NOTES FROM:
MONETARY POLICY AND ECONOMIC AFFAIRS
12.7.2001. House of Lords
(Keeping you in the picture)

Column 1187,  House of Lords 12.7.2001.

"Can the Minister tell the House when the Monetary Policy Committee (MPC) was made aware that in April and May of this year government spending would rise by a staggering yearly rate of 12.5 per cent?  Will the Minister also explain how the MPC first found out that the Government, having first repaid debts of £34 billion-- and received applause for doing so-- would then promptly borrow it again over the next four years?  In the Red Book, the Government say that their solution to the gap between income and expenditure is to borrow £12 billion a year by the end of this Parliament.  Have the Minister held discussions with the MPC about the consequences of such a deficit?  Would it not be better if the MPC could speak out, and if it believes that fiscal and monetary policy are at variance, and perhaps then declare publicly whether its decisions might have been different, given a different fiscal stance?"

                                         -----------------------------

"On 10th May, the ECB stated that it was cutting interest rates because low growth prospects meant lower inflation.  The ECB said that future prospects,

                         "No longer pose a risk to price stability"

But now we know that in May--the month in which that statement was made--inflation in the euro-zone rose from 2.9 per cent, its highest level since the euro's launch in January 1999.  By what reasoning did the ECB get it so wrong?  This we shall never know and is the reason why many people, led by the noble Lord, are becoming so worried about replacing the MPC with the ECB."

                                          -------------------------------

"Article 10 of the protocol on the Statute of the European System of central banks and of the European Central Bank states that the Governing Council shall comprise the members of the Executive Board of the ECB and the Governors of the national banks.  Together they shall vote (by simple majority) on the interest rate policy.  In the event of a tie president has a casting vote.  The council is required at least 10 times a year."

"What that means is that, instead of the MPC regime, we shall get into a situation in which we shall have no more influence on euro-zone monetary policy that the governor of the Luxembourg central, even though our economy is much bigger."

"If we take moves towards the euro, the Bank's independence and the MPC's role would end.  It would become the London branch of the ECB.  Control over interest rates' decisions to suit not only Britain but the whole of the European Union would pass to the European Central Bank and our Governor's vote would become only one out of 17 votes.  I find that extremely worrying."

"It will lead to a tangled web at the centre of the future of the MPC.  Multinational companies, many of whom we know are pressing the Government to join the euro, are saying that the exchange rate must fall below our current rate of 3.15 to 3.20 deutschmarks.  All of them say that the present rate of sterling is "unsustainable" and "uncompetitive" and would cause another ERM debacle if we joined at this rate.  Noble Lords should remember that, when we joined the ERM, it was set at the fateful rate of 2.95 deuschmarks.  We all remember what happened.  So they say the pound must be cut.  Sir Edward George says that he hears suggestions from such businessmen varying from 2.40 deutschmarks to 2.90 deutschmarks"

"This implies, on average, a 12 per cent fall in the pound versus the euro.  I am told by those who well know about these things that that kind of devaluation will add 1.5 per cent to UK inflation, taking it to over 4 per cent, way above the Bank of England's target of 2.5 per cent."

"We should remember that inflation in the UK is already at 2.4 per cent, so we are already on the Bank of England's limit.  Any further rise in inflation caused by a devaluation of the pound to get us into the euro at the right rate, will trigger interest rate rises.  That would lead to a wider gap in interest rates between the UK and the euro zone, less convergence and, probably, a higher pound--the exact opposite of what the devaluers in industry want."

          --------------------------------------

Column 1200
"If we met the exchange rate convergence criterion, we would inevitably diverge even more on interest rates and other parts of the business cycle.  In those circumstances, whatever the views of the Governor or the monetary Policy Committee, the Chancellor at least is committed in principle to Britain to joining the euro.  The concern must be that with the Government's present policy we will never have the sustainable convergence that the Chancellor wants.  As soon as we converge, we will immediately diverge.  I am glad to see me noble friend Lord Shore nodding in agreement.  If we stick rigidly to the present policy, we will never meet the Chancellor's five tests.  I hope that is not the reason why he set them."

                                 --------------------------------------

Column1202
"The Government believe that 2.5 per cent is the correct inflation rate for this economy.  We know that the true inflation rate, if measured on the same basis as it is measured in the EU, is some-where below 1 per cent.  It is acceptable to ask for 2.5 per cent wage increases and some more--say, another two or three percentage points--as the Government appear to be sanguine about inflation.  Then what happens to our competitiveness?

                                      ---------------------------------------
Column 1209
"In the debate as to whether the MPC could reconcile all the different interests of our economy and geography, it is interesting to note that this argument is being repeated again over the Single European Currency.  Exactly the same arguments about diversity and geography are being presented to explain why the euro will not work and is unsuitable for us.  Excepting that joining the euro is virtually irreversible--but the Bank of England Act 1998 can presumably be repealed--the economic and geographical augments are much the same, as though Britain were a microcosm of Europe, which it could well be."

                                     ---------------------------------

Column 1211
….."the major problem that has emerged is that the exchange rate has now been divorced from the Bank of England and its terms of reference.  That is a serious matter because we have a misalignment in our exchange rate, particularly with the euro."

"Nobody should doubt that there has been a considerable price to pay already for the misalignment of the pound, the euro and other exchanges.  The effects of that, particularly in the North-South divide in the UK--it still exists although "North" is a bit crude to describe the areas of manufacturing, and includes Wales, the north of England and part of Scotland--have accentuated the problem.  We have had the booming South with its service economy and we have had the rather severe effects of an adverse exchange rate on our manufacturing industry mainly concentrated elsewhere in the country and indeed also affecting agriculture."

"One of the results of that, as we know has been the increase of imports, a falling off of exports and a widening trade gap which is now of a very serious order…………….We are running the largest trade current account deficit in our history.  It is bigger even than the appalling affliction that we had to cope with in 1975 when our oil prices quadrupled almost overnight and we faced problems that flowed from that.  So, the situation is extremely serious.  It is likely to be accentuated because the world economy is slowing down."

"What can we do?  The most obvious thing that comes to mind in terms of monetary policy is, of course, to lower interest rates.  British interest rates are much higher that they are in euroland; they are much higher than in Japan and they are very much higher than in the USA, where the Fed has acted vigorously to reduce interest rates as a counter-recessionary measure."

"So why do we not cut our interest rates?  What is to prevent us doing that?  The answer is that, unfortunately, that decision no longer lies within the competence of the Governor of the Bank of England."

"It lies with the Treasury; and the Treasury has shown an astonishing indifference to this problem."

                     -------------------------

Column 1212
…….."There is a great gap between monetary policy on the one hand and fiscal policy on the other.  The obvious answer to the question of what is to be done if inflation is to be brought in as a result of a sensible interest rate policy is that we have to operate either on public expenditure or on taxation, on fiscal policy or on the gap between them.  That is the dilemma."

"If my party, my colleagues and the Government are as wedded, as they are, to high totals of public expenditure which will grow--there is no doubt about that-- they will have to look again at the fiscal instrument.  Instead of dodging around and making rather dangerous promises about not increasing taxation, they had better think again."

"Almost inevitably something has to be done if the ambition of my noble friend to join the euro is to become a possibility.  The Government knows very well that they cannot join at the present rate of exchange.  They have to get it down.  But they must not be surprised that the Bank of England and the ECB have as their first objective the containment of prices.  Price restraint is built into the Maastricht Treaty, into the protocols about exchange rate and the euro, and as noble Lords well know it is in the Bank of England Act as well.  We must not be surprised about that."

…….".I belong to that small group of people--we are almost a unique club--that does not yet believe that the great economic judgement of the Chancellor is wholly infallible.  We think that he may have made a great mistake in separating fiscal from monetary policy, either by making the Bank of England independent or, at least, by giving the Bank of England such restricted terms of reference."

Anne Palmer  15.7.2001.

There is NO CopyRight on this document, which is one of many 1,000s of items freely available on http://www.SilentMajority.co.UK [some 20Mbs.] & 10s of 1,000s of items on The SilentMajority CD [with over 80Mbs.] which contains the entire web site & hosts other web sites also, 1,000s of apposite quotations, Articles, Speeches, Commentaries, ArtWork, & The FULL text of The EU Treaties, Several Related Books, The British Constitution, The American Constitution & Numerous related Items.
SilentMajority nor any associate thereof does NOT vouch for the veracity of the documents hosted on its site or CD nor any foreign language documents thereon & advises you consult your own solicitor on legal details as we do not accept liability for, nor presume to give legal advice ourselves.
For a copy of the CD please mail payment of £20.00 for UK deliver or £25.00 for ALL other Countries payable to:
Greg Lance – Watkins,
Glance Back Books,
17 Upper Church Street,
CHEPSTOW,
NP16 5EX
Monmouthshire,
GREAT BRITAIN
For delivery of 2 x CDs
one for your own use
+ one for on selling or donation to an individual of influence (media, politician, activist etc.)

IF YOU wish to use the Material Above, which is freely provided
Please have the Courtesy to Print It out in its entirety from start to finish with NO alterations, as displayed.
To This Point
.