§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. McNulty.]10.23 pm
§ Mr. David Laws (Yeovil)
I am glad to be able to raise an issue of great importance to the Government's economic policy, and I am pleased that the Economic Secretary is in her place this evening. I am sure that she is eager to engage in the matters that we are to debate, which have to do with the five preliminary economic tests for joining the euro. Those tests are famous in this Parliament, but little debated.
That there have been so few opportunities to debate a matter so important to the country's economic and political future is unfortunate, not least because Conservative Members seem to have lost some of the enthusiasm for discussing the matter that they showed at the end of the previous Parliament. However, I am delighted that one representative of the Conservative party at least is with us this evening. The presence of the hon. Member for Mid-Worcestershire (Mr. Luff) is most welcome.
It is a great surprise that the Government should be so reticent about discussing some of the issues to do with the five economic tests for joining the euro, given their importance for the Government and the future of the country's economy. In particular, I draw the House's attention to a series of written questions that have been tabled over the past few months. The Economic Secretary replied to many of them, but many of the answers—no doubt through the fault of the civil servants involved rather than the Minister—have not been as full as one might have hoped. I therefore hope that she will use this debate to clarify the Government's position on a number of issues and shed more light on an extremely important issue.
To make it easier for the Economic Secretary to respond to some of the major issues, I thought that I would put to her five simple questions about the five tests and the work that has been done to evaluate them. I hope that it will be possible for her to respond to those questions in her reply. I look forward to that.
First, when did the Government start the preliminary work that is now under way on the economic tests for the euro? It does not appear to have started at the end of the last Parliament. We were told earlier in this Parliament that the work had suddenly begun. It would be useful to know when it began and, in particular, when it is due to be completed. We know that the evaluation of the five economic tests will not be completed until June of next year, but at the moment— I am sure that the position will change later this evening—we are at a loss as to where we are on the evaluation of the preliminary work on the tests.
My second question relates to an issue about which it has been difficult to flush out information from the Treasury. Who precisely is involved in evaluating the five economic tests? That appears to be relatively straightforward, yet it has proved to be astonishingly difficult to get answers out of the Government about which Minister is responsible for the preliminary work, which units within the Treasury are involved in it and how many officials are engaged on it. I hope that the Economic Secretary can shed some light on those issues.
263 My third question relates to the fact that it is obvious that any evaluation of the five tests must embrace the Bank of England because of its responsibility for monetary policy. We are aware from the Governor of the Bank of England that at least one bank official has been seconded to the Treasury to help with this work. Unfortunately, the Governor's correspondence with me on this point suggests that he is not sure of what the official is doing at the Treasury and what contribution he or she is making to the work. It would be most welcome to me and, no doubt, to the Governor, to know what the official is doing in relation to the five tests and the preliminary evaluation.
Fourthly, perhaps the Economic Secretary can also tell us what parts of the preliminary work have been evaluated to date. Which bits of the work are complete and which still need a significant amount of work?
My final question is about the work that the Government may or may not have done in judging what the sustainable long-term exchange rate for the pound is in relation to the euro. We have to resort largely to the newspapers to find out what the Government are doing on this important issue, and we understand from the Financial Times that they are using a variety of economic models from the private sector and some advisers and economists from the private sector to allow them to evaluate the tests and, in particular, make a judgment about the long-term sustainable exchange rate. That is vital in determining whether we have met the five tests. Perhaps the Economic Secretary will also reflect on that point in her speech.
What are the Government doing not just to test whether we have met the five economic tests, but to achieve them? As we know that the Government want to join the euro and therefore presumably want to meet the five tests, we presume that they are doing something to achieve them. We know that, over recent years, our interest rates have been above those in the eurozone and that there is a convergence issue. We also know that the Governor of the Bank of England and the Chancellor consider the current rate of sterling against the euro too high and would seek a devaluation of the pound against the euro before we contemplate joining it.
It would be immensely interesting to know what the Government intend to do and how they are co-ordinating their fiscal and monetary policies to achieve a lower exchange rate and lower interest rates. When the Governor of the Bank of England came before the Select Committee on the Treasury last week and was questioned on this point, he said that there had been no discussions with the Treasury's representative on the Committee, Gus O'Donnell, about this issue and that he was unable to factor any decision about the euro into the Bank of England's forecasts for inflation and the economy because he had no idea of the Government's intentions in this regard. He suggested that the Committee had as much idea as he did about what the Government were intending to do.
Surely that is of great concern if the Government are seriously trying to converge in relation to the euro and meet the five economic tests. We expected at least some discussion between the Chancellor and the Bank of England about how to achieve the five economic tests and 264 the convergence. Surely there would be some discussion about the way in which monetary and fiscal policy can work together to allow the Government to achieve those tests. It seems astonishing that there appears to have been no discussion between the Governor of the Bank of England and the Treasury or even within the Monetary Policy Committee about this issue. I hope that the Economic Secretary can not only tell us what work has been done on the tests to date and answer my five questions but explain how the Government are seeking to ensure that we meet those tests.
The final major issue relating to the euro, which was aired, to some extent, by the Chancellor last week in relation to the new Treasury White Paper involved structural and political reform within Europe and the way in which that may contribute to us meeting—or not meeting—the five economic tests. It has been no secret for some time that the Government are concerned about some of the structural aspects in Europe, such as how the European Central Bank operates, the lack of political accountability of its inflation target, and its unaccountability to politicians. Indeed, we understand that Mr. Gus O'Donnell has aired those concerns with undergraduates at various universities, although not in this place, unfortunately.
We know that the Government consider their own inflation target and the way in which the Monetary Policy Committee of the Bank of England is established to be a far superior model to the European Central Bank. However, we have no idea about what the Government intend to do to reform the ECB or whether that is a condition of joining the euro. We would be grateful for the Economic Secretary's insight.
Of particular importance to the Government's agenda for structural reform in Europe is the growth and stability pact. It was specifically aired in the White Paper "Realising Europe's Potential", which was released by the Government last week. For a long time, the Government have expressed concerns about the operation of the growth and stability pact and the fact that it is not consistent with their fiscal policies, which allow them to borrow money to invest in capital items in this country—sensibly, in our view. It is well known that the pact does not offer the Government that flexibility in economic policy and that that might therefore be a problem—a sixth test, as the Chancellor put it the other day—in getting this country into the euro. For a long time, the Government have seemed to think that they could get away with what they described in the pre-Budget report last year as a prudent interpretation of the growth and stability pact. That is an odd use of "prudent" as it is clear that the Chancellor's view of the word is that it means less rather than more prudent.
Until now, the Treasury's position appeared to be that there was sufficient flexibility in "prudent" to allow the Government to sign up to the existing growth and stability pact while retaining the flexibility to borrow money for capital purposes. We know that this is a vital issue for the Government because in the last pre-Budget report they said that they were planning toborrow modestly to fund increased investment in the country's capital stock.The Government's fiscal policy relies upon borrowing to fund the investment that Liberal Democrat and Labour Members believe is important for the country's future, yet we know that that is not consistent with the growth and stability pact.
265 The paper issued by the Government last week was a movement away from their reliance on merely a prudent interpretation of the pact towards its reform. The Chancellor spelt out that change of policy last week at Treasury questions although he failed to recognise that it was a change. He said that the growth and stability pact needed improvement in three areas: the economic cycle, public investment and debt sustainability.
If the Government's position is now that the pact is in need of improvement and reform rather than merely a different interpretation, is their policy that there should be a sixth test before we contemplate joining the euro? Will the Government suggest to the country that we should sign up to the euro in the absence of reform of the pact? That extremely important point was highlighted by the Government's announcement last week, and I hope that the Economic Secretary can shed some light on it.
There are other considerations in Europe, such as drawing up a constitutional settlement for the European Union that would define and limit some of its powers. As Liberals, my party and I have no problem with that. We believe that Europe should be able to focus on issues such as trade, environment, foreign policy and even perhaps defence, but it should not meddle unnecessarily in matters such as tax, social and spending policies or borrowing.
Will the Economic Secretary tell us more about the Government's policy on the constitutional convention? Will there be input from the Treasury on matters such as tax policy and spending and social policies? Will there be a Treasury obligation to obtain agreement on flexibility in those matters before we consider signing up to the euro? Will any of them form part of additional tests that the Government might impose, or are they embedded in the famous five economic tests that few people outside the Treasury seem able to remember?
§ Mr. Laws
I shall not rise to the bait offered by my hon. Friend. The tests are in my notes, but I do not want to detain the Minister.
I shall conclude my remarks soon so that the Economic Secretary has the longest possible time in which to respond and give us as much information as possible. I welcome the Government's suggestion last week that the growth and stability pact is in need of reform. The greatest hurdle against Britain's joining the euro is people's anxiety about some of the constitutional and political issues rather than the economic issues. That is almost directly opposed to the Government's view: they say that there are economic tests to be met, but no constitutional objections.
If we can deal with issues such as the growth and stability pact, the lack of accountability of the ECB and the dangers of unnecessary tax harmonisation rather than tax competition, we shall be more successful in persuading people that they need seriously to consider the prospect of joining the euro. I hope that the Economic Secretary will respond by saying more about the important preliminary technical preparations, by explaining how the Government are going to meet the five economic tests and by telling us how they will pursue their reform agenda in Europe to persuade the British people of the economic advantages of the euro.
§ The Economic Secretary to the Treasury (Ruth Kelly)
I should like to take the opportunity provided by this important and useful debate to address some of the issues raised by the hon. Member for Yeovil (Mr. Laws) and, of course, to restate the Government's policy on United Kingdom membership of the single currency.
The hon. Gentleman has raised a considerable number of issues. I shall attempt to deal with as many as I can during the short time available. The question that he seemed to put most often related to the number of tests and I hope to make that clear during my response.
Europe is fundamental to the UK economy. About 3 million jobs are directly affected by our economic ties with Europe. More than 50 per cent. of our total trade is with the European Union. The EU is our largest trade and investment partner.
In his statement on economic and monetary union in October 1997, the Chancellor said:The potential benefits for Britain of a successful single currency are obvious in terms of trade, transparency of costs and currency stability.The Chancellor also said thata successful single currency within a single European market would be of benefit to Europe and Britain".—[Official Report, 27 October 1997; Vol. 299, c. 583.]That is why, in principle, the Government are in favour of UK membership of EMU; in practice, the economic conditions must be right. That is the Government's policy, as it was set out by the Chancellor of the Exchequer in October 1997, and repeated by him in the House last week.
The determining factor underpinning any Government decision on membership of the single currency is the national economic interest and whether the economic case for joining is clear and unambiguous. We have consistently said that if that is the case, there is no constitutional bar to joining.
As the Chancellor said in his October 1997 statement, the five economic tests will define whether a clear and unambiguous case can be made. In the same statement, the Chancellor set out the five tests. These are, first: are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis? Secondly, if problems emerge, is there sufficient flexibility to deal with them? Thirdly, would joining EMU create better conditions for firms making long-term decisions to invest in Britain? Fourthly, what impact would entry into EMU have on the competitive position of the UK's financial services industry, particularly the City's wholesale markets? Fifthly, in summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?
The Chancellor said in his Mansion House speech in June 2001 thatto join in the wrong way or on the wrong basis without rigorously ensuring the tests are met, would not be in the national interest. Such a course would risk repeating past failures, would prejudice our stability and would be damaging for investment, business and jobs generally.
The International Monetary Fund stated in its 2001 article IV report on the UK economy that the five tests wereconsistent with the economic considerations which would be important for the decision to join a monetary union.
267 The Chancellor repeated only last week that the Treasury will complete an assessment of the five tests within two years of the start of this Parliament. The Government remain committed to that.
Once the Treasury has completed the five tests assessment, a recommendation will be made to Cabinet. The Government will then make a decision on UK membership of EMU. If the Government recommend UK entry, it will be put to a vote in Parliament and then to a referendum of the British people.
The hon. Gentleman called this debate because he is interested in the preliminary and technical work. The Government have been nothing but open about the nature of this preliminary and technical work. I am happy to respond to the hon. Gentleman by once again setting out the nature and content of the that work.
§ Mr. Laws
The Minister and her abilities are renowned in this place. May we take as read much of the Government's standard position on the euro, so that we have time to address some of the substantive issues raised this evening, in particular the Chancellor's comments last week about the economic growth and stability pact? Can the Economic Secretary say whether the Government would be willing to recommend that we join the euro without reform of the growth and stability pact?
§ Ruth Kelly
I will come on to the growth and stability pact, but I believe that the hon. Gentleman welcomed the full answer that the Chancellor gave to his question at Treasury questions last week. As he knows, the Chancellor is committed to a prudent interpretation of the growth and stability pact which recognises the full role that public investment should play, as well as sustainability of the debt. He has argued strongly for that at ECOFIN and will continue to do so.
On 4 November 2001, in his speech to the Confederation of British Industry, the Chancellor said:While the assessment has not yet started, the necessary preliminary analysis—technical work that is necessary to allow us to undertake the assessment within two years as promised—is underway.
The Chancellor once again made it clear in his reply to the hon. Gentleman at Treasury oral questions last Thursday thatafter the first detailed assessment of the five economic tests in 1997, we said that our policy was to prepare and decide and to make an assessment early in the Parliament. The assessment of the five economic tests has not yet started, but last year we set out the necessary next stage of preliminary and technical work."—[Official Report, 28 February 2002; Vol. 380. c. 823.]
As I repeated in the Westminster Hall debate in January, the scope of the necessary preliminary and technical work was set out in the original October 1997 assessment. Although there have been new developments since then, the underlying issues to be analysed remain the same and the five tests themselves are unchanged.
The Treasury released a paper in November last year entitled "Preliminary and technical work to prepare for the assessment of the five tests for UK membership of the single currency". Hon. Members can find a copy of that in the Library of the House. It sets out some of the key parts of the preliminary and technical work, although it is 268 by no means an exhaustive list as the preliminary work continues to evolve to take account of the latest technical research and analysis.
Let me give some details of the work taken from the paper, as the Chancellor did at Treasury questions last week.
§ Ruth Kelly
The Chancellor said that the preliminary and technical work is necessary to inform the assessment of the economic tests. We have committed ourselves to completing the assessment within the first two years of this Parliament, as the hon. Gentleman is aware. I have just stated that the nature of the preliminary and technical work is evolving to take account of the latest research and analysis. It would not be meaningful or right for us to give a running commentary on what stage that work is at, and I am not about to do so.
However, it is worth setting out what the work attempts to achieve. It updates the analysis on the cyclical behaviour of the UK economy relative to the euro area and the relative responses to economic shocks; on the mechanisms by which product, labour and capital markets adjust, and how well and how quickly they work; on the impact of the single currency on the cost and availability of capital; on the effect of the single currency on financial services; and on the impact of the single currency on trade, competition, productivity and employment. As I noted in the Westminster Hall debate on the five tests in January, the Government have no intention of entering into a running commentary on the preliminary and technical work. However, we are committed to finishing the assessment within the first two years of this Parliament.
The hon. Gentleman raised several questions about the nature of the preliminary and technical work. For instance, he asked who is involved in it. The Treasury is in regular contact with outside economists, the Bank of England and other Departments on a range of issues, including aspects of the work. However, it is clear that the assessment will be a Government assessment and that the work will be undertaken by the Treasury. There is no intention to contract out any part of the assessment.
The hon. Gentleman also tried to ascertain how many Treasury officials are working on the preliminary and technical work. I am sure that he received my recent letter to him in which I stated:It would not be meaningful to quantify the numbers of Treasury management units involved in this work, since this would be only a number with no real indication of the resources allocated to the work".As each management unit is involved to a differing extent and in a variety of ways, to indicate the number of Treasury teams involved in the work by simply listing names would be misleading. The work is constantly changing and is updated to take account of the latest research and analysis. So the number of officials and the nature of the management units involved changes as the work evolves. Even if I could carry out a meaningful calculation to disclose the names of the teams and individuals involved, it would be only a snapshot which would be even less representative as the work progresses.
§ Mr. Laws
I am very grateful to the Economic Secretary for giving way again. She reminds me of one of those graceful ships in the second world war whose job was to put up a big smokescreen so the convoy could escape—but she does it in a very glamorous and effective way. Before she finishes, will she tell us whether we will be informed that the preliminary technical assessment has been completed before we find out the result of the five economic tests? In other words, will we be told that the preliminary work has finished and then that the work on the tests has started, or will the results suddenly land on us from on high, perhaps on the front page of The Times, as happened in the previous Parliament?
§ Ruth Kelly
The hon. Gentleman knows that the Government have committed themselves to completing the assessment of the five economic tests within the first two years of this Parliament. We remain committed to that and nothing has changed, so in the remaining few minutes, it would be useful if I tried to answer some of his other questions.
The hon. Gentleman was interested in the White Paper on European economic reform and asked whether economic reform was in some respects a sixth test for entry into the euro. It is not. We have always underlined the importance of economic reform in its own right; it is crucial to Europe's future success. The Government are determined to play a positive and constructive role in Europe, helping to deliver that reform. All member states now recognise the importance of such reform.
270 The hon. Gentleman also referred to the European Central Bank and our views about the nature of its workings. We share the ECB's primary objective of ensuring price stability as a platform for high and stable growth and employment. We agree that the ECB must ensure that decisions are as transparent as possible and we welcome the efforts that it has made so far. We think that openness and transparency are key to ensuring that the ECB gains the trust of the European public and financial markets, and that that will ultimately help to provide the credibility that is needed to deliver a more effective monetary policy. We would not, however, somehow make reform of the ECB an additional test to our five economic tests or a precondition of the euro decision. We have set out our policy clearly: the five economic tests should be assessed and must be judged clearly and unambiguously before any recommendation is made to Parliament and the people.
The hon. Gentleman also mentioned the growth and stability pact. As my right hon. Friend the Chancellor said in oral questions last week, we support prudent interpretation of the operation of the pact, but yet again, we would in no sense move away from the five economic tests that have been set out. It is clear what those tests are and we remain determined to assess them.
§ The motion having been made after Ten o'clock, and the debate having continued for half an hour, MR. SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
§ Adjourned at seven minutes to Eleven o'clock.