Only at my meeting with John Major on Wednesday 13 June did I eventually say that I would not resist sterling joining the ERM. Although the terms I had laid down had not been fully met, I had too few allies to continue to resist and win the day.
But my willingness to join the ERM was qualified by a crucial condition. I insisted that we enter the wide band – 6 per cent on either side. Even then I made it very clear that, if sterling came under pressure, I was not going to use massive intervention, either pouring in pounds and cutting interest rates to keep sterling down or raising interest rates to damaging levels and using precious reserves to keep sterling up. This makes nonsense of the claim, sometimes heard from ERM proponents justifying the subsequent collapse, that we were right to go in, but wrong to do so at that rate. In fact, a rate that is right today can be wrong tomorrow and vice versa. Until now, the ERM had never been a rigid system. I did not need to spell this out to our European partners because, whatever the fine points of detail, a country which wished to realign had always been able to do so in practice. Now that the UK was inside the ERM, other countries would have been so anxious to keep us in that they would have made little or no difficulty about realignment.
I resisted John Major’s wish to go into the ERM in July. The monetary signals, indicating that inflation was starting to turn down so that we could enter the ERM with some confidence that the parity could be sustained, were not yet in place.
By the autumn, however, the high interest rates were clearly doing their work. The money supply fell sharply. It was clear that interest rates should now be reduced, quite apart from the question of the ERM. As regards ERM entry, the Madrid conditions had not been fully met. But the most important consideration was inflation. It was not till the end of the year that inflation as measured by the RPI (heavily distorted by mortgage interest rates and the way the community charge figured in it) began to fall. Other indicators, however – CBI surveys, car sales, retail sales and above all the money supply – showed that we were getting on top of inflation. I insisted against the Treasury and the Bank on a simultaneous announcement of a 1 per cent cut in interest rates. They had not disputed that the monetary and other figures warranted this; but they had wanted to delay. But I for my part was determined to demonstrate that we would be looking more to monetary conditions than to the exchange rate in setting interest rates. So on Friday 5 October we announced that we were seeking entry into the ERM, and I placed heavy emphasis on the interest rate cut and the reasons for it in presenting that day’s decision.
* Overfunding was the practice by which the Government sought to reduce private bank deposits – and hence £M3 – by selling greater amounts of public debt than were required merely to finance its own deficit. The ‘bill mountain’ arose from the use of the proceeds to buy back Treasury bills from the market.
* In all this, it is always necessary to distinguish between nominal and real interest rates. High money interest rates are predominantly a consequence of the market’s expectations of high inflation. If inflation is expected to be high, say at 10 per cent, then, even if one ignores taxes, interest rates of 10 per cent are required just to offset the inflationary erosion of a family’s savings. In fact it is real interest rates – the excess of the percentage interest rate above the expected inflation – which affects the thrift and investment of families and businesses.
* The suggestion that the inflation, which began at the end of 1988 and lasted until mid-1991, could be explained by decisions on interest rates and monetary policy in 1985 assumed almost a four-year lag in the effect of monetary expansion on inflation. We know that lags, in Milton Friedman’s words, are ‘long and variable’ with an average of about eighteen months. So three to four years is possible, but hardly plausible.
* Interest rates had gone up to 13 per cent in November 1988 and to 14 per cent in May 1989.
* Following the negative reception accorded to our original proposal for competing currencies, we began to develop this new hard ecu approach based on the suggestions made by Sir Michael Butler, Britain’s former Ambassador to the Community, now working in the City.
CHAPTER THIRTY-SEVEN
The Babel Express
Relations with the European Community 1987–1990
I HAVE ALREADY DESCRIBED how during my second term of office as Prime Minister certain harmful features and tendencies in the European Community started to become evident. Against the notable gains constituted by the securing of Britain’s budget rebate and progress towards a real Common – or ‘Single’ – Market had to be set a more powerful Commission ambitious for power, an inclination towards bureaucratic rather than market solutions to economic problems and the re-emergence of a Franco-German axis with its own covert federalist and protectionist agenda. As yet, however, the full implications of all this were unclear – even to me, distrustful as I always was of that un-British combination of high-flown rhetoric and pork-barrel politics which passed for European statesmanship.
It is fair to say that from early 1988 the agenda in Europe began to take an increasingly unwelcome shape. It also began to deviate sharply from that being pursued in the wider international community.
At the G7 summit in Toronto in June 1988, I had an hour’s meeting with Chancellor Kohl. Much of it focused on the forthcoming Hanover summit. Chancellor Kohl, supported by the German Finance Ministry and the Bundesbank, seemed ready now to plump for a committee of central bankers rather than academic experts – as the French and the German Foreign Minister Hans-Dietrich Genscher wanted – to report on EMU. This I welcomed. But I restated my unbending hostility to setting up a European Central Bank. By now I was having to recognize that the chance of stopping the committee being set up at all was ebbing away; but I was determined to try to minimize the harm it would do. I also had to recognize that we were saddled with M. Delors as President of the Commission for another two years, since my own favoured candidate, Ruud Lubbers, was not going to stand and the French and Germans supported M. Delors. (In the end I bit the bullet and seconded M. Delors’s reappointment myself.)
The Hanover Council turned out to be a fairly good-humoured if disputatious affair. The most important discussion took place on the first evening over dinner. Jacques Delors introduced the discussion of EMU. Chancellor Kohl suggested that a committee of Central Bank governors with a few outsiders be set up under M. Delors’s chairmanship. In the ensuing discussion most of the heads of government wanted the report to centre on a European Central Bank. Poul Schlüter, the Danish Prime Minister, opposed this and I supported him strongly. We succeeded in getting mention of the Central Bank removed. The Delors Group was to report back to the June 1989 European Council – that is, in a year’s time.
My problem throughout these discussions of EMU was twofold. First, of course, was the fact that I had so few allies; only Denmark, a small country with plenty of spirit but less weight, was with me. But I was fighting with one hand tied behind my back for another reason. As a ‘future member’ of the EEC, the UK had agreed a communiqué in Paris following a conference of heads of government in October 1972. This reaffirmed ‘the resolve of the member states of the enlarged Community to move irrevocably [towards] Economic and Monetary Union, by confirming all the details of the acts passed by the Council and by the member states’ representatives on 22 March 1971 and 21 March 1972’. Such language may have reflected Ted Heath’s wishes. It certainly did not reflect mine. But there was no point in picking a quarrel which we would have lost. I preferred to let sleeping dogs lie.
Then, of course, they woke up and started barking in the course of the negotiation of the Single European Act of 1985–86. I had not wanted any reference to EMU in at all. The Germans failed to support me and so the reference to EMU was inserted. But I had Article 20 of the Single European Act give my interpretation of what EMU meant; its title read: ‘Cooperation in Economic and Monetary Policy (Economic and Monetary Union)’. This enabled me to claim at subsequent forums that EMU now meant economic
and monetary co-operation, not moving towards a single currency. There was a studied ambiguity about all this. Councils at Hanover in June 1988 and then at Madrid in 1989 referred back to the Single European Act’s ‘objective of progressive realization of economic and monetary union’. I was more or less happy with this, because it meant no more than co-operation. The rest of the European heads of government were equally happy, because they interpreted it as progress towards a European Central Bank and a single currency. At some point, of course, these two interpretations would clash. And when they did I was bound to be fighting on ground not of my choosing.
The fact was that the more I saw of how the Community operated, the less I was attracted by any further steps on the road towards monetary integration. We advanced our proposals for a ‘hard ecu’. We issued Treasury bills denominated in ecu terms. And (though this was done because it was in our own interests, not in order to please our European partners) we had swept away exchange controls before anyone else. All this was very communautaire in its way, as I never ceased to point out when criticized for resisting entry into the ERM. But my own preference was always for open markets, floating exchange rates and strong political and economic transatlantic links. In arguing for that alternative approach I was bound to be handicapped by the formal commitment to European ‘economic and monetary union’ – or indeed that of ‘ever closer union’ contained in the preamble to the original Treaty of Rome. These phrases predetermined many decisions which we thought we had reserved for future consideration. This gave a psychological advantage to my opponents, who never let an opportunity go by of making use of it.
Not the least of those opponents was Jacques Delors. By the summer of 1988 he had become a fully fledged political spokesman for federalism. The blurring of the roles of civil servants and elected representatives was more in the continental tradition than in ours. It proceeded from the widespread distrust which their voters had for politicians in countries like France and Italy. That same distrust also fuelled the federalist express. If you have no real confidence in the political system or political leaders of your own country you are bound to be more tolerant of foreigners of manifest intelligence, ability and integrity like M. Delors telling you how to run your affairs. Or to put it more bluntly, if I were an Italian I might prefer rule from Brussels too. But the mood in Britain was different. I sensed it. More than that, I shared it and I decided that the time had come to strike out against what I saw as the erosion of democracy by centralization and bureaucracy, and to set out an alternative view of Europe’s future.
It was high time. It was clear that the momentum towards full-blooded EMU, which I always recognized must mean political union too, was building. In July M. Delors told the European Parliament that ‘We are not going to manage to take all the decisions needed between now and 1995 unless we see the beginnings of European government in one form or another,’ and predicted that within ten years the Community would be the source of ‘80 per cent of our economic legislation and perhaps even our fiscal and social legislation as well’. In September he addressed the TUC in Bournemouth, calling for measures to be taken on collective bargaining at the European level.
But there were also more subtle, less easily detectable, but perhaps even more important signs of the way things were going. That summer I commissioned a paper from officials which spelt out in precise detail how the Commission was pushing forward the frontiers of its ‘competence’ into new areas – culture, education, health and social security. It used a whole range of techniques. It set up ‘advisory committees’ whose membership was neither appointed by, nor answerable to, member states and which tended therefore to reach communautaire decisions. It carefully built up a library of declaratory language, largely drawn from the sort of vacuous nonsense which found its way into Council conclusions, in order to justify subsequent proposals. It used a special budgetary procedure, known as ‘actions ponctuelles’, which enabled it to finance new projects without a legal base for doing so. But, most seriously of all, it consistently misemployed treaty articles requiring only a qualified majority to issue directives which it could not pass under articles which required unanimity.
Often, it was difficult to explain to the general public precisely why we opposed the specific measure the Commission wanted. This made it politically difficult to resist the creeping expansion of the Commission’s authority. In theory, it would have been possible to fight all this in the courts; for time after time the Commission were twisting the words and intentions of the European Council to its own ends. We did indeed fight, and won a number of cases on these grounds before the European Court of Justice (ECJ). But the advice from the lawyers was that in relation to questions of Community and Commission competence the ECJ would favour ‘dynamic and expansive’ interpretations of the treaty over restrictive ones. The dice were loaded against us.
The more I considered all this, the greater my frustration and the deeper my anger became. Were British democracy, parliamentary sovereignty, the common law, our traditional sense of fairness, our ability to run our own affairs in our own way to be subordinated to the demands of a remote European bureaucracy, resting on very different traditions? Because Britain was the most stable and developed democracy in Europe we had perhaps most to lose from these developments. But Frenchmen who wanted to see France free to decide her own destiny would be losers too. So would Germans, who wished to retain their own currency, the deutschmark, which they had made the most credible in the world.
I was no less conscious of those millions of eastern Europeans living under communism. How could a tightly centralized, highly regulated, supra-national European Community meet their aspirations and needs?
This wider Europe, stretching perhaps to the Urals and certainly to include that New Europe across the Atlantic, was an entity which made at least historical and cultural sense. And in economic terms, only a truly global approach would do. This then was my thinking as I turned my mind to what would be the ‘Bruges Speech’.
The hall in which I made my speech was oddly arranged. The platform from which I spoke was placed in the middle of the long side so that the audience stretched far to my left and right, with only a few rows in front of me. But the message got across well enough. And it was not only my hosts at the College of Europe in Bruges who got more than they bargained for. The Foreign Office had been pressing me for several years to accept an invitation to speak there to set out our European credentials.
I began by doing what the Foreign Office wished. I pointed out just how much Britain had contributed to Europe over the centuries and how much we still contributed, with 70,000 British servicemen stationed there. But what was Europe? I went on to remind my audience that, contrary to the pretensions of the European Community, it was not the only manifestation of European identity. ‘We shall always look on Warsaw, Prague and Budapest as great European cities.’ I went on to argue that western Europe had something to learn from the admittedly dreadful experience of its eastern neighbours and their strong and principled reaction to it:
It is ironic that just when those countries, such as the Soviet Union, which have tried to run everything from the centre, are learning that success depends on dispersing power and decisions away from the centre, some in the Community seem to want to move in the opposite direction. We have not successfully rolled back the frontiers of the state in Britain only to see them reimposed at a European level, with a European super-state exercising a new dominance from Brussels.
There were, moreover, powerful non-economic reasons for the retention of sovereignty and, as far as possible, of power, by nation-states. Not only were such nations functioning democracies, but they also represented intractable political realities which it would be folly to seek to override or suppress in favour of a wider but as yet theoretical European nationhood. I pointed out:
Willing and active co-operation between independent sovereign states is the best way to build a successful European Community … Europe will be stronger
precisely because it has France as France, Spain as Spain, Britain as Britain, each with its own customs, traditions and identity. It would be folly to try to fit them into some sort of identikit European personality.
I set out other guidelines for the future. Problems must be tackled practically: and there was plenty in the CAP which still needed tackling. We must have a European Single Market with the minimum of regulations – a Europe of enterprise. Europe must not be protectionist: and that must be reflected in our approach to the GATT. Finally, I stressed the great importance of NATO and warned against any development (as a result of Franco-German initiatives) of the Western European Union as an alternative to it.*
Not even I would have predicted the furore the Bruges speech unleashed. In Britain, to the horror of the Euro-enthusiasts, there was a great wave of popular support for what I had said. But the reaction in polite European circles – or at least the official reaction – was one of stunned outrage.
By now attention in British politics was turning to two issues which, much as I sought to disentangle them, became entwined: the elections to the European Parliament and the occasion of my tenth anniversary. On the second of these, I had given strict instructions to Central Office and the Party that it should be handled with as little fuss as possible. I gave one or two interviews; I received a commemorative vase from the National Union; and a rather attractive publication was issued by the Party, which was a modest success without being exactly a bestseller. But, of course, there were plenty of journalists anxious to write ‘reflective’ pieces on ten years of Thatcher and to conclude, as I knew they would, that a decade of this woman was quite enough.
Margaret Thatcher: The Autobiography Page 85