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Mr. Redwood: Will the Chancellor explain why the richest country in Europe, as measured in per capita income, is Switzerland? It does not intend to join the euro but it does massive trade with the rest of the European area.
Mr. David Laws (Yeovil): We know the Chancellor's judgment at this time about the five economic tests. Will he tell us whether he would be disappointed if Britain was not in the single currency in five years' time?
Mr. Brown: We are in favour of joining the single currency in principle, but we need to meet the five economic tests. I am about to explain what needs to be done to meet the tests and the changes that we need to make. However, the changes that we are bringing about to the British economy are in the British national economic interest.
Mr. Michael Howard (Folkestone and Hythe): The Chancellor might be about to pass on from his observations about our membership of the European Union. He is fully aware that our ability to continue to be a strong and active member of the European Union without joining the single currency is safeguarded by the opt-out clause in the treaty of Maastricht. Is he aware that no such opt-out clause exists in the European constitution?
Mr. Brown: We always supported the Maastricht opt-out clause. The opt-out clause stands. If the right hon. and learned Gentleman is suggesting that the opt-out clause falls, he is making a great mistake.
Mr. Howard: In that case, will the Chancellor give the House a cast-iron guarantee this afternoon that in the negotiations on the constitution at the intergovernmental conference the United Kingdom Government will make it absolutely clear that they will not sign up to the new constitution unless it replicates the opt-out from the single currency that is contained in the Maastricht treaty?
Mr. Brown: Not only does the opt-out clause remain, but, equally, the other states that are joining the European Union from the east of Europe do not have that opt-out clause, nor does Sweden. Britain has that opt-out clause, and we supported it in 1992 when the Bill came before the House of Commons. The right hon. and learned Gentleman does not have the evidence to suggest that Britain is walking away from the opt-out clause.
Mr. Howard: If what the Chancellor says is correct, there should be no difficulty in giving me the assurance for which I asked. He should be able to give the House a guarantee this afternoon that the Government will not sign up to any constitution that does not replicate the opt-out from the single currency contained in the Maastricht treaty. It is a perfectly simple matter.
Mr. John Bercow (Buckingham): The right hon. Gentleman is factually and legally wrong, and my right hon. and learned Friend is factually and legally right. Does the Chancellor not recognise that the European constitution will override and supersede all previous treaties and that it is therefore essential to guarantee the opt-out by incorporating a clause to that effect in the new constitution? In the absence of such a clause, will the Government veto the constitutionyea or nay?
Mr. Brown: Once again, Conservative Front Benchers and Back Benchers are trying to get us into a position of vetoing the conclusions of the IGC. They will choose any issueany red herringto do so. Their aim, frankly, is that we reject the IGC, put Europe into crisis and have a semi-detached or associate membership of the European Union, or some other relationship with it. I have told the shadow Chancellor the position: the opt-out stands. It was negotiated. We supported it at the time, just as they supported it. As for what is likely to happen, no other members of the European Union that are joining from the east have sought, or are getting, the opt-out clause. Britain has the opt-out clause. Even Sweden, which is to have a referendum later this year, has not asked for, and does not have, such a clause.
Europe is having to make difficult decisions about outward-looking relationships with the rest of the world, economic reform and a new social dimension. As a nation with a global trading economy and a history of stop-go in economic policy and management, the question for us, which the euro assessment addresses, is not whether further engagement is, in principle, against the British national interest, but whether the practical economic consequences of euro membership are in British national economic interests, because the decision is irreversiblehence the policy that we have adopted of testing membership against strict criteria, investment flexibility, financial services, employment and growth, and convergence.
Sustainable convergence is essentially the stability test. It means that the British economy can live on a permanent basis with euro area interest rates, can advance our objectives of high and stable levels of growth and employment and, of course, can provide secure, sustained and stable funding of our schools, hospitals and other public services. Flexibility is being able, in the absence of exchange rate or interest rate flexibility, to adjust our economy quickly to any shocks that arise so that we do not put those objectives at risk.
The purpose, therefore, of the five tests is to assess whether we have secured for Britain convergence with our European partners that is settled and durable, which is the first test; sufficient flexibility, which is the second test; and whether we can also confirm conclusively and confidently to the British people that the potential benefits for investment, financial services, employment, growth and tradethe benefits that I listed in detail when I made my statement to the House of Commons, which are contained in the many documents that were produced on the daycan indeed be realised.
The five tests are our guarantee of stability, high and stable levels of growth and employment, and the proper funding of public services. To meet them would ensure that we do not put at risk our economy or our public services. To fail to meet them would risk repeating the exchange rate mechanism mistakes. Overall, the assessment concluded that, inside or outside the single currency, the competitive strength of the City of London is such that the UK financial services industry should continue to thrive. Subject to the achievement of sustainable convergence and sufficient flexibility, we also concluded that the tests for investment and employment would be met. We were especially interested in the views of many inward investors about how they saw the future.
The issue is the convergence and flexibility tests, and then the exchange rate and transition issues. On convergence, since 1997 the short-term interest rate divergence between Britain and the euro area has fallen from 4 percentage points to 1.5 percentage points after the interest rate cut announced by the Bank of England today. Long-term interest rates have virtually converged today at around 4 per cent., but while our assessment finds that convergence has been, or can be, achieved in the provision of small business finance, large company finance and personal finance where, in fact, the UK economy is found to be no more interest-rate sensitive than othersit is the inflationary pressures that arise from the housing market that have led consistently, over the past 30 years, either to higher inflation in Britain than in other countries or to higher interest rates to keep inflation under control, and sometimes both.
The challenge of convergence when applied to housing is not, as some suggest, that we seek the same structure of the housing market or the mortgage market as the Germans, French, Dutch or Italians. All countries have, and will continue to have, unique features of their housing markets. The challenge is that the combination of house price inflation and volatility, and the impact of both on consumption, has generally led to interest rates that are higher than rates in other countries in order to deliver stability. Measures that reduce housing market volatility would reduce the extent to which interest rates need to take account of the housing market, and they would be good for industry whether or not the UK were to join the economic and monetary union.
Mr. Michael Fallon (Sevenoaks): Given the structural issues involved in meeting the convergence test and the steps that the Chancellor has set out to tackle them, what is his forecast of when the convergence test might be met?
Mr. Brown: I am not going to give a running commentary. I gave the assessment that we have made to the House of Commons a few weeks ago. I said that we would review the position prior to the Budget next year and report on progress. If there were sufficient progress, we would trigger a further assessment. I do not believe that it is helpful for me either to prejudge what might be announced next year or to give a forecast, as though I were a gambler on such matters. The important thing to recognise is that we will not short-cut or fudge the test. We will have a rigorous assessment and, before the Budget next year, a rigorous review. That is the best guarantee I should and can give to the British people.
The one thing that is absolutely clearI think it needs to be said, given what we have heard from Conservative Front Benchers todayis that we will not repeat the mistakes that were made in the ERM era. Those mistakes were, incidentally, never to have an assessment, either public or private[Interruption.] Let me explain to Conservative Members the extent of their problem. No assessment was ever made, internal to Government, of any detail