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Mr. Hopkins: We could, no doubt, debate those points at great length. The hon. Gentleman denies the efficacy of the new deal in America in the 1930s and the post-war period—the Bretton Woods era, to which I refer time and again—when we had the fastest growth, the highest employment, the greatest equality and the development of a full welfare state. For most people, living standards rose as they had never done before. Throwing away the gains of that period was a great mistake.
In effect, EMU will marketise the economy and will give away even more of the gains of the immediate post-war period. Former Chancellor Erhard must be turning in his grave. The miracle that he guided through, based on an undervalued Deutschmark—allowed by the west as a shining example of how capitalism could work across the border from where communism did not work—is being reversed.
I was interested in the suggestion made by the hon. Member for Chichester that it would not be difficult for a member state to withdraw from the EU. That would be likely to cause problems. It is at least possible, indeed some people might say it is likely, that EMU will soon run into serious problems. Germany is a case in point. Portugal will try to tough it out by using flexible labour markets or whatever, without any attempt to change its macro-economic variables. While on holiday in Portugal last year, I saw a notice at a building site, put there by trade unionists, that said, "No to flexible
labour." Well, that is what I thought it said—it was in Portuguese—but I think that my translation was pretty accurate.Last year, a study said that if interest rates were appropriate to the national economies of the member states, we would have a vast range of interest rates. At that time, Germany would have required an interest rate of 1.5 per cent. Ireland was at the other extreme, at 6.5 per cent. Spain was at 4.5 per cent. and France at 3.5 per cent. Those are big differences in interest rates, and I cannot envisage the appropriate interest rates converging. Indeed, as the hon. Member for Chichester and others have said, Ireland is booming and Germany is going into serious recession and is in serious danger of deflation.
A year from now, we may have to assess not whether we join the eurozone, but whether the eurozone will survive and whether major countries will abandon the euro and reinvent their own currencies, as has been done in recent years. When the Soviet Union collapsed, all its member states took up their own currencies. We have recently seen the dissolution of Czechoslovakia into the Czech Republic and Slovakia, and they have their own currencies.
I am fearful about losing our own currency because we would lose control of macro-economic policy, which is of fundamental importance to ensuring that we can retain full employment and growth in living standards and that we can manage our own economy in the way that we want, according to the democratic dictates of our population. Every other country in the EU ought to have that as well.
My concern is that EMU might destroy the EU, with serious political consequences. In previous generations, economics was always called political economy, and economics and politics are inevitably locked together. When economics go wrong, we get dictatorial regimes, and there is an uncomfortable growth of the extreme right in Europe at the moment. If German unemployment went up to an even more frightening level and deflation occurred, some rather unpleasant political groupings could grow in popularity in Germany, and that could happen elsewhere. One or two hon. Members are concerned about that, because they are perhaps somewhat older than I am and have longer memories and can remember what happened immediately before the war. Serious political possibilities arise from the problem that EMU will cause all the member states.
I want Europe to work, and I dislike being told constantly that I am anti-European because I am anti-EMU and anti-euro. No one is more pro-European than me. I am culturally European; I go there for my holidays; I try to speak European languages. I am not from any other continent. I am deeply involved in European culture and life, and I go there regularly. I want to have good, friendly relations with all my European colleagues and to talk about politics and music, and, indeed, to drink their wine. Europe will not work if we smash its economy by driving forward the euro, the eurozone and EMU. I have possibly spoken for too long, and I hope that I have not taken up other hon. Members' time.
6.18 pm
Jon Cruddas (Dagenham): Thank you very much, Mr. Deputy Speaker, for allowing me to make a few comments at the end of the debate. In echoing the comments made by my hon. Friend the Member for Luton, North (Mr. Hopkins), I want to explain briefly where I am coming from. I am not anti-European. Indeed, I am very much pro-European. I am not anti-euro in principle. I was elected on a manifesto that supported the principle of joining a successful single currency.
I feel that I am quite pragmatic about entering the euro, but I cannot understand how we can join in the immediate future, for two reasons: first, the structural reforms necessary to live permanently with eurozone interest rates, and secondly, the scale of reform needed to the policy framework that operates in the eurozone. To date, the debate about monetary union has tended to be dominated by caricature. On the one hand, pro-euro advocates are seen as selling out our history and traditions and propelling us towards a superstate, governed by an elite. On the other, those who are anti-euro or cautious about early entry are seen as little Englanders and as road blocks standing in the way of the inevitable laws of history and of our political and economic destiny.
For me, the main problem for my party is that over the past few years we have given the impression of appearing to collapse two separate issues into one: first, that we are a pro-European political party; secondly, that we are in favour of joining the euro as soon as possible, irrespective of political and economic context. The consequence of that is that for some in the party, preparedness to join the euro is seen as a hallmark of their pro-European—and new Labour—bona fides. At times, it has appeared that anyone who is cautious about early euro entry, and who wants to see some of the policy frameworks and institutions reformed before we join, is in effect perceived to be an "outer", a non-believer, and almost an opponent of a modernised Labour party: a de facto member of the Bruges group. In that sense, some pro-euro enthusiasts have done a disservice to their cause, as their lack of pragmatism has distorted the debate and served to underplay the profound and complex issues at stake.
For me, the real significance of the Government's recent announcements on the euro is that they decouple those two positions: on the one hand, our general pro-European position, and on the other, a cautious approach to early euro entry. As such, our pro-European bona fides have been re-established while simultaneously mapping out a major agenda for reform, both here and within the eurozone. The approach is to consider the issues around prospective entry through the grid of self-interest rather than a determinist assumption about destiny and inevitability.
In terms of the five tests, I want to focus briefly on the issue of convergence, as in 1997 it was determined as the critical test. It pivots on the fundamental questions: are our cycles and economic structures compatible so that we can live comfortably with euro interest rates on a permanent basis; and what are the risk factors for sustainable and settled convergence? It seems to me that, alongside that, a political test should be related to convergence: is the euro interest rate on a permanent
basis compatible with our domestic political agenda? Without the monetary policy flexibility that we currently maintain, emphasis is placed on the operation of a more discretionary fiscal policy to enhance economic stabilisation. That means discretionary direct and indirect taxes and temporary tax credits either to cool down or to stimulate the economy. Those issues are covered in the interesting Treasury discussion document, "Fiscal stabilisation and EMU".There is no doubt that if we were to join the euro now this discretionary fiscal policy would have to kick in to raise taxes significantly. Let us imagine what would happen if interest rates were cut by 1.3 per cent. now. We would see another bout of consumption and a surge in the housing market, reinforcing the way in which the housing market in the south-east constrains our macro-economic performance. In Dagenham, for example—the area that I represent—the lowest-cost housing market in Greater London, house prices have virtually doubled over the last three years. Of the 39,000 council dwellings, 17,000 have been sold off over the last 20 years. We currently have 6,000 applicants on the waiting lists, last year there were 2,000 homeless applications in the borough, and there is a chronic shortage of social housing. Many find it very difficult to enter the private sector. At the same time, it is estimated that the population of London will grow by some 750,000 over the next 10 to 15 years, and it is assumed that much of that will be handled on the east side of the city. In the borough that I represent, we are talking about some 25,000 extra dwellings over the next 10 to 15 years.
The simple points that I am seeking to make are as follows: first, pressures exist on the housing stock at the moment; secondly, tensions are at work even within the lowest-cost housing market in London; thirdly, pressures on the demand side are going to intensify; and fourthly, we need to acknowledge that there is a long-term supply-side plan to hand. The scale of this project of economic restructuring cannot be overstated, however; nor can the implications of significant interest rate cuts and the abolition of national level monetary policy to regulate these markets before structural reforms kick in.
Let us consider this: we join the euro, we trigger another boom in the housing market, but we have not sorted out the supply side issues, and we have no national control over interest rates to constrain this renewed consumption. The solution would be significant increases in tax rises through this discretionary fiscal policy. Two words jump out—stop-go. However, the situation could be worse. The Treasury discussion paper suggests that there is no guarantee of success: witness the failure of discretionary fiscal policy in the 1950s and 1960s under Bretton Woods.
At the same time, this discretionary policy sits uneasily with the Government agenda of tax rises that are levelled for investments in public services. This strategy is politically acceptable only if the tax rises are transparently linked to investments in public services. That is the implied compact that we have with the British people. Without major structural reform, we would join the euro and would put up taxes to cool down the housing market in the south-east. There is little evidence that that discretionary fiscal policy would work, yet we would have undermined the compact with
the people regarding a general transfer of any new revenues into public service investments. Any Government who proposed such a package would develop a pretty uncomfortable relationship with the electorate.The situation could be worse, however. At the moment, we are in the mid-term of the agenda for refinancing public services. Cumulatively, there will be a £61 billion increase in public service investment by 2005–06. That is having an effect at a local level and change is occurring. Yes, it is uneven and at times slow, but it is occurring and that is the agenda that we were elected on. I think people will be patient provided that we preserve the link between the tax rises and the expenditure plans. That could be derailed in one of two ways: first, if we had to push up the discretionary tax rises that I mentioned earlier or, secondly, if we were to enter a system whose rules would bring into question this strategy and imply spending cuts to restrict borrowing.
Under the stability and growth pact, the objective was balanced budgets by 2002–03. Late last year, that was changed to an objective of 0.5 per cent. cuts off borrowing for the next three years. Simply on the Red Book numbers, that would imply cuts of £35 billion. The excessive deficit procedure has been triggered in Portugal and Germany, as has the early warning system in France. There is also trouble in Italy. It is vital that we resist pressures to compromise our domestic strategy.
We have had to revise our borrowing estimates upwards over the last year. The estimates for 2003–04 to 2005–06 are cumulatively some £74 billion, 2.4 per cent. to 1.9 per cent. of GDP in terms of Government net borrowing, or what the Red Book describes as the treaty deficit. Any further downward revision of our growth estimates will push us very close to the 3 per cent. levels introduced at Maastricht.
Even to preserve our spending plans, we could fall foul of the current budgetary rules of monetary union while having to signal more tax increases before the election. Therefore our compact with the electorate could be more difficult to sustain over the next few years, irrespective of euro entry. Inside the euro, our spending plans could well be compromised. Moreover, the discretionary tax rises that would be needed if there were no substantial structural reform could rupture this compact.
Overall, the Government's recent statement has rebalanced debate in the Labour party by separating our pro-European agenda from an early rush into monetary union. It is a rational and pragmatic position to take. The structural reforms needed before we again contemplate entry are significant. Without the reforms, the discretionary fiscal policies needed are not necessarily workable or politically desirable, given our domestic strategy to rebuild public services. Notwithstanding this, our current approach to revenue raising and expenditure will itself require renewed work over the next few years. The present rules of the eurozone regarding borrowing would compound rather than resolve these problems.
The rational position, therefore, is a cautious one. That is why I fully support the Government agenda. We should concentrate on the manifesto we were elected on: rebuilding our public services and linking any tax rises specifically to that project.
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