My Lords, the Government’s policy on membership of the single currency was set out by the Chancellor in his Statement to the House of Commons in October 1997, and again in his Statement on the five tests assessment in June 2003. The Chancellor announced in Budget 2006:
“The Government does not propose a euro assessment to be initiated at the time of this Budget. The Treasury will again review the situation at Budget time next year”.
My Lords, I am grateful to the Minister for that reply, although it was vague in many ways. However, it leads me on to my question. This issue is important, given that events are moving and, in particular, given that the owner of the five tests is poised to move from No. 11 to No. 10. If he does so, will we have more precision and urgency in this matter, recognising that the situation is changing in many important regards, or are the five tests in practice a mask behind which there is a determination that we will not join the euro-zone?
My Lords, I stress that this is the policy of the whole Labour Government. On whether the policy tests are a mask for some other policy, the answer is no. The Government have clearly set their policy on joining the euro when conditions are right, when it is in the country’s economic interest to do so and when the case is clear and unequivocal. The five tests are our stability guarantee. If we can satisfy them, the issue will be put to Parliament and to the country in a referendum.
My Lords, is it not a good job that we have not been part of this system and that the Monetary Policy Committee of the Bank of England has been free to manage conditions to promote continuing growth, low inflation and low unemployment in this country, in contrast to the economic stagnation of, for example, Germany? Given the difficulty of hitting on an interest rate that is appropriate at the same time for industry in south-east Wales and for the housing market in south-east England, is not the project for a single interest rate across a large part of the continent of Europe doomed to failure?
My Lords, we cannot conclude that the policy of a single interest rate is inevitably doomed to failure. It drives the need for flexibility and innovation in the economies that are potentially part of that zone. My noble friend is absolutely right to say that the assessment made in June 2003 was spot on. The growth rate in the period 2001 to 2005 was on average 2.5 per cent in the UK, 2.4 per cent in the US and 1.4 per cent in the euro area. There are key structural issues that need to be addressed by European economies.
My Lords, is there not more to the point made by the noble Lord, Lord Howarth of Newport, in that the criteria set for the Bank of England are not just about monetary stability but also about promoting growth? That is in sharp contrast to the criteria of the European Central Bank, which operates purely in terms of monetary stability. Even without the five tests, that factor alone would mean that it would not be right for us to go into the euro-zone while the European Central Bank operates on a completely different basis from that of the Bank of England.
My Lords, it is right to say that the mandates for the Bank of England and the European Central Bank are not identical. In particular, the European Central Bank does not have an explicit symmetric target for inflation. Both the Bank of England and the ECB are required to have regard to growth and employment. If you look at the minutes of the Bank of England, you will see that those issues are a factor in its deliberations.
My Lords, these Benches would like to congratulate the Chancellor on inventing and then manipulating the five tests in such a way as to keep us out of the euro for the past six years. Does the Minister agree that in practice there is only one test for euro entry, which is whether it is good for the British economy? Does he also agree that all the evidence to date shows that the massive costs of entry would not be outweighed by the relatively small benefits that might accrue?
My Lords, I agree that the test is whether joining is in our national and economic interest and whether the case is clear and unambiguous. The potential benefits of joining are reduced transaction costs, increased trade and currency stability. The noble Baroness is quite right to say that those issues have to be put in the balance against all the others. That is why the tests are so important. It is not right to say that the tests were manipulated. An extensive piece of work was done in 2003—I think that some 20 documents were published supporting the conclusions reached, and I should be happy to loan them to the noble Baroness for the weekend if she wishes. That underlines just how extensive the work was. It was a genuine assessment.
My Lords, does the Minister accept that a major cost of being outside the euro-zone is the major lack and loss of political influence for the UK, because the British Chancellor is simply not at the table when many of the key economic decisions facing the whole of Europe are being determined? Will he ensure that, if and when there is a further assessment of our membership of the euro-zone, the political consequences of not being a member are given due weight?
My Lords, it is not correct to say that we have not been at the forefront of political influence in Europe. We certainly were through the period of our presidency of the Union and we are at the forefront of many of the key developments. This Government have been pressing Europe to make the structural changes in its economies that are crucial for the success of the euro and to face the wider issues of globalisation.
My Lords, have the Government given any further thought to what is perhaps the euro-zone’s most important long-term design fault, which is the lack of a federal budget? When the noble Lord tries to defend the single interest rate, would he care to comment on the predicament in which Italy finds herself today?
Well, my Lords, in defending a single interest rate, I point out the benefits that that can have in certain circumstances, but a couple of answers previously I tried to explain that that must be put in the balance against all other economic considerations. A single federal budget is not on the agenda, as far as I am aware.