Mr Major’s Exchange Rate Mechanism Statement – 23 October 1990

October 23, 1990February 15, 2021 admin 1990, ERM, Inflation, Interest Rates, Monetary Policy

The text of Mr Major’s Exchange Rate Mechanism Statement, made on 23rd October 1990 in the House of Commons.

Mr. Speaker I have selected the amendment in the name of the Leader of the Opposition. Furthermore, as 39 right hon. and hon. Members have already submitted an application to speak, I propose to place a 10-minute limit on speeches between 6 pm and 8 pm. I am afraid that that may mean that some Privy Councillors will be called within that 10-minute period. In fairness to all, I hope that right hon. and hon. Members who are called will bear that limit broadly in mind.

The Chancellor of the Exchequer (Mr. John Major) I beg to move, That this House congratulates the Government on joining the Exchange Rate Mechanism of the European Monetary System; notes the clear evidence that the Government’s tight monetary and fiscal policies are reducing inflationary pressures in the economy; and believes Exchange Rate Mechanism membership will reinforce the Government’s counter-inflationary strategy and help to strengthen the framework for a sustained improvement in economic performance. Sterling’s entry into the exchange rate mechanism is undoubtedly an important economic event and, moreover, an event which has long had the general support of the House, industry, commerce, the City and most, although inevitably not all, economic commentators.

This debate is a welcome opportunity to set out the rationale for entry; the potential advantages and constraints that it brings with it; and to consider also the effects of standing aloof from membership. I wish also to address the details of entry: the rate; the timing; the bands; and the necessary discipline of membership. And, of course, I shall touch also upon how entry affects the wider question of economic and monetary union, which is, I know, of great concern to the House.

It is now 12 years since the European monetary system and the exchange rate mechanism were established. At the outset, in 1978, the last Labour Government decided not to join the exchange rate mechanism. Since then the question whether and, if so, when we should join has been an important and contentious issue at the very centre of political and economic debate.

Two years ago my right hon. Friend the Prime Minister set out our commitment to join the mechanism and the conditions in which we would do so. On the free movement of capital, the single market, competition policy, and the liberalisation of financial services those important conditions have effectively been met for some time. It is possible to quibble about them only if excuses are being sought not to enter the ERM.

For some months the key remaining condition has been that domestic conditions – and our inflation performance in particular – should enable us to accept the exchange rate discipline. In economic terms, what mattered for that was not what happened in the months leading up to membership, nor was it the distortions in comparative inflation performance caused by different methods of measuring inflation. The important factor was that our inflation performance would enable us to converge and thus enable us to compete at the chosen exchange rate. It was for that reason that we did not join the mechanism until we were absolutely sure that our tight monetary policies were having their intended effect and inflationary pressures were easing.

That is now the position. The evidence that this has now happened comes first from the monetary aggregates. The growth of narrow money, M0, has fallen in each of the last five months and is now back well within the target range I set for this year. M4 growth – broad money – has fallen steadily throughout 1990 and currently stands at its lowest point for nearly three and a half years. Bank lending has also decelerated sharply.

In the real economy the picture is the same. The indicators show that the economy is slowing, as indeed it must if inflation is to fall. That is clear in the high street, it is clear in the housing market, it is clear in the figures for car sales, and it is clear in activity generally. It is clear also in the gradual and welcome recovery in the savings ratio, which hit its low point of 4.9 per cent. in the third quarter of 1988 and has now risen again to 7.7 per cent.

It was those conditions – that amalgam of conditions which are now clear – which prompted me to cut interest rates by I per cent. at the same time as entry. Some external commentators claim that it was too early; others claim that it was too late. I am confident that events will justify the timing of that reduction in interest rates.

If I had cut interest rates before joining the exchange rate mechanism, I believe that it would have been viewed by the markets and by commentators as driving the exchange rate down before entry or, alternatively, as a signal that entry was to be delayed. Both of those were wrong and both would have weakened the exchange rate and thus our anti-inflationary position. It was for those reasons that I announced both those steps at the same time to ensure that the markets were fully aware of our position as we entered the mechanism and were fully aware of what the immediate prospect was for monetary policy.

Mr. D. N. Campbell-Savours (Workington) On timing, in so far as it is quite clear from a series of parliamentary questions given to me by Ministers that people in the Bank of England, senior civil servants and some Ministers knew of the Chancellor’s intention to make his statement at 4 o’clock on that Friday, and in so far as it is also known that Ministers and civil servants may well have met people in City institutions in the five days prior to that Friday, why cannot we now have a leak inquiry into how three separate markets in the City rose substantially in the 90 minutes before 4 o’clock, in conditions in which some people made millions of pounds in capital gains in a few minutes? Why cannot we have a leak inquiry into that? Let us have the truth.

Mr. Major If the hon. Gentleman has any information whatsoever to suggest that there was advance knowledge of entry into the exchange rate mechanism – [Interruption]. Perhaps the hon. Gentleman would do me the courtesy of listening. If he will give that evidence to me, I shall ensure that it is placed before the proper authorities and that the appropriate action is taken. Unsubstantiated allegations do not help. If the hon. Gentleman really believes that there was a leak, he should provide the information so that it can be properly examined and not make widespread scatter-gun allegations for which at the moment he has provided no evidence.

As we have seen repeatedly throughout the past 30 years or so, inflation is always one of the last measures in the economy to register that the growth of demand is falling away; and the rise in oil prices in the past few months has complicated the picture this time and, conceivably, may yet push up the headline total further. But I now have no doubt that we shall see inflation falling substantially throughout next year. It will do so particularly quickly from next April, and for two reasons: the underlying rate will improve and some of the unusual adverse factors that have artificially boosted the headline rate will drop out next year. Our inflation performance will improve therefore both in absolute terms, and, just as importantly for entry into the mechanism, relative to those of our European competitors. I shall make a detailed forecast in the autumn statement in due course.

There was, therefore, no reason for further delay in meeting our long-standing commitment to join the ERM. There is a further point of some importance. The persistent market rumours of entry and non-entry were damaging to stability and created uncertainty for industry. Week after week some chance remark, some speculation, some unsubstantiated rumour changed the value of sterling. I wished therefore to end the damaging uncertainty at the earliest possible moment, and I believe it was right to do so.

Mr. Harry Ewing (Falkirk, East) rose – –

Mr. Major Perhaps the hon. Gentleman will forgive me if I do not give way for a moment.

The House will remember that I answered questions on this matter for an hour a week ago. I shall be here at the Dispatch Box on Thursday and a vast number of hon. Members – [Interruption]. Perhaps hon. Members would listen for a moment. A vast number of hon. Members wish to speak today. I shall give way to a small number, but perhaps not as generously as I sometimes do.

Mr. Harry Ewing I am grateful to the Chancellor for giving way. If the right hon. Gentleman is pleading that the reason that he took this country into the exchange rate mechanism was to get rid of all the rumours about whether we would or would not join, is not that the fault on the one hand of the Prime Minister, who constantly said that we would not join, and of the Chancellor himself on the other hand, who constantly said that we would join? Which of the two of them was the City and the country to believe?

Mr. Major The hon. Gentleman will do well tomorrow to read my speech in Hansard. He will then see that I made it perfectly clear that we entered because I thought that the conditions were right for our entry. I set that out plainly. I also set out a subsidiary matter that weighed on my mind – that the essential reason for entry was that the market conditions were met and the preconditions that we had set out were now right for sterling to enter the mechanism.

The belief that we should end the uncertainty and that we should enter early was also held by others. We got a great deal of advice. In June we were told: We do not urge the Government to wait until some unspecified rate of inflation or fulfilment of the Madrid conditions is attained. We urge them to commence discussions now.” – [Official Report, 15 June 1990; Vol. 174, c. 636.] That was not an overenthusiastic Member of the European Parliament speaking – it was the Opposition Front Bench in the persona of the hon. Member for Islington, South and Finsbury (Mr. Smith). Nor was that an isolated comment. In August the hon. Gentleman was strongly supported in that view by his right hon. and learned Friend the Member for Monklands, East (Mr. Smith), who said: I don’t think there is ever going to be a perfect time for Britain to enter the ERM, and I think therefore that we should take the opportunity to do so at the earliest time. That is what I have done and the reason why Opposition Members attack us is that they know that we have taken the right decision and they do not want to acknowledge it. They want to hide the fact that their party is split asunder on the issue. [Interruption]. Oh yes. Of course, Opposition Members want it both ways. If we had delayed they would have questioned our intention of going in. They would have said that my right hon. Friend the Prime Minister was preventing us. Now that we have gone in they question our motives and claim that my right hon. Friend has been pushed. The simple truth is that my right hon. Friend first stated our commitment to entry during stage 1 – over two years ago. She and I have been discussing possible dates for months. Four months after the start of stage 1 we found an appropriate date and honoured our promise. That is what Opposition Members cannot stomach. Their attitude is the typical triumph of expediency over conviction – [HON. MEMBERS: “Your attitude.”] That is their attitude.

Now that we are in the ERM we need to be entirely clear about what it means. First, maintaining the exchange rate will be an important discipline. Tight monetary conditions will have to be sustained to put continued downward pressure on inflation. Joining the ERM in no way replaces the need for a tight monetary policy; it reinforces it. Indeed, making a success of the ERM means making a success of our own domestic monetary policy, not abandoning it. That is why joining the ERM is in no sense a soft option or a short-term one.

The euphoria with which some people greeted the news of our entry seemed to me mistaken; and the argument that entry has short-term advantages and a long-term cost is wholly misleading. In fact, it is a complete misunderstanding of the ERM. In the short term, membership will require tough action to ensure that we achieve low inflation thereafter. The rewards are long term with that very low rate of inflation. That does mean making no further reductions in interest rates until it is prudent to do so.

Mr. Anthony Nelson (Chichester) My right hon. Friend has referred to the prospect of reductions in interest rates. Is not it probable that, if we were within the narrower band of fluctuations within the ERM, as certain other European countries are, we would enjoy lower rates of interest, as they currently do? As it is a matter of enormous interest to millions of mortgage payers and others in Britain, can my right hon. Friend say a little about the conditions that must be precedent upon our becoming part of the narrower bands of the ERM?

Mr. Major I shall turn shortly to the question of the narrow band.

In case there was any misunderstanding a moment or so ago, I was saying clearly that membership means that we shall be in a position to make no further reductions in interest rates until it is prudent to do so. I hope that that point is fully taken on board. I shall turn to my hon. Friend’s specific point in a second or so.

What we have undertaken is an express obligation to keep sterling within the bands around our central rate of DM2.95. We take that obligation seriously and we intend to meet it. We decided to enter the mechanism with wide 6 per cent. margins to give sterling an opportunity to settle down. It is a widely traded currency and it is necessary to give the markets some time to assess the implications for entry and the domestic response to it. But when conditions permit, and only then, we will move into the narrow 21 per cent. band to which my hon. Friend the Member for Chichester (Mr. Nelson) referred.

I want to add a word about fiscal policy. Throughout the 1980s my two predecessors have successfully used fiscal policy to buttress monetary policy. That is precisely what we shall continue to do in future. But what we shall not do is to resort to fiscal fine tuning, the effects of which tend to be unpredictable and, in many cases, unworkable. I have no intention of returning to the era of mini-Budgets, but we will keep to our policy of a balanced budget over the medium term.

Dr. Lewis Moonie (Kirkcaldy) rose – –

Mr. Major If the hon. Gentleman will forgive me, I shall make a little more progress in the interests of several other hon. Members who wish to speak.

It is clear that membership of the ERM will impose an extra discipline on the Government’s conduct of economic policy. But, equally, membership of the mechanism requires businesses and industry to take tough decisions of their own. Companies must understand the need to contain their costs – principally, but not, of course, exclusively, their wage costs. For them, joining the ERM means that devaluing our currency to bail out uncompetitive firms is no longer an option. It was never an attractive one and now it has gone. It is ruled out by our commitment to maintain a broadly stable exchange rate. If the costs of British companies rise, inevitably orders will be lost, profits will be squeezed, jobs will be shed, and companies will put their futures at risk. That has always been true, but ERM membership will make it even more apparent, for the devaluation option is no longer there.

For business, staying competitive means relating wage rises to what is realistic and justifiable. That means what can be afforded by the individual company facing tight competition in the international market with no help from a falling exchange rate.

Sir Anthony Grant (Cambridgeshire, South-West) On that point, does my right hon. Friend agree that the necessary exhortations to pay restraint would be very much helped if senior leading industrialists who are on performance-related pay related their pay to not only the profits but the losses that they sometimes sustain?

Mr. Major I share that view strongly. Leadership in this matter must come from the top, and I hope that it will do so.

Mr. Dennis Skinner (Bolsover) Is not the truth of the matter that the exchange rate mechanism is another name for a Common Market incomes policy? Why should people who work for a living, the real wealth creators, have a wages or incomes policy stuffed down their throats by the Government when the bosses got increases of 28 per cent. the year before last and 33 per cent. last year? In the past 10 years the wealthiest 1 per cent. in Britain have received cumulatively £26.2 billion in tax cuts; now they are calling upon the workers to bail out this Government, but they have no intention of doing so. Everyone who is fighting to get a living wage needs the support of Opposition Members to sustain that living wage.

Mr. Major Well, so much for unity on the Opposition Benches about joining the ERM.

On the substantive point that the hon. Gentleman makes, he will be aware that I have said before – I reiterated my remarks to my hon. Friend the Member for Cambridgeshire, South-West (Sir A. Grant) – that I share his view that the sacrifices that may need to be made on wages must apply to those at the top of industry as well as those elsewhere.

The hon. Member for Bolsover (Mr. Skinner) should be aware, however, of the consequences of taking his theory a stage further. The consequences for people not obeying that necessary discipline will be lost jobs. I cannot compel people to negotiate sensibly, but I have an obligation to make it absolutely clear to people what the effect of not negotiating sensibly will be. That I am seeking to do, and that I am prepared to do; and I share the hon. Gentleman’s view that that applies to all people in industry and commerce and not just to those on the shop floor. What does that mean? It means negotiating what can be afforded by the individual company facing the international competition in the market. In essence, it is that which will determine our performance.

There can be no more negotiating around the benchmark of the retail prices index as though that represented the minimum increase it was reasonable to expect. I know that that kind of inflationary psychology is deeply embedded in the consciousness of British industry. I believe that, over the years, it has damaged us greatly, and, if it continues, it will cost us jobs in the future. I do not for a second underestimate the cultural change that that will mean for many wage negotiators, but the sooner they make the change the better. That psychology needs to be shaken out of the system, for the Government cannot keep companies competitive – they can only warn them of the dangers that they face. Their fate is in their hands – the hands of those on each side of the negotiating table who will determine the future of their companies and their work forces in the next few years.

Mr. Rhodri Morgan (Cardiff, West) I am grateful to the Chancellor for telling the House that the Government cannot bail out companies that persist in using the RPI as a benchmark for wage increases. If the Opposition accept that, will the right hon. Gentleman accept that he should not allow his Ministers to use the RPI as a benchmark for price increases in former nationalised industries now in private ownership? The electricity industry has not yet been privatised, but its prices are set to rise every year by an RPI-related formula. Is the right hon. Gentleman prepared to instruct the Secretaries of State for Energy and for Trade and Industry to give up that practice, which is applied to British Telecom, water and gas charges?

Mr. Major Some of those increases are less than the retail prices index and many of the others are far more specifically related to investment performance than to anything else.

Those are the constraints and restraints which management and work forces will need to accept if we are to make a success of membership of the exchange rate mechanism. I know that they are not easy, but I believe that they are worth while because they will help us to achieve lower inflation by reinforcing existing policies. I am delighted that, fully understanding those points, the CBI has given such a warm welcome to our decision to enter the ERM.

In recent years, the average inflation performance of the countries participating in the ERM has been significantly better than that of all those outside the mechanism. Between 1979 and July 1990, inflation in countries within the mechanism fell by nearly two thirds; in European countries outside the ERM, by one sixth; and in OECD countries outside the mechanism, by two fifths.

As inflation in member countries has come down, the prospects for steady, sustainable economic growth have improved, and that is the prize to be achieved. The growth rates in Germany, France, Italy and a number of smaller mechanism countries have increased in the last few years and the prospects for growth continuing at favourable rates in the future appear good. I believe strongly that that is a goal worth pursuing by us as well.

Mr. Jeff Rooker (Birmingham, Perry Barr) rose – –

Mr. Major I hope that the hon. Gentleman will forgive me if I do not give way. I have given way on a number of occasions, and I am conscious of the number of hon. Members who wish to take part in the debate.

Moreover, maintaining a broadly stable exchange rate will assist British companies to plan ahead and to invest with greater certainty about the future. Since the mechanism has been in operation, there have been a few changes of parities, but there has been no substantive realignment since the beginning of 1987.

That stability will enable firms to develop their business strategies in Europe and be well placed for the opportunities of the single market. They will no longer face the problems of exchange rate movements disrupting their plans by imposing on them unexpected cost increases or pricing their goods out of the European market. It will mean, in my judgment, that Britain will prove still more attractive to inward investors. We already attract more direct investment from abroad than any other Community country. Membership of the ERM can only add to that.

During my statement last week, a number of hon. Members expressed concern at the exchange rate at which we had entered. For some of them the argument was a surrogate for outright opposition to entry at any exchange rate. But others are concerned lest the rate we have chosen is too high. That reflects a longstanding argument over whether devaluation is required for economic success. It is a legitimate argument which has a long political pedigree, but I believe that it is wholly wrong.

I believe that our central rate can be sustained, and I will explain why. Some hon. Members fear that the exchange rate will damage exports and encourage imports. But experience in recent years suggests that other factors are more important. The volume of our exports, excluding oil and erratic items, is up 8 per cent. on last year, and our share of world trade in manufactures increased in 1989 and is likely to rise again this year. Japan and Germany, with the firmest exchange rates over the last decade, also have the best current account performance.

The rate that we have chosen is also sterling’s recent market rate and the average real exchange rate over recent years after making adjustment for differential inflation performance. Other subsidiary information suggests that we have not put sterling at a competitive disadvantage. Independent analyses suggests that DM2.95 is sustainable. Indeed, a report by CBI economists only recently advocated entry into the mechanism at around the bands that we have chosen. Some comments that I have read have focused on the dollar. I would only make the point that our membership of the ERM does not in any way determine the sterling dollar exchange rate.

Mr. Peter Shore (Bethnal Green and Stepney) The inflation-adjusted real exchange rate of DM2.95, or the right hon. Gentleman’s choice of that rate, is 20 per cent. higher – that is, an appreciation of sterling against the mark – than it was in the first half of 1987, which was the last time we were in current account balance with the rest of the world. We are now disastrously in deficit. We are going in at an exchange rate 20 per cent. higher against the mark than it was when we were last in balance. What does the right hon. Gentleman say about that?

Mr. Major We are in deficit because of the growth of demand, which is self-evident from the change in our position during the past year as sterling has appreciated and the trade gap has begun closing. Therefore, there is no reason why British companies should not compete successfully in Europe at present exchange rates, and, in the medium term, with lower inflation, they will compete even more successfully.

Although entry to the mechanism is part of our commitment to stage I of economic monetary union and the single market, it in no sense commits us to the Delors approach for stages 2 or 3. I assure the House that there has been no shift, no weakening in our opposition to the imposition of a single currency and a single monetary authority. We remain opposed to that, and I believe that our opposition has the overwhelming support of the House. That does not mean that we shall play a wrecking role at the intergovernmental conference – the IGC. We have no intention of doing that. We shall continue to advocate our plans for the development of the hard ecu.

We believe that our proposals are practical, evolutionary and based on markets and choice. They offer a realistic solution that would enable the 12 to move forward together without risking damaging rifts in the Community. They leave open the possibility of the hard ecu evolving towards a parallel currency and then a single currency, but only if that were the wish of Governments and peoples. That is subject for ever to the check of the House of Commons.

Mr. Paddy Ashdown (Yeovil) The House will have made particular note of the right hon. Gentleman’s use of the word “evolutionary”. The matter that isolates Britain in Europe, divides the Conservative party and splits the Cabinet is whether his hard ecu is to be regarded as the ultimate, final position or is a transition to a future European single currency. If in due course, his hard ecu proposals were to be used as a transition mechanism to a single European currency, would the Chancellor oppose that?

Mr. Major If the right hon. Gentleman reads what I have just said, he will have his answer.

Our proposals are those that I have set out on a number of occasions and are subject to the check of the House of Commons at future stages.

Mr. Julian Amery (Brighton, Pavilion) While I fully understand the Chancellor’s reluctance to have anything to do with the date of 1994 proposed by the German Chancellor, cannot he say that if everyone were prepared to go ahead with the hard ecu in 1994 we should be happy to go along with them?

Mr. Major We must wait and see how the IGC develops. But the only way in which this country could proceed would be on the basis of the hard ecu, for in my judgment there is no will in the House or country to surrender the use of sterling as our currency.

During the past half an hour or so, I have set out in some detail what I believe will be the effect of membership of the exchange rate mechanism and our policies. I hope that in the next few minutes the right hon. Member for Islwyn (Mr. Kinnock) will set out his views with equal clarity. Judged by what he has said, there is more agreement between us than he may imagine. He shares my view that entry is not an alternative to the economic realities – he has said so – can work to the advantage of the British people – he has said so – and can help in securing stability – he has said so, and I agree with him about that.

I hope, therefore, that as I have done, the right hon. Gentleman will set out his party’s policy precisely – on rates, bands, timing, and fiscal policy. He committed himself to entry some years ago, so he has had ample time to consider the implications. If he does not do so, the suspicion will arise that Labour’s commitment to enter the mechanism has been nothing more than a device – a clever device but a device none the less – which was intended to hide the fact that there is no real determination to tackle inflation at the heart of the Labour party’s policies.

The conditions that they devised for entry into the mechanism are frankly incredible. They involve fundamentally subverting the whole purpose and structure of the EMS. The main reason why many people on all sides of the political spectrum have come to appreciate the benefits of the mechanism is that it provides a buttress and an anchor against inflation. That is precisely the feature of the mechanism which the Labour party planned to ditch.

That could not have been clearer from the remarks made by the Opposition in the House last week. Time and again they made it plain that their inclination would always be to take the easy option and to go for devaluation. When the right hon. Gentleman replies, will he tell the House: would he devalue or would he fight inflation? He cannot do both, and if he is to be credible he must tell us which he would do.

I noted with interest that the Opposition’s amendment commends credit controls similar to those in other exchange rate mechanism countries. I wonder which countries he has in mind, for France had credit controls, but abandoned them at the end of 1987, Italy had bank loan ceilings, which were last used in 1988, the Netherlands had an informal corset – it lapsed some months ago. Germany has never used credit controls proper, although it uses a reserve asset ratio, as we use Treasury bills. In Europe, only Spain, Greece and Portugal have credit controls. Perhaps the right hon. Gentleman can tell us whether he equates our economy to theirs, and what sort of credit controls he plans to introduce. Under a Labour Government no doubt that is the sort of economy that we might move to.

The truth is that membership of the exchange rate mechanism involves maintaining an agreed range for the exchange rate and it requires tight monetary discipline to counter inflation. In short, it involves all the things that the Labour party has set its mind against.

For us, the ERM stands for stability – for effective, reliable management; it stands for low inflation – for an end to ruining money. For the Opposition it means credit controls – and excessive restrictions on mortgages. It stands for all its old policies of expropriation, re-nationalisation and meddling. I commend our policy to the House.

Mr. Neil Kinnock (Islwyn) I beg to move, to leave out from “House” to the end of the Question and to add instead thereof: while recognising the potential opportunities for economic stability afforded by the inclusion of sterling in the Exchange Rate Mechanism, notes the failure of the Government to achieve the reduction in inflation repeatedly stipulated by the Prime Minister to be the essential condition to be satisfied before entry; considers that political expediency rather than economic considerations prompted the Government’s decision to participate in the Mechanism from 8th October; regards the Government’s continuing refusal to use credit controls similar to those employed in other Exchange Rate Mechanism countries as imprudent; deplores the fact that the task of achieving economic success within the Single Market and the Exchange Rate Mechanism has been made immensely more difficult by Government policies which have resulted in the United Kingdom experiencing a large and persistent current account deficit, 10.9 per cent. inflation, rising unemployment and losses in domestic and world manufacturing market share; again urges Her Majesty’s Government to adopt policies that are essential to the achievement of a productive and competitive economy, particularly those required for improvements in the quality of and opportunities for education and training, for the development of a modern economic infrastructure, including an adequate transport system, for the promotion of sustained investment in civilian research and development and for the instituting of a vigorous regional policy; and concludes that if such policies, long advocated by Her Majesty’s Opposition and long resisted by Her Majesty’s Government, are not adopted, producers in Britain will continue to work at considerable disadvantage by comparison with those in other Exchange Rate Mechanism member countries and the nation will continue to lag behind the standards of economic success and social progress achieved in other European Community countries.’. May I begin by saying how grateful we are to the Government for providing the time for this debate on their decision to take sterling into the exchange rate mechanism of the European monetary system on 8 October.

As the Chancellor said, that was a decision of immense importance; it will have effects on every person, family and business in Britain; it will have significant influence on shaping all future economic policy and very obviously, it can have major implications for the constitutional future of our country and of the European Community. There can be no one in the House or outside who does not regard the decision to enter the exchange rate mechanism as being truly worthy of the adjective “momentous”, and since that is self-evidently true, it is all the more difficult for us and the British people to understand the refusal by the Head of the Government who made that decision to participate in the debate. [Interruption]. Let the Prime Minister speak for herself. It appears that the Prime Minister has chosen this significant occasion, of all occasions, to become untypically reticent, to embrace a previously undisclosed shyness, to become – how shall I put it – a sort of crypto-Trappist.

Today and on previous occasions since entry to the ERM, the Chancellor has made a characteristically suave presentation of the circumstances in which the decision to put the pound into the ERM took place. We heard a repetition today of the way in which he put it at the Mansion house last Thursday. There is nothing wrong with that at all. It is one way of demonstrating total consistency, but it is causing some problems on the Government Front Bench.

Dame Elaine Kellett-Bowman (Lancaster) The right hon. Gentleman should take a look at his lot.

Mr. Kinnock I look at my lot with great pleasure.

In the Mansion house on Thursday the Chancellor said that inflation was definitely coming down. He said: There was therefore no further reason for delay in entering the mechanism. And it was, of course, those very same conditions that indicated that a reduction in interest rates was now appropriate. I decided, therefore, to announce the two moves at once. It was a smooth and soothing explanation – and absolutely unconvincing to everybody concerned. Hardly anyone believed the Chancellor. In the markets and in the newspapers the general and justifiable feeling has been that his action was far more political than economic. Mr. Robin Marshall, chief economist at Chase Manhattan, said: Major comes out of this looking like Mrs Thatcher’s poodle. Mr. Peter Spencer, chief economist at Shearson Lehman, said: The base rate cut was clearly dictated by No. 10″. I can see from the friends that they have in the City that Conservative Members are hearing exactly the same thing. Those economists were only two of many people in similar positions who put the view that agreement to ERM entry was nothing more or less than the price paid by the Prime Minister for the 1 per cent. cut in interest rates that she needed to take to the Tory party conference. Never has so much been done that affects so many to please so few. [Interruption].

Mr. Speaker Order.

Mr. Kinnock Of course, those accusations of political rather than economic motivations are serious and they could have serious consequences. They call into question the credibility of the Government’s commitment to the ERM. In spite of that seriousness, the witness whose testimony is essential simply refuses to be called. At the Dispatch Box where, on this momentous issue, the Prime Minister should speak we have merely a question mark. The reason for the Prime Minister’s unwillingness to speak is quite obvious. The right hon. Lady has been saying since 1985 that we will go into the ERM only “when the time is ripe” and she could hardly say in this debate, “Inflation is 10.9 per cent., we have a huge balance of payments deficit, the economic consequences of the Gulf crisis are unknown, output and investment are down, so the time is not ripe. In fact, it’s pretty rotten – but we have entered the ERM in any case, regardless of everything that I have ever said before.”

Mr. A. J. Beith (Berwick-upon-Tweed) Does the right hon. Gentleman himself think that the time was pretty rotten? Or have his conditions been satisfied? Can he conceive that his condition that the ERM should be accompanied by a Europewide reflation will ever be satisfied?

Mr. Kinnock Our case was never made in the way in which the hon. Gentleman professes that it was made. Our argument has been, and remains, that when, from time to time, Europe is faced with the threat of Eurosclerosis – the hon. Gentleman will be familiar with the term – the case for joint growth strategies exists and is widely accepted. [Interruption]. I realise that Conservative Members are very reluctant to allow any answer to be given to a Liberal Democrat on this particular day: there is a certain Eastbourne sensitivity about. None the less, I shall reply to the hon. Member for Berwick-upon-Tweed (Mr. Beith) – [Interruption].

Mr. Speaker Order. We shall make very slow progress at this rate. The Chancellor of the Exchequer was heard in relative silence; I ask for the same treatment for the Leader of the Opposition.

Mr. Kinnock Thank you, Mr. Speaker. A different order of decency and discipline applies on this side of the House.

Mr. Phillip Oppenheim (Amber Valley) rose – –

Mr. Kinnock I will respond to the hon. Member for Amber Valley (Mr. Oppenheim) if he will first permit me to reply to the hon. Member for Berwick-upon-Tweed.

It is true that my right hon. and hon. Friends and I have been making the case for entry into the exchange rate mechanism, because of its basic attractiveness, to which the Chancellor referred. It gives the British economy the necessary stability, allowing us – together with other policies – to secure an advance in productivity and competitiveness. That is still our case for entry: for that reason we welcomed Britain’s entry on the date on which it took place, and will continue to argue that ERM membership is right.

That stability, however, is put in jeopardy if the Government’s commitment and the sincerity of the Prime Minister are not even evidenced by the right hon. Lady’s willingness to come to the Dispatch Box. I am sure that the Government will have noted the reactions to the circumstances in which Britain entered the ERM, and the excuses that they presented for their timing. The fact remains that our ERM membership is legitimate, valid and to be worked on to the advantage of our country.

Mr. Oppenheim rose – –

Sir Peter Hordern (Horsham) rose – –

Mr. Major rose – –

Mr. Kinnock I will give way to the Chancellor, by all means.

Mr. Major I am grateful to the right hon. Gentleman for his courtesy.

A moment ago, the right hon. Gentleman had something to say about the interest rate cut and the timing. May I remind him of what he said three days before we entered the ERM? First – at the Labour party conference – he said that the Government should cut the very high interest rate and should be negotiating entry into the exchange rate mechanism of the European monetary system. That is precisely what we did. Why will the right hon. Gentleman not give us unalloyed credit for doing it at the right time and in the right way?

Mr. Kinnock The Chancellor negotiated nothing, other than a little deal with the Prime Minister to swap a 1 per cent. interest rate reduction for ERM entry. That was the only bit of negotiation.

Mr. Major If the right hon. Gentleman will permit me, I will correct the misconception in his mind. Uniquely – somewhat to the irritation of our European partners – I told them the terms of entry that we sought before I went to them. We obtained those terms of entry, absolutely and entirely. I think that that is quite a success.

Mr. Kinnock I really do not think that obtaining DM2.95 to the pound in a 6 per cent. band required all that much negotiating skill.

The Chancellor asked me about a speech that I made. Let me tell him precisely what I said. I said not only that we wanted entry to the ERM, and would certainly have brought it about had we been in office, and not only that we wanted a reduction in interest rates, which we would also have introduced, but that we would have accompanied those moves with two other policies essential to the proper working of our economy in an intensely competitive European Community and trading world.

First, we should institute exactly the same form of credit controls as those still operated in comparable countries with great success, and which result in much lower interest rates. The Banque de France operated such a policy only last Wednesday, to ensure that France could retain its position within the ERM while lessening the burden of interest rates on the productive sector of its economy. Conservative Members know that that is precisely what happened. Secondly, and most important, we still want a commitment – and I shall again make the case for it this afternoon – to a proper, comprehensive, modern, supply-side policy, something which the Government have never introduced and will never introduce.

Mr. Oppenheim rose – –

Mr. Kinnock I must continue. I gave way to the Chancellor, who asked an interesting question which required a prolonged answer.

The Prime Minister’s absence from the Dispatch Box is further explained by the fact that she came to the House in June 1989, from the European Community summit, and told us that she had made it clear that before ERM entry, We must first get our inflation down. She told me that One condition of entry depends on us”. It was that we get inflation well down”. She was saying that repeatedly during all the following 15 months, right up to and including her visit to Switzerland where, on 20 September, she said: The Madrid conditions won’t be changed and they include getting inflation near to the European average. Nothing could be clearer, nothing could be more absolute, nothing could be more implacable than those words from the right hon. Lady – the prima donna of the Madrid conditions.

Against that background, the Prime Minister plainly felt that it was beneath her dignity to come to the House today to justify her abandonment of that paramount condition on inflation, while simultaneously standing on her head. That is why she will not speak.

Mr. Quentin Davies (Stamford and Spalding) rose – –

Mr. Kinnock I must continue. If Conservative Members have any questions, please address them to the Prime Minister – although she never provides any answers.

The Prime Minister felt that she could not say that she knew that the whole Government – [Interruption]. Perhaps I could have some order, Mr. Speaker. She knew – [Interruption]. The people watching this exhibition will pay due regard to the continual interruptions by Conservative Members. They are not making genuine inquiries; they are trying to disrupt the business of the House. Everybody will understand that. The more that I pursue the question of the Prime Minister’s motivation, the noisier they are likely to become.

The Prime Minister knew that the whole Government had been chanting that cardinal Madrid condition, but, because their policy of high interest rates was throttling the economy, interest rates had to be cut, even though the only way to do that, without sending the pound plummeting, was simultaneously to join the ERM and desert the Madrid conditions. It was not so much a case that the lady was for turning, as a case of the lady twisting in the wind – a wind of looming recession and greatly increasing political unpopularity.

Of course, the Prime Minister and the Chancellor tried to make the best of the mess. The Chancellor said that the prospects were good and that the market conditions and the market rate were right. He said that there was an ideal conjunction of events – precisely the right conjunction of events. I note that he has not repeated those phrases in the House today, but I am sure that he will not disown them.

The Prime Minister was similarly fulsome. She took out the portable pulpit that she has taken to using in Downing street and announced that it was suddenly possible after all to put sterling into the ERM because of the uncontestable signs that the economy is working in the way that we intended it to. Unemployment is rising, bankruptcies this year are up by 35 per cent., industrial output is falling, inflation is still rising, the business community is warning that there is recession in several industries and recession threatens the whole economy, but the Prime Minister describes all that as uncontestable signs that the economy is working in the way that the Government intended it to”. Could there be any greater self-condemnation of the Government? Could there be any clearer admission of incompetence and failure over 11 years? The Government could not even clip 1 per cent. off the highest interest rates of all major industrialised countries without joining the ERM – 10.9 per cent. inflation and all. What a mess.

Mr. Teddy Taylor (Southend, East) On behalf of the Labour party and a future Labour Government, the right hon. Gentleman has said that the ERM will help to bring stability. On behalf of the Labour party and future Labour Government, will he give us some idea about what he thinks the ERM will help to stabilise and roughly how he thinks that will be achieved?

Mr. Kinnock The exchange rate. That is the whole purpose of the mechanism. If the hon. Gentleman does not have that basic piece of knowledge, I am not surprised that he takes the view that he does. I am sure that he has. [Interruption].

Mr. Speaker Order. It will be impossible to call all those who wish to participate if the Leader of the Opposition is continually interrupted. I notice that the three hon. Members who have recently been rising all wish to speak later.

Mr. Kinnock Inflation is vexatious when it is as high as it is and so largely the result of the Government’s policies, but the Chancellor tells us that it is not the actual rate of inflation but the prospective rate of inflation that matters. When he went to the IMF meetings in Washington at the end of September he said What matters is less the difference between headline figures which measure what has happened over the last 12 months than the prospective movements in price levels from now on. Forecasts have always been important. Obviously they are essential to economic navigation. But now it seems that they have gained unprecedented significance. Not only do they matter more than the actual rate of inflation with which people have to live, but they are important enough to justify the most momentous of economic decisions, such as entry into the ERM.

But if the Government have such boundless confidence in forecast inflation rates, I am bound to wonder why sterling was not put into the ERM a year ago. After all, at that time in his Autumn Statement last November the Chancellor told us that the prospective rate of inflation for this quarter of 1990 – the period that we are in now – was 5.75 per cent. He was just about 100 per cent. out in his forecast. He tried to correct that in the Budget in March, seven months ago, when he said that his 5.75 per cent. forecast for this quarter of 1990 had been revised upwards to 7.25 per cent. That was only 50 per cent. out on the actual rate of inflation that we are experiencing now.

That record hardly fills us with confidence about the Government’s judgment, especially when the Treasury had to admit yesterday: Since forecasts of the RPI were first published in 1976 only one year has seen a larger error than the forecasts for 1988 and 1989. That is not much of a crystal ball, especially as an important indicator on which to base a judgment such as the Government’s abandonment of the Madrid conditions.

But at least one Government forecast will be right. The rate of inflation will come down. If any economy is squeezed hard enough for long enough, and this one certainly has been squeezed hard and for a long time, eventually prices will almost certainly follow demand in a downward direction. But the damage already done to the economy by the high interest rate squeeze, and the damage that will be done to the economy, has pushed Britain back, pushed costs and inflation up and weakened our productive industries in the approach to the single market. What a fine preparation for the coming of the single market at the end of 1992.

Even if the crude recessionary slump contrived by the Government brings inflation down, it certainly will not keep inflation down. It cannot, as the Government have already proved. The Conservative party chairman’s absence today is notable – it may be because he can count his supporters in the Cabinet on the fingers of one finger – so unfortunately I speak in his absence. A few weeks ago in September he said that the Government’s interest rate strategy for bringing down inflation would work because they had done it “twice before”.

But clearly, if the Government have used the strategy twice before and now have to use it a third time, it is not because it has worked; it is because it has failed. That must be the case. It will go on failing because, in the very act of being applied as an instrument against inflation, recession causes extra living costs, pushes up wage demands and imposes extra borrowing costs that bring bankruptcies, cancelled investment plans, instability and under-performance causing inflation to come back again, as it has.

We have had 11 years of repeated use of those policies alternating with pre-election credit sprees, but the Government have not yet learned the error of their ways. The only response that the Government have ever made to a mistake is to repeat it and then call that being resolute. Despite his many charms, the Chancellor of the Exchequer is no exception to that rule.

The Chancellor told us last week, and again this afternoon – it was an important point in his speech – that the only real problem afflicting Britain is excess demand. That, he said, is the single evil that causes inflation and the massive trade deficit. He says it with such charming bravura that he would convince anyone who did not know better that he had never been in a Government who had repeatedly generated excess demand for electoral purposes. Unfortunately, about the supply side the Chancellor says next to nothing.

Mr. Jonathan Sayeed (Bristol, East) Will the right hon. Gentleman give way?

Mr. Kinnock No, I am sorry. I have given way several times.

I suppose that the Chancellor knows that if he did give real attention to the supply side he might have to do something more than undertake some City deregulation, some trade union legislation and give some tax handouts. If he really was interested in wanting Britain to succeed, he would do much more. If he really wanted to encourage enterprise and combat inflation, he would be doing what other ERM countries do and use more moderate interest rates in combination with credit controls instead of relying so heavily on high interest rates.

If the Chancellor and the Government really wanted to attack the rigidities, the bottlenecks, the restraints on the productive economy, they would have followed the example of Governments of other countries in the ERM. Those Governments have ensured proper investment in modern transport. This Government have not. Those Governments have invested more in civil research and development. This Government have not. Those Governments have wisely invested more in education and training. This Government have not.

Mr. Nicholas Bennett (Pembroke) That is not true. Look at the OECD figures.

Mr. Kinnock I am not so interested in the OECD comparisons. Why does not the hon. Gentleman go to a school or college in Britain and see the results of under-investment?

The whole country knows that the Government have failed to make the necessary investment. To see the results of the difference between both kinds of performance, it is only necessary to compare this country’s oil-rich economy after 11 years of Tory Government and those of other ERM countries, whatever the political colour of their national or regional government, and none of which has any oil. The difference is that the Governments of those other countries have enabled a productive economy, whereas the Government of our country have disabled a productive economy.

Whatever our future may be in the European Community, that situation must change, so that our industries may have a fair chance under the exchange rate mechanism. Many tough, determined and enterprising people are saying still that they are not enjoying a fair chance by comparison with their competitors in other ERM countries. There is a great deal in what they say.

It is not just a matter of the ERM, because attitudes towards the supply side must change as pressures build up within the Community to go beyond the ERM and stage 1 of the goal to which the Chancellor says that he is committed, of economic and monetary union. The Chancellor said also that movement towards a single currency is “not inexorable”, and he is absolutely right. That movement is the result of a deliberate decision by free countries. It is not a consequence of faith or of dictatorial imposition.

If the Chancellor had said that, with the economy in its present state, monetary union was not in any case acceptable, he would also be right. Given Britain’s deficit, inflation rate, inadequate training and substandard transport systems, there is no possibility, without great change, that monetary union could be tolerated.

The question that is increasingly posing itself is not whether monetary union is desirable to us but whether it is the ambition of others, including the strongest economies of the Community – with or without the United Kingdom.

The plain fact is that monetary union is something to which those other member states aspire, and they are intent on achieving it – if not within the next five years, then not very long after that. That is a certain prospect. The consequence of all that is that our future will be more strongly influenced than ever not only by what we would prefer to do for ourselves but by what others prefer to do for themselves, and which they will do for themselves.

Mr. Nicholas Budgen (Wolverhampton, South-West) rose – –

Mr. Kinnock Just a moment.

The European Community has not yet decided on the path to a common currency. There is much that we should and can do in this House and through government to shape the course of events. However, we are not helped much in that by the isolationism of the British Government – or at least that part of it that is controlled by the Prime Minister. Those parts of the Government that owe fealty to the deputy Prime Minister and to the Foreign Secretary are different, but I say to both Governments that, however we might try to influence events, it is imperative to ensure that the British economy is more productive and competitive, less prone to trade deficits and more resistant to inflation than it is now.

The Government should be the ally of modern industry in a way that the present Government have never been, nor ever will be. The pre-conditions that I describe have merit at any time, but they are of extra importance now. Only by gaining those strengths can we achieve convergence with the higher performance standards of our neighbours and fellow members of the exchange rate mechanism. That effort of upward convergence represents a sensible strategy, and it is among the aims of the Labour party.

Only by improvements in productivity will we be able really to choose between co-existing with monetary union if we choose not to join and thriving economically within currency union if we do decide to join.

Mr. Jacques Arnold (Gravesham) Would Labour take Britain into monetary union or would it not? Will the right hon. Gentleman show some leadership?

Mr. Kinnock When it comes to leadership, I am rather less susceptible to challenge than the Prime Minister at this precise time, so the hon. Gentleman would do well to keep his own counsel.

Those are the facts of life that we must face. There is no refuge from them, in the blithe hope that our economy can make such a bound forward in competitive performance that Britain will suddenly be able to recapture great swathes of world markets and will thus push the European Community to the periphery of our interests as an important trading nation.

Mr. Budgen Will the right hon. Gentleman give way now?

Mr. Kinnock No, I will not give way, because of time constraints.

Mr. Budgen rose – –

Mr. Speaker Order. The hon. Member for Wolverhampton, South-West (Mr. Budgen) also has indicated that he wants to participate in the debate later. Perhaps he will get a chance to do so.

Mr. Kinnock The hon. Member for Wolverhampton, South-West (Mr. Budgen) will acknowledge that there were a number of disorderly interruptions earlier, which took up time. I regret that, but I shall respond to the hon. Gentleman on a future occasion.

There is no serious third way out of the stark choices that face us in the form of the Chancellor’s proposals for the so-called hard ecu. That is a clever illusionist’s trick from the right hon. Gentleman, but it is a trick nevertheless. The Chancellor claims to be against what he calls the imposition of a single currency, so he advocates a multiple currency system. He says that such an arrangement will consist of a hard ecu as a common currency, with all existing currencies used alongside it. However, he knows that the hard ecu, being almost incapable of devaluation, would render just about every other existing currency as redundant as the farthing and about as attractive as bent washers.

The Chancellor might have bamboozled the Prime Minister with his hard ecu. He might even enjoy being patronised by others in the European Community. Nevertheless, if the hard ecu is ever adopted, the single currency that the Prime Minister so abhors would arrive not in the long term, as the Chancellor promises, but very quickly.

Some members of the Government know that. Right hon. and hon. Members may have read in the Financial Times this morning a report quoting the Financial Secretary to the Treasury, who remarked in relation to the hard ecu: I would argue personally that the next stage of having a single currency could actually happen more quickly going down this path. I wonder whether the Prime Minister would say the same, or whether that is again a tale of two Governments.

As there is a strong and developing consensus in several other Community countries in favour of currency union, I repeat now what I have told many colleagues in the Community and in the Commission for some years. That community of democracies should never support the creation of a so-called independent central bank. It is no more appropriate for a democratic country or a group of democratic countries to allow monetary policy to be handed over to an independent, unaccountable bank than it would be for fiscal, public expenditure and taxation policies to be given over to such a bank.

If the Community seeks to achieve currency union between member states, then, whatever the implications for Britain, it will have to make arrangements for joint growth strategies, fiscal co-ordination and regional policies on an unprecedented scale. The regional policies would, by the very nature of currency union, require transfers between regions of the Community, just as transfers are made now between the German Lander, French departments and Italian regione, within their own national currency units. That is the dimension of the change that would need to occur if monetary union is to work to the advantage of the peoples of the Community. Even the most enthusiastic monetary unionist would recognise the truth of that.

Our country has been taken into the exchange rate mechanism by a Government who have been in power 11 years, and who found themselves cornered by the approach of two crucial European summits and boxed in by the expectation that the Government themselves have created that entry into the ERM would occur this autumn. They were a Government trapped by the approach of the Tory party conference, which needed pleasing, and by a looming recession, resulting largely from their own policies. They are a Government who were besieged, and who are besieged, by their own political and economic errors and failures. They are a Government who sought to use a 1 per cent. interest rate cut and ERM entry as a political escape.

They have failed in all of that. The interest rate cut is regarded with cynicism even by those people who yearn for relief from the crushing burdens of mortgage payments and business loans. The gush of City euphoria that greeted ERM entry went flat as quickly as the bubbles in the champagne that celebrated it. The Government’s decision and the Government’s timing are accurately seen as being determined by political expediency and concern for their own status and not by economic judgment made for the sake of the economy or the national welfare.

They are a Government who have been found out and, as soon as the British people get the chance, they will be a Government who have been put out.