long-held view that the right thing to do is to let sterling float. I understand that view, but I must remind him that sterling was floating when, in 1981, interest rates rose by 4 per cent. in less than a month, and that it was under a system of floating exchange rates that interest rates rose to 15 per cent. before we were able to bring them down to 10 per cent. within a co-operative mechanism such as the ERM.
The Government’s general policy towards Europe must be founded on a concern for our long-term national interests, and I believe that it is time that we turned afresh to face directly the whole question of Europe and our place in the European Community.
There are broadly three schools of thought about our membership of the Community. The first–it is spread thinly across each political party–is that we should leave the Community; that we should never have joined. It is a minority view, often disguised by rhetoric affirming support for the principles of membership while actions speak the opposite. There are people who, in their hearts, would prefer it if we were not in the Community, who trade under false colours and who do not address their arguments to the implications of non-membership for jobs, prosperity and the future.
The second school of thought is that European development is inevitable and goes inexorably in one direction : that sooner or later a centralised Europe is inevitable. Those who take that view are often the direct descendants of those who, 20 years ago, thought that socialism was inevitable, before it became completely discredited around the world.
I do not share the belief in the desirability or inevitability of a centralised Europe. Each country in the Community at times of crisis will inevitably look first to its own national interest; each will pool some of it in the common interest, but none will sacrifice it. Just as the interests of France and Germany will always come first for them, so the interests of Britain must always come first for us. I understand the fears about a centralised Europe, but I think that they are fanciful, for we will not have one.
The third school of thought, the one for which I stand, is quite different. It is that it is in the interests of Britain–our interests, our objectives and our prosperity–for us to be part of the development of our continent. By part, I do not mean a walk-on part; I do not mean simply being a member. I mean playing a leading role in the European Community. I mean helping to determine the direction of policy, building the policies that we want and fighting those that we do not want. We will need to compromise on some matters, but so will every national state in Europe unless we return to tribalism right across the European Community.
This co-operation in Europe demands a wider Europe. It demands the entry of the Scandinavians and the Austrians and, over time, of the east Europeans– those newly democratic states which have every right to look to the Community and the west for a more secure future. This co-operation also requires us to deal with the concerns about the internal development of the European Community. Those concerns exist not only in this country but in every country of the Community. There are fears throughout Europe that the Community is too centralised, that it is too undemocratic and that the leaders of the Community are seeking to develop it too fast for their national Parliaments and people. The events of recent months have shown that, if Europe is to be built on a sound foundation, we cannot ignore those feelings or brush them aside as a matter of no concern. The good European does not ignore those fears. He seeks to put them right–and that is the policy we pursued up to Maastricht, during Maastricht and after Maastricht.
The Maastricht treaty has become a totem around which those in favour of Europe and those opposed to Europe are now dancing. In truth, it is less important than the pro-Europeans claim and in no way as far-reaching as the sceptics tell us. Many of the things for which the Maastricht treaty has been criticised spring inexorably from the treaty of Rome or the Single European Act.
One of the main criticisms of the Maastricht treaty is the move towards a single currency. The House will recall that I declined to accept that move in the negotiations because I did not believe that Europe would reach the right economic conditions to support a single currency. I have never believed–I have stated it frequently–that Europe would reach the right convergence by the mid-1990s. That is why I refused to commit Britain to a single currency.
In the light of the continuing economic problems throughout Europe and of the currency turmoil of the past week, I must say that I was right and– [Interruption.]
Mr. William Cash (Stafford) rose–[Interruption.]
Madam Speaker : Order. A great many of our fellow citizens were keen that the House should be recalled, and they want to hear what the House has to say–as, I believe, do people thousands of miles away. Let us give each and every one of us a proper hearing. The Prime Minister knows exactly who is standing behind him. If he wants to give way, he will do so.
The Prime Minister : I must tell those who have exaggerated ambitions for a single currency that it must now be an ambition postponed. In the Maastricht treaty, we safeguarded our national interest on the single currency. Elsewhere in the treaty, we secured other very important gains for Britain. I remind the House that, early in their presidency, the Dutch presented proposals on foreign policy, defence policy, immigration and justice–all of which would have been undertaken under the treaty of Rome. We rejected that. At Maastricht, we secured provision for co-operation between nation states outside the treaty of Rome, outside the power of initiative of the Commission and outside the jurisdiction of the European Court. Those who claim that Maastricht was a treaty too far should ask themselves, “What was the situation before the Maastricht treaty?” Another important achievement was the provision restricting the scope for Community action. That provision was put in at our insistence. It reflected our long-standing argument that the Community should take action only where it could do so more effectively than a nation state or more than one member state co-operating voluntarily. We had to fight hard for that provision with the support of some other countries–notably Germany–but it was a break point and we won it. It has since found an echo in public opinion in Denmark, France and right across the Community. Although the Danish people narrowly voted against the Maastricht treaty, the Danish Government have made it clear that that is not necessarily the last word. The Danish Government plan a further referendum.
Mr. D. N. Campbell-Savours (Workington) : Will the Prime Minister give way?
The Prime Minister : I will make some more progress.
If, however, the Danes were unable to go back to the people, or were to lose again in that further referendum, the Maastricht treaty could not proceed. It would not be acceptable for the 11 to go ahead without Denmark, and against the will of the Danish Government and people. That cannot happen, and it will not happen.
The Danish Government will publish a White Paper next month, at the start of a process of consultation. It would not make sense to bring the Maastricht Bill back to the House of Commons before we know clearly what Danish intentions are, and when and how the Danes propose to consult their people again. When those things are known, however, we must examine the Bill further.
Those who assume that the Bill is dead have overlooked two things. First, there is much in it that we want; secondly, with the consent of this House of Commons, I agreed that Bill. I do not believe that it would be proper for a British Prime Minister to agree a treaty, and then come back to the House of Commons and disown it. In this country, people know that it is in our interests to be in Europe, but they fear that the Community seeks to intervene too intrusively in our national life. They fear that things that have always been dealt with by individual nation states–and should be dealt with by individual nation states–are instead gradually being drawn within the control of the Community. So we need a definition–a settled order–of what is for national action and what is for Community action. We need clear criteria by which Community proposals will be judged. When we are satisfied that such a system has been put in place, and when we are clear that the Danes have a basis on which they can put the treaty back to their electorate, we shall bring the Maastricht Bill back to the House of Commons.
Mr. Campbell-Savours : If the French, the Germans and the Benelux countries decide to forge ahead with a Community based on greater monetary and political co-operation, will the Prime Minister be prepared in any conditions to leave Britain outside that in the Community?
The Prime Minister : There might well be circumstances in which others would make decisions that they believed to be in their national interests; but I have said repeatedly, and agreed under the Maastricht treaty, that any question of a single currency must be determined by the House of Commons at the time when others go ahead, and I stick to that view.
Mr. John Wilkinson (Ruislip-Northwood) : Is my right hon. Friend really telling the House that–notwithstanding the fact that two thirds of the French people did not vote in favour of the ratification of the Maastricht treaty; notwithstanding the fact that, when the question was first put to them, the Danes voted against it; and notwithstanding the fact that my right hon. Friend will not grant the British people a referendum–the House is somehow to proceed with this extraordinary process?
The Prime Minister : We are a parliamentary democracy, and the House is the place in which to consider the Bill–line by line and clause by clause. Other nations may have a tradition of referendums : they may call a referendum, followed by a debate on the whole Bill lasting one or two days, and approve every part of the Bill immediately. That is not our parliamentary tradition, and I do not believe that it would be acceptable to the House of Commons. As for the second part of my hon. Friend’s question, I have made it clear–and I repeat again–that, when the conditions that I have set out are fulfilled–when we have moved forward on subsidiarity, and when the Danes have decided how they will proceed–I will bring back to the House the treaty that I negotiated with the approval of the House : the treaty that was approved at the general election, and on Second Reading some time ago.
Let me repeat that, when we are satisfied that a settled order has been put in place, we will bring the Bill back to the House. That is one of the matters that are to be put in hand at the special meeting of the European Council on Friday 16 October.
Mr. Michael Spicer (Worcestershire, South) : I am most grateful to my right hon. Friend for giving way. He has expressed the view that the House should take the final decision on the Maastricht Bill. Therefore, will he give consideration to allowing a free vote in the House?
The Prime Minister : I believe that my hon. Friend stood at the general election supporting the Conservative manifesto, which indicated that we would bring the Bill before the House. I still support the commitment that I had in that regard in the manifesto. I said that that was one of the matters to be put in hand at the special meeting of the European Council on Friday 16 October. That special meeting will take place at the international conference centre in Birmingham.
That European Council needs to respond to the concerns that people right across Europe have shown about the direction of Community policy, to review what is wrong with the exchange rate mechanism and how the system can be made to work better in future, to consider preparatory work to meet Denmark’s concerns and, of course, to give a further impetus to the general agreement on tariffs and trade round. During recent months, our concerns about the Community have been mirrored across Europe. The British agenda is now on the table in every country of the Community.
It is worth reminding ourselves why the Community was built and why we joined it. Its founders wanted lasting peace in western Europe, and they achieved it. But they wanted something more [Interruption.] Yes, what about the economy? The founders wanted to build up economic prospects across Europe on a scale that no previous generation had seen, and they achieved that. They wanted the prosperity of each generation to exceed that of its parents, so that the chances for each generation would be greater and the opportunities more fulfilling. Collectively in Europe, that is what we have achieved, despite the difficulties that presently exist.
Mr. Jimmy Boyce (Rotherham) : On a point of order, Madam Speaker. Given that the debate’s title is the United Kingdom’s economic policy, could you tell us when the Prime Minister is going to get round to discussing that policy?
Madam Speaker : As I have not seen the Prime Minister’s speech, I can only say that the hon. Member for Rotherham (Mr. Boyce) must give the Prime Minister the opportunity to reach that point.
The Prime Minister : Clearly, the hon. Member for Rotherham (Mr. Boyce) does not realise the extent to which our economic well-being depends on our relationship and trade with Europe.
I have never seen our future as being a sour, isolated country off the mainland of continental Europe. That surely cannot be a way for us. Even though some will swallow hard at compromises that may need to be made, they should remember that others in Europe will need to compromise as well. The voice that is raised to say that we should look after only our own interests is the voice of narrow self-interest. Such a voice always has resonance in politics and is almost always wrong. It is a policy more certain to begin with cheers and end in tears than any other policy that has been devised.
I have never understood why some are so fearful of our prospects in Europe–neither do I understand why those who are often most fearful are those who would claim to be most proud to be British. Why, then, with that pride do they assume that we will always lose the arguments in Europe when that has not been the Community’s history and will not be the Community’s future?
We have the chance to build in our time, in our generation, the sort of Europe for which we have always longed; the sort of Europe that I believe its citizens want; a secure Europe of nation states co-operating freely for the common good; a prosperous Europe, generating new wealth within the biggest free trade area in the world; a free trade Europe in which Brussels is kept off industry’s back. Only one Government–this Government- -offer industry freedom from state control. Only our policies of low taxation and low inflation will allow the genius of British enterprise to flourish, and only this Government’s policies will secure for the British people the prosperity that they deserve in the ’90s and which this Government will deliver. I commend the motion to the House.