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Economic And Monetary Union

Volume 408: debated on Tuesday 7 October 2003

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Question again proposed,That this House do now adjourn.

6 pm

I therefore welcome the Government's announcement that they are going to campaign vigorously for the benefits in principle of the single currency and, more importantly, for a combination of those benefits and the benefits that accrue from membership of the EU and the single market. In the end, the single currency and the single market are not distinguishable. It is in our strong long-term interest that Britain join European monetary union as soon as that is compatible with our interest. I shall certainly support the Government strongly in their efforts to bring that about.

6.1 pm

Before I begin my speech proper, I wish to join my hon. Friend the Member for Southampton, Test (Dr. Whitehead) in paying tribute to the hon. Member for Chichester (Mr. Tyrie) for his absolutely excellent speech. I can only imagine that the Conservative party's present difficulties will continue for as long as he remains on their Back Benches rather than being on their Front Bench.

I speak from the perhaps quaint premise that it ill behoves Members of this House to be either pro-European or anti-European. The only thing that Members of the British Parliament should be is pro-British. That is why I reject the Conservative dogma that says that EMU should be opposed even if it were good for Britain, and the Liberal Democrat dogma that would insist on joining EMU, even if that were bad for Britain.

Of course, Conservative Members would respond by saying that EMU could not be good for Britain, and Liberal Democrat Members would say that it could not be bad. That is the trouble with fundamentalists—one cannot hold a rational argument with them because they refuse to consider possible anything that might expose their position as flawed.

When the right hon. and learned Member for Folkestone and Hythe (Mr. Howard), the shadow Chancellor, spoke in the House on 9 June, the whole House laughed. It was a genuinely funny speech, with some excellent gags. I cannot claim that the speech has since been forgotten, as the right hon. and learned Gentleman has committed the mistake of repeating most of the gags several times. However, the shadow Chancellor experienced something worse than laughter today: his speech was ignored. He singularly failed to win the attention of the House.

By contrast, the statement by my right hon. Friend the Chancellor contained no quips or gags, and no polished delivery of a line. However, it had a very clear line. The message was, "Not now, but not no." The euro will be good for the UK. It will reduce long-term business costs, and act as a spur to economic dynamism in this country, but we can join only when there is real convergence with the European economy.

I am sorry that the hon. Member for Sevenoaks (Mr. Fallon) is not present. He spoke about the fallacy of convergence—the notion, as he put it, that economies could become linked together like spaceships floating in space. His view has been widely held. It is a classical one, in the sense that it was held in great esteem in the 18th century classical period, when cities had walls around them. The thought that economic decisions could be taken that would work as well for both Bremen and Bonn was deemed to be ludicrous. What made that view outdated was greater communication, improved technology and better transport. It is technology, transport and communication that render the classical view that he espoused equally inappropriate when considering independent nation states today.

The business community welcomed the Chancellor's message. Digby Jones, director general of the CBI, noted:
"The process for review on convergence and flexibility will be welcome to businesses that need certainty to plan ahead. We are pleased the government is doing nothing to harm the hard-won economic stability that has made the UK the most successful economy in Europe",
while the leader in The Economist that week concluded:

"the main thing to understand is quite simple: the policy is right, politically and in economic terms as well."
Business welcomed the statement because it showed the Chancellor's determination to ground the decision in economic fact and not in political dogma. The Chancellor's announcement that a draft referendum Bill would be published this autumn and the release of further details about the UK's preparations for adopting the euro sent a clear message that the decision of principle has already been made. What remains, of course, is the need to satisfy the economic tests. Businesses need clarity and they need transparency. That is what the Chancellor's statement offered—a clear road map to euro entry and an assurance that his sound economic policies will not be diminished. So we can continue with the record levels of investment in the public services and with the clear long-term fiscal and monetary policy, but in addition when we enter the eurozone, business should reap the benefits of lower transaction costs, diminished exchange rate volatility and substantially easier cross-border trade.

The 9 June statement was about more than the decision to enter the euro, momentous though that is. It was about dealing with systemic problems in the British economy as well—problems that we need to deal with regardless of whether we join the eurozone. Under the Conservatives 300,000 families were in negative equity as the economy went through cycles of boom and bust—not an impressive record. That is why today the Chancellor has set out his vision of a sustainable housing market: one that would ensure added personal economic security for home owners and sustainability for the impressive economic framework that we have established. Those are the domestic prospects that EMU membership holds out. Attaining the goals set down by the Chancellor will ensure that home owners have long-term security with the increased use of fixed-rate mortgages.

The Chancellor also made it clear that he will seek reforms to the stability and growth pact so that when Britain enters the eurozone it will benefit from reforms to the structures that govern Europe's economy. There is growing agreement that the current structures are not right and that there needs to be reform if the UK and the rest of Europe are to benefit from our joining the European economy. It is because Britain has a policy of engagement with the EU that we can expect movement on that issue.

On jobs and prosperity, investment may produce a short-term increase in employment, but Europe's labour markets are far more restrictive than the UK's. Ultimately, that may present problems. As for convergence with the eurozone economy, our GDP growth, unemployment and the output gap are not aligned, although they are closer than they were six years ago. Tackling that problem is difficult, because on all those indicators Europe is lagging behind the UK. In effect, we have to wait for Europe to catch up with us. If we want to join in the near future, the economy cannot afford to grow too much. Growth of even 2.5 per cent. while Europe is in recession will mean large gaps opening up and causing real problems in meeting the convergence criteria. Convergence is, of course, about cycles. It is not just about having the same vital signs at the point of entry; it means having the same cycle and experiencing and responding to the same shocks and stimuli thereafter.

If the right hon. Gentleman will excuse me, I will not, as a number of other hon. Members wish to speak and I was about to conclude my remarks to allow them to do so.

The final test, flexibility, poses the greatest challenge. I doubt that our economy is flexible enough at present to lose the shock absorber of its own exchange rate. Fiscal constraint to stop the public sector borrowing requirement running at more than 3 per cent. of GDP would severely restrict the Chancellor, irrespective of the overall level of debt. I suspect that that loss of flexibility, so necessary to our economy, as the Red Book figures on the public sector net cash requirement show, means that the UK economy must continue outside the eurozone for a little while longer.

It is clear, however, that the course is set. We should go in when we can go in, and when we do, it will be because it is right for Britain and the British economy.

6.10 pm

I shall speak briefly because much of what I wanted to say has already been said by others, probably better than I could say it.

I congratulate hon. Members on making good speeches, whether or not I agree with them; for example, the hon. Member for Chichester (Mr. Tyrie) seems to be in favour of EMU, while I am against it. His speech convinced me that I was right.

I take issue with the hon. Gentleman on his dismissal of the need for fiscal transfers and provision for subsidiary fiscal transfers in a single currency. That is mistaken. More than 20 years ago, the McDougall report stated that the European budget would have to be multiplied many times if the European economy were to work under a single currency.

I was a little perplexed by my hon. Friend's comments, too. Does the hon. Member for Luton, North (Mr. Hopkins) agree with Hans Tietmeyer, the former president of the Bundesbank, that greater fiscal harmonisation is essential in a single currency?

Indeed. McDougall argued that, in essence, one would need a single government and a single economy, with a tax and benefits system, which would automatically make for big fiscal transfers—plus regional policy and government, locating industry in the regions and so on.

The hon. Member for Chichester mentioned America. Federal spending is vital to keeping the American states together and helping the poorer states to survive. If the Americans wanted to reduce the differentials in living standards between rich and poor states, the fiscal transfers should be even bigger.

Fiscal transfers play a role in narrowing income differentials between states, although in the United States that role is relatively small. The important point is to identify the flows that may take place as a consequence of a shock hitting one part the US, creating asymmetric performance between regions, and the extent to which the federal budget can compensate for that. That issue has been extensively studied and the conclusion is that federal transfers provide only limited protection—about 25 per cent. The main study has been carried out by Barry Eichengreen.

My general point in response to the hon. Gentleman's remarks is that many currency zones with free trade and high investment flows have no fiscal protection at all—the gold standard being the clearest example.

We could, no doubt, debate those points at great length. The hon. Gentleman denies the efficacy of the new deal in America in the 1930s and the post-war period—the Bretton Woods era, to which I refer time and again—when we had the fastest growth, the highest employment, the greatest equality and the development of a full welfare state. For most people, living standards rose as they had never done before. Throwing away the gains of that period was a great mistake.

In effect, EMU will marketise the economy and will give away even more of the gains a the immediate postwar period. Former Chancellor Erhard must be turning in his grave. The miracle that he guided through, based on an undervalued Deutschmark—allowed by the west as a shining example of how capitalism could work across the border from where communism did not work—is being reversed.

I was interested in the suggestion made by the hon. Member for Chichester that it would not be difficult for a member state to withdraw from the EU. That would be likely to cause problems. It is at least possible, indeed some people might say it is likely, that EMU will soon run into serious problems. Germany is a case in point. Portugal will try to tough it out by using flexible labour markets or whatever, without any attempt to change its macro-economic variables. While on holiday in Portugal last year, I saw a notice at a building site, put there by trade unionists, that said. "No to flexible labour." Well, that is what I thought it said—it was in Portuguese—but I think that my translation was pretty accurate.

Last year, a study said that if interest rates were appropriate to the national economies of the member states, we would have a vast range of interest rates. At that time, Germany would have required an interest rate of 1.5 per cent. Ireland was at the other extreme, at 6.5 per cent. Spain was at 4.5 per cent. and France at 3.5 per cent. Those are big differences in interest rates, and I cannot envisage the appropriate interest rates converging. Indeed, as the hon. Member for Chichester and others have said, Ireland is booming and Germany is going into serious recession and is in serious danger of deflation.

A year from now, we may have to assess not whether we join the eurozone, but whether the eurozone will survive and whether major countries will abandon the euro and reinvent their own currencies, as has been done in recent years. When the Soviet Union collapsed, all its member states took up their own currencies. We have recently seen the dissolution of Czechoslovakia into the Czech Republic and Slovakia, and they have their own currencies.

I am fearful about losing our own currency because we would lose control of macro-economic policy, which is of fundamental importance to ensuring that we can retain full employment and growth in living standards and that we can manage our own economy in the way that we want, according to the democratic dictates of our population. Every other country in the EU ought to have that as well.

My concern is that EMU might destroy the EU, with serious political consequences. In previous generations, economics was always called political economy, and economics and politics are inevitably locked together. When economics go wrong, we get dictatorial regimes, and there is an uncomfortable growth of the extreme right in Europe at the moment. If German unemployment went up to an even more frightening level and deflation occurred, some rather unpleasant political groupings could grow in popularity in Germany, and that could happen elsewhere. One or two hon. Members are concerned about that, because they are perhaps somewhat older than I am and have longer memories and can remember what happened immediately before the war. Serious political possibilities arise from the problem that EMU will cause all the member states.

I want Europe to work, and I dislike being told constantly that I am anti-European because I am anti-EMU and anti-euro. No one is more pro-European than me. I am culturally European; I go there for my holidays; I try to speak European languages. I am not from any other continent. I am deeply involved in European culture and life, and I go there regularly. I want to have good, friendly relations with all my European colleagues and to talk about politics and music, and, indeed, to drink their wine. Europe will not work if we smash its economy by driving forward the euro, the eurozone and EMU. I have possibly spoken for too long, and I hope that I have not taken up other hon. Members' time.

6.18 pm

Thank you very much, Mr. Deputy Speaker, for allowing me to make a few comments at the end of the debate. In echoing the comments made by my hon. Friend the Member for Luton, North (Mr. Hopkins), I want to explain briefly where I am coming from. I am not anti-European. Indeed, I am very much pro-European. I am not anti-euro in principle. I was elected on a manifesto that supported the principle of joining a successful single currency.

I feel that I am quite pragmatic about entering the euro, but I cannot understand how we can join in the immediate future, for two reasons: first, the structural reforms necessary to live permanently with eurozone interest rates, and secondly, the scale of reform needed to the policy framework that operates in the eurozone. To date, the debate about monetary union has tended to be dominated by caricature. On the one hand, pro-euro advocates are seen as selling out our history and traditions and propelling us towards a superstate, governed by an elite. On the other, those who are anti-euro or cautious about early entry are seen as little Englanders and as road blocks standing in the way of the inevitable laws of history and of our political and economic destiny.

For me, the main problem for my party is that over the past few years we have given the impression of appearing to collapse two separate issues into one: first, that we are a pro-European political party; secondly, that we are in favour of joining the euro as soon as possible, irrespective of political and economic context. The consequence of that is that for some in the party, preparedness to join the euro is seen as a hallmark of their pro-European—and new Labour—bona fides. At times, it has appeared that anyone who is cautious about early euro entry, and who wants to see some of the policy frameworks and institutions reformed before we join, is in effect perceived to be an "outer", a non-believer, and almost an opponent of a modernised Labour party: a de facto member of the Bruges group. In that sense, some pro-euro enthusiasts have done a disservice to their cause, as their lack of pragmatism has distorted the debate and served to underplay the profound and complex issues at stake.

For me, the real significance of the Government's recent announcements on the euro is that they decouple those two positions: on the one hand, our general pro-European position, and on the other, a cautious approach to early euro entry. As such, our pro-European bona fides have been re-established while simultaneously mapping out a major agenda for reform, both here and within the eurozone. The approach is to consider the issues around prospective entry through the grid of self-interest rather than a determinist assumption about destiny and inevitability.

In terms of the five tests, I want to focus briefly on the issue of convergence, as in 1997 it was determined as the critical test. It pivots on the fundamental questions: are our cycles and economic structures compatible so that we can live comfortably with euro interest rates on a permanent basis; and what are the risk factors for sustainable and settled convergence? It seems to me that, alongside that, a political test should be related to convergence: is the euro interest rate on a permanent basis compatible with our domestic political agenda? Without the monetary policy flexibility that we currently maintain, emphasis is placed on the operation of a more discretionary fiscal policy to enhance economic stabilisation. That means discretionary direct and indirect taxes and temporary tax credits either to cool down or to stimulate the economy. Those issues are covered in the interesting Treasury discussion document, "Fiscal stabilisation and EMU".

There is no doubt that if we were to join the euro now this discretionary fiscal policy would have to kick in to raise taxes significantly. Let us imagine what would happen if interest rates were cut by 1.3 per cent. now. We would see another bout of consumption and a surge in the housing market, reinforcing the way in which the housing market in the south-east constrains our macroeconomic performance. In Dagenham, for example—the area that I represent—the lowest-cost housing market in Greater London, house prices have virtually doubled over the last three years. Of the 39,000 council dwellings, 17,000 have been sold off over the last 20 years. We currently have 6,000 applicants on the waiting lists, last year there were 2,000 homeless applications in the borough, and there is a chronic shortage of social housing. Many find it very difficult to enter the private sector. At the same time, it is estimated that the population of London will grow by some 750,000 over the next 10 to 15 years, and it is assumed that much of that will be handled on the east side of the city. In the borough that I represent, we are talking about some 25,000 extra dwellings over the next 10 to 15 years.

The simple points that I am seeking to make are as follows: first, pressures exist on the housing stock at the moment; secondly, tensions are at work even within the lowest-cost housing market in London; thirdly, pressures on the demand side are going to intensify; and fourthly, we need to acknowledge that there is a long-term supply-side plan to hand. The scale of this project of economic restructuring cannot be overstated, however; nor can the implications of significant interest rate cuts and the abolition of national level monetary policy to regulate these markets before structural reforms kick in.

Let us consider this: we join the euro, we trigger another boom in the housing market, but we have not sorted out the supply side issues, and we have no national control over interest rates to constrain this renewed consumption. The solution would be significant increases in tax rises through this discretionary fiscal policy. Two words jump out—stop-go. However, the situation could be worse. The Treasury discussion paper suggests that there is no guarantee of success: witness the failure of discretionary fiscal policy in the 1950s and 1960s under Bretton Woods.

At the same time, this discretionary policy sits uneasily with the Government agenda of tax rises that are levelled for investments in public services. This strategy is politically acceptable only if the tax rises are transparently linked to investments in public services. That is the implied compact that we have with the British people. Without major structural reform, we would join the euro and would put up taxes to cool down the housing market in the south-east. There is little evidence that that discretionary fiscal policy would work, yet we would have undermined the compact with the people regarding a general transfer of any new revenues into public service investments. Any Government who proposed such a package would develop a pretty uncomfortable relationship with the electorate.

The situation could be worse, however. At the moment, we are in the mid-term of the agenda for refinancing public services. Cumulatively, there will be a £61 billion increase in public service investment by 2005–06. That is having an effect at a local level and change is occurring. Yes, it is uneven and at times slow, but it is occurring and that is the agenda that we were elected on. I think people will be patient provided that we preserve the link between the tax rises and the expenditure plans. That could be derailed in one of two ways: first, if we had to push up the discretionary tax rises that I mentioned earlier or, secondly, if we were to enter a system whose rules would bring into question this strategy and imply spending cuts to restrict borrowing.

Under the stability and growth pact, the objective was balanced budgets by 2002–03. Late last year, that was changed to an objective of 0.5 per cent. cuts off borrowing for the next three years. Simply on the Red Book numbers, that would imply cuts of £35 billion. The excessive deficit procedure has been triggered in Portugal and Germany, as has the early warning system in France. There is also trouble in Italy. It is vital that we resist pressures to compromise our domestic strategy.

We have had to revise our borrowing estimates upwards over the last year. The estimates for 2003–04 to 2005–06 are cumulatively some £74 billion, 2.4 per cent. to 1.9 per cent. of GDP in terms of Government net borrowing, or what the Red Book describes as the treaty deficit. Any further downward revision of our growth estimates will push us very close to the 3 per cent. levels introduced at Maastricht.

Even to preserve our spending plans, we could fall foul of the current budgetary rules of monetary union while having to signal more tax increases before the election. Therefore our compact with the electorate could be more difficult to sustain over the next few years, irrespective of euro entry. Inside the euro, our spending plans could well be compromised. Moreover, the discretionary tax rises that would be needed if there were no substantial structural reform could rupture this compact.

Overall, the Government's recent statement has rebalanced debate in the Labour party by separating our pro-European agenda from an early rush into monetary union. It is a rational and pragmatic position to take. The structural reforms needed before we again contemplate entry are significant. Without the reforms, the discretionary fiscal policies needed are not necessarily workable or politically desirable, given our domestic strategy to rebuild public services. Notwithstanding this, our current approach to revenue raising and expenditure will itself require renewed work over the next few years. The present rules of the eurozone regarding borrowing would compound rather than resolve these problems.

The rational position, therefore, is a cautious one. That is why I fully support the Government agenda. We should concentrate on the manifesto we were elected on: rebuilding our public services and linking any tax rises specifically to that project.

6.28 pm

I draw the House's attention to my entry in the Register of Members' Interests.

This has been a timely debate, although perhaps not if one is a Liberal Democrat. I was not sure whether the hon. Member for Yeovil (Mr. Laws) was acting as spokesman for the Liberal Democrats or acting as a literary agent. His endless references to biographies and so on seemed something of a distraction.

This has been an informed debate and we have heard some excellent contributions from both sides of the House. Indeed, I commend the contributions of the hon. Members for Warwick and Leamington (Mr. Plaskitt) and for Hackney, South and Shoreditch (Mr. Sedgemore). As we came to end of the debate, we heard the contribution of the hon. Member for Luton, North (Mr. Hopkins). Perhaps more than any other speaker in the debate, he showed that one does not have to be in the euro to be a good European.

We heard tremendous speeches from Conservative Members. My right hon. Friend the Member for Kensington and Chelsea (Mr. Portillo) gave an eloquent exposition of the reason why the economics and politics of the euro are inextricably interwoven. My right hon. Friend the Member for Wokingham (Mr. Redwood) made a typically robust speech in which he drew out the central question of volatility. I was sorry that I missed the speech made by my hon. Friend the Member for Ruislip-Northwood (Mr. Wilkinson), although I am told that it was both humorous and honest. It is interesting that he and my hon. Friends the Members for Sevenoaks (Mr. Fallon) and for Chichester (Mr. Tyrie) were able to encapsulate all the key issues that we are considering in their short yet strong contributions. I enjoyed not only the rigour of the speech made by the hon. Friend the Member for Chichester, but his comparison involving stoats, and I shall remember his speech in that context.

Conservative Members welcome the debate on the Government's policy on the euro because it relates to perhaps the single most important decision to face this country for a generation. It is important because of economic and constitutional implications and because such a decision, once taken, is irreversible. Although we have largely focused today on the broad monetary and fiscal aspects, the real significance of the euro is that it affects each and every Member of the House and all those whom we represent.

With a single currency, of course, would come a single interest rate, which would set the cost of borrowing for home owners and business and the value of savings. It would affect the cost of the goods and services that we buy and the worth of our assets. Thus no one in the House or beyond it is immune from the decision. That was why everyone was hoping that after months of Cabinet wrangling, the announcement on 9 June would provide clarity and certainty. Indeed, as the director general of the British Chambers of Commerce, David Frost, said a week before the announcement, on 1 June:

"Any euro verdict that can be reopened and reviewed, within 12 to 18 months, will be potentially destabilising and will lack credibility."
Sadly, the Government were not listening. Instead of a clear and unambiguous decision, we got a political fix. The Chancellor announced that four of the five tests had failed, but then said that the Government would go out and promote the case for the euro anyway. Worse still, he announced that the whole process would be rerun in a year's time, thus creating maximum uncertainty. As the highly respected chief executive of Next plc, Simon Wolfson, pointed out:

"Business wants certainty, so that it can plan ahead with confidence. What it does not want is continued speculation over whether the Government intends to take risks with the British economy in order to pursue its political ambitions."
What of the famous five tests? As several hon. Members said, the first and most important is the need for sustainable convergence—the stability test, as the Chancellor put it. The former Governor of the Bank of England, Sir Edward George, said that there was a risk if countries' economies were not convergent:
"The risk is that a single interest rate, which has to go with the single currency, is not going to be appropriate for all the member countries at the same time."
Indeed, the problem is ideally illustrated by the current combination of a boom in Ireland and the record unemployment in Spain and Germany to which hon. Members in all parts of the House referred.

According to the Treasury's analysis, convergence of the UK economy and eurozone economies is likely to be especially difficult. As the shadow Chancellor told us, the document "Analysis of European and UK business cycles and shocks" says:
"It is generally recognised that fluctuations in UK GDP are…idiosyncratic in certain respects, when compared to behaviour in the euro area countries."
However, most tellingly of all, the study concludes:
"It remains true that the UK's cycle is strongly correlated with that in the US, somewhat more so than with those in Europe."
There is, however, a second aspect to convergence that is equally important: sustainability. Even if, at a particular moment in time, this country's inflation rate, interest rate, growth rate, unemployment rate and so on were similar to those in other European economies, it would be wrong to assume that that was sustainable. Given the Treasury's view that the UK economy is idiosyncratic, it is far more likely that our economies would be like ships passing in the night, coming together momentarily before moving off in different directions. The chief economic adviser to the Treasury, with whom I assume the Chancellor is familiar, Mr. Ed Balls, stated:
"If interest rates and the exchange rate come down sharply, you haven't got a settled and durable convergence."
It is clear why the Government thought that the test had failed.

The second failed test related to economic flexibility. Following the Conservative Government's reforms of the 1980s and 1990s, this country's ability to respond to mobile and price-sensitive capital and labour movements was transformed. In spite of this Government's best efforts to weigh British business down with 15 new regulations every working day and additional annual taxes of £15 billion, this country is still managing to compete.

What is of equal concern, however, is the lack of flexibility in the eurozone economies. Indeed, in April the Treasury Committee stated that
"insufficient progress has been made in the Eurozone in making labour markets more flexible."
Even the Prime Minister conceded, in a recent review of progress on the Lisbon objectives, that

"there remains a daunting amount to be done."
On the third test of investment, to which several hon. Members referred, the Chancellor stated:
"If sustainable and durable convergence is achieved, then we can be confident that the quantity and quality of investment would increase, ensuring that the investment test was met."
Note the all-important word "if". As we have learned in the debate, no such sustainable convergence has been achieved and nor is it likely to be achieved. One thing has become clear, however. Three years ago we were warned that if we did not join the euro we would lose inward investment. Yet, as Barry Bright, head of Ernst and Young's UK location advisory team, says:
"The issue of euro membership appears to be a bit of a damp squib, as far as inward investors into Europe are concerned."
Indeed, Ernst and Young's latest figures show that Britain's share of EU inward investment projects rose from 26.5 per cent. in 2001 to 28.4 per cent. in 2002. Conservative Members will be aware that that is still significantly down from the 40 per cent. achieved under the last Conservative Government.

Of course the one test that the Government reckon did succeed related to whether entry would have a positive impact on our financial services industry. Apparently, the Government's answer was yes, it would. Yet at the same time the Treasury's paper "The location of financial activity and the euro" conceded that
"the euro has not affected London's ability to compete in international wholesale markets."
That simply affirmed the earlier report by the Bank of England in 1999, when it stated:
"The evidence indicates that, since the launch of the euro, the City has maintained its market share."
That raises an awkward question, to which I hope the Chief Secretary will respond. If it makes little difference to financial services whether we are in or out of the euro, what function does the test serve?

The final test on employment, which the Government declared failed, seems similarly inconclusive. While some people like to claim that joining the eurozone would immediately and significantly boost jobs, a large part of the evidence seems to disagree. Even the Chancellor has admitted that
"macroeconomic stability would be harder to maintain inside EMU than outside, were the UK to join at the present time",
and of course stability is crucial to growth and jobs.

A number of hon. Members have rightly highlighted the findings of the 18 documents that accompanied the Chancellor's statement—and yes, I have read all 1,700 pages or so, which is a good comment from a professional point of view, although I am not sure whether it says much about my social life around 9 June. Nevertheless, I have read all the documents, and I should like to consider an issue that applies to a number of them.

In their study of housing consumption and the euro, the Government recognise that housing has a vital influence on whether the UK meets the key test on convergence, not least, as hon. Members have pointed out, because of an historic preference by British homeowners for short-term variable mortgages. The Chancellor told us on 9 June that it was his intention to review the mortgage market. He has affirmed that today. He also told us that he would accelerate the rate of house building. Given this Government's record in that regard, that will not be very difficult.

In the accompanying document, the entertainingly entitled "Fiscal Stabilisation and EMU", we were treated to what I can describe only as a psychedelic trip back to the 1960s, with an agenda of active Keynesian-style fiscal regulators that would enable the Government to vary indirect taxes several times a year, and also in different parts of the country, in order to stabilise the economy. According to the Treasury,
"investment in housing is relatively lightly taxed by comparison to other investments".
Of course, that ignores the small fact that, for most of us, our house is our home. However, as my right hon. Friend the Member for Wokingham rightly highlighted, the document goes on to look at other issues about property taxes and how they could be used to dampen the housing market in raising stamp duty land tax or imposing capital gains tax on our homes. Naturally, many people following this debate will be deeply concerned by those statements—[Interruption.] If the Chief Secretary could stop listening to the Chancellor for a moment and listen to the debate, perhaps I could ask him to reassure the House on these questions. Does he believe that housing in the UK is lightly taxed? Does he support the statement that taxing housing has some immediate appeal; and which—stamp duty land tax, capital gains tax or even VAT—does he think would be preferable?

The decision whether to join the euro is vital to this country's future direction. It is an issue that affects us all, and as it is irreversible it is a decision that must be based on clear and unambiguous evidence. On 9 June, the Government had a wonderful opportunity to end the backstairs bickering and Cabinet squabbles and give us a clear direction. Instead, we were told that while four of the five tests had failed, the Government were going to go ahead anyway and promote the case for the euro. Instead of a firm decision helping investment and jobs, we got a threat of endless uncertainty undermining business confidence. Instead of a principled decision in the country's best interests, we got a political fudge in Labour's best interests.

As on so many issues, this Government are failing to provide either the direction or leadership that they promised. What a breach of faith, and what a wasted opportunity.

6.43 pm

The debate that we have had today is one of fundamental importance, and hon. Members on both sides of the House have made a number of valuable and interesting contributions.

I thank my hon. Friends the Members for Dumbarton (Mr. McFall) and for Warwick and Leamington (Mr. Plaskitt) for their contributions. In particular, I thank them and all members of the Select Committee on the Treasury for their sixth report, to which we responded today and which we recognise as an important contribution to the debate that we are having about the euro. I have no doubt that we will return to it from time to time in the coming months.

The debate has not lacked passion. I was struck by the speech of my hon. Friend the Member for Hackney, South and Shoreditch (Mr. Sedgemore). He made the case for passion in our discussion of these issues. That passion was reflected on the other side of the debate by my hon. Friend the Member for Luton, North (Mr. Hopkins). We had passion, too—of a slightly different sort, but equally so—from the right hon. Member for Wokingham (Mr. Redwood), who, at a stroke, undid any good that the Leader of the Opposition might have been doing in Prague. When today is remembered, in so far as it is remembered at all, it will be for Wokingham, not for Prague, because Wokingham reflected the true nature of the Conservative party and the Conservative Opposition—they have an almost tangible animus against Europe. Indeed, it was almost tangible in the Chamber.

In a moment.

I pay tribute to the thought and care that went into all hon. Members' contributions, whatever their perspective. I certainly sensed that in the speech by the hon. Member for Chichester (Mr. Tyrie). My hon. Friend the Member for Hackney, South and Shoreditch was good enough to give me a copy of the original speech that he made in 1990. I found the first iteration of his thoughts more acceptable—no wonder, because it consisted of a diatribe against Treasury Ministers and officials. Given the then role of the hon. Member for Chichester, I fancy that he would have been obliged to sit in the box and listen to that speech.

We want the debate to be reflected more widely in the country because of the great significance not only of the decision that we are considering, but of the radical programme of reforms that my right hon. Friend the Chancellor announced to the House on 9 June. Those included a new inflation target; reforms to housing and planning; reforms to achieve greater flexibility in markets for products, capital and labour; and a consultation on a new fiscal policy regime—reforms that are essential to Britain's economic success inside or outside the euro.

In today's debate, as in my right hon. Friend's assessment of the five tests, we made clear the strength of our commitment to and support for the principle of joining the euro and our determination to base a decision on EMU on Britain's long-term national interest. The assessments show that if durable convergence and flexibility can be achieved, the potential gains from joining to trade, business and living standards are, if anything, greater than previously anticipated. But the potential benefits cannot be captured unless we achieve settled convergence between the economies of the UK and the euro area and the UK economy has sufficient flexibility to respond to economic shocks.

It is therefore essential that the five tests be met, because they are the guarantee that joining the euro will not prejudice growth, business investment, jobs or our radical agenda to deliver better public services. That point was made clearly and helpfully by my hon. Friend the Member for Dagenham (Jon Cruddas). He stressed the central importance of convergence and structural reform of the policy framework to our approach to these issues.

Given that the pensions tax has destroyed many pension funds and the telecoms tax has destroyed many telephone companies, does the Chief Secretary worry that extra housing taxes will destroy the housing market, and with it much consumption? Is that a price worth paying for the euro?

The right hon. Gentleman reverts to a favourite theme. I do not know why he attacks the windfall levy and denies the importance of the corporate taxation reforms. The reforms have been well received by those who want to remove distortions in taxation. I believed that that was a concern of the right hon. Gentleman's.

The hon. Member for Hertford and Stortford (Mr. Prisk) suggested that we had a hidden agenda on taxing property. That is nonsense. Only the Conservatives, when they had stewardship of the economy, used stamp duty as a regulator in that way.

I shall finish my argument first.

No one who has listened to the debate could be in any doubt about the dividing lines on the issue. Some would rule out membership of the single currency on principle, even if joining were in the national economic interest. [Interruption.] Opposition Members cheer that. They reveal themselves through their own mouths. I fear that that approach was characterised by the speeches of the right hon. Member for Wokingham and the right hon. Member for Kensington and Chelsea (Mr. Portillo), from whom one would have hoped for better. His blithe dismissal of the five tests as irrelevant and a cover for a political decision did not do the arguments justice.

Let us consider the Liberal Democrats—at least I can now use the term in the plural. For almost the entire debate, the hon. Member for Yeovil (Mr. Laws), with whom we spent many happy hours in the Committee that considered the Finance Bill, was entirely alone. However, Liberal representation has doubled: two members of the party are present. They urge us to join the euro, regardless of the five tests. Such a course would prejudice our stability, risk repeating past failures of exchange rate management and could return us to the days of stop and go, at the expense of our ambitions for high investment, full employment and high and sustained growth.

We are considering not the "now or never" options that Conservative Members represent, but what takes forward our agenda of concrete, practical reforms that promote stability and dynamism and are right for Britain's future. As my hon. Friend the Member for Brent, North (Mr. Gardiner) said, it is not a question of being pro or anti-Europe, but of being pro-Britain. The pro-Britain approach is also right for Europe, which can benefit from our reform agenda.

Many hon. Members, especially my hon. Friends the Members for Dagenham and for Leicester, East (Keith Vaz), spoke about convergence. Hon. Members asked what could change in the year before the next Budget, when the Chancellor will revisit the matter. As my right hon. Friend made clear, the Government are not in the business of giving a running commentary on that. However, we have also made it clear that we believe that there is a realistic prospect of making significant progress in the next year. We will outline the implementation of several step changes in policy in the pre-Budget report.

In a moment. My hon. Friend the Member for Leicester, East requested such a timetable. The Chancellor outlined it in his statement to the House on 9 June.

The Chief Secretary has referred to the need for reform and to the changes that will take place over the coming year, yet he has made light of the question that I and others have asked about whether he believes that property is lightly taxed. The matter is dealt with in the Treasury document to which I have referred, and the Chief Secretary is a Treasury Minister. Is it true or not?

I refer the hon. Gentleman to section 6.102 and 89, which make it clear that there are no proposals for new taxes in the fiscal stabilisation paper. How many times do we have to say that there are no proposals here for new taxes? I have given the hon. Gentleman the answer to his question; he really needs to grasp it.

Important issues relating to the housing market must be addressed. Our agenda is not to attain market structures identical to those of other countries. Every country's market will have unique features, but history shows that the combination of house price inflation and volatility has been a problem for stability. We all know that, and we are determined to do more to entrench stability and to reduce the risk of inflation, irrespective of the decision on the euro. That is right for Britain, and for those who look to the housing market to meet their needs and aspirations. That is why we have asked Professor David Miles to examine the obstacles to the development of a bigger market in fixed-rate mortgages and to make recommendations on how the obstacles can be removed.

That review is taking place alongside major reforms to speed up the planning process to ensure that we give more certainty to developers and businesses, and that we meet the housing needs of the regions, backed up by £22 billion of investment over three years through the Deputy Prime Minister's sustainable communities plan. The Conservatives never put such investment into housing when they had stewardship of the economy. Outside EMU, our reforms will enhance the stability of the housing market and of the wider economy, and, if the UK were to join EMU, a more stable housing market would increase the compatibility of UK and euro business cycles, facilitating sustainable convergence. That must be right, and we are doing the right thing. It is right for Britain, right for our future, and right for the needs and aspirations of our people.

At the same time, we are taking the necessary steps to set the Bank of England a new inflation target based on the harmonised index of consumer prices, which is a measure of inflation that has much to commend it. The HICP provides a more accurate reflection of consumer behaviour than RPIX, and allows for consumers substituting cheaper goods for more expensive ones when relative prices change. This more accurately reflects people's spending behaviour, and is in line with international best practice. That ought to be welcomed by Conservative Members. It gives a more complete picture of spending patterns, as it takes account of spending by all consumers, including the richest earners, foreign visitors and all pensioners. It is the most comparable international measure used by our neighbours in Europe, and it enables people to make sound decisions on pricing and investment in the context of increasingly integrated global markets.

Our objective is to ensure that Britain, as a nation, benefits from those markets, from European reform and from the steps that we have taken to build on the framework of macro-economic stability that has characterised the Chancellor's stewardship of the economy. Conservative Members have made great play of the horrors that they say lie ahead in terms of closer working with Europe. In so doing, they reveal their blindness to the benefits of reform. The Government have consistently supported a prudent interpretation of the stability and growth pact. We have also consistently supported reforms designed to meet the objectives of the Lisbon agenda, for which my hon. Friend the Member for Leicester, East specifically called.

We are determined to safeguard the UK's stability and prosperity, and to ensure that they go hand in hand with a readiness to play our part in Europe's reforms and to build a modern, pro-European political consensus at home. That is why we, as a party, have the confidence to say that our future lies in Europe and that we should lead in Europe, and why the conclusions of the assessment and the package of reforms presented to the House on 9 June represent the right way forward as we work to build greater flexibility and higher productivity, growth and employment in Britain, and a more prosperous and successful Britain in Europe.

It being Seven o'clock, the motion for the Adjournment of the House lapsed, without Question put.