John McDonnell
Redwood call for new relationship with Europe
Mr. John Redwood (Wokingham): Yesterday, the Foreign Secretary came to the House to tell us that the Government were minded to accept most of the huge transfer to the European Union of powers and opportunities to govern ourselves that are set out in the draft constitution. Today, a rather reluctant and muted Chancellor of the Exchequer came to the House to tell us of his rearguard action to save the pound-forced, I think, by the political reality that there is no hope of his winning a referendum to abolish it, and by the fortunate fact that some of us have forced the Government into offering a referendum on the currency. The Government will not yet offer a referendum on the even more important issue of the constitution.
That means-unless we can force a change on the constitution-that the Government wish to embark on a most unusual experiment. It is quite normal for a country that wants to be self-governing to keep the powers to govern itself and to have, as part of that variety of powers, the opportunity to run its own currency, settle its own interest rates and make its own monetary decisions. Indeed, I do not think it possible to say that a country is an independent self-governing democracy unless it both retains all its principal constitutional rights and has its own currency.
I can just about understand those who wish to conduct the experiment of having a self-governing country without its own currency, although I do not think that it would work very well. Ireland gave up and wisely decided to have its own currency some years after becoming independent from the United Kingdom, and I believe that that judgment was correct. Never in my life, however, have I heard of, or read of in history books, any group of politicians wishing to run a self-governing currency without a country to go with it. That seems to be where the Government have taken themselves through their asymmetrical approach to referendums, and the political logic that led to their decision that, while they cannot sell the euro to the British people, they can ram the European constitution through the House regardless of opinion in the country.
The arguments adduced in favour of our sacrificing the pound and adopting the euro are extremely flimsy. I give credit to those in the Treasury-they are well-informed economically, and they clearly have a sense of humour as well-who have managed to produce 18 volumes containing all the evidence that people like me need to make a strong economic case against joining the euro today, against joining it next year, and indeed against ever joining it.
We know that, when having conversations in the bar, members of the Government who have not read all 18 volumes try to keep it rather more simple. We are told that joining the euro would be good for all those with mortgages, because clearly mortgage rates would be lower. Yet evidence from these documents, and from the pages of the interesting financial press, shows that
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mortgages are dearer on the mainland of Europe-in euroland-than they are in Britain. It is difficult to see how it can be argued that mortgage rates would fall, as we would be joining an area with higher mortgage rates.
We are sometimes told by Ministers and other campaigners that if we joined the euro there would be what they call price transparency, and that miraculously the prices of all the things that are dearer in Britain than in Germany or France would tumble. Suddenly the scales would be stripped from our eyes, and at last we would understand that cars were cheaper in Germany than in Britain. Then people would no longer put up with the current situation.
That too is complete bunkum. The studies show that in the early stages of currency union there was quite a bit of rounding up in the countries that were abolishing their own currencies and going in for the euro experiment-just as there was a lot of rounding up when we last had a fundamental currency reform in Britain, over the period of decimalisation. It stands to reason that there is a great temptation to round up prices when people are shopping in a foreign currency for a while, as they would be during the painful and difficult transition from shopping in pounds to shopping in euros, were we ever foolish enough to say yes to that.
More important, we could have price inflation if euroland set the wrong interest rates for us. As a business man, before entering the House, I was responsible as chairman for a fairly large industrial conglomerate. I gave careful consideration to the idea of the exchange rate mechanism, and decided that it was definitely against the interests of the business I was leading, and definitely against the interests of my employees. My decision led to my resigning the company from the CBI, which happened at the time to have a policy of urging membership of the ERM. I was able to save my company £20,000 a year in CBI membership fees because we could not see eye to eye on that central policy.
The CBI came to see me in despair, saying "What do you want, Mr. Redwood? We will come and visit you every week". I said "No, that is not quite what I had in mind. That would not make my day or my week. What I want you to do is change your policy, because the ERM will be very damaging". The CBI said that that was the one thing that it could not do.
I tell that story because the entire British establishment recommended the ERM. At the time there were many wrong heads on the Labour Benches, in the shadow Cabinet and elsewhere, as well as in industry and the trade unions. It was a monumental mistake. The first thing that happened on linking our currency to the Deutschmark-as it then was-was that we set interest rates that were too low and we experienced rampant inflation. Subsequently, things turned round, we had to set interest rates too high and we experienced a very cruel recession.
I wrote a pamphlet in the late 1980s-before we joined-in which I said that if we joined, we would end up with either high inflation or a deep recession, because there was no right rate for entry. I said that there would be no common interest rate that would make sense across the ERM area, and that we would end up with the wrong interest rates because we would undoubtedly go in at the wrong currency rate. Even I, in my wildest
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nightmares, did not dream that we would end up doing both, but we did because people did not understand the economics.
I was therefore delighted to discover that the Treasury officials who wrote the 18 documents have grasped that point. They say that it is quite possible to end up with the wrong interest rate, and that adjustments would then have to be made to the level of employment, taxation or output that would probably be more severe than allowing the strain to be taken through the exchange rate. What they say about exchange rates is particularly interesting. Today, someone expressed a misconception on exchange rate movements by saying that they could be a worse shock than other factors. Indeed, the Treasury clearly states that
"exchange rate movements have not been a significant source of shocks to the UK economy as a whole. Instead exchange rate changes appear to have absorbed shocks that might otherwise have had a greater impact on UK output and prices."
Exactly. That was our experience of the ERM, and it would surely be our experience were we foolish enough to join the euro. It is the bitter experience of Germany, which is discovering that now she can no longer set her own interest rates-she needs them to be much lower than euroland rates-or influence her own exchange rate, all of the cruel adjustments to her economy are taking place in lost output, closed factories, bankrupt businesses and lost jobs.
We also hear from advocates of this foolish scheme that we would get exchange rate stability if we joined. Of course it is true that we would have absolute exchange rate stability against the former currencies of euroland, because that is the idea of the scheme. Despairing of being able to bring the currencies together in the normal marketplace through the ERM, which was busted apart by market pressures, such advocates decided on this ultimate ERM-the one that can never be got out of. One locks oneself in the burning building and throws away the key, as one of our right hon. Friends memorably reminded us. The advocates suggest that we would have guaranteed rate stability because there are no longer separate currencies, which in their view would bring business great success and the ability to plan well.
What advocates of the scheme ignore is that it could well produce greater instability for the new, adopted currency against the other very important trading currencies of the world. It so happens that we use the dollar much more than we use the euro for our trade and investment flows. We are an oil producer, and oil is priced in dollars. We are a big producer of high tech, and high-tech products are normally traded in dollars. We deal in all sorts of soft commodities and in investment markets, many of which are priced in dollars. On this issue, the Treasury study tells us the self-evident truth:
"In recent years the euro has been more volatile against the US dollar than the pound . . . If these trends were typical"-
they are, because they have existed for a very long time-
"then the UK exchange rate against the dollar would be more volatile within EMU than outside."
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Were we to join this silly scheme, we would therefore be opting for far more volatility in the crucial exchange rate that influences our economic policy: the exchange rate with the dollar.
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Keith Vaz: I understand the right hon. Gentleman's argument as to why he is opposed to Britain's joining the euro, but is he in favour of Britain's withdrawing from the European Union?
Mr. Redwood: I believe that we need to negotiate a better deal to improve our relationship with the EU. The UK cannot accept the current draft constitution and I recommend that the Government not only hold a referendum, but do a lot of negotiating first, because they will not have a cat in hell's chance of winning a referendum on that unacceptable proposal. I want us to trade with, and be friends with, our European partners, and I believe that we are much more likely to be friends with them if we get the veto back on several important areas. If a veto is in place, we will agree much more with our partners because we will not feel threatened. Losing so many vetoes-with many more to come-creates far more arguments and rows.
Mr. Bryant: How precisely would the right hon. Gentleman set about the renegotiation? Would he threaten withdrawal from the EU, or some sort of associate membership with it?
Mr. Redwood: Powers with nuclear weapons do not usually go around threatening people with their nuclear weapons. I would tell our partners that the relationship has not worked. We have had many Prime Ministers, and our present one, who is very Europhile, will not join the full common defence system and certainly not the euro-one of the main aspects of the whole integration process. So even a Europhile Prime Minister makes the correct-or forced-political judgment that he and the UK cannot participate in big chunks of the Union. We should tell our partners that the relationship is not working because integration is being pursued far faster than any reasonable British Prime Minister could accept. For our partners' sake and ours, we need a new deal, whereby France and Germany and their satellite countries can accelerate their political union, and we can have a relationship with them that is conducted within the single market and according to which we can work with them on a variety of matters-we might want common environmental policies, for example-but under which we retain a veto so that the House can decide what is right for Britain. It would be possible to negotiate that.
Government Front Benchers are always telling us that we can have enormous influence in Europe. I suggest that they go and use that influence to get something that the UK wants. I can tell them that a massive majority in this country wants to be friends with and trade with our partners in Europe, but does not want to be bossed around by bureaucrats from Brussels or see more powers taken away from what used to be a sovereign Parliament.
Keith Vaz: I cannot remember whether the right hon. Gentleman voted in favour of the Maastricht treaty or
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against it. It was his Government who signed the Maastricht treaty and gave away the vote in so many areas.
Mr. Redwood: The important point about the Maastricht treaty is that it retained the veto over the currency. That was the guts of the treaty, and I have always been at the forefront of the argument that Conservative and Labour Governments should use that veto. We are conducting a debate today and have the opportunity to keep the British people out of the euro only because we negotiated that important opt-out. Incidentally, we have learned from the Chancellor today that he has not managed to transfer that opt-out to the constitution, which could then fall because it is part of a treaty that is replaced. If the Government have any influence at all in Europe, will they please ensure that our vital opt-out from the euro is preserved in the constitution? When they demonstrate their influence, can they at last renegotiate the common agricultural policy so that it is not so offensive to the developing world and does not do so much damage to those living in poverty in Africa?
Mr. Love: Coming back to the renegotiation, what happens if the European states say no? What evidence does the right hon. Gentleman have to suggest that they would contemplate the sort of renegotiation that he proposes? If they do not, will we not be isolated in Europe and then have to make a fundamental choice between whether to be in or out?
Mr. Redwood: We have many opportunities to persuade our partners, and I would prefer to do it through reason, through strength of character and through the political will of the British people expressed in the ballot box at the next general election, when Europe may be a crucial issue. A referendum would strengthen the Government's hand because it would show our European partners that the will of the people is to have the sort of relationship that I am describing-based on agreement, common sense and not feeling threatened. Our partners could be allowed to proceed more quickly. Under the current system, we can always prevent our partners from proceeding as they want. That is one of the available threats, falling well short of the nuclear option. We send them an awful lot of money, and we could consider how much we should send them if they do not wish to co-operate. However, I would not want to start by threatening them. It would be better to proceed by saying that no matter who is the Prime Minister of the United Kingdom, we could never be a full participant in a scheme of political and monetary union, because we wish to be a largely independent, self-governing democracy, and that is not compatible with giving away our currency or the wide array of powers highlighted in the European constitution.
Mr. Laws: Is the right hon. Gentleman saying that a country such as France, as a member of the euro, is not a self-governing democracy?
Mr. Redwood: Yes, in many important respects, France is no longer self-governing in economic matters. If it signs the draft constitution in its present form, it will cease to be-in any meaningful sense-a self-governing,
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independent democracy. It will become part of a much bigger, proto-United States of Europe, with a huge democratic deficit, which would have to make rapid strides towards developing a proper democracy before many of us who are democrats would be happy with that side of its arrangements.
The EU has put the cart before the horse. It has not built a strong democratic centre first, and then given it some powers-as happened with this House of Commons. Instead it has been done the other way round, which is why it does not work.
