Repeatedly interrupted by Conservative critics of European union during a 40-minute speech, the Prime Minister said there had been no choice but to withdraw from the ERM following last week's speculative attack.
'I don't believe that any mechanism would have been able to withstand the size and scale of that; but I do believe there are areas within the ERM where reform could have made it a more credible instrument for use last week.'
However, he said reform would inevitably depend on negotiation with other ERM members and nobody could say how long that would take.
'Given the turbulence that has existed, and not least the money supply figures announced in Germany again, I would not expect our return to any mechanism and certainly not the same mechanism, to be in the near future.'
Conservative backbenchers cheered and some waved their order papers as Mr Major entered the chamber followed by Norman Lamont. The Prime Minister told the House: 'I take full responsibility for the actions and promises of my Chancellor.' Shouts of 'What about Mellor?' followed from Labour MPs. The Secretary of State for National Heritage, who resigned later, did not appear to be in the House.
Winding up the debate, Mr Lamont put the blame for withdrawal from the ERM squarely on the President of the Bundesbank. 'Those remarks (on the need for a devaluation of sterling) were never convincingly denied and they triggered the final irreversible advance on sterling.'
Mr Lamont said the root cause of the turbulence in the currency markets was German unification. His preference was to return to the ERM, but he said: 'I do not believe it would be right for me to recommend that sterling should re-enter the ERM unless and until the Germans and ourselves are more in step and unless and until the Germans are in a position to bring interest rates down to levels more compatible with sustained non-inflationary growth.' Mr Lamont dismissed as 'naive', John Smith's suggestion that the Government should have sought a realignment of ERM currencies. So long as the French, the Dutch and the others were not prepared to devalue against the deutschmark, that solution 'simply did not exist'.
The Chancellor said he would shortly set out in more detail in another speech the precise, more detailed framework the Government would be following. 'But monetary policy will continue as before to be supported by a tight fiscal stance. In this new situation, it is all the more important that the Government should stick rigorously to its public spending objectives. The strictest control of public expenditure is at the top of my policy agenda.'
Earlier, Mr Major rejected calls from Tory backbenchers for a referendum on the European union proposed in the Maastricht treaty and for a free vote on the European Communities (Amendment) Bill that implements it.
He made plain the Bill would not proceed to its Committee Stage until it was clear what the Danes intended to do and until there was a settled system for deciding what was for national action and what was for Community action.
'Subsidiarity' was one of the matters Mr Major said he wanted put in hand at the special meeting of the European Council on 16 October, which he announced would take place at the International Conference Centre in Birmingham. Mr Major said he would also be repeating criticisms of the exchange rate mechanism. In a swipe at the Bundesbank, he said the market speculation which overwhelmed the pound had been 'encouraged by injudicious comments about realignment that should never have been made. I do not see myself that we could readily return to the mechanism without dealing with the problems that have been thrown up in the last fortnight.'
Mr Major said his expectation was that co-operation was the better way and he warned MPs: 'Nobody should believe that a floating exchange rate is a free meal, always allowing interest rates to fall to a very low level.'
Turning on Lord (Norman) Tebbit and spreading responsibility for joining the ERM to Baroness Thatcher, he ridiculed the former Conservative Party chairman's claim that the Government had been 'dragged' into the ERM in 1990 by the then Chancellor - Mr Major himself.
Lord Tebbit was 'a man of courage, a fighter, a bruiser', but even he had lost many battles against Margaret Thatcher, Mr Major said. 'And yet despite this, according to Lord Tebbit, even my formidable predecessor, whose conviction and firmness of purpose are everywhere admired, was somehow dragged into the ERM by her new Chancellor.'
Looking ahead, Mr Major said that outside the ERM, monetary policy could not remain the same. The Government would have to take account of a range of indicators of monetary conditions to ensure its anti-inflationary objectives were not at risk. These would include the existing narrow money target, the behaviour of asset prices and the exchange rate.
Lower interest rates alone would not achieve the objective of non-inflationary growth, he said. 'This now depends even more crucially on keeping firm control over public spending.
'The Government's new system of control will allow money to be directed towards priorities whilst we keep strictly within the limits laid down for the growth of public expenditure as a whole.'
In essence, the Government had set an upper limit to expenditure and would divide resources between priorities, he said.
In the main vote on a motion supporting Government economic policy, eight Tory MPs abstained. They were: Teresa Gorman (Billericay), John Carlisle (Luton N), Nicholas Winterton (Macclesfield), Ann Winterton (Congleton), Bill Cash (Stafford), Sir Teddy Taylor (Southend East), Richard Shepherd (Aldridge Brownhills) and Nicholas Budgen (Wolverhampton SW).Reuse content