§ Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Dowd.]9.30 am
§ Mr. Geoffrey Clifton-Brown (Cotswold)
I am delighted to have secured this debate in this parallel Chamber on the cost of changeover to the euro. I welcome my hon. Friends and the Minister.
The debate is especially timely. The press is full of spin and counterspin on whether the euro should be debated in public. The only time I have ever agreed with the Secretary of State for Trade and Industry was when he said that a proper debate should be held on the subject. I wholeheartedly agree, as do most of my constituents, who feel that a debate should be held to enable the general public to be thoroughly familiar with the issues involved so that, when a referendum is held, they can make a properly informed decision.
Eleven countries met the Maastricht criteria. Phase 3, to lock irrevocably the national currencies of the 11 countries, took place on 1 January 1999. The currencies of those countries will cease to exist on 1 January 2002. Interestingly, Greece, too, has now been admitted to the system. Denmark will hold a referendum on 28 September, the result of which will be eagerly awaited by the peoples and Governments of not only this country but Sweden, where Danish developments are anxiously watched.
In October 1997, the Government set out five economic tests that must be met before we can join the euro. I refer to box 2.1 on page 21 of the Government's Budget 2000 Red Book—interestingly enough, there is just three quarters of a page on the euro in the entire book. It is almost as though Mr. Brown personally wrote the Red Book to ensure little discussion of the matter.
Mr. Deputy Speaker
Order. The hon. Gentleman should know how to refer to other right hon. and hon. Members of the House.
§ Mr. Clifton-Brown
It is almost as though the Chancellor personally wrote the Red Book to ensure little discussion of the euro. That scant three quarters of a page sets out the five economic tests that must be met before a decision to join can be made. They are:whether the UK has achieved sustainable convergence with the economies of the single currency; whether there is sufficient flexibility in the UK economy to adapt to change and unexpected economic events; whether joining the single currency would create better conditions for business to make long term decisions to invest in the UK; the impact membership would have on our financial services…and, ultimately, whether the single currency would be good for employment.Those five tests could be stretched to mean almost anything to anyone. I suppose that the first test is the most important and regularly cited. It relates to the 44WH problem with our exchange rate and the fact that our economy is out of synch with those of other European countries.
Some of my constituents who advocate joining the euro say that that will be a magical way to ensure either that the euro rises or the pound drops, placing us in a realistic position to accede to phase three. Commentators generally estimate that we need an exchange rate of DM2.60 to DM2.70 before it would be feasible for us to join. Surely if we magically achieved that exchange rate, the argument that manufacturing businesses would be put out of business would cease to exist. The core economic argument about whether to join the euro would then be the exchange rate of the euro against the United States dollar and the other major currencies of the world. It is worth noting that an exchange rate is an expression of the economic performance of a country or a group of countries. It is not some artificial mechanism.
That is where the argument becomes difficult. Economic tests have been set as to why we should join the euro, but on the major tests it seems that the United Kingdom economy does better outside the euro than it would inside it. The euro has dropped and our exchange rate has remained relatively strong against the dollar, the currency of our major trading nation. On inflation, which is one of the major reasons for wanting to join the euro, our rate is lower than those in all 11 countries on an adjusted basis. More importantly, our unemployment is favourable in comparison with that in other countries, and considerably so when one remembers that the average rate of unemployment in the European Community among those aged 25 and under was a staggering 18.4 per cent., almost twice our rate. On the major economic tests, there is good evidence to show that there is no urgency to join the euro.
The Government's case has been shot out of the water by some helpful figures from the Invest in Britain Bureau. One of the Government's major arguments is that we are losing out on inward investment, but an article in Sunday Business of 2 July blows a hole in that. It states:More than 40% of US investment in the European Union locates in the UK. And more than 25% of all investment in the EU comes to the UK.It goes on to state that
70% of US businesses succeed in the UK compared with just 42% in Europe.Some of those points will be made at a conference later this week that the Chancellor will attend, so no doubt he will get into an even more dormant mode about publicising the benefits of the euro.
The Government have announced the second outline national changeover plan, which said that preparations for joining should continue in the public and private sectors. I want to concentrate on those aspects. Through the introduction of secondary legislation on negative procedure, which is difficult to challenge in the House, the Government have given themselves wide powers to spend almost unlimited and certainly unspecified sums—whatever is necessary—on the changeover to the euro. That especially applies in terms of spending by the Inland Revenue and the Commissioners of Customs and Excise.
Each Department has produced its own outline changeover plan. By the end of February, £6.3 million will have been spent in planning. Her Majesty's 45WH Customs and Excise and the Department of Social Security will have invested £20 million in planning by the end of the year. That is a thoroughly good thing. The conclusion of the report of the Select Committee on the Treasury that was published on 22 April 1998 states that if we are going to go into the euro, proper planning will be absolutely essential.
Paragraph 9 of the report draws a useful parallel, stating that the European Commission frequently cites the UK's decimalisation programme as a good example of the implementation of a complex programme of change. The Committee recalled that one feature of its success was the fact that the decimalisation board consulted closely with retailers throughout and implemented the lessons that it learned.
Paragraph 9.2 reflects on the fact that preparations were in hand for five years, with no change for the value of the pound. Very few coins had to be replaced on decimalisation day itself, and there was general popular support. Despite all those factors, people working in shops in February 1972 say that that day was the worst of their working lives. The challenge of the euro is significantly greater, and one would expect people working in shops to find it difficult. Similar difficulty was anticipated on euro changeover day on 1 January 1999 but, despite the considerable numbers working in the City, the change itself was smooth. Whatever happens, everyone would admit that, in the unlikely event that the British people decide, in a referendum, that we should go into phase 3 of the euro, it is essential that the Government carry out proper planning. There is no doubt that considerable planning is taking place behind the scenes.
If the euro could be phased in over a longer period, costs to the taxpayer and private industry could be reduced. Existing systems would expire over their natural life, rather than being replaced prematurely in an accelerated programme to join the euro. The greater the warning before we join the euro, the lower the cost will be.
What is happening out there in the private and public sectors? It is worth examining the situation out there on the ground. In the past year, only 40,000 euro accounts were opened, only 4 per cent. of the total number of business accounts. London has 20 per cent. of the euro deposit market—my source is the Wholesale Market Brokers Association. London's global share of foreign exchange, at 32 per cent., compares with Germany at 5 per cent. In derivatives, London's share is 35 per cent., France's 10 per cent. and Germany's 7 per cent. My source for those figures is the Bank of International Settlements. People say that we are missing out by not joining the euro, but take-up of the euro is small in trade terms, especially among non-euro nations. The City of London is not at a disadvantage because we have not joined the euro, although it is often cited as being so. People can trade perfectly securely in a range of markets in London, which continues to have the lion's share of that trade.
§ Dr. Julian Lewis (New Forest, East)
I apologise because a Select Committee engagement means that I will miss the last part of my hon. Friend's speech. It is hardly surprising that large firms and the City are 46WH making so few preparations for changeover, given that everybody knows that between 60 and 70 per cent. of the British people are opposed to scrapping the pound and replacing it with the euro. Why should businesses or the City want to spend great sums of money when they know that, if the referendum is ever held, the Government will lose it?
§ Mr. Clifton-Brown
I am grateful to my hon. Friend for making that point, which I was going to make myself later. There is also a more pragmatic reason for not making preparations. If there is no necessity to spend money on the changeover because business systems or trading patterns work perfectly well outside the euro, what is the incentive to spend on huge preparations for something that may or may not happen, on an uncertain time scale?
The Bank of England produces updated reports about practical issues, and it monitors the financial effects of the euro alongside the euro preparation units within the Treasury. Another problem, beyond the preparedness of the private and public sectors, is the production of euro notes and coins, which will have to take place in the 11 eurozone countries by 1 January 2002. Minting of all eight denominations of euro coins is also under way throughout those countries, and production is broadly on track to meet the requirement for 56 billion coins on the changeover date. Nine billion notes will need to be in circulation to meet transactions in the first fortnight after that date. It is a huge operation by the 11 eurozone countries, and it may be fortunate that we are not part of it. Those countries can allow their systems to settle down, and, should we ever want to go into the euro, we will be able to learn from their experience and see what the problems are.
What are the practical implications for Britain remaining outside the eurozone? The December 1999 edition of the Bank of England's "Practical Issues" report, to which I referred, states:All the available evidence indicates that, since the launch of the euro, London has fully maintained its market share. Statistics for the change in London's market share are not yet available in every market. However, the latest figures serve to demonstrate the extent to which the City is not just a UK asset but an asset for the EU as a whole.That applies whether we are in or out of the eurozone. In a number of aspects, London is transacting the lion's share of the eurozone business. For example, it has more foreign banks and subsidiaries—537—than Frankfurt, Paris and New York, which have 242, 187 and 275 respectively.
I want to deal with the technical aspect of preparation in the public sector, as well as the private sector, money-handling sectors and opinion on the ground. This month was the deadline for all national health service trusts, which run our hospitals, to create a product initiation document. I have referred to the changeover document that every Department was required to produce, and trusts will be required to produce such documents by the end of this month. At a time when trusts are financially and physically stretched—outpatient lists, and waiting lists to get on to waiting lists, are growing every day—they are being saddled with the additional responsibility of producing a changeover 47WH plan. A document was presented to the Salisbury Health Care NHS trust by its finance director, who said, devastatingly:there are no known benefits from this project just a great deal of hard work.Perhaps more importantly, no additional funding has been made available to pay for the huge amount of work and new equipment involved. That is an indictment of this Government, who are making preparations in the health service for something that may or may not happen, on a time scale that may or may not be certain, yet people's lives are at risk every day. It is incumbent on the Government to provide the trusts, and every other Government Department whose work is being hampered by changeover plans, with the proper funding and expertise to do the necessary work. It should not expect it to be funded out of existing budgets.
From my work on the Public Accounts Committee, I know the huge amount of money that has been wasted on highly expensive information technology systems that do not work properly. People's pensions were affected by the huge delay in getting the IRS2 computer up and running in the Benefits Agency. It is still not up and running properly. There have been problems with IT systems in the Crown Prosecution Service, the health service, the Ministry of Defence and the Passport Agency, just to mention a few. The Government grant of £20 million to update IT systems for the change to the euro, which is far bigger than any envisaged for those systems, is a drop in the ocean. It will be an interesting project to work out the true cost to the public sector.
§ Mr. John Bercow (Buckingham)
The United Kingdom is variously rated as the fourth or fifth largest economy in the world, the second biggest overseas investor in the world, and the third most attractive location for inward investment in the world. Does my hon. Friend therefore agree that it is absurd that the Government are spending vast public sums on such an ill-conceived project? In the circumstances, should the Chancellor of the Exchequer be subject to a cash point fine?
§ Mr. Clifton-Brown
The sums to be spent on a changeover plan must be considered carefully. In the public domain, two tranches of £20 million have already been spent and considerably more will doubtless be spent. I shall concentrate on the total spent by the private and public sectors as well as the cash-dispensing and note businesses because future and uncertain benefit could be gained against the present cost.
I have dealt at length with public sector costs and I shall now refer to private sector costs. Various studies have been undertaken into those costs. For example, Chantrey Vellacott, a firm of accountants in the City, has produced a well-founded plan showing that the costs to the private sector have already been £36 billion or 4.2 per cent. of gross domestic product. Some have criticised the company's figure as being unreliable, but KPMG's recent study of the 600 largest companies in the country shows that £12 billion has already been spent—and that was just by the 600 largest companies. It is reasonable to suppose that costs are at least double that, and that they probably amount to £24 billion. If we add to that figure the costs that have been spent in the 48WH public sector and the £1.7 billion that will need to be spent by the coins and note business, we will see that the costs amount to a significant proportion of GDP.
The costs represent 10 per cent. of the total wealth of the economy in one year. On 27 January 2000, the Daily Mail compared the cost of changeover of the euro with the Y2K problem and the necessity for business to invest in new IT and other systems to deal with the growing trade of e-commerce. All such matters must be put into context because they are all costs that business will have to bear and which will come off their bottom-line profits. The article stated:Y2K is a known cost, whereas EMU estimates have been increasing over time, so it is likely that EMU will represent an even higher multiple of Y2K costs.It admits that the costs of preparing for the euro could divert companies from developing e-commerce strategies. Europe is already lagging behind the US in selling products on the internet.
There does not seem to be a particular imperative why the Government's five key economic tests should be met. On exchange rates, inward investment, employment, inflation and growth, it appears that no damage is being done to the UK economy. Indeed, there is ample evidence to show that trade with the United States and the far east has been growing since 1 January 1999, when the 11 eurozone countries came together. Britain could continue to be a magnet for inward investment throughout the world. It should trade with the rest of the world
One of my great fears is what will happen once we lock ourselves in. Under the Maastricht treaty, we would make an irrevocable decision to lock our exchange rate reserves into the system once we agreed to drop our opt-out against joining. The British people will need to think long and hard about the economic benefits. However, the economic benefits will not ultimately be the test. There will be a referendum. The British people will have to decide whether they want to join a system that will lead inexorably to a single European economy, following which we will have gone a long way towards having one European state. If, in the referendum, the British people decide to join, they would be taking one of the most far-reaching decisions made by the country since the second world war. No doubt the Government, through their spinning machine, will try their level best to persuade us that that is the right thing to do but there is much evidence on the other side to show that there is not necessarily any advantage to joining.
§ Mr. Tony Baldry (Banbury)
British business wants certainty, on which it can base investment decisions, as do potential overseas investors in Britain. A Conservative Government would bring certainty. It is certain that a Conservative Government would not introduce a referendum on the single currency during the lifetime of the next Parliament. That is settled Conservative policy, and it would be the outcome of a Conservative win at the next election.
We have, however, no clear indication of the consequences of a Labour win at the next election. There is an effective policy vacuum on the issue. I have no doubt that the Minister will say that the Government 49WH have set five tests, but they are not tests and they do not constitute a line to be taken. The five economic tests are merely a policy mantra. I suspect that there are five of them because a Minister in difficulty on the "Today" programme or the "World at One" can simply recite them so that even the commentator becomes bored and moves on to something else. The Government's tests are merely a mantra.
As everyone now appreciates that there is no policy but only a mantra, leaks are inevitably emerging throughout Whitehall, from the Department of Trade and Industry to the Foreign and Commonwealth Office. The British people perceive that the Labour party and the Government want no debate whatsoever on the subject, this side of an election. The Room that we are in provides clear evidence of that: unfortunately, under the guidelines set up by the relevant Committee, the television cameras can focus only on the hon. Member who is speaking, and that means that they cannot show the area in which one would expect to see Labour Back Benchers, which is entirely empty. Not a single Labour member of the Select Committee on the Treasury, the Select Committee on Trade and Industry or the Select Committee on Education and Employment has managed to tear himself out of bed or from other activities to attend the debate.
The Labour party does not wish to engage in debate on the euro. It has sent the Minister, who of course draws his pay and rations from the Treasury, and I am sure that he will elegantly and eloquently recite the mantra of the five economic tests—but that will be it. That is all that we will hear from the Labour party, despite the fact that senior officials in the Department of Trade and Industry are talking about a meltdown. Andrew Fraser, the chief executive of the Invest in Britain Bureau—today renaming itself Invest UK—has referred to a manufacturing meltdown. Having given advice to the permanent secretary and others, the poor man was allowed to go to the media—not to renege on his advice that there would be an economic meltdown in manufacturing if we did not settle a policy on our membership of the single currency, but simply to apologise for the leak.
Our ambassador to Japan in a memo to the Foreign Secretary commented:we flagged up increasing concern about the level of Sterling and uncertainty about British policy on the Euro. We assessed that "in the absence of new developments, Japanese companies in the UK will probably sit tight for another year or so in the hope that the Government will succeed in moving public opinion towards acceptance of Euro membership.This is broadly what has happened, but with two new negative factors. First, we have seen some actual closures and moves to source outside the UK as a result of price pressure. Secondly, as prospects for early entry into the Euro are perceived through media coverage to be receding, companies are beginning to see £/ Euro unpredictability as a long term disincentive to investment in Britain.More generally, a perception has been spreading among economic opinion formers that the UK is not at present a safe bet. For example a former vice minister of finance said at a Welsh seminar on the Euro recently that "Until the UK decides to join the Euro, there is an element of risk which makes the UK a difficult choice for investment.Against that background, Madam Deputy Speaker, all Ministers can do is repeat the five economic tests. From whichever perspective one comes, a debate is needed on 50WH this issue. The London chamber of commerce recently carried out a survey that found that almost three quarters of London businesses want Britain to join the single currency. Nine out of 10 executives who feel that a decision matters to their own company back entry. Yet not a single London Labour Member of Parliament is present to express the concerns of those businesses.
§ Mr. Andrew Rowe (Faversham and Mid-Kent)
The relevance of what my hon. Friend is saying is borne out particularly strongly by what is happening to companies like the big brewer in my constituency, Shepherd Neame, which must decide within the next two or three months whether to have tills capable of taking euro coins and notes. In Kent, particularly, places like Leeds castle and Shepherd Neame pubs will be forced to take the coins and notes, whether or not we join the single currency. If we cannot debate these issues, how can companies make an informed decision?
§ Mr. Baldry
I entirely agree with my hon. Friend's comments. I fear that the British people will feel that the Government are involving them in one of the greatest spins ever. It is a deception, and it is disingenuous to have no public debate on the single currency between now and the next general election, and beyond. The electors suspect a sleight of hand, and, if and when a referendum is held on the single currency, they will feel that they have been cheated of a debate. Even worse, if, perchance, there were a Labour Government after the next general election and if they held a referendum, the public would feel that it was part of some plan in which they were expected to take the role of patsies. We all know that our constituents dislike that role and would reject those who put them into that position.
As Peter Riddell wrote in The Times yesterday, in some wise words that everyone should read,What the Gomersall memorandum really reveals is that the debate on euro entry is already alive, and kicking, and cannot be put off until after the next general election.Our discussion shows that the debate is alive and kicking only in the Conservative party, while the Labour party is running from debate. Labour Members want to do nothing more than recite the five tests as a mantra. Those tests are meaningless and politically self-seeking, and Labour Members could suddenly decide at any time that they were being met.
§ Mr. John Bercow
Does my hon. Friend agree that Ministers are divided only over tactics, and not over their absolute determination to abolish the pound and join the euro? Does he also agree that the Prime Minister is hell-bent on dragging Britain into the euro at a cost that he cannot calculate, for a benefit that he cannot quantify and at a risk to the self-government of the British people that he dare not admit? It is a pity that the Prime Minister does not have the decency to reveal those crucial facts to the British people.
§ Mr. Baldry
I should not necessarily use exactly the language that my hon. Friend employs, but if that is the Government's collective view, it would be much healthier for democracy and the United Kingdom if they said so and initiated a decent debate. All that we have 51WH now is some shadow boxing in the Cabinet and elsewhere. A proper debate is not taking place. That is disingenuous and dishonest, and discredits UK politics.
§ Mr. Clifton-Brown
I am grateful to my hon. Friend for giving way, especially as I have had the Floor for the bulk of our debate. Does he agree that when the Government participate in the debate, they will have a duty not to put a highly pro-euro case, but to balance the argument properly, in our schools and elsewhere?
§ Mr. Baldry
There will be no difficulty in having a proper public debate. I have no doubt that people in business, public life and politics will speak robustly for and against our membership of the single currency.
Whether we join the euro is one of the most important questions facing the country in the early part of the millennium yet we are in a policy vacuum, in which the only people with the guts to speak up are officials and ambassadors, who are then immediately chastised and accused of deliberate and orchestrated leaks. I do not believe that those people leaked, but if an honest and open public debate is not led by Ministers, who have a responsibility to make clear the view of Her Majesty's Government, leaks from officials and others are inevitable, because that is the only way in which they can vent their frustration with the Government.
Madam Deputy Speaker, my hon. Friend the Member for Cotswold (Mr. Clifton-Brown) has done us a service by initiating the debate, which has provided the graphic picture of the empty Labour Benches. Labour Members are engaging in a conspiracy of silence to ensure that a proper public debate does not take place.
§ Mrs. Marion Roe (in the Chair)
Order. I remind hon. Members that when I am in the Chair I should be addressed as Mrs. Roe, not as Madam Deputy Speaker.
§ 10.8 am
§ Dr. Vincent Cable (Twickenham)
Mrs. Roe, I welcome the opportunity to contribute to the debate. I shall refer only to the narrowly defined issue of the costs of euro preparation.
A couple of years ago, the Chancellor of the Exchequer established a committee on euro preparation, in which all parties were invited to participate. It is unfortunate that the Conservatives opted out, because that committee is questioning expert witnesses on many of the valid questions that Conservatives ask about the costs to the Government and the private sector. Participating in the committee at least removes some of the mystery and the elements of conspiracy that the hon. Member for Cotswold (Mr. Clifton-Brown) saw. I amicably ask the Conservatives to take a fresh look at their participation.
At the most recent meeting, for example, we had a perfectly businesslike discussion with a Government nominee and the leader of the Welsh nationalists. I represented the Liberal Democrats. The fact that the Conservatives were not present robbed the debate of much of the flow for which one would have hoped. Their complaints about secret information and spin lose much of their legitimacy because they have passed up that opportunity.
52WH In the broader context, I am not a fundamentalist, as most hon. Members are not. Doubtless there are people who would have us enter economic and monetary union at any time, while others would not join under any circumstances. A sensible approach is to consider the undoubted costs and risks of entry and those of exclusion, and to balance the two. That is what the debate is really about.
The hon. Member for Cotswold was primarily concerned about costs to the private sector. Attempts have been made to quantify them, and they are well worth considering. The hon. Gentleman mentioned the Chantrey Vellacott study, a useful starting point that suggests substantial figures for the conversion costs. He alluded to a key point in that study: if capital stock is replaced as it becomes obsolete, there is no cost, because a new generation of investments would be required in any event. That is one reason why as much certainty and predictability as possible is desirable.
A whole set of studies has followed, one of which was made available to the Chancellor's sub-committee a couple of weeks ago. It dealt with the costs of preparation in Spain. Some detailed small-firm analysis was undertaken, which suggested that, if the UK experience was similar to Spain's, the cost would be a maximum of £1,000 each for about three quarters of companies—most of the small companies. We are talking about very small sums, although a lot more work clearly needs to be done.
The big question—this is where we get into the big debate about the five conditions—is whether the benefits of joining or the costs of exclusion are sufficiently large to outweigh the undoubted predictable conversion costs. As a result of the past two or three years' experience, we have a better understanding of the costs to the UK of both exchange rate instability and highly inappropriate exchange rates. Despite recent adjustments, the exchange rate is still, in real terms, higher than it was when we were members of the exchange rate mechanism. The costs of that are felt acutely by manufacturing industry.
Whatever the rate, exchange rate instability is a major cost that manufacturers in particular must bear. There have been fluctuations of 20 to 30 per cent. in both directions in the past few years. Clearly, if a rate can be fixed with trading partners who account for roughly 55 per cent. of our visible trade, one does not eliminate exchange rate instability, but one goes a considerable way towards mitigating its effects.
§ Dr. Cable
Yes, the hon. Gentleman is absolutely correct. Perhaps I should more precisely have said that the trading part of the British economy, which is predominantly manufacturing, includes agriculture and tourism. All three sectors have been hit badly by instability and the over-valuation of the pound. The cost of exclusion from EMU is that the trading part of the economy would face indefinitely all that instability.
53WH The second point—the debate is developing in an interesting way—relates to the impact on foreign direct investment It is true, and this morning's figures show it, that Britain remains an attractive destination for foreign investment.
There was a revealing survey last week of the 10 leading foreign investors—American, Japanese and European—in the UK, nine of which made it clear that, although they were happy to continue to operate in the UK, future investment would be heavily dependent on whether they could see Britain making progress towards entry to EMU. The impact of exclusion on foreign direct investment is unlikely to be viewed dramatically, but Britain's share of new foreign investment flows will decline. We can already see the relative share beginning to tail off. The consequences for jobs and the overall impact on the efficiency of British manufacturing industry—will become increasingly onerous as time goes by.
To add anecdote to statistics, the most telling example last week was Nissan, which has made a major impact in the UK because of high productivity at its Sunderland plant. The Japanese and UK management made it clear that they viewed the future of Nissan in the UK as conditional on participation in EMU within a reasonable time.
§ Mr. Clifton-Brown
Does the hon. Gentleman agree that exchange rates are not the only factor that companies take into account when they decide whether to invest in Britain? The wider macro-economic situation, including regulations and legal systems, is also important.
§ Dr. Cable
Exchange rates are only one among several factors, but the hon. Gentleman is complacent if he believes that the UK is far ahead of continental competition in other respects. An increasing percentage of foreign investment is going into France—traditionally regarded as hidebound by dirigiste controls. France is liberalising, at least partly because of the impact of the single market and EMU. For those faced with the brutal choice between liberalising European economies or the UK economy—still attractive in certain respects—EMU could make a decisive difference.
The third respect in which the costs of exclusion will prove important—and they are already making an impact—relates to the workings of the single market. As I enjoy pointing out to Conservative Members, the single market was Mrs. Thatcher's great historic achievement and it is having major consequences on European industry. The combination of the present single market with stable currencies is—as anyone in frequent contact with European business will know—having a major impact on the restructuring of European industry, fuelled by the rapidly growing eurobond market.
EMU has been an important catalyst. Both foreign and indigenous businesses across Europe are radically restructuring to take account of the realities of EMU, but British companies are not part of that process. As long as they are excluded, the long-term consequences on investment will be negative.
54WH The costs of exclusion can be measured in terms of interest rates. Despite the fact that British short-term rates are moving upwards, the differential is about 2 per cent., which reflects long-term experiences of inflation. That amounts to a real cost for business and for domestic householders. The Government and the private sector will face conversion costs—and we should be honest about that—but the costs of exclusion will become more tangible and apparent as time goes by.
In conclusion, I share some common ground with previous speakers, who are absolutely right about the importance of debating these issues publicly. The Government have done us no favour by stretching out the uncertainty associated with British entry. Major uncertainty remains about when the referendum will be held and its likely results, which could have been reduced if the referendum had been tackled earlier in the Parliament.
§ Mr. Bercow
May I challenge the hon. Gentleman on what he just said? Interest rates rise and fall, and the proportion of variable rate mortgage finance in this country is substantially greater than in the member states of the eurozone. When calculating the cost of our becoming part of the eurozone, does the hon. Gentleman accept that he must factor in the surrender of our exclusive right to set our interest rates to people whom we do not elect and cannot remove?
§ Dr. Cable
The hon. Gentleman makes a major point about sovereignty, and a more specific point about interest rates and mortgages. I shall respond to the latter. It is true that there is more exposure to inappropriate interest rates if there is a variable interest rate system in the housing market. The hon. Gentleman, who is interested in finance and economic policy, knows, however, that much experimentation is taking place by British institutions. For example, Standard Life, which survived a proposal for demutualisation last week, is leading the market in introducing fixed-rate mortgages. When that spreads throughout the City, many of the associated risks will disappear.
The Government were remiss in not accepting the challenge of public debate, which those who favour EMU entry would win. They should make it absolutely clear that entry to the EMU is right for the British economy and should not hide behind the five conditions. Secondly, they should state that they will hold a referendum at the earliest opportunity—at the start of the next Parliament. Thirdly, on the basis of the promise of an early referendum, they should set out a timetable to prepare United Kingdom business to join.
§ Mr. Howard Flight (Arundel and South Downs)
I congratulate my hon. Friend for Cotswold (Mr. Clifton-Brown) on securing the debate, which affords the Government the occasion to report on the changeover. If the Minister gives a full report of what is going on, we shall learn some interesting truths.
The debate is not about whether we are for or against the euro. First, the citizens of this country are not stupid; they know that, for a long time, the British economy has been broadly in synch with that of the United States, not Europe's, and that our exchange and interest rates 55WH therefore move in tandem with those of the USA. Secondly, events in Asia have shown how important it is to allow the exchange rate to take the strain, even though doing so may cause pain. It could be argued that that is the reason why the United Kingdom and the United States have enjoyed an extra three years of strong growth.
I take issue with some of the comments of my hon. Friend the Member for Cotswold. Europe is restructuring because that is what its business desperately needed to do; the feebleness of the euro reflected Europe's economic weaknesses. Restructuring in the UK started long ago as part of the Thatcherite supply-side reforms and it continues here, as it does in the USA.
Our debate focuses on the mechanics of the changeover and the costs. The Finance Act 1998 required the Treasury to be transparent about financial matters, and the Government's policy on the euro is relatively clear: they are pledged to join the euro when five conditions have been met. As has been stated several times, it is Government policy to prepare for possible entry by putting in place the necessary mechanisms, so that entry is not delayed by lack of preparation.
Making preparations is consistent with Government policy, but what has been happening in reality? What progress has been made and what are the plans? As with any commercial undertaking, one needs to know first about the costs to the public and private sectors. I acknowledge that capital equipment will need to be replaced, especially where such equipment relates to cash. It will not be difficult to produce figures for gross costs and estimated net costs to the public and private sectors. I hope that the Financial Secretary will take this opportunity to report estimated costs in the light of money spent and efforts made. We have seen only the Chantrey Vellacott report and KPMG estimates. According to Government data, Marks & Spencer estimates a gross figure of £100 million, and Tesco estimates £20 million. Lloyds-TSB estimates the cost of system conversions to be about £300 million. I assume that all that homework will ensure that we leave this Chamber much better informed about estimated costs.
The national changeover plan has allegedly identified the measures necessary to prepare the business sector, but I have read the reports, and to be frank, much of the information is guff. No clear analysis is provided of what is to be done and when. As hon. Members have pointed out, the process cannot compare with decimalisation—a relatively modest process that was successfully planned and executed over five years.
According to current Government figures, £6.3 million was spent on planning to the end of February and there is a further budget of £20 million. Although that may be wasted money, it is not very much to finance the grand changeover plan. The expenditure of such a sum would not prepare this country for joining the euro, were we foolish enough to decide to do so. Some £20 million has been budgeted for the Department of Social Security—what is that about? What will the health service be obliged to spend, given that it often has other, more pressing priorities?
In short, what is the plan? What are the plans for the public and private sectors, and what costs will they incur? Last year, many businesses voiced strong 56WH objections to being pressed to spend money before a decision has been taken. Last week, I made several inquiries and found to my surprise that very little has been happening. In most cases, there has been all talk and no action. As I shall explain, the perception throughout the private sector is that the matter is on the back burner and, unlike a year ago, is not being addressed actively.
The Bank of England is the one body that soldiers on doing a splendidly professional job. Although its Governor has made it clear that the Bank does not think that it would be a good idea for this country to join the euro, it has set out for the financial sector, both institutional and retail, what would be involved, what needs to be done and what sort of detailed plan needs to be drawn up. I commend the Bank, as ever, for its diligence and professionalism.
The Government formed an organisation called BAG—the business advisers group—to go round visiting private sector businesses to tee them up, tell them what to do and gather information. I have received personal representations from several of the main banks: as far as I can tell, BAG has done precious little and nothing much has happened. Businesses are focusing on and concerned with the regulatory changes, taxes and UK employment burdens that have been imposed on them, but they are certainly not focusing on planning for euro membership. I understand from the banks that they have effectively told the Government that they have no intention of improperly wasting shareholders' money on the necessary technical changes until Government policy has been sharpened up considerably. They have also told me that it would take at least three years from now to put the economy in a financial position suitable for euro membership.
The Government are in exactly the position that they said that they did not want to be in. Even if—unlikely as it now appears—they were to win the next election and hold their referendum, they could not possibly meet the requirements within the time scale that they have set, because the necessary organisation and preparation has not been done.
§ Mr. Clifton-Brown
Is my hon. Friend aware of an article that was published in The Times on 17 February, which described an ICM survey of 1,001 company chief executives that revealed that 87 per cent. would not make any significant preparations for the euro before a referendum, and that 73 per cent., compared to 63 per cent. last March, were opposed to joining?
§ Mr. Flight
I thank my hon. Friend for that extremely relevant intervention. He reminds me of another survey—which he has, no doubt, seen—revealing that only 15 per cent. of Japanese businesses that have invested in this country have any material concern about whether we join the euro—they have invested here because of the quality of our law, our language and the fact that we do not have expensive employment taxes. The myth that international investors believe that everything hangs on whether we join the euro is peddled for political reasons by those who want to join the euro, but it is manifestly not true.
The key issue is the Government's timetable. One of the few concrete things to have come out of all their planning is their bold and important argument that, if 57WH they get back into power, they expect to take four months between proposing to join the single currency and holding a referendum, and 30 months between the referendum and joining. Given the state of organisation in the private sector—and, I assume, the public sector, although we have little knowledge of what it has been doing—it is clear that there is absolutely no way in which that timetable could be met. In 1999, regional forums were held around the country, but little emerged from them, because, as my hon. Friend pointed out, almost 90 per cent. of businesses are, rightly, not prepared to waste their funds until the Government show greater clarity of policy.
The events I describe reflect the fact that the wise people in the Treasury have quite rightly gone cold on the euro. I dare say that they have come to appreciate the sound economic and political reasons for which the Conservative party has, for some time, opposed euro entry. A major division between the Treasury and the Department of Trade and Industry, and between individual Ministers, has become apparent.
The Chancellor recited as usual the mantra of his five principles in his Mansion House speech. However, it is telling that, toward the end of his speech, he said something that struck me as a coded signal against membership of the euro. He stated:We cannot pre-judge the five economic tests. To do so before we have secured sustainable convergence would risk repeating past failures, mistaking exchange rate stability for stability across the economy and prejudicing our commitment to move Britain from the instabilities of a stop-go economy to greater long-term stability. The Government will not agree to a short-termist approach that would put at risk economic stability or the discipline that has created sustained growth, rising investment and—so many new jobs.
Despite the coded nature of that statement, the crucial point is that there has been no material development towards convergence. As Europe gradually comes up, and the United States and the United Kingdom go down, as is likely after eight years of growth, there may be some coincidence of interest rates and inflation rates. However, in terms of economic cycles, the United Kingdom is ever more in tandem with the United States, while remaining at a 180-degree variance with continental Europe.
§ The Financial Secretary to the Treasury (Mr. Stephen Timms)
The hon. Gentleman said a moment ago that the Conservative party was opposed to entering the single currency. My understanding of the Conservative party's formal position is that it would not take Britain into the single currency during the life of the next Parliament. Will the hon. Gentleman clarify his party's position?
§ Mr. Flight
I am glad to hear that the Financial Secretary knows Conservative party policy and that he describes it correctly. The essence of our position is that, on both economic and political grounds, it would be against the interests of this country to join the euro. However, no one can ever claim to have perfect wisdom, so we say, "Let us see what happens." We could be wrong, and the lifetime of a Parliament is a reasonable period in which to determine whether we are wrong. That is common sense.
58WH Treasury Ministers appear to be moving fast toward the same policies, in complete contradiction of the official policy of the Prime Minister and the Labour party. It is hardly surprising that the pro-euro camp in the Government has resorted in recent weeks to slightly desperate spin and public relations, led by the Secretaries of State for Trade and Industry, for Northern Ireland, and for Foreign and Commonwealth Affairs, who are spinning as hard as they can against the shift in policy that the Chancellor is attempting to initiate and to control.
As I said earlier, the Labour party is committed to entry, and, if it wins the next election, to holding a referendum as soon as possible. It is also committed to ensuring that the country is organised to join the euro if all those conditions are met, and to ensuring that delays do not occur because the pre-planning and organisation have not been carried out. However, if one focuses on reality, not on spin, one can see that little has been done in connection with the national changeover plan. The Government have given no advice to the nation or its businesses about what the true costs are likely to be. If the Minister acknowledges that and says that the approach is not part of a deliberate Treasury slowdown, he will have to say, by default, that incompetence is involved.
Representatives from the real business world, including the Confederation of British Industry, banks, companies and trade representatives, have told me that the issue is definitely on the back burner. The Government's measures mean that they have plenty of other things to do. Last year, they thought that they were being kicked and cajoled into making progress, but that has stopped and they have heard nothing for the past year or so.
I conclude by repeating the request that I put to the Minister at the start of my speech. What is going on? What will the costs be, what are the Government doing in the public sector, and what do they want to achieve in the private sector?
§ The Financial Secretary to the Treasury (Mr. Stephen Timms)
I welcome the fact that the hon. Member for Cotswold (Mr. Clifton-Brown) secured this debate. We have had an interesting discussion, and I congratulate him. To some extent, the discussion has trodden on familiar ground but I am pleased to have this opportunity to set out, once again, the Government's policies on these important matters.
Our policy can be summed up in the slogan, "Prepare and decide". That summarises the policy set out to Parliament by my right hon. Friend the Chancellor of the Exchequer in October 1997 and reiterated by my right hon. Friend the Prime Minister in February 1999. We announced our commitment in principle to economic and monetary union and our belief that the decisive test for United Kingdom membership should be whether there was a clear and unambiguous case for us to join. That is why we set out five economic tests, to which several hon. Members have referred, which will have to be met before any decision to join can be taken.
I remind hon. Members that those tests are: first, whether the UK economy has achieved sustainable convergence with the economies of the single currency; 59WH secondly, whether there is sufficient flexibility to adapt to economic change; thirdly, whether joining the single currency would create better conditions for businesses to make long-term decisions to invest in the UK; fourthly, the impact that membership would have on the financial services industry; and, fifthly, whether joining the single currency would ultimately be good for employment.
In view of the magnitude of the issue, we have said that, as a matter of principle, if, having assessed those five tests, the Government decide to enter, the decision should be put to the British people in a referendum. If we are to join the single currency, the Government, Parliament and the people must agree. We want to give Britain a genuine option to decide whether to join, if that is what the Government, Parliament and the people want to do.
We are keeping open the option of making a decision early in the next Parliament. That involves ensuring that those parts of the economy that would be central to changeover, such as the Government's revenue Departments, the wholesale financial markets and the retail banks, should continue to plan effectively. I welcome the point made by the hon. Member for Cotswold about the importance of having those plans in hand and of making progress. The second outline national changeover plan makes it clear that, thanks to the targeted work that has been carried out individually and collectively during the past year, the strategy is firmly on course.
I can tell the hon. Member for Arundel and South Downs (Mr. Flight) that we have had continuing discussions with key stakeholders in the private sector. The illustrative timetable—the period of up to 40 months set out in the latest edition of the changeover plan, published in March—remains valid. It has been endorsed by the Confederation of British Industry, the British Chambers of Commerce and the Trades Union Congress, so the fears that the hon. Gentleman expressed are ill founded.
§ Mr. Flight
Has it been endorsed by the all-important institutions, namely the banks? The Minister will recall that I mentioned that my soundings with the heads of some of our main banks had pointed towards a three-year programme.
§ Mr. Timms
As I said, the period envisaged in the changeover plan is 40 months. The plans have been endorsed by the banks. The hon. Gentleman said that the Bank of England had done a great deal of work with the financial services industry. Last month, it published a report on the practical issues arising from the euro. Progress has been made, and is continuing satisfactorily.
Our approach to preparing for the possibility of joining the single currency is to co-ordinate planning and facilitate the appropriate level of preparation. That involves, first, identifying areas key to a smooth and cost-effective changeover. Secondly, we will work with the key parties to agree effective ways forward. Thirdly, we will provide a framework within which organisations can take forward their planning. Fourthly, we will set out a critical path for the process. Fifthly, we can give a lead by planning for the public sector.
Following publication of the first outline national changeover plan, Ministers agreed that all Departments should advance internal planning and prepare outline 60WH changeover plans by the end of 1999. Departments used a template-based planning approach. Officials worked with consultants to design a model—Ernst and Young was involved—that was piloted and rolled out to all Departments and designated key agencies. All Departments prepared internal planning documents before the end of 1999. Departments considered the services that they might provide during changeover and how they might convert their systems to the euro. They identified key planning activities and lead times for carrying them out. That exercise confirmed that only the Department of Social Security and the revenue Departments have lead times that require them to start detailed development before a referendum. Many public sectors are drawing on the experience of member states in the first wave and are working with the private sector in developing their planning.
With the private sector, we have facilitated a series of discussion groups, involving suppliers and users of financial services, to produce a set of common assumptions on the likely pattern of demand for euro services during a UK changeover. Those discussions will form the basis of future work to develop an understanding of the likely pattern of demand. The work will take into account the experiences of first wave member states and the evolving expectations of suppliers and customers.
The process has involved the retail banks, the utilities—through the Utility Buyers Forum—the Inland Revenue, Customs and Excise, the Department of Social Security, the Association of British Insurers and the British Retail Consortium. The City euro group is working on the needs and expectations of those in the wholesale financial markets who rely on retail linkages—for example, the fund management industry. There will be further consultation, including discussions with representatives of the large and small corporate markets. Contrary to the impression that was given earlier, a great deal of work is going on.
We are also learning by monitoring what happened in the first wave member states. We have an opportunity to see how the 11 participating member states managed the changeover to the single currency. They successfully converted their wholesale financial systems in time for the locking of currencies. That evidence backs up what United Kingdom businesses that have considered making a changeover are saying: that demand for euro services early in a transition period would be limited mainly to wholesale financial markets and larger businesses.
§ Mr. Clifton-Brown
I am sorry to interrupt the Minister, but as well as detailing the considerable amount of consultation, will he speak about the financial cost to the public sector using the Salisbury Health Care NHS trust example that I gave, in which patient care was being put at risk because the health service has received no additional budget to meet the cost of the changeover plans?
§ Mr. Timms
I shall certainly comment on the financial aspects, but I assure the hon. Gentleman that there has been no diversion of resources from front-line patient care to planning work. I shall speak about the costs that have been incurred by the public sector and respond to his intervention.
61WH We have continued to give regular updates on our changeover work and, of particular importance in the context of our debate, the cost of the work that we have carried out. We provided details in the second outline changeover plan, published in March, on spending to date on preparations for the possibility of United Kingdom entry, which is some £6.3 million. That includes £1.6 million by the Department of Social Security, £1.8 million by Customs and Excise, £1.3 million by the Inland Revenue, £600,000 by the Bank of England and £500,000 by the Treasury's euro preparations unit. That investment has allowed us to undertake analysis and design work. We recognise that further work will be necessary in the key departments, and legislation has been implemented to allow Departments on the critical path—revenue Departments and the Department of Social Security—to invest in preparation for their large and complex information technology systems. References have been made to £20 million, which has arisen because three Departments—the Department of Social Security, the Inland Revenue and Customs and Excise—plan to invest around £20 million during the current financial year. That will ensure that the public sector is ready for the possibility of a decision to join early in the next Parliament and to follow the illustrative 40-month timetable set out in our published changeover plans, if required.
§ Mr. Timms
The hon. Gentleman makes an interesting point. Major stores in Oxford street already accept notes and coins of other currencies, and I have no doubt that they expect to accept euros. The hon. Gentleman may be right: there may be a wider decision to accept euros in tourist areas in the United Kingdom.
I turn to spending beyond a positive referendum result. We must distinguish between the costs incurred by the public and private sectors. We have not estimated the total cost to the public sector of a changeover because planning is still incomplete, so we are not able to do so. However, the cost of a changeover would essentially depend on the approach adopted by the public sector.
We recognise the importance of continuing to monitor the position closely. In the event of a changeover, any spending would be scrutinised by the Treasury in the usual way, just as departmental spending has been. In the private sector, the cost would depend on the approach taken to a changeover by each firm and the extent to which the euro had been considered in investment decisions prior to joining. Those are commercial decisions for individual companies.
I am a little sceptical about the value and the feasibility of trying to produce overall estimates for the whole private sector. A major survey would certainly be necessary for the production of a robust estimate, the 62WH conduct of which would place a significant and unnecessary burden on businesses. However, we are working hard to ensure that a changeover would be cost effective. We are consulting widely to establish the key issues in a changeover and how they might be addressed, and we are monitoring the experiences of the first wave countries. We are consulting their key customers and learning from the experience of the first wave member states. The revenue Departments believe that the best use of resources would be to phase in euro services, ensuring that they invest only in those services for which there will be real demand.
I wish to respond to a couple of points that were critical of the Government's position. Hon. Members have asked why businesses should spend on something that might never happen. I agree with the hon. Member for Cotswold that people should take steps to prepare for a changeover. Each company has to decide on its own approach. Some sectors, such as the retail banks, the wholesale financial markets—to which the hon. Member for Arundel and South Downs referred—and retailers are critical of the changeover process, because they provide the infrastructure on which other parts of the economy depend.
§ Mr. Clifton-Brown
I am grateful to the Minister for being exceptionally courteous during the debate. Are the Government considering whether returns for value added tax and income tax may be filed in euros and, if so, when is that likely to happen?
§ Mr. Timms
That is one of the issues that the revenue Departments are considering. A gamut of matters will need to be addressed. As the hon. Member for Cotswold said, changeover planning will take money from frontline services. All parts of the public sector must undertake analysis and planning for the possibility of UK entry. The hon. Gentleman was right to support that planning and, by undertaking it now, the Government will ensure that any changeover takes place in a smooth and cost-effective way. It will be a management exercise and such work will be developed to ensure that it does not disrupt front-line patient care, for example. Proper preparation will help to deliver a smooth and cost-effective changeover and ensure that public services will not be significantly disrupted.
Our policy on the single currency can be summed up neatly as being to prepare and to decide—the policy set out by the Chancellor of the Exchequer in October 1997 to Parliament and by the Prime Minister in February last year. I am grateful for the support expressed for preparations to be made in Parliament so that, should the economic tests be met, a decision to join the single currency can be made early in the next Parliament. Without preparation, that would not be a practical option. We need a framework for businesses that want to plan ahead. We have a unique opportunity to learn from the experiences of the first wave member states. Where expenditure might be required in the public sector—for example, in the revenue Departments and the Department for Social Security—legislation has been passed that will allow planning for that.
Parliament should be asked to provide permission for such expenditure. We have been open about our investment in pre-planning work, and our changeover plans set out what we have achieved and invested, the 63WH direction of our future changeover work and the amount that the public sector has spent on preparations. We cannot estimate the cost of changeover at this stage. Interestingly, even the first wave has not produced official estimates of the cost of changeover work.