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Economic And Monetary Union

Volume 408: debated on Tuesday 7 October 2003

The text on this page has been created from Hansard archive content, it may contain typographical errors.

[Relevant document: The Sixth Report from the Treasury Committee, Session 2002–03, HC 187-I and -II, on the UK and the euro.]

Motion made, and Question proposed,That this House do now adjourn.— [Vernon Coaker.]

1.32 pm

I want to share with the House the evidence and conclusions contained in the euro assessment. I shall give more detail on measures that are good for Britain and that advance convergence and flexibility: measures on housing, the sale of surplus public sector land; planning, driving up performance; and flexibility, progress on skills, labour market reforms and pay flexibility in the public sector. I want to show not only that sustained convergence and living with euro area interest rates while advancing stability, full employment and the funding of public services is in the national economic interest, but, more generally, that it is in the British national economic interest to be fully engaged and enthusiastic members of the European Union—not to be semi-detached—and to play a full part in equipping a new enlarged Europe to meet global challenges.

I acknowledge that no cause has been more controversial, no issue has been more difficult, and no subject has been more complex for the British people for so long than Britain's relationship with Europe. No issue has attracted more of the House's attention or engaged it in so much scrutiny and debate. However, if the first three phases in our post-war relationship with Europe were our pre-1972 decision not to join, which was wrong, our decision to join yet to be continually unhappy with the terms for the next two decades and, in the wake of the fall of the Berlin wall and the Maastricht treaty, the decision in the early 1990s to stand further apart from Europe, we have now entered a new fourth phase of our relationship. Europe is moving from its often inward-looking and exclusive era as a trade bloc towards a recognition that it must compete globally. That is the context of the decisions that we must take about not only the intergovernmental conference but the euro.

When we joined the then Common Market in 1972, 2 million jobs depended on our trade with Europe, but now 3 million jobs depend on it. We now import £154 billion of goods and services each year from Europe—53 per cent. of our total imports of goods and services—compared with £5 billion in 1972. Compared with £4 billion in 1972, we now export £140 billion of goods and services to Europe each year, which is 52 per cent. of our total exports of goods and services. It is estimated that 750,000 British companies have trading relationships with the rest of Europe. As Europe has advanced from a common market to a single market, 73 per cent. of our investment overseas now goes to European Union countries, compared with less than 14 per cent. before we joined the Common Market. Therefore, adopting a policy that would leave Britain semi-detached from Europe would be a disastrous stance for jobs, business and trade.

Until now, the context in which we have viewed decisions about Europe has been European rather than global. The European Union was the world's first trading bloc. It was the precursor of the North American Free Trade Agreement, Mercosur, the Association of South East Asian Nations and the other trade blocs. Its role was to organise its rules, to formulate its preferential agreements and to fashion its social dimension and external relations. However, discussion of the euro takes place today in a new global context. We have an enlarged Europe that is moving from the Europe of the trade-bloc era in which it was more protected, sheltered and inward-looking, to a Europe of the global age that cannot avoid intense global competition.

I shall give way after I have set up the argument.

In 1972, 21 per cent. of the UK's output was traded, and the figure is now 27 per cent. France traded 22 per cent. of its output in 1972 and now trades 26 per cent. Germany's figure was 29 per cent. and is now 33 per cent. Twenty-one per cent. of Europe's output was traded worldwide in 1972. The figure was 30 per cent. in 1990 and is 34 per cent. today.

In this new stage of Europe's history as a union—the global rather than trade-bloc phase—three changes affect our decision on the euro. First, the enlarged Europe has to look outwards. Indeed, during the past 10 years, there has been a tenfold increase in European investment in the USA, and European investment in the USA has been twice American investment in Europe. That means that Europe must recognise that it benefits from partnership rather than rivalry with the USA, and that it must seek job-enhancing trade agreements with the rest of the world, including the USA.

Secondly, the euro decision must be taken, as the intense competition that globalisation brings forces every country to become more competitive. Economic reform is, and must be, the driving force behind Europe's economic agenda. Thirdly, the euro decision is being made as the global competitive challenge demands a greater flexibility in labour markets, thus forcing Europe to redefine its social dimension.

Europe has to form new outward-looking relationships and is being forced to reform economically and socially. That leads me to conclude that those who rule out euro membership, either because they demand a choice between Europe and America or because they believe that Europe does not have the capacity to reform, are misreading the direction of change and the influence that Britain is having, and can have, on the debate about a global Europe, because, after all, Britain was the pioneer of free trade and the first proponent of economic liberalisation—I pay tribute to Conservative Members for their role in that—and the single market. That is the new global context in which we must make our decisions about the euro.

Will the Chancellor explain why the richest country in Europe, as measured in per capita income, is Switzerland? It does not intend to join the euro but it does massive trade with the rest of the European area.

It is funny that the right hon. Gentleman says that because whenever I meet Switzerland's finance Ministers I am told that they wish to join the European Union and that it would be to their advantage. When I give him figures showing the increasing amount of British trade with the European area, surely he must accept, as many of his Front-Bench colleagues now do, that detaching ourselves from the European Union would be a big mistake. The question is not whether we detach ourselves but whether it is right to join the euro at this stage.

We know the Chancellor's judgment at this time about the five economic tests. Will he tell us whether he would be disappointed if Britain was not in the single currency in five years' time?

We are in favour of joining the single currency in principle, but we need to meet the five economic tests. I am about to explain what needs to be done to meet the tests and the changes that we need to make. However, the changes that we are bringing about to the British economy are in the British national economic interest.

The Chancellor might be about to pass on from his observations about our membership of the European Union. He is fully aware that our ability to continue to be a strong and active member of the European Union without joining the single currency is safeguarded by the opt-out clause in the treaty of Maastricht. Is he aware that no such opt-out clause exists in the European constitution?

We always supported the Maastricht opt-out clause. The opt-out clause stands. If the right hon. and learned Gentleman is suggesting that the opt-out clause falls, he is making a great mistake.

In that case, will the Chancellor give the House a cast-iron guarantee this afternoon that in the negotiations on the constitution at the intergovernmental conference the United Kingdom Government will make it absolutely clear that they will not sign up to the new constitution unless it replicates the opt-out from the single currency that is contained in the Maastricht treaty?

Not only does the opt-out clause remain, but, equally, the other states that are joining the European Union from the east of Europe do not have that opt-out clause, nor does Sweden. Britain has that opt-out clause, and we supported it in 1992 when the Bill came before the House of Commons. The right hon. and learned Gentleman does not have the evidence to suggest that Britain is walking away from the opt-out clause.

If what the Chancellor says is correct, there should be no difficulty in giving me the assurance for which I asked. He should be able to give the House a guarantee this afternoon that the Government will not sign up to any constitution that does not replicate the opt-out from the single currency contained in the Maastricht treaty. It is a perfectly simple matter.

The shadow Chancellor is trying to raise an issue that does not arise. The opt-out clause remains. Once again, it is a Conservative red herring to disguise the fact that the Conservative party is against the euro in principle and against membership of the European Union. That is the position.

The right hon. Gentleman is factually and legally wrong, and my right hon. and learned Friend is factually and legally right. Does the Chancellor not recognise that the European constitution will override and supersede all previous treaties and that it is therefore essential to guarantee the opt-out by incorporating a clause to that effect in the new constitution? In the absence of such a clause, will the Government veto the constitution—yea or nay?

Once again, Conservative Front Benchers and Back Benchers are trying to get us into a position of vetoing the conclusions of the IGC. They will choose any issue—any red herring—to do so. Their aim, frankly, is that we reject the IGC, put Europe into crisis and have a semi-detached or associate membership of the European Union, or some other relationship with it. I have told the shadow Chancellor the position: the opt-out stands. It was negotiated. We supported it at the time, just as they supported it. As for what is likely to happen, no other members of the European Union that are joining from the east have sought, or are getting, the opt-out clause. Britain has the opt-out clause. Even Sweden, which is to have a referendum later this year, has not asked for, and does not have, such a clause.

Europe is having to make difficult decisions about outward-looking relationships with the rest of the world, economic reform and a new social dimension. As a nation with a global trading economy and a history of stop-go in economic policy and management, the question for us, which the euro assessment addresses, is not whether further engagement is, in principle, against the British national interest, but whether the practical economic consequences of euro membership are in British national economic interests, because the decision is irreversible—hence the policy that we have adopted of testing membership against strict criteria, investment flexibility, financial services, employment and growth, and convergence.

Sustainable convergence is essentially the stability test. It means that the British economy can live on a permanent basis with euro area interest rates, can advance our objectives of high and stable levels of growth and employment and, of course, can provide secure, sustained and stable funding of our schools, hospitals and other public services. Flexibility is being able, in the absence of exchange rate or interest rate flexibility, to adjust our economy quickly to any shocks that arise so that we do not put those objectives at risk.

The purpose, therefore, of the five tests is to assess whether we have secured for Britain convergence with our European partners that is settled and durable, which is the first test; sufficient flexibility, which is the second test; and whether we can also confirm conclusively and confidently to the British people that the potential benefits for investment, financial services, employment, growth and trade—the benefits that I listed in detail when I made my statement to the House of Commons, which are contained in the many documents that were produced on the day—can indeed be realised.

The five tests are our guarantee of stability, high and stable levels of growth and employment, and the proper funding of public services. To meet them would ensure that we do not put at risk our economy or our public services. To fail to meet them would risk repeating the exchange rate mechanism mistakes. Overall, the assessment concluded that, inside or outside the single currency, the competitive strength of the City of London is such that the UK financial services industry should continue to thrive. Subject to the achievement of sustainable convergence and sufficient flexibility, we also concluded that the tests for investment and employment would be met. We were especially interested in the views of many inward investors about how they saw the future.

The issue is the convergence and flexibility tests, and then the exchange rate and transition issues. On convergence, since 1997 the short-term interest rate divergence between Britain and the euro area has fallen from 4 percentage points to 1.5 percentage points after the interest rate cut announced by the Bank of England today. Long-term interest rates have virtually converged today at around 4 per cent., but while our assessment finds that convergence has been, or can be, achieved in the provision of small business finance, large company finance and personal finance—where, in fact, the UK economy is found to be no more interest-rate sensitive than others—it is the inflationary pressures that arise from the housing market that have led consistently, over the past 30 years, either to higher inflation in Britain than in other countries or to higher interest rates to keep inflation under control, and sometimes both.

The challenge of convergence when applied to housing is not, as some suggest, that we seek the same structure of the housing market or the mortgage market as the Germans, French, Dutch or Italians. All countries have, and will continue to have, unique features of their housing markets. The challenge is that the combination of house price inflation and volatility, and the impact of both on consumption, has generally led to interest rates that are higher than rates in other countries in order to deliver stability. Measures that reduce housing market volatility would reduce the extent to which interest rates need to take account of the housing market, and they would be good for industry whether or not the UK were to join the economic and monetary union.

Given the structural issues involved in meeting the convergence test and the steps that the Chancellor has set out to tackle them, what is his forecast of when the convergence test might be met?

I am not going to give a running commentary. I gave the assessment that we have made to the House of Commons a few weeks ago. I said that we would review the position prior to the Budget next year and report on progress. If there were sufficient progress, we would trigger a further assessment. I do not believe that it is helpful for me either to prejudge what might be announced next year or to give a forecast, as though I were a gambler on such matters. The important thing to recognise is that we will not short-cut or fudge the test. We will have a rigorous assessment and, before the Budget next year, a rigorous review. That is the best guarantee I should and can give to the British people.

The one thing that is absolutely clear—I think it needs to be said, given what we have heard from Conservative Front Benchers today—is that we will not repeat the mistakes that were made in the ERM era. Those mistakes were, incidentally, never to have an assessment, either public or private—[Interruption.]Let me explain to Conservative Members the extent of their problem. No assessment was ever made, internal to Government, of any detail—

Oh! So it would have been right, as an act of statesmanship, for us to ask for an assessment before it could be done?

The Chancellor cannot escape from his history on the matter. A year before we joined the ERM, he was asking for early entry. When we joined, the right hon. Gentleman and his colleagues in the shadow Cabinet never asked for an assessment, never said it was the wrong rate and never criticised that decision in any way, shape or form. Instead, they gave that decision their full and wholehearted support. That decision, which was a grievously mistaken decision, had the full support of the Chancellor, all his right hon. and hon. Friends, the TUC, the CBI, the Liberal Democrats—of absolutely everyone. The Chancellor cannot escape his history.

The shadow Chancellor was Secretary of State for Employment. He conducted no assessment of the employment consequences of entering the exchange rate mechanism, and the Secretary of State for Trade and Industry did no proper assessment of the investment and trade consequences—and now the Opposition try to blame us. They told us at the time that they had five conditions that had to be met. Those conditions were not met, and they still joined the ERM. They were never able to prove to us that the conditions were met.

The shadow Chancellor thinks that he has got out of the problem because he has made an apology, but I seem to remember that, as Home Secretary, he used to say that apologies were not enough. He said that the punishment must fit the crime. He used to tell us that punishment worked and that we should condemn a little more and understand a little less. Why is he the only surviving member of that ERM Cabinet who is still sitting on the Conservative Front Bench? He is a very fortunate man, but the electorate will not forget that he was responsible for the loss of a million jobs in manufacturing and unemployment rising above 3 million, even while he was cutting employment training schemes that would have kept people in work. So we will accept no attempt to blame the Labour party in opposition for the mistakes of a Conservative Government who brought us the worst recession since the second world war and caused 15 per cent. interest rates and 10 per cent. inflation. Until the Conservatives do more than apologise for those mistakes, the electorate will never support them for economic competence again.

I am grateful to my right hon. Friend for giving way. At the time of ERM entry, there was not only a complete lack of rigour in making any assessment, but the Government of the day also had a completely enfeebled negotiating stance, because the party was completely split on Europe—a split between those who wanted to come out and those who saw its practical benefits. Does he agree that that is still the case today? The Conservatives would be on their knees in the face of having to negotiate at a new intergovernmental conference, whereas I know that my right hon. Friends will stand up and fight for British interests.

My hon. Friend is absolutely right. [HON. MEMBERS: "Give him a job."] Job applications do not come to me; they come to the Prime Minister.

I intervene in the hope of understanding a little more and perhaps making a little bit of special pleading on the question of the stability of interest rates. My right hon. Friend and I know, as we both represent the paper industry, how incredibly important stability of interest rates is. My hon. Friend the Member for Glasgow, Anniesland (John Robertson) and I, along with other colleagues, were recently in Finland finding out about nuclear waste, but we heard about the paper industry there. Surely these industries throughout Europe need an indication of the stability or otherwise of interest rates? Can he be helpful on that point?

I am grateful to my hon. Friend. We represent adjoining constituencies, but I cannot say that I represent the paper industry, even though I use a great deal of paper. It is absolutely true that a number of companies are involved in the production of paper and that they represent a number of companies throughout the country that are worried about issues relating to interest rates and stability. I assure him that we will do nothing in any decision that we make to put the basic stability of the British economy at risk. It is precisely because we will not put the British economy's stability at risk that we introduced independence for the Bank of England and our new fiscal and monetary regime. It is also precisely for that reason that we will take no risks in the euro assessment, which will be conducted with rigour and in a way that is both transparent and comprehensive. I hope that he will agree that the documentation produced by the Treasury, which has been made available to every Member of Parliament—all the detailed work done by the Treasury on these issues has been made public—shows that we take these issues seriously. The future of both manufacturing industry and industry in services generally is uppermost in our minds as we consider these issues.

I was raising the question of convergence generally and specifically referring to the state of the housing market and the inflationary consequences that have arisen over many years from its volatility. To help balance supply and demand in the housing market further and reduce the scarcity of housing, which is an issue for many British people and has lain behind the long-term growth in house prices, in the national interest as well as the interests of convergence, the Deputy Prime Minister will shortly make further announcements on new house building with the aim of achieving existing planning targets in the south of England and building an additional 200,000 homes by 2016. That will include expanding the Thames gateway, which is probably the largest area of derelict land available for development in western Europe; releasing surplus public sector landholdings to further increase the supply of land for housing; and ensuring that regional and local planning authorities—I think that all hon. Members would wish to see this—respond to housing market needs, not least by encouraging land that has been allocated for commercial and industrial purposes to be used for housing unless a convincing alternative case can be made.

We have also been looking at the planning system. To speed up that system, the Deputy Prime Minister is giving planning authorities an extra £170 million by 2006; insisting that 60 per cent. of all major applications are processed within 13 weeks; intervening when planning authorities fail; taking powers to call in large planning applications in areas with housing shortfalls; and piloting a new planning advisory service to drive up performance. We are also considering—he will make an announcement at the appropriate stage—whether the poorest-performing local authorities should be linked with high-performing authorities, so that we can share best practice and achieve best results. So further housing market reforms will be put in place over the coming year.

I am very enthusiastic about the announcements from the Deputy Prime Minister. Has there been any discussion with the Scottish Executive about housing in Scotland and the similar planning issues that arise time and again in every local authority in Scotland? Will there be any liaison with the Scottish Executive on this policy?

Not only is there liaison on these issues, but a Scottish euro preparations committee will be formed by the Secretary of State for Scotland. That will involve representation from the Scottish Executive and the business community in Scotland. I believe that similar organisations will be formed—announcements will be made very shortly—in Wales and Northern Ireland. Of course, we are adding representation from the regions to the euro preparations committee that meets under my chairmanship and includes representatives of the Bank of England, the Financial Services Authority, the clearing banks and many other financial sector organisations.

Those further housing market reforms will be put in place over the coming year. They are right, in any event, for the British economy, as hon. Members in all parts of the House will agree. They will help to ensure that, by having a reduced propensity towards house price inflation in this country, stability in our economy can be further entrenched. In addition to the study that Kate Barker of the Monetary Policy Committee is leading to examine what more can be done to remove barriers to supply in housing, a further study, also with an interim report in the pre-Budget report, by Professor Miles of Imperial college, is examining the case for a long-term fixed-rate mortgage market in the UK and how we can help its development.

On convergence, I also announced to this House on 9 June that, subject to confirmation at the time of the pre-Budget report, I intend to change the inflation target at that time to the consumer prices definition. As is customary, I will provide all the supporting documentation setting out the detailed advantages of the new target at that time. The advantage of the current indicator, RPIX, is that it is known and well understood and has served us well. However, the advantages of the consumer price index, HICP, the harmonised index of consumer prices, which is internationally recognised, are that it uses a geometric rather than an arithmetic mean and so allows for consumers substituting cheaper goods for more expensive ones when relative prices change and can therefore more accurately reflect people's behaviour in the marketplace. It is also in line with best international practice; it gives a more complete picture of spending patterns as it takes account of spending by all consumers, including foreign visitors and pensioners, who are not part of the RPIX process in the way that one might have expected; and it is the most comparable measure internationally and is used by our neighbours in Europe. It also gives businesses and households the information that they need to make sound decisions on pricing and investment in the context of being able to make comparisons with other countries in this increasingly global economy. Given that pensions, benefits and index-linked gilts will be calculated on exactly the same basis as now, however, pensioners and claimants do not need to fear that there is any change that will directly affect them, and they will not lose out.

The second issue raised on 9 June when I made the assessment and announced it to the House of Commons was flexibility. The flexibility test that would have to be made is whether, if problems emerge, there is sufficient flexibility in our economy to deal with them. Although Britain is indeed a more flexible economy, flexibility means being able, in the absence of exchange rate or interest rate flexibility, to adjust our economy quickly to any shocks that arise so that we do not put at risk our objectives of high and stable levels of growth and employment and sustained and sustainable funding of schools, hospitals and other services.

The hon. Gentleman is the only representative of the Liberals here today. Every year they have called for us to join the single currency. His leader has said that it was a total mistake that we did not join in 1999: a decision that would have put the British economy into recession, as evidenced by the detailed assessment that we published. Given that he is the only Liberal who has bothered to turn up; he is not even the Treasury spokesman—[Interruption.]By popular request, I will allow him to intervene.

I am grateful to the Chancellor for that introduction. Perhaps my colleagues realise that as he has been politically successful in kicking the issue into the next Parliament, some of these economic issues are not substantive.

As regards flexibility, would any changes in the stability and growth pact that he seeks constitute preconditions before we could join the euro?

I am coming to that in a minute. There is no sixth test. The stability and growth pact is under discussion, as are the rules governing the monetary policy of the European Central Bank. We have been very clear since 1997 that we believe that the stability and growth pact will work better if it takes account of the whole economic cycle, if it recognises the importance of investment as well as consumption—of course, we have a major investment programme under way—and if it takes account of sustainable levels of debt. In the United Kingdom we have achieved debt levels of the order of 30 to 35 per cent., but other countries in the eurozone have debt levels of 110 per cent., 105 per cent. or 100 per cent. of GDP. Clearly, therefore, their capacity to borrow is far more limited than that of a country that has relatively low levels of debt and a sustainable fiscal position on that basis.

We have been discussing three changes in relation to the stability and growth pact, and the intellectual argument has moved firmly in our favour on this: first, taking more account of investment, not just consumption; secondly, looking over the cycle; and thirdly, investment. I hope that there will be general support in the House for that.

On the possibility of a sixth test, does the Chancellor concede that it might be advantageous to assess the risks and costs of staying out of the single currency area? Does he appreciate that for economies that depend in large part on exports—such as Scotland, or my constituency, with its whisky and food manufacturing sector—the time is right to assess the risks and costs of staying out of the eurozone?

I do not know whether the hon. Gentleman has bothered to read the 18 studies, which examine all those issues. As part of the five tests, we consider the advantages and disadvantages in relation to investment, financial services, convergence and all the other points that I mentioned earlier. The importance that certain industries attach to being part of the euro and the disadvantages that they have raised with us in relation to staying out are dealt with in the assessment, and we have come to a rounded conclusion.

The problem for the Scottish National party is that for the first 50 years of its history it wanted to break up the single currency area of the United Kingdom and retreat into a Scottish pound, but the nationalists seem to have abandoned that policy in favour of going straight into the euro. However, they cannot tell us how, in the independent Scotland that they propose, their monetary or fiscal policy would work. They cannot tell us whether they would still want the Bank of England to set interest rates in the interim or no.

They do not want the Bank of England to set interest rates in the interim. What would happen if the hon. Gentleman had an independent Scotland and we were still not part of the euro? Who would set the interest rates?

Perhaps the Chancellor will announce that we can have a referendum so that we can move as quickly as possible into the single currency.

The hon. Gentleman cannot answer the question as to what would happen if there was an independent Scotland and we were still not part of the euro. Would the interest rate be set by the Bank of England, would there be a separate monetary policy committee in Scotland, would there be a separate Scottish pound or would he work within the British pound? The SNP really needs to go back to the drawing board and think again.

I wonder whether my right hon. Friend has analysed the Welsh nationalists' position, which is even more complex. Their economic spokesman wants to make sure that we stay out of the euro for ever, but also wants to separate Wales from the rest of the United Kingdom: they advocate precisely what the Chancellor criticises.

My hon. Friend is right: there is no convergence among the nationalist parties of the United Kingdom. The Welsh nationalist party wants to stay out of the single currency and the Scottish National party wants to join, while the Liberal party wants to join tomorrow, or as quickly as possible. [Interruption.]For the Liberal party, every time we have a debate is the right time to join, irrespective of the exchange rate or the interest rate. I am sorry that the hon. Member for Yeovil (Mr. Laws) has to speak for both the leader of the Liberal party and the Treasury spokesman, because the Liberals' position is that they would have joined in 1999 at the first stage, and everybody now knows that that would have caused real problems for the British economy.

I give way to the hon. Gentleman once more, in recognition of the fact that he is a lone voice in the Chamber.

The Chancellor must not continue to misrepresent the position of the Liberal Democrats. He might do well instead to pay far more heed to some of the documents that we produce, including one from 2000, which showed that the exchange rate was then overvalued and signalled a target range of precisely the figure that he came up with in the five tests analysis.

The leader of the Liberal party said that he very much regretted that we had not joined on the first day that the single currency was formed. [Interruption.]Well, I have the quote. Perhaps it would educate the hon. Member for Yeovil and he can take it to use in his missionary work among Liberal MPs who cannot find their way into the Chamber. The Liberal leader said that

"Britain would have been a great deal better off as a founder member of the euro."
That is the formal position of the Liberal party, and the hon. Gentleman cannot deny that it is the position that was taken by his leader. He must also recognise, if he believes that the five tests assessment is a serious piece of work, that it would have been wrong to join in 1999 and that there would have been inflationary consequences for the British economy. The interest rate divergence was too high. Although Britain is a more flexible economy than it was in 1999, when the single currency was formed, flexibility means being able, in the absence of exchange rate or interest rate flexibility, to adjust our economy quickly. What measures do we propose to take to deal with that? First, to improve functional flexibility—that is, the flexibility of our wage and labour markets—we need to equip people with the skills that they need to meet new and different challenges; the Secretary of State for Education and Skills set out measures on skills yesterday.

Secondly, to achieve full employment we must do more to improve the regional and local labour market flexibility of our economy to get more of the long-term unemployed and inactive back to work, more successfully to match vacancies to jobs, and to increase the new deal's ability to respond in the event of a local or regional shock. Over the next few months, we will announce new measures that will help the unemployed get to work, help to deal with the large numbers of unfilled vacancies in many regions and localities, and help to deal with some of the problems that have arisen in relation to incapacity benefit and housing benefit. In return for greater local discretion for Employment Service managers, a new performance regime will accord higher rewards to jobcentre managers, with provision to change the management of the worst performing jobcentres.

Thirdly, we propose to strike the right balance between fairness and flexibility in the pursuit of full employment. We have already introduced a minimum wage, which now has all-party support in the House of Commons and a new tax credit system that will soon, I hope, have all-party support in the House of Commons—[Interruption.]After all, the tax credit system that we introduced is based on an original idea by Ronald Reagan in the United States of America. If it was good enough for the American Republicans, it ought to be good enough for the British Conservatives.

The Chancellor did not tell Labour Back Benchers that.

I am proud to acknowledge the role of American labour market policy in helping us to develop the tax credit—

Ronald Reagan, the American President. The problem is that Ronald Reagan is too right-wing for Conservative Members, and they will not adopt the policy of tax credits. [HON. MEMBERS: "Not too right-wing for you, then."]

Absolutely. The Opposition's response is interesting. The working families tax credit has worked in getting thousands of people back into jobs. The new employment tax credit will help single people and couples back to work, but for ideological reasons the Conservative party continues to refuse to support not only something that is a good idea on paper but a policy that works and gets people into jobs. Why do not Conservative Members support measures such as the working families tax credit and the employment tax credit?

The shadow Chancellor refers to the child tax credit, for which, Conservative Members claimed, no one would apply. They said that it was too complicated and that there would be no applications, yet 5.5 million people are receiving it. Conservative Members know that if they reject measures that help to tackle family poverty and get money to lower and middle-income families, they will pay a heavy price at the general election. I reiterate that 5.5 million families are receiving a benefit that helps family prosperity in this country.

We want to improve the working families tax credit and the related employment credit. With a national framework of fairness in place, it makes sense to acknowledge that a more considered approach to local and regional pay conditions, including in London and the south-east, where the low-paid in particular have lost out, offers the best modern route to full employment. In future, we will not only publish data on regional prices and inflation, but by next year we will ensure that almost all pay remits for public sector bodies, including the civil service, can incorporate a regional or local pay dimension within their nationally determined frameworks.

Today, we are publishing amended remits for the health service and Prison Service. We shall shortly publish the remits for schoolteachers and senior salary review bodies, taking account of local and regional conditions. At the same time, the Secretary of State for Work and Pensions will introduce reforms to improve labour market mobility, including housing benefit reform to remove disincentives to work or to move from one place to another.

Those measures, which will be introduced in the coming year, will make Britain, which already has the lowest unemployment of the main industrialised countries and has created 1.5 million more jobs than existed in 1997, the most employment-friendly country. The changes that we have had to make in Britain to render our labour market more flexible would, if applied through economic reform of labour markets in Europe, yield extra jobs.

The other form of flexibility is fiscal. Just as we in Britain are examining the way in which we advance in monetary policy, and the European Central Bank is reviewing its monetary policy strategy, European Governments, as I said in reply to the hon. Member for Yeovil, are rightly examining the way in which the stability and growth pact can become more effective. There is growing agreement that the fiscal rules of the stability and growth pact should be sufficiently flexible to make the right fiscal adjustments at every stage of the economic cycle. Several countries are setting up or considering new domestic procedures for faster and more effective adjustments to change.

In the principles that we have applied to British monetary policy, we insisted on clear, symmetrical rules, well understood procedures and enhanced transparency. We believe that the same principles should apply to any new arrangements for British fiscal policy if we were part of economic and monetary union. To ensure stability in the euro area, we are consulting, as a result of the publications on 9 June, on the case for an open letter system on fiscal policy and a new, additional fiscal rule. We propose a regular fiscal stability report, which is published to Parliament according to a preannounced timetable, thus ensuring that fiscal decisions are fully transparent and accountable. The report will contain an assessment of the gap between actual and trend output in the economy. When actual output materially diverges from its trend, we propose an open letter by the Treasury to Parliament, setting out the Government's response. In that way, in EMU, the principles that underpin our monetary policy regime and have successfully provided stability would be mirrored in a similar fiscal policy regime. However, we will not rejoin the exchange rate mechanism.

Our resolve to implement far-reaching reforms is the practical and best expression of our intent. In answer to an earlier question, I said that we would report on progress in next year's Budget. We can then consider the extent of progress and determine whether we make a further Treasury assessment of the five tests. If it were positive next year, that would allow us to put the issue before the British people in a referendum.

In line with our policy of prepare and decide, we are stepping up our preparatory work, expanding the membership of the UK preparation standing committee and establishing regional and national committees. A draft referendum Bill will be published in the autumn. We are considering paving legislation to finance the changeover and issuing a detailed report on euro preparations in Government. We shall publish that report later this year. We shall undertake a programme of consultation with all sectors of the economy throughout the UK. At every point, the national economic interest will be the deciding factor. There will be no fudge or short cuts, as happened with the Conservative Government's disastrous judgments between 1990 and 1992. There must be rigour at every point.

The Government believe in our membership of the European Union and reject the semi-detached policy for Europe that would be disastrous for jobs, business and trade. We also believe that engaging with an enlarged, reforming European Union is in the national economic interest and that we have a vital role in helping to shape the changing Europe as we move from the Europe of the trade bloc era to that of the global era. We believe that it is possible to build in our country a deeper, wider, pro-European consensus. It is time that sensible Conservatives united behind a pro-European consensus. Our approach is at odds with that of those who would rule out euro membership, even if there were a clear and unambiguous case for it and joining was shown to be in the national economic interest.

All our decisions will be made in the national economic interest. We have said that we support the principle of membership of the euro; we have told hon. Members the conditions that will have to be fulfilled; we have given hon. Members the measures that we will take and the reporting mechanism that we will use. I commend the Government's assessment to the House.

2.15 pm

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

I welcome the debate, not least because we have had revealed to us this afternoon the hitherto secret identity of the Chancellor's economic guru: it was not Balls after all; it was Ronald Reagan. It is a great shame that the Chancellor did not make that clear to Labour Back Benchers when he introduced his policies on tax credits. I wonder whether he will attribute to Ronald Reagan the authorship of the new policies on regional pay that he announced this afternoon, which caused such joy among Labour Members.

The Chancellor began his speech in Monday's debate by claiming that the documents from which he quoted were neither "sexed up" nor based on a PhD thesis. He repeated that claim this morning at Treasury questions. He is obviously keen to distance himself from claims that any document to which he refers is "sexed up" or based on a PhD thesis. I am sure his next-door neighbour will scrutinise those remarks carefully—although I do not wish to enter into that debate.

The conclusions on the euro that we are discussing this afternoon are so sexed up and dodgy that even the Chancellor has not been able to repeat his claim again. His conclusions come from a single source and I am afraid they cannot be backed up. But the source is far from anonymous; indeed, he is sitting directly opposite me, although of course whether the words are those of the Chancellor or of the Prime Minister is a different matter.

This is the second time in a month that the Chancellor has come to the House to explain the Government's position on the euro. Given the extent of the open warfare in the Cabinet that preceded his first outing, I was a little surprised to see him volunteer a second. But now of course it is quite clear that, compared with the splits on foundation hospitals, Iraq and top-up fees, going back to euro factionalism is a nostalgic exercise—a welcome break, which, by contrast, almost presents a picture of unity. And on this issue at least the battle lines have been drawn for some time. They know who is on which side, who briefs against whom and who wants the other's job.

But policy on the euro is not an issue that should be determined according to factions in the Cabinet. The conclusions that the Chancellor reached on 9 June and put before the House again this afternoon were simply not supported by the evidence that he published. As the Treasury's analysis states,
"the EMU decision is irreversible".
So the burden of proof lies with those who would seek to take such a momentous and irreversible step. In the oft-repeated words of the Chancellor, the economic case has to be clear and unambiguous.

Yet far from there being a clear and unambiguous case in favour of euro entry, any objective reading of the Treasury's own evidence, published by the Chancellor on 9 June, leads to the opposite conclusion. As the Chancellor himself said when he set his tests six years ago, the
"first and most critical
"is convergence"—[Official Report,27 October 1997; Vol. 299, c. 584.]
Unless that test is met, clearly and unambiguously, he conceded that jobs, prosperity and the national economic interest would be damaged if we joined. The evidence that the Chancellor himself published shows how far that test is from being met. The evidence shows that our economic cycle is
"strongly correlated with that in the US, somewhat more so than with those in Europe".
The evidence shows that, if we abandon the ability to set our interest rates to meet our own economic needs and instead adopt a one-size-fits-all interest rate for the whole of the eurozone,
"real interest rate movements in the UK might prove destabilising".
Those are the words of the Treasury documents themselves. And the evidence shows that, since 1997, the UK has had a weaker correlation of business cycle to the euro area than Germany has had. So all the problems that Germany has faced through having the wrong interest rates for its needs would be magnified here. Germany has 4.3 million people out of work. Its Economics Minister has said that recent interest rate cuts were "overdue", and that there was
"scope for further cuts yet"
while acknowledging that
"of course, the European Central Bank has to take account of the economies of all the member states, and so that sometimes leads to certain delays in its interest rates move in comparison with what would be required by the situation in Germany."
The evidence that the Chancellor himself published shows that the effect of the euro would be all too real in Britain, as it has been in Germany. It shows what the real effect would be on pensioners, for whom the Treasury concludes that
"overall the environment would be one of greater uncertainty."
It also shows what the real effect would be on homeowners, whom the Treasury evidence warns of
"particularly large swings in the housing market",
and on companies and employees, for whom the Treasury's evidence warns of cuts in output and jobs if wages grow without offsetting gains in productivity.

The Chancellor knows full well what the economic evidence—including that in the 18 volumes that he published—says. Yet on 9 June, he refused to put forward that case. He refused to put forward what he knew to be an honest assessment of the evidence. His statement on that day was not based on the national economic interest, or on economics at all. It was not even based on the perceived political needs of the country. Instead, it was based on the narrow partisan interests of a faction-ridden Cabinet and of a Chancellor of the Exchequer trying to keep in with both sides. The result was a ludicrous compromise that was cobbled together to try to satisfy the Labour party's factions, and which makes no sense whatever.

The Chancellor admitted that four of the five tests had been failed, yet he said that he and his colleagues would anyway go round the country saying how wonderful euro membership would be. The Labour party's eNews, which goes to all the party activists, put it perfectly:
"The Euro only met one of the government's five tests…and failed others on jobs and investment. However, the government made clear that ministers and others will mount a nationwide tour explaining how the single currency will benefit the people of this country".
So there we have it. How wonderful it will be to join the euro, they say, if only we can just resolve the minor matters of lack of convergence, absence of flexibility, the negative assessment of the effect on investment, and the euro's adverse effects on growth, stability and jobs. The score in 1997 was 4–1 against; the score now is 4–1 against. And the Government's conclusion? What a great victory for the euro!

The Chancellor and his colleagues are reduced to following the example set by the hon. Member for Leicester, East (Keith Vaz)—I am delighted to see him in his place this afternoon—and spending taxpayers' money travelling round the country extolling the virtue of a currency which few people want and which the Treasury's own evidence shows is not in the national economic interest. This will be the first 4–1 defeat in history to lead to a nationwide victory tour in an open-top bus.

On 9 June, the Chancellor was reduced to distorting the Treasury's own evidence in order to try to keep all the factions in the Cabinet happy. In his statement, he said that
"since 1997 there has been significant progress in achieving cyclical convergence."—[Official Report,9 June 2003; Vol. 406, c. 410.]
But the evidence is that not a single region in the United Kingdom is strongly associated with the European cycle. In that, we are unique in Europe. The Chancellor said that the City test had been passed, but the evidence is that
"to date the euro has not affected London's ability to compete in international wholesale markets."
The Chancellor said that homeowners in continental Europe had "consistently" had the benefit of lower interest rates. But the evidence is that mortgage rates in the United Kingdom average 5 per cent., compared with an average of 5.4 per cent. in the euro area. If inflation is taken into account, the gap is even wider.

The Chancellor said that we could gain up to 50 per cent. more trade by joining the euro and that national income could grow by 0.25 per cent. a year as a result. But the evidence supports
"the view that euro membership would not increase UK euro area trade by much."
On 9 June, I said that the Chancellor's figures on trade were based on studies of currency unions involving Angola and Mozambique, Burkina Faso and Chad, Vatican City and San Marino, and Tuvalu and Tonga. Some have claimed, as I think the Chief Secretary may be doing from a sedentary position now, that I presented a distorted impression of the Chancellor's analysis—that I gave too much prominence to those particular currency unions. Some might think that those were not the only countries that the Chancellor and his colleagues looked at. I have to confess that they would be right. There are indeed other countries included in that analysis. In the heat of the moment on 9 June, I am afraid that I did not mention the other currency unions that were studied—the currency unions involving Christmas Island and Kiribati, Anguilla and St. Vincent and the Grenadines, French Polynesia and Guadeloupe, and Gabon and Guinea-Bissau.

Why is the Chancellor reduced to presenting such a ludicrous case? Why is his analysis so distorted? It is, of course, because his statement was based not on the national economic interest but on trying to keep all the Cabinet's factions happy.

But the result of the compromise that the Chancellor has been forced to cobble together is more serious than just the propaganda and the deception. He intends to make real and lasting changes to economic policy in this country merely to satisfy the Cabinet's factions. Six years ago, the Chancellor said that Britain could join the single currency only when we could demonstrate a "settled period of convergence" with the eurozone. He said that this would come about only after a "period of stability" for the economy.

On 9 June, however, the position changed. The Chancellor can no longer sit back and wait for convergence of the UK and eurozone economies to occur naturally. The Cabinet's factions will not let him. Instead, he has set out measures that aim to shoehorn our economy into the structure that he thinks will fit the euro. Now, he is hell-bent on achieving convergence artificially when it would not occur naturally. No longer will he sit back and wait; he is going to try to wrench our economy into the euro straitjacket, whether it fits or not.

First, the Chancellor said that there would be changes to the housing market. This is not because the housing market needs changing, but because one faction in the Cabinet needs pleasing. So he will be trying to encourage fixed-rate mortgages. But was the former Governor of the Bank of England not right when he said that
"there are long-term fixed-rate mortgages if you want to take them up…the question is, is there an appetite for them?"
But to please the Cabinet's factions, the Chancellor wants to force-feed them to us, whether we have the appetite for them or not. He will be pursuing this course in advance of a euro referendum. The Bank of England's chief economist told the Treasury Committee what that would mean:
"you would certainly have to move interest rates more than you would otherwise have to do, to have the same impact on demand".
I am sorry that the hon. Member for Linlithgow (Mr. Dalyell) is not here to listen to that.

So, the result of the Chancellor's policy of cajoling people into taking out a mortgage product that they do not want will be more violent swings in interest rates. Despite all that, when the Chancellor's study is complete and the changes have been made, the evidence suggests that even then he will not achieve what he wants. His reforms will not change the fact that, as his own evidence shows, we have higher mortgage debt and more home ownership than France or Germany, more equity withdrawal, and house prices that have risen at double the rate in France and Germany. That will be true even after the Chancellor has messed around with the mortgage market.

That is not all that the Chancellor has in mind on housing to please the Cabinet's factions. He also has planning policy in his sights, as he reminded us this afternoon. His assessment talks of
"tough and credible measures, including intervention, where local authorities are not delivering housing numbers in high demand areas; and exploring whether, in the medium term, achieving the Government's objective will require a system of binding local plans".
The Campaign to Protect Rural England has warned that Government proposals could cause a further erosion of greenfield sites.

The Chancellor also plans the most significant change in inflation targeting for a decade—not because he thinks that monetary policy needs changing, but to please one faction in the Cabinet. He plans to make changes before a single vote is cast in a referendum, and irrespective of whether people want the euro or not. Monetary policy will no longer be based on the current measure of inflation, the retail prices index excluding mortgage interest payments; instead, we will adopt the eurozone's favoured measure, the harmonised index of consumer prices or HICP.

The Chancellor tries to justify that in two contradictory ways. First, he says that the new measure will be better, although apparently we shall have to wait until the decision is implemented to see a comprehensive list of what he considers to be its advantages. Normally when people propose a new policy they set out its advantages at the time. Secondly, he implies that it will not make much difference anyway. In his 246-page assessment of the five economic tests, just one paragraph is devoted to the issue. It states that over the long term the current inflation target corresponds to around 2 per cent. for HICP. Yet had the Bank of England been set in January 2000 the HICP inflation target that the Government now suggest, it would have missed that target repeatedly. On 12 occasions since then, HICP inflation has been below 1 per cent. Each time, the governor would have needed to send the Chancellor a letter explaining the reasons for the failure.

Had the Government set the inflation target that they now suggest, monetary policy over the last three years would have been significantly looser than it has been. In fact, the latest figures show that RPIX exceeded HICP by the widest margin for 14 years.

Where is the Chancellor's analysis of the effects of this change? Where are the pros and cons of excluding housing costs from a price index in a country where those costs are so important? Where is the estimate of what such a change would mean for interest rates when the gap between the two measures of inflation was widening? What will be the effect if, in future, policy based on HICP is loosened at a time when RPIX is rising? The Chancellor's only analysis has been of the effect on the factions in the Cabinet, because that is the only test he cares about now.

Given that the Chancellor strongly advocated entry to the exchange rate mechanism—which was unsuccessful but reversible—and given that he now favours, in principle, entry to the European central currency and the running of our monetary policy by people whom we do not elect and cannot remove, does he now recall the wisdom of Kipling, who wrote:

"The burnt Fool's bandaged finger goes wabbling back to the Fire"

My hon. Friend makes his point with characteristic eloquence, and I entirely agree with him. Perhaps, however, he makes the mistake of assuming that the Chancellor's approach to this matter is rational. As we know, his approach to the whole question is determined simply on the basis of the faction fighting in the Cabinet.

The Chancellor is also consulting on a new fiscal policy in the event of our joining the euro. He is not content with merely abandoning his monetary policy; he must abandon his fiscal policy as well. Since becoming Chancellor, the right hon. Gentleman has gone to great lengths to boast about his fiscal policy framework and his supposedly cast-iron fiscal rules. If we join the euro, however, that framework is set to change. The Chancellor will have to introduce a third rule allowing him to do what Governments stopped doing 30 years ago, and try to fine-tune the economy with tax changes. Governments gave that up 30 years ago because it did not work, but the Chancellor has to try to do it again, because he will have given away the ability to set interest rates. He is giving away the nutcracker, so out comes the sledgehammer to crack the nut instead. That is why his own evidence says that
"fiscal policy may need to be more activist"
if Britain joins the single currency.

My right hon. and learned Friend has identified an important point. The problem experienced by Finance Minister Eichel in the Federal Republic of Germany, to which he alluded earlier, is precisely the one that he describes. Forcing through a reform package of taxation against the predispositions of the Social Democratic party has proved to be exceedingly difficult, and in the meantime German unemployment remains inexorably high.

That is true, but the change that the Chancellor is embracing needs a little more analysis. We must consider what it will mean in the real world. According to John Butler of HSBC,

"very important and frequent swings in tax rates"
will be required. The Chancellor's documents list the taxes that he has in mind: VAT, excise duties and taxes on housing. "Investment in housing", his documents complain,
"is relatively lightly taxed compared to other investments".
The Chancellor has spent six years "converging" Britain with European levels of business tax and European levels of red tape. Now it is the turn of homeowners.
"Tax instruments affecting the housing market have some immediate appeal".
his documents say, and stamp duty is singled out. What level of tax rises has he in mind?

Will the right hon. and learned Gentleman give way?

I am afraid that the hon. Gentleman will have to listen to this for a little longer.

Replicating the average level of stamp duty in France. Germany, Italy and Spain would involve a fivefold increase in the tax paid by people buying properties valued at between £60,000 and £250,000. That would increase the amount of stamp duty paid on a £100,000 house by £4,000.

I now give way to the hon. Gentleman. I look forward to hearing him explain how he will justify that sort of increase to his constituents.

Can the right hon. and learned Gentleman explain why the United States, with a common interest policy, does not experience the vast swings of tax policy that he describes, yet is perfectly well managed economically?

The United States is one country. It has much higher labour mobility. Its people speak one language. It has a system of substantial fiscal transfers between one state and another. The only reason for entering the euro is to build a country called Europe. Those who want to build a country called Europe are absolutely right to be in favour of joining the euro, but if there is no wish to build a country called Europe there is no justification for joining.

The increases in stamp duty are not the only tax increases identified in the Chancellor's own documents. Everything that I am saying is based on those documents. They say that existing powers to raise taxes such as VAT may not be enough, and that the limits may have to be widened if we join the euro. The fact that the existing powers allow the Chancellor to increase VAT to nearly 22 per cent. gives some indication of the sort of tax rises that he has in mind.

None of it would work anyway. The Treasury's own evidence lists all the reasons why discretionary fiscal policy has failed in the past. I think I just heard the Chancellor ask, from a sedentary position, "Who wrote this?" The answer is the economists in the Treasury. It all comes from the 18 volumes of supporting documents that the Chancellor produced on 9 June.

Listing the reasons for the failure of discretionary fiscal policy, the Treasury says that there are "complexities" and "practical difficulties". It cites studies showing that the policy was a destabilising influence. The Chancellor's permanent secretary and his chief economic adviser have written a book about what a mess it all was, and how wonderful it is that we have left all that behind. But now, as the Institute for Fiscal Studies puts it, it is "back to the future". It says:
"The idea that tax rates should be used actively to manage the amount of spending power in the economy has been out of fashion for three decades, but Mr. Brown is willing to turn the clock back".
That is not all. This is the Chancellor whose allies told The Independent inFebruary:
"If the tests have not been met, we should rule it out for the Parliament. You can't keep looking at it every six months or a year until you get the right result. People would see that as a political fix rather than a decision taken on economic grounds".
But a political fix is exactly what the Chancellor announced.

The Chancellor once used to say that to join the euro successfully,
"we must demonstrate a settled period of convergence."
And to "demonstrate sustainable convergence", he said,
"will take a period of years".—[OfficialReport, 27 October 1997; Vol. 299, c. 584–85.]
After all, if our economy looks similar to the eurozone economy, how do we know that so-called convergence is real, and that it is not a case of ships simply passing in the night? But on 9 June all that changed, when the Chancellor told the House that far from judging sustainable and durable convergence over a period of years, he will give it until next March, when he may look at the tests again. So we have no convergence to speak of now, but the Chancellor is asking us to believe that we might have "sustainable and durable" convergence in eight months' time. Four in five tests have been failed, but the Chancellor is asking us to believe that all five might be passed "clearly and unambiguously" in eight months' time.

What of all the reforms that the Chancellor says are required to bring that about, such as changes to housing finance, labour market flexibility, regional and local pay structures, new inflation targets, reform of the stability and growth pact, and reform of the European Central Bank and of the economies of the eurozone? All of that is to be completed well before next March, to provide time for the result to be assessed afterwards. But in fact, this week the Prime Minister gave the game away when he suggested that the referendum could take place before the reforms are fully implemented.

So there we have it: the issue is not completing the reforms and assessing the results. So much for assessing sustainable and durable convergence over a period of years! Now, convergence is to be judged on the basis that these reforms just might, eventually, get under way. So not only will we not know whether the ships are just passing in the night; the ships will not actually be anywhere near each other. They will just be on the way, and hopefully they may meet, this year, next year, sometime—or never. What an absurd basis on which to make irrevocable changes to the economic future of our country.

As Steven Andrew of the asset management company ISIS said:
"It borders on the incredible to suggest a significantly different conclusion can be sensibly reached within such a brief time frame".
Even the Institute for Public Policy Research, the Government's favourite think-tank, says that it is "implausible" that progress will have been made by next year on the
"long-term barriers to euro entry"
that the Chancellor identified. So why is the Chancellor continuing the uncertainty in this way?

It is clear that the policy that the Chancellor has now adopted on the euro was based not on logic, and certainly not on the national economic interest, but on the narrow, partisan interest of a faction-ridden Cabinet, and on the narrow, partisan interest of a Chancellor looking to keep in with both sides. None of this would matter quite so much if he did not mean it and he was just taking his colleagues for a ride, but his policies will affect people before a single vote is cast in a referendum. It is the country that is being taken for a ride. Business will now pay the price of the Chancellor's rolling assessments and rolling uncertainty. Households will now pay the price of his attempts to force our economy to "converge". And the whole nation will now pay the price of the Cabinet's faction-fighting—a nation that says that its priorities are hospitals, schools, crime and tax, but which sees the Government continuing to waste time on the euro.

To curry favour with those factions, the self-styled "iron Chancellor" has announced that he was prepared to ditch everything that he claimed he stood for: his monetary policy, his fiscal framework and his so-called prudence. Some of it will go now, irrespective of whether we join, and he has no qualms about abandoning the rest if we go in. The Chancellor's approach is now clear for the whole nation to see. After all the fine talk of the last six years, when it came to the crunch, this Chancellor has chosen to sacrifice his credibility for partisan reasons; and now that it has gone, he will find that it has gone for good.

The Chancellor may have thought that the compromise that he agreed on 9 June was worth it for a quiet life. He may have thought that the price of the policies that he has now adopted would be paid by others than himself. He may even like to pretend that it was really nothing to do with him, but ultimately the content of that statement was his responsibility, and in lost credibility and respect he may find that he has paid the biggest price of all.

Order. I remind all Members that Mr. Speaker has imposed a 15-minute limit on Back-Bench speeches.

2.44 pm

It is a pleasure to speak in today's debate, and I begin by thanking the Chancellor for the Treasury's response to the Select Committee report on the euro. In particular, I want to thank him, on behalf of my colleagues, for saying that the report is an important contribution to the debate. I remind the House that this report was unanimous—a fact that demonstrates that individuals throughout the House can come together and examine a complex and sensitive issue in a serious way. I want to compliment my colleagues on their long-term contribution to this debate.

We did not undertake a running commentary on the Chancellor's tests, but we did identify key questions. For example, are they the correct tests and does the technical and preliminary work cover the relevant areas? Also, how did other countries prepare—or how are they preparing—for entry, and what were their changeover plans? I hope that the report can be a template for the ensuing debate, because we need a long and sustained discussion on this issue.

I commend the Chancellor and the Treasury for the rigorous economic analysis that they undertook. A look back at the 20th century reveals the debacle of sterling, which began in 1925 with the gold standard and continued in the 1940s. Devaluation occurred in 1967, and the debacle culminated in our exit from the exchange rate mechanism. The shadow Chancellor's imprecision is admirable, as he was very much involved in the ERM decision. We can imagine him and other members of the then Cabinet in Horseguards Parade, listening to the radio to discover the latest value of sterling, and to see where their policy would lead them. I do not call that decision making—I call it an utter and total shambles. If he wants to show the necessary degree of humility today, I shall be delighted to give way to him.

The hon. Gentleman must know that I have said on countless occasions that the decision in question was a terrible mistake, and that I fully accept my share of responsibility for it, because I was a member of the Cabinet at the time, but unlike Labour Members—who were fully supportive of that decision before, when and after it was taken—I have learned the error of my ways. I am determined that the people of this country should not again have to go through the hardships that they went through after that decision was taken.

For the shadow Chancellor, that is an example of consistent humility, and I shall be quite happy if he signs up to it, but in practice, one week he says that he is humble, and the next he becomes arrogant on this issue. The point is that it is those in government who take the decisions; it is not the Opposition who take them. We have to make the economic tests rigorous, and I should like him and the rest of the official Opposition to sign up to that principle. Economic tests are extremely important, and the Committee was unanimous in recognising that fact.

Although the five tests are extremely important, there is a debate as to whether they are clear and unambiguous. At the end of the day, some form of judgment on them is essential.

It is customary when candidates sit examinations that they can never pass that somebody says to them at some point, "I wouldn't carry on wasting your time." At what point should we say to the Chancellor that there is no point in trying to pass these tests, because we are not going to?

That position derives from a stubborn and intellectually ignorant base. The issue that we must engage with is Europe, but where are the Tory party coming from in this regard? On GMTV on 1 May 1999, the former shadow Chancellor, the right hon. Member for Kensington and Chelsea (Mr. Portillo)—he is in his place—said, with determination and sureness:

"We've always said that we don't know whether the principle of a single currency is right."
Is that the correct stance for 2003, as we in Europe look forward? Is the principle of a single currency correct or not? What is the Tory party position? There is so much obfuscation that we cannot engage in a reasonable and rational debate. That is the core of the issue today.

What we heard from the shadow Chancellor a few moments ago was an elucidation of all the negative aspects: nothing positive and no engagement in the debate on Britain's place in Europe. That reflects the negative position of Conservative Members, and they will never make electoral headway until they realise that they have to be honest and open with the electorate and engage in a constructive debate.

From a personal point of view, I would like to comment on the fact that only one of the five economic tests has been passed. That is similar to the position in 1997. In the coming weeks and months, I would like the Chancellor to elaborate on the tests, because I believe that significant progress has been made in several aspects of them. For example, on convergence, the Chancellor himself said in a report this morning that "significant progress" had been made, and I well remember Professor Michael Moore of Queen's university Belfast telling the Select Committee that there would be no convergence
"until Britain joins the monetary union."
Convergence requires a process of involvement in monetary union and I would like the Chancellor to take account of such comments.

We are currently one of the most flexible economies in Europe. Yes, more could be done, and I applaud the establishment of the review on housing and labour market flexibility, but the Chancellor should report on that matter in a reasonable time. Professor David Miles, whom he appointed to examine the issues, gave evidence to the Committee, and I questioned him on how long it would take to move over to fixed interest rates. He said that it could take several years. The question is whether we are satisfied that sufficient progress has been made, or whether we wait for full completion in respect of the housing market, which could be detrimental to our medium and long-term interests in Europe.

On investment, are we not already losing out in existing circumstances? Several witnesses spoke about that, including the president of Alstom in the UK and the chief executive of Siemens. Niall Fitzgerald of Unilever made a submission in which he made it clear that the company was already suffering from the current position. The president of Alstom was equally clear in saying that, if hard facts were wanted, staying out of the euro would mean that, within two or three years, he would have to recommend transferring 50 per cent. of the UK's manufacturing jobs into the eurozone economy.

Has my hon. Friend seen the latest figures on foreign direct investment, which show a further fall in the value of FDI coming into the UK over the past 12 months?

I have seen those figures, which make the problem even more urgent. Constituencies such as mine, which has a whisky interest and greatly depends on exports to Europe, will very shortly start suffering if a decision is not taken.

The Chancellor told us that the City test was passed. Members of my Committee had regular and extensive discussions with individuals from the City, and it is fair to describe the City's position as agnostic—it will make money irrespective of what currency it is in. That is basically what City people told us, but we also have to consider the issue of regulation and euro regulation. The City of London is twice the size of its nearest competitor, Frankfurt, but regulation in Europe will increase over the years, which will be to the detriment of the City. As my hon. Friend the Member for Bexleyheath and Crayford (Mr. Beard) said, people in the City are aware that in the longer term it could be disadvantageous to the City, so they are turning their minds to a future in the euro.

The last test was jobs and growth. The figures will be important in the medium term, but there can be no doubt about the danger of longer-term detriment. The Chancellor made it clear in his opening speech that we depend on Europe for 3 million jobs, and we have £154 billion of imports and £140 billion of exports. That is hugely significant, so we have to be careful when so many jobs are at stake. The hon. Member for Moray (Angus Robertson) made an important point about that, which has not received the prominence that it should have. The status quo will no longer be an option. The ground is moving under our feet, and if we do not recognise that, it will be detrimental to both our medium and our long-term interests. The status quo is no longer an option.

Public understanding was the last issue that the Committee examined. We feel that the public have a right to know the parameters—

I would like to bring my hon. Friend back to the five tests. He made historical analogies earlier when he spoke about the gold standard at $4.80 in 1925, making the point that we joined the exchange rate mechanism at far too high a rate. Is the exchange rate itself important enough to be one of the tests?

We heard evidence about that, and one of the witnesses described it as a sixth test. The report also makes considerable reference to the issue. Several witnesses were asked what the most suitable exchange rate would be, and the former Governor of the Bank of England came close to saying that the current level was almost correct. The exchange rate is an important matter. Professor Simon Wren-Lewis, the author of a study commissioned by the Treasury, mentioned 73p as an appropriate exchange rate, but in the Chancellor's response to our report, the Treasury did not—and I am not surprised—tie itself down on that. Several members of the Committee felt that we were roughly at the level at which we should contemplate going in, but that is a matter for the Government.

On public understanding, the polls suggest that people are about two to one against euro entry, but I do not view that as a case for packing up and moving away. Rather, it is a case for having a long and sustained debate. Intelligence from various studies suggests that the UK population is the least educated in respect of understanding of Europe. Being at the bottom of the league is disgraceful. It does not reflect on all of us in this place and it is crucial to aim for greater public understanding.

I am reminded of 1991 when the Maastricht treaty was under consideration and the Deutschmark was effectively signed away. It was said, "What?—you cannot be serious." There was no understanding. Is it not the case that this country's scepticism is not the result of any lack of understanding, but of people's genuine understanding of the intimate connection between losing one's currency and losing control of the political future?

I do not believe that 1991 is a very good example. People make up their minds before finding out the true position, and many people in the country do not understand it. The politicians—all of us—have not been good enough at communicating to people in the country. When we talk, people often do not understand our language. We use a Westminster-type language, whereas we should aim for greater clarity in the debate.

I believe that the Government missed an opportunity in the last reshuffle to appoint a Minister for Europe to the Cabinet.

Absolutely not. I am delighted to have the opportunity to elucidate and to criticise from my present vantage point, but a Minister for Europe would have an opportunity to put the case in the Cabinet. I welcome the new European strategy committee that has been set up by the Prime Minister, but I hope that its members will bear in mind the window of opportunity that we have for joining Europe. Professor Francesco Giavazzi, a former employee of the Bank of England and now at Milan university, has said that if we wish to influence the European financial architecture in the European Central Bank and the stability and growth pact, we have only a period of two or three years to do so. We should remember that the 10 accession countries will also join, so the ECB could have 30 members in just over a year's time. It is obvious that UK political influence will lessen the longer we stay out.

I want the euro roadshow to go on the road. Before the next Budget, the Government need to demonstrate that progress has been made. It was clear to the Committee that the debate on Europe is confusing, complicated and irrelevant to people's everyday lives. It needs to be more intelligible and less arcane. We have a duty to achieve that, and I hope that the Government will undertake the task as soon as possible.

3.1 pm

I am delighted to follow my former colleague and boss on the Treasury Committee, the hon. Member for Dumbarton (Mr. McFall), in the debate, and I congratulate him on the report on the euro. I also congratulate him on managing to bind together a coalition of that Committee's members, from all political parties represented on it, to produce a high quality report that has helped to inform the debate in this area.

This is an important debate, but it is not very timely. It is important because, as the Chancellor said to the Treasury Committee, when he gave evidence on the issue, joining the euro is
"perhaps the biggest peace time economic decision we as a nation have to make".
It is not very timely because we know that the decision has already been made, largely for political reasons, and—however much the Chancellor pretends that we are undertaking a serious analysis of the five economic tests, that we will revisit the issue next year, and that we may then have another assessment—we know that the truth is that he has won his battle with the Prime Minister and has succeeded in kicking this issue into the next Parliament at least. Perhaps that is why the Chancellor has failed to attract more Liberal Democrats to the debate today.

What is Liberal Democrat policy on this issue? Does the hon. Gentleman still think that it would have been right to join the euro on 1 January 1999?

If the hon. Gentleman—a former colleague on the Treasury Committee—had listened to my earlier comments, he would know that the Liberal Democrats said clearly in 1999, 2000 and 2001 that the pound was overvalued. In fact, we published documents to that effect.

It is tempting to go through the 18 documents of economic analysis published recently by the Treasury, but that would be to miss some of the serious points that surround what is not only an economic decision but a political issue. The hon. Member for Dumbarton and other colleagues from the Committee will remember the evidence given in a memorandum, as part of their inquiry, by Peter Riddell, the respected economic and political correspondent on The Times. He said:
"The Government's assessment of euro entry is flawed, both in structure and in implementation. The exercise elevates the Chancellor's five economic tests to an exaggerated status and seeks to separate constitutional, political and economic issues, which are, in practice, inter-linked. Therefore, basic structural issues of whether Britain should join the euro are confused with cyclical ones of when the time is right."
I agree with that analysis and we must recognise—it is obvious to those outside the House—that people make their judgments not only on an economic analysis, but on the constitutional and political implications of the decision. I shall therefore concentrate on three issues.

First, I shall probe the rather divisive decision-making process of the Government, to try to explore the real motivations and positions of Ministers, not least on the key issue of whether we will trade in the macroeconomic framework that we have in this country for that of the eurozone. Secondly, I shall consider some of the analysis in summary of the five economic tests; and thirdly, I shall consider some of the political and constitutional issues that the Chancellor alluded to in his speech when he unveiled the decision on the five tests, but which he seems shy of addressing otherwise.

Does the hon. Gentleman agree with the Chancellor that higher stamp duty and capital gains tax on the prime residence are a price worth paying to converge with euroland? If he does not agree, what other higher taxes would the Liberal Democrats suggest, because they would need to raise taxes to converge?

I am doing so. The intervention characterises the often unbalanced contributions from the Conservatives on this topic. The right hon. Member for Wokingham (Mr. Redwood) asked which taxes we would increase. He is too intelligent for it to have escaped him that if one were trying to use fiscal policy to cushion an economy, taxes could go down, as well as up. The right hon. Gentleman is scaremongering, and that is one reason why this debate is so ill informed.

If we consider the way in which the Government approach the decision, we can see a division between the various players. The Prime Minister rises above the economic debate, seeing mostly the political issues that arise. Every now and again, he implies that at some stage in the future it will be possible for the Government to make a positive decision. He also urges the right hon. and learned Member for Rushcliffe (Mr. Clarke), who is not in his place today, unfortunately, and my right hon. Friend the Member for Ross, Skye and Inverness, West (Mr. Kennedy) and various business men, to do his work for him, but he is unwilling to lead on the issue. In July 2000, the Prime Minister said on "Question Time" that if we carried on running the economy well, the Government would be able to make a recommendation—presumably to join—early in the next Parliament. However, when the next Parliament came along we discovered that we had had no leadership on the issue from the Prime Minister and the Chancellor, and that the issue had been kicked just over the horizon, yet again.

The late Lord Jenkins summarised the Government's approach to this issue, and to many other difficult issues, when he said:
"It is no good just waiting for the weather of public opinion to improve. It is no good just going down in the morning, looking at the rain, gloomily tapping the barometer and saying we cannot do anything today. The great Prime Ministers, those who leave a mark on history, are those who make the political weather and not those who skilfully avoid its storms and shelter from its downpours."
The Prime Minister's view on the euro is that it i s a decision that he wants to make, but not yet—in a couple of years or after the next election.

At the other end of the spectrum is the Treasury view. It is far more sceptical and perhaps owes something to Mr. Balls, the very influential chief economic adviser in the Treasury. He has had extraordinary influence over economic policy in this Parliament and the previous one. He was taken on by the Chancellor in 1994, just after he had written a pamphlet for the Fabian society in which he was especially critical of monetary union. He wrote:
"In short, monetary union in the manner and timetable envisaged in the treaty is an economically and politically misconceived project."
He went on to criticise trading in the macroeconomic model that we have in this country. Elsewhere in the Treasury is the distinctive figure of Mr. Gus O'Donnell. He is now the permanent secretary and was also an important figure in the Conservative years in government. He gave a remarkable speech to undergraduate students a year or so ago, in which he included a series of extraordinary cartoons that I understand he drew himself. I wish that we could put them in Hansard so that we could use them to show his scepticism about the co-ordination of monetary and fiscal policy in the eurozone, compared with the UK.

I accept that I am talking about distant documents and cartoons, but the undertone of scepticism about the willingness to trade in the macroeconomic structures that the Government have set up in this country runs through the chief economic adviser's recent Cairncross lecture, and some of the less noticed documents published when the Chancellor unveiled the decision on the five economic tests. One of those documents was called "Policy Frameworks in the UK and the EMU". The fingerprints of the chief economic adviser are all over it. He goes through the UK macroeconomic infrastructure, which he characterises as a "system of constrained discretion". He contrasts that, in many different areas, with the economic structures in the European Central Bank and in terms of the stability and growth pact.

The Government are raising some legitimate points about the way in which the stability and growth pact has been set up, and the Chancellor did so again today. Those matters include the constraints that the pact creates in terms of macroeconomic flexibility, and the ability to borrow money for investment purposes. We agree with the Chancellor that those matters deserve serious attention and that they need to be tackled to help Britain to operate flexibly and in a serious way in the eurozone. However, it is odd that the Chancellor should be keen to draw attention to these very important matters but then move away from saying that they will be fundamental to his decision to join the euro.

That is the first big issue that we must consider—the extent to which the Chancellor and the Treasury are serious about taking the decision to go into the euro. We do not know whether they have yet made the necessary mental leap, or are doing what the previous Prime Minister did. He adopted a wait-and-see policy that kept his options open, and that seems very similar to the position taken today by the Chancellor.

I asked the Chancellor earlier whether he would be disappointed if we were not members of the euro in five years time. As ever, he ducked the question and said that it was a matter of meeting the five economic tests. What does that tell us about the Government's economic strategy and commitment to the euro? There is no real commitment to decide and prepare. The strategy is to put off the decision. There is an unwillingness to acknowledge the potential gains that could arise from joining the euro.

The hon. Gentleman talks about potential gains, but my right hon. Friend the Chancellor of the Exchequer has managed the economy extremely well. The contrast with the eurozone is obvious.

The hon. Gentleman makes my point for me—that the Treasury, the Labour party and the Government have not decided whether they want to trade in their UK macro-economic model for the euro model. The hon. Gentleman exposes the uncertainties in the Government's economic policy, and the pretence that the Government have made up their mind about the issue.

Why would the Chancellor want to trade in the framework, when it is plainly doing better than the eurozone framework, as the hon. Member for Luton, North (Mr. Hopkins) noted?

I am grateful to the hon. Gentleman for that intervention. He and his party seem to have changed their minds about having an independent central bank in this country. It operates monetary policy much more effectively than was the case in the days of the right hon. and learned Member for Rushcliffe and his predecessors. They used to change interest rates every day, week or month, often to suit the needs of short-term party political management. [Interruption.] The right hon. Member for Wokingham (Mr. Redwood) is making comments from a sedentary position. If he does not believe that that is what happened, he ought to take time to read the memoirs of Lord Lawson. If the right hon. Gentleman has not read them before, I can tell him that Lord Lawson describes in several places the pressure that he faced as Chancellor, when the then Prime Minister wanted interest rates to be cut to get her out of short-term political difficulties.

I see that I have stimulated a debate. I cannot resist giving way to the hon. Member for Buckingham (Mr. Bercow).

It is a cardinal principle of the British political system that no Parliament should be allowed to bind its successor. Why then does the hon. Gentleman, on behalf of the Liberal Democrats, think that it is not merely acceptable but desirable to hand over responsibility for the UK's monetary policy to people whom we do not elect and cannot remove and whom, under article 108 of the treaty of Amsterdam, it is illegal to seek to persuade of the British Parliament's point of view?

The latter part of that point was used by Conservative Members to keep UK monetary policy under the control of elected politicians—

It is not ancient history as far as the hon. Member for Buckingham is concerned. I turn now to the first part of the hon. Gentleman's point. Is he arguing that, if we in this House believed that significant economic benefits could be realised for this country by joining the euro, we should take a decision that is completely different from the one taken by other countries in Europe just because we would not want to bind future Parliaments? Even if the benefits were extraordinary—to the extent of 10, 20 or even 50 per cent. of gross domestic product—

Let us say that GDP may be increased by 50 per cent. as a consequence of euro entry—

Would the hon. Member for Buckingham say that even then, he would reject joining the euro simply because it would bind future Parliaments? That is a bizarre suggestion.

I would certainly reject any idea that one could be assured that euro entry would be of such permanent economic advantage to the UK that it would outweigh the potential disadvantages of a sacrifice of national control. The hon. Gentleman asks a fair question, but the difference is simple. The Bank of England has operational independence, but Parliament can always change its remit. The same does not apply to the European Central Bank.

The hon. Gentleman's last comment is a fair point, but his position—and that of his party—has changed greatly on the matter.

I was not aware that the hon. Gentleman was previously an ardent advocate of operational independence for the UK central bank.

I shall give way once more, to the right hon. Member for Wokingham. Then I shall make progress, as many others want to contribute to the debate.

I am grateful to the hon. Gentleman. I was the chief policy adviser to the Prime Minister in the period that he mentioned, and I gave her advice on economics and interest rates among other matters. I assure the hon. Gentleman that the only consideration in the advice that I gave was improving the prosperity and employment prospects of the British people. I hope that he will withdraw his slur from the record book. The only time that Government's monetary policy went wrong was when we were slaves to Europe in the exchange rate mechanism—something that I opposed.

It is not I who wrote that record book, but Lord Lawson. His autobiography is an excellent work, and I recommend that the right hon. Gentleman go back and reread it. If he does, he will see why Lord Lawson recommended that there should be an operationally independent central bank—it was because he was subjected to bullying from the then Prime Minister. The book also shows that Lord Lawson also recommended a constitutional settlement for the EU. I shall deal with that matter in a moment, and try to provoke the right hon. Gentleman further.

I must make some progress.

The second major area that we must consider is the overall economic analysis—the judgment made within the five economic tests document and the preliminary studies. There, the Government are on better ground. The assessment that they have made and, in particular, their quantification of the potential gains from joining the euro are credible and significant. Some people have suggested that the Government's estimate of an increase in the trend rate of growth of the economy of about a quarter of a per cent. per year, which they claim is possible if we join the euro, is in some ways a trivial amount. People who suggest that do not understand the powers of compound interest and the huge impact that that sort of increase in the trend rate of growth could have on the economy and economic growth over time, or the fact that it could provide the resources that we need to improve our public services and tackle poverty.

I also find it more credible that the Government should come up with an estimate of that nature than with some of the inflated figures that are often produced by advocates of the euro, who like to pretend that it would be a universal panacea for every type of economic problem. We are more likely to convince people of the value of the euro and its economic benefits if our claims are modest, sensible and well informed rather than over-hyped. The Government have made a sensible judgment by coming up with that calculation. It shows how much wealthier the country could be over the years if we decide to go into the euro and achieve the gains so clearly spelled out in the Government's documents.

Until now, the greatest economic impediment to joining the euro has been not some of the issues that the Chancellor of the Exchequer has mentioned recently—one suspects as a smokescreen to give him time to delay the decision and kick it into the next Parliament—such as the changes in the housing market, but the overvaluation of the pound against the euro. Although the Chancellor insists on implying that the Liberal Democrats have been urging the Government to join the euro at all times in the past few years, he should be fair and admit that we have always acknowledged during that time that the pound has been seriously overvalued and that we could not contemplate going in at that level.

Indeed, the Chief Secretary will no doubt have read the excellent Liberal Democrat commission document to which a number of respected economists including Martin Weale contributed two or three years ago. In 2000, that committee assessed the long-term sustainable rate of the pound against the euro and came up with a range of 1.25 to 1.45, which turns out to be almost identical to the 1.37 mid-point that the Government have come up with in their economic assessment. As we are now much closer to that figure as a result of the appreciation of the euro in recent months, that removes one of the greatest impediments to joining the euro. It should be a reason for the Chancellor to stop finding bogus economic excuses among the five-tests document for delaying the decision as long as he wants for political reasons, and to begin to grapple with the serious economic issues.

The hon. Gentleman's comments have been largely confined to the domestic situation. If joining economic and monetary union and participating in the eurozone is going to open up a land of milk and honey and bring prosperity to the British people, why do the core economies of the eurozone have a much higher unemployment rate than ours? They have been in EMU since it started and their work forces do not seem to have done very well out of it.

If the hon. Gentleman looks at the performance of the eurozone economies since they adopted the euro, he will find that in seven out of the 12 countries growth has been faster than in the United Kingdom. Also, as many of the problems that those countries—

Such as Germany. Many of the problems may be due to other economic and social issues, not least reunification and the labour market.

If the hon. Member for Ruislip-Northwood (Mr. Wilkinson) presented an economic hypothesis to any serious economist saying that simply because particular eurozone economies have been growing slowly in the past couple of years it was evidence that the euro would not be in our national self-interest, he would be laughed out of court. That is not a serious economic analysis.

At least the Government have undertaken that analysis, even if the Chancellor of the Exchequer has written in the conclusions for the Treasury economists at the end of the process as a result of a political decision—[Interruption.]It is no use the Chief Secretary pretending that there are no politics in this; of course there are. He leads me nicely to the third and, regrettably, the final part of my contribution, which is about the constitutional and political issues involved with the euro.

It would be naive in the extreme, even though the Chancellor pretends that these are merely economic issues, to think that they do not have political and constitutional implications, as Peter Riddell said in his evidence to the Treasury Committee. It is obvious to anyone who is an elected politician and has to account for his or her views on the euro that most people in this country are immensely confused about the economic arguments for it—that is not surprising, given their complexity. They are tending to make up their minds on the political and constitutional issues associated with the euro.

I welcome the debate that we have had in recent months and the past year or so on the European Convention and constitution, as it gives us the opportunity to do what Lord Lawson recommended in his autobiography—again, I recommend that work to Conservative Members, who seem not to have read it for some time. It gives us the opportunity to define and limit more clearly the powers of European Union institutions and to ensure that in those areas where Europe can play a positive role—trade, the environment and so forth—it does so, but also to ring-fence Europe from those areas in which it does not need to get involved.

As the Chief Secretary knows, unless we tackle that issue and take on the political and constitutional concerns of our constituents, we will not be able to win a referendum on the issue. The real test—the seventh or eighth test, or whatever—that must have been uppermost in the Chancellor's mind when he made his decision was not only the economics and the fact that he still seems uncertain about trading in the UK's macroeconomic framework for that of the EU, but the politics. The lack of leadership on the issue since 1997 and the lack of any convincing European strategy on the part of the Government have meant that they have been entirely unsuccessful in shifting the opinion polls on the euro. Since 1997, we have been stuck at about 50 to 55 per cent. of the public saying that they would not want to join the euro. That must have been one of the overwhelming reasons why the Government did not decide to call a referendum. Presumably, it will remain that way until the Government, or at least the Chancellor, feel that a referendum can be won.

If we look slightly more deeply into the polls, we find that although people on both sides of the argument have entrenched views—as we have heard today—the overwhelming majority of the British people are waverers. They are willing to be persuaded by the economic arguments and, perhaps grudgingly, by the constitutional and political arguments on Britain's role in Europe.

The Conservative party has undoubtedly played a useful part, even including some of the more outspoken of its members, in highlighting some of the constitutional issues that need to be addressed and dealt with as part of the process of taking Britain into the euro. They have helped to identify some of the public concerns that need to be dealt with before we can win a referendum. My regret is that so many of them insist on doing so from such an extreme and implausible perspective—[HON. MEMBERS: "Rubbish."] The claim made earlier by the right h on. Member for Wokingham that fiscal stability would only mean higher taxes was an excellent example of that perspective.

The current leader of the Conservative party offered a further example of that view when he wrote in 1996—[Interruption.]The hon. Member for Hertford and Stortford (Mr. Prisk) laughs, but I am sure that the right hon. Member for Chingford and Woodford Green (Mr. Duncan Smith) has not changed his mind since 1996, when he wrote that
"the EU has become the legal framework not for containing Germany but for increasing German hegemony".
That type of extreme attitude to the EU will leave the Conservative party out in the wilderness, until it can enter the mainstream debate and acknowledge the value of our membership of the EU.

I commend to Conservative Members not only Lord Lawson's autobiography—

Order. I am sorry to interrupt the hon. Gentleman, but I must remind the hon. Member for South Norfolk (Mr. Bacon) of what was said from the Chair at column 1151 of the Official Report yesterday. It would assist the debate if there were fewer sedentary comments.

I am grateful to you, Mr. Deputy Speaker. I understand that these are sensitive issues within the Conservative party and I am trying not to provoke Conservative Members too much. However, I commend the contribution of pro-European Tories: for example, the contribution to the paper on the Convention on the Future of Europe that many Conservative Members of this and the other place signed up to, including the right hon. and learned Member for Rushcliffe. That paper noted:

"Where it can be clearly shown that we can achieve together what we cannot so effectively achieve separately, we have no hesitation in stating that the EU and its institutions must have the competence and the effectiveness to act for and on behalf of the citizens of member states".
That, politically and economically, is where most people in this country stand. That is what most of them believe in.

Over the next couple of years, I hope that the Government will be more robust on the issue and that they will show some leadership. In some of the documents that they have produced recently, they have set out some of the powerful arguments in favour of the economic advantages of the euro. I hope that they will help to communicate those to the electorate, but above all, I hope that they will lead on the political and constitutional issues on which they must persuade the public if we are to win a referendum on the vital issue of the euro.

3.31 pm

It is a pleasure to follow the hon. Member for Yeovil (Mr. Laws), my erstwhile colleague on the Treasury Committee. I am pleased to note that he is still as concise as he was then. I am struck, however, by the extraordinary lengths to which the Liberal Democrats have gone to ensure unity on their Benches on the subject of the euro.

I applaud the Government's approach to the complex issue of the euro. The analysis that has been provided and the accompanying studies should be praised for their breadth and depth. It is striking that we have not yet heard—at least I do not think we have—what the official Opposition think should be analysed and tested before deciding whether it is right to join the euro. They seem to accept that the issue is complex, but they cannot engage with the analysis of whether entry is in the economic interests of the country. The tests should not be rubbished; they should be studied, and if the other parties do not like the way the Government are carrying out the analysis it behoves them to suggest exactly what should be analysed and assessed, rather than taking such a dogmatic position.

I, too, want to address my brief comments to the report of the Treasury Committee. At the end of our report, we reviewed the possible positions that the Government and the country could reach during consideration of euro entry. Indeed, we anticipated and thoroughly rehearsed the position in which we find ourselves at present: namely, declaring that the Government remain, in principle, in favour of entering the euro; and that the economic conditions, as assessed in the analysis, are not yet right, but that the issue will be revisited at appropriate times in the near future. The Government continue to give positive signals, such as undertaking studies and policy initiatives designed to move the convergence process that has already taken place further along. They are, for example, looking into the mortgage structure and into changing the inflation index to that used inside the eurozone.

As my hon. Friend the Member for Dumbarton (Mr. McFall)—the Chairman of the Treasury Committee—mentioned in his contribution, we are talking about a window of opportunity that opens while we stand in this position and how long that window will remain open. It is a window of opportunity, but opportunity for what? It is the chance to play a leading role in shaping the core institutions of economic and monetary union.

The official Opposition think that the 18 studies are very good and contain some very sound advice that points to the obvious conclusion that we have not converged, that we are not going to converge and that is a waste of time and money playing around the pretence that we might.

I do not think that the right hon. Gentleman has read the studies carefully enough. If he revisits them, he will find that there is considerable analysis of the degree to which there is increasing convergence—that is very clearly spelt out—while other parts of the studies clearly indicate where convergence has not happened and what might need to be done to encourage it to happen. In fact, they are very balanced studies. That is why his intervention suggests that he may not have read them carefully enough.

Does my hon. Friend agree that one of the crucial comments in the studies is that on EMU and trade? It says very clearly:

"The emerging research consensus therefore…signals substantial gains to trade through membership of a currency union".
Given the importance that the United Kingdom places on trade, surely that extremely important comment points us in the right direction.

My hon. Friend is exactly right and reinforces my point about the importance of the studies and the depth of the analysis in them.

Why should we wish to converge with the economies of the eurozone? Would it not be better for our people to become richer than them, with higher employment and a better quality of life in this country? Is that not what our electors want?

The hon. Gentleman assumes that he knows what will happen decades into the future. As the Chancellor said, we now have to assess such things in the global context. We have to consider the United Kingdom economy in relation to the global economy and the deepening single market in the EU. If we take any risk or chance over engaging properly with that, the only price that we will pay is sacrificing this country's future prosperity, not enhancing it, as the hon. Gentleman seems to think.

I was talking about the opportunity significantly to shape the emerging institutions of economic and monetary union. Those institutions are in their infancy, and they will be subject to change, despite the language of rigidity that we sometimes hear from politicians and Governments currently in the eurozone. The reality is that the institutions will steadily solidify. Over time, they will become less subject to change and reform. Having adopted our current position as a country that is outside the eurozone, we need to ask how much influence we have in shaping its architecture, for how long we will have that influence and at what rate will it wane the longer we stay outside the zone. Clearly, there is an opportunity cost of not being in the eurozone, or being close to joining it.

Will the hon. Gentleman give an example of how those rules and institutions might solidify against Britain's interests?

I am grateful to the hon. Gentleman for asking that question: I am coming to precisely that point in my speech. First, let me answer in respect of the European Central Bank. It currently has its own definition of price stability, which it sets at between 0 and 2 per cent. That is a non-symmetrical target, and the Committee took a fair amount of evidence on that during our deliberations that led to the publication of the report. We found a lot of evidence to suggest that a non-symmetrical target has a tendency to be too tight and runs a risk of encouraging deflation. I was pleased to note that the Government acknowledge in their response to our report, which they published today, the strength of the point that our Committee made in respect of the ECB's inflation target.

Is not my hon. Friend understating the point about the ECB's policy being too tight? In fact, the eurozone is on the brink of deflation and a serious depression and would learn a lot from following our Chancellor's view that the asymmetrical inflation target should be rather higher.

I thank my hon. Friend, and I think that he reinforces my point. The United Kingdom has an important opportunity to influence the emerging architecture of economic and monetary union. We can be encouraged by a comparison of our architecture with that inside the ECB, and I suspect that many inside the eurozone look at the way that we do things in this country and are anxious to learn from it. My point is about whether we have the opportunity to influence that evolution the longer we remain outside the system.

The European Central Bank has a monetary growth pillar, which is becoming increasingly discredited and which it is likely to abandon. Other problems inside the ECB include the non-publication of votes, for which there is a credible argument: the bank is reluctant to have member states' voting positions revealed, as it is trying to act in the interests of the zone as a whole and not identify itself with country positions. At the same time, however, that creates a lack of transparency, and in contrast with the system that we use, it is a distinct negative for the current arrangements inside the ECB.

Reform of the ECB's governing council is a very important issue. At the moment, a scheme has been adopted that anticipates rotating voting rights, but it is a cumbersome, complex scheme that is yet to be agreed by member states. It creates the position, however, whereby the five largest members in the eurozone will vote on only 80 per cent. of interest rate decisions, which will present something of a hurdle in terms of convincing sceptics in this country about democratic accountability inside the zone. We made that point with some force in our report. I feel that the ECB's current scheme is not altogether credible and sustainable, and I believe that it will have to be subject to further reform. I would like to see the UK Government play a leading part in the continuing evolution of that mechanism.

Secondly, we clearly saw the need for the stability and growth pact. It deals with the potential problem of freeloading inside the zone and provides an essential fiscal framework, which must be aligned with monetary union. The evidence that we gathered in our inquiry, however, suggested that there was more emphasis on stability than on growth, on which there was not enough, which may account for some of the problems that we are now seeing inside the eurozone economies. We should be cautious before being too critical of the pact. Pre-entry steps, which were necessary, were not taken by some of the large countries now inside the zone. There was insufficient incentive for them to take measures in their economy before joining, but there is no lack of sanction impelling them to do so now that they are inside. In that sense, the first tests through which the pact is going are likely to be the toughest. Once it is through its initial difficulties, it might work more effectively.

We want to see reform, however, and I welcome the Chancellor's comments today and on previous occasions about the Government pushing for reforms to some of the rules of the pact. It is clear that the pact should allow for debt to be measured across the economic cycle, and it should be more flexible in allowing for borrowing for investment as opposed to supporting consumption. In addition, it needs to allow for short-term borrowing to be geared against the overall level of a country's debt. All those changes are consistent with the underlying rules of the pact but are not yet adopted within the model.

Our position is that staying out of the euro—which is a logical and sensible position at which to have arrived at the moment—but continuing to prepare for entry is not a cost-free option. We have much to offer the eurozone in terms of monetary and financial architecture. My concern, however, is that as an "out" we will probably punch below our weight until we are inside the eurozone.

The system will evolve accordingly and it will gradually solidify, but it will be much harder to negotiate changes or assert British influence in the formation of this architecture in, let us say, five years' time when we might be considering joining.

On the evidence, I believe that the position that the Government have adopted in relation to the five tests is the right one. However, given that we have adopted that position, I urge them to work hard to keep up our weight and influence inside the European Union in the best interests of securing a successful monetary union and ultimately, therefore, in the best interests of our country.