The Path to Power m-2

by Margaret Thatcher

  Moreover, there is no doubt that the French, in particular, will do everything in their power to prevent transfers of investment and jobs to Britain because of our lower social costs. This was illustrated by the outraged French reaction to the decision by Hoover-Europe to transfer production of vacuum cleaners from Dijon to Cambuslang near Glasgow because, as the President of Hoover-Europe explained, in Scotland total remuneration costs were 37 per cent lower than in France. A large part of that difference reflects the cost of social benefits required by French law. What Britain regards as a desirable policy of keeping the burden of regulations and costs on business down the French denounce as ‘social dumping’. In these circumstances, the pressure on Britain to accept regulations which will damage business will continue and intensify.

  Similarly, the ‘opt-out’ on monetary union is less than meets the eye. It has only given us the right to opt out of the third stage of monetary union, not the first or second stages. The precise degree to which the first two stages of the process limit Britain’s economic freedom in practice is debatable, though on any view it is considerable. Member states are required to ‘regard their economic policies as a matter of common concern’; guidelines on economic policy are to be established by the Commission and the Council of Ministers, and member states are then to be monitored for compliance with those guidelines through a system called ‘multilateral surveillance’. The Commission has acquired a power to monitor the public sector deficits of member states and to initiate procedures against the member state if it considers such a deficit to be ‘excessive’. During the second stage of monetary union, member states must prepare their central banks for independence (as Britain has already begun to do) and adopt and adhere to a ‘multi-annual convergence programme’ designed to align currencies for eventual monetary union.

  Finally, each member state is required to ‘treat its exchange rate policy as a matter of common interest’. There is a danger that this will be interpreted by other member states and by the European institutions as imposing an obligation on Britain to rejoin the ERM and again to subordinate its monetary policy to the maintenance of an external parity. Although the effective shattering of the ERM in 1992/93 makes the future course of convergence towards EMU less predictable than at the time of the signing of Maastricht, the widened 15 per cent ERM bands are likely to be interpreted as being ‘normal fluctuation margins’ for the purposes of the Treaty’s so-called ‘convergence criteria’. This would permit an inner core of member states to proceed to the full currency union of Stage 3 with only limited slippage to the original timetable. And the basic problem with the British right to opt out of Stage 3 remains. Once an inner core had entered Stage 3 and formed an ECU currency bloc, Britain would come under strong political (and ultimately legal) pressure to maintain the pound’s parity against the ECU in accordance with its continuing Stage 2 obligations, and so to follow ECU interest rates. And if some member states enter into full monetary union, Britain would have no seat on the European Central Bank Board which sets the interest rates we would be expected to follow. In these circumstances the temptation for Britain to go the whole hog and move to the third stage of monetary union would be very great. The Maastricht Treaty makes it clear that Stage 3 is ‘irreversible’, which means that we would, at least under Community law, have no right subsequently to withdraw and issue sterling again. That would be a fundamental and crucial loss of sovereignty and would mark a decisive step towards Britain’s submergence in a European superstate.

  The argument that this will never happen because the break-up of the ERM demonstrated the folly of fixed exchange rates in a turbulent world overlooks two important considerations. First, the history of the acceleration of moves towards federalism in Europe demonstrates that the federalists are not to be dissuaded by circumstances from pursuing their project: indeed, each blow to it only confirms them in their desire to move further and faster towards an irrevocable conclusion. Secondly, it would be possible to avoid much of the instability caused by speculative flows across the exchanges which caused the break-up of the ERM by moving directly to locked currencies and EMU. Of course, the consequences for the weaker national economies would be even more disastrous than they were as a result of overvalued currencies in the ERM. Large regional variations in economic activity, industrial decline and soaring unemployment on the periphery would follow in due course and these in turn would prompt heavy migration across frontiers.

  But we would be brave to the point of foolhardiness to imagine that such consequences would necessarily lead to the abandonment of the venture. For such a favourable outcome would depend upon the health and responsibility of democratic institutions in Europe. But national political institutions are losing their powers to centralized European ones on which there is no real democratic check. In any case, it is an abdication of political leadership to expect hostile circumstances over which one has no control to relieve one of the responsibility of pursuing policies in the nation’s long-term interest.

  My dismay about Maastricht reflected my concern about its effects internationally almost as much as the risks it posed to Britain. Although in the Bruges speech in 1988 I spoke about the distinctive strengths of British traditions and institutions, I was equally concerned about the effects on other European countries and on the outside world. Ultimately, of course, it is up to the Germans, French, Italians and others what kind of economic and political relations they want with each other. But anyone who does not sound the alarm on seeing great nations in headlong pursuit of disastrous goals is grossly irresponsible — and indeed a bad European.

  It makes no sense for Germany to abandon the Deutschmark; nor for France to settle down permanently to playing second fiddle to its dominant eastern neighbour; nor for Italy to be distracted from the task of domestic political reform by looking to the European Union for solutions; nor for Spain, Portugal, Greece and Ireland to rely on subsidies from Germany in exchange for abandoning the opportunity to make the best of their lower labour costs; nor for the Scandinavian countries to export their high social costs to other European countries rather than cutting them back. As for the former communist countries of Central and Eastern Europe, how can they be expected to live with the high-cost regimes which the monetary and social policies of the Community would place upon them? It is difficult to see them being anything other than distant, poor relations of a Delors-style European Union. For the members of the Union, therefore, such a policy offers economic decline. For its neighbours it offers instability. For the rest of the world it provides a momentum towards protectionism.

  For a treaty which threatens so much harm to all concerned, Maastricht has not even had the promised effect of uniting the Conservative Party. Indeed, it split the Conservative Party in Parliament and in the country, undermining confidence in the Government’s sense of direction. Because the strategy of which it was a part rested essentially upon proving to our partners that Britain wished to be ‘at the heart of Europe’, it led directly to the unnecessarily deep recession caused by trying to maintain an unsustainable parity for sterling within the ERM. The humiliating circumstances of our departure added to the political damage to the Conservative Party. And all of the fundamental problems will surface again as we approach the 1996 Inter-Governmental Conference.

  I could foresee enough of this in November 1991, even before the full details of Maastricht were known, to understand that I would have to oppose it root and branch. For the reasons I have already outlined, this was bound to be more embarrassing for all concerned if I remained in the House of Commons. Moreover, it seemed likely that the result of the general election, whenever it came, was likely to be a reduction in the large majority we had obtained in 1987. This would make it more difficult for me to speak and vote as I wanted. In any case, although I had taken the same seat on the backbenches that I had occupied some twenty-five years earlier — and I had enjoyed my time as a young backbencher — I now felt ill at ease. The enjoyment of the backbenches co
mes from being able to speak out freely. This, however, I knew would never again be possible. My every word would be judged in terms of support for or opposition to John Major. I would inhibit him just by my presence, and that in turn would inhibit me. So I decided to stand down as Member of Parliament for Finchley and accept a life peerage.

  My mixed emotions about this were compensated by the happiness I felt in Denis’s baronetcy. With the Conservative victory in the April 1992 general election, a result achieved in equal measure as a result of my record, John Major’s admirable grit and the Labour Party’s egregious errors, I felt newly liberated to continue the argument about Europe’s future.

  ANOTHER EUROPE

  The Bill to implement the Maastricht Treaty was announced in the first Queen’s Speech of the new Parliament. Ten days later, on Friday 15 May, I was due to speak in The Hague. My speech-writing team and I wrestled to include within one framework all the main elements of the alternative to a Maastricht-style Europe. I deliberately intended it as Bruges Mark II. Of course, I could not expect that it would have the same impact; after all, I was no longer a head of government. But for that very reason I hoped that the ideas could be developed more provocatively and would help to alert the more open-minded members of Europe’s political élite to new possibilities.[71]

  I began by likening the architecture of the Berlaymont building in Brussels — the home of the European Commission which was due to be demolished — to the political architecture of the European Community, ‘infused with the spirit of yesterday’s future’. Circumstances had so changed since the foundation of the Community that major rethinking was required. Looking back at its origins and development, I distinguished between two different economic traditions — those of liberalism and socialism. The time had now come when Europe had to choose between these two approaches. Maastricht’s federalism was essentially the child of socialist thinking. It involved a degree of centralized control which the wider Europe created by the fall of communism made outdated. In fact, what was involved, I argued, was:

  …a central intellectual mistake. [It was] assumed that the model for future government was that of a centralized bureaucracy that would collect information upwards, make decisions at the top, and then issue orders downwards. And what seemed the wisdom of the ages in 1945 was in fact a primitive fallacy. Hierarchical bureaucracy may be a suitable method of organizing a small business that is exposed to fierce external competition — but it is a recipe for stagnation and inefficiency in almost every other context.

  …The larger Europe grows, the more diverse must be the forms of cooperation it requires. Instead of a centralized bureaucracy, the model should be a market — not only a market of individuals and companies, but also a market in which the players are governments. Thus governments would compete with each other for foreign investments, top management and high earners through lower taxes and less regulation. Such a market would impose a fiscal discipline on governments because they would not want to drive away expertise and business. It would also help to establish which fiscal and regulatory policies produced the best overall economic results. No wonder socialists don’t like it. To make such a market work, of course, national governments must retain most of their existing powers in social and economic affairs. Since these governments are closer and accountable to their voters, it is doubly desirable that we should keep power at the national level.

  On the basis of this analysis, I argued for two specific changes. The first conclusion I drew was that there was no reason why every new European initiative should require the participation of all Community members. If Europe did move into new areas, it must do so under separate treaties which clearly defined the powers which had been surrendered:

  We should aim at a multi-track Europe in which ad hoc groups of different states — such as the Schengen Group[72] — forge varying levels of cooperation and integration on a case-by-case basis. Such a structure would lack graph-paper neatness. But it would accommodate the diversity of post-communist Europe.

  Second, far from giving the European Commission more power, it should have less. In fact, it was not needed in its present form and it should cease to be legislative in any sense; rather it should become an administrative body, not initiating policy but carrying it out.

  Still more outrageously, I mentioned the issue which was on everyone’s mind and no one’s agenda in Europe, ‘the German Question’. I expressed admiration for the German achievement and, indeed, agreement with several distinctive German policies, for example on monetary matters and on recognizing Slovenia and Croatia. But I argued that we had to face up to the fact that the power of a reunited Germany was a problem. The Germans themselves realized this; it explained, for instance, why Chancellor Kohl and the German political establishment were so anxious for their country to be ‘anchored’ in Europe and restrained by institutions of federal decision-making. Tying the German Gulliver down within a federal European Community was no answer, however, because Germany’s preponderance within it was so great that federalism itself augmented German power rather than contained it. In place of this vision, we had to return to the politics of the balance of power which would ensure that individual nation states, like Britain and France, would be able to act as a counterweight to Germany if it pursued policies which were against our interests. Meanwhile — and this was perhaps the most important element in any modern balance of power politics — the American military presence in Europe was a guarantee against any European power being tempted to assert its interests beyond a certain point.

  This frank analysis was condemned in some quarters as antiGerman. In fact, it was nothing of the sort. It was my firm conviction that it would be in Germany’s interests as much as those of her neighbours for the realities of power politics to be reflected in diplomatic relations, rather than concealed behind a veil of federalist political correctness. Germany is a rich and powerful country in which there is much to admire. But because of its size, geographical location and history, it presents a problem. The Germans discuss this problem quite freely and responsibly (even if I happen to disagree with the particular solution they have found for it). There is no reason why we should not do the same.

  As I had in Opposition all those years earlier, I found it easier to express even these controversial points about international relations abroad than at home. My every word in Britain was scrutinized for possibilities of misrepresentation. I was always conscious of the feeling, with which I could sympathize, that John Major should be left free to lead the Party and the country in his own way.

  I made my maiden speech in the House of Lords in a debate on the UK Presidency of the European Community in July 1992. It was a slightly strange experience and I realized that it would take some time before I became used to the style of the Upper House, where formal courtesy and diplomatic consensus are so much more evident than anything that could be called lively debate. On this occasion, I was able to point to what I described as ‘the very sharp change in attitudes’ brought about by the Maastricht Treaty in Europe. The Danes had just voted in a referendum to reject the Treaty. Opinion in Germany had hardened against a single currency. The French were to hold their own referendum. Backbench Tory MPs had started to articulate the anti-Maastricht sentiments which were becoming more evident in their own constituencies.

  But it was not until the autumn that events demolished far more effectively than I ever could the credibility of the European federalist project in the eyes of all but its most enthusiastic advocates. As 1992 progressed, the ERM came under increasing strain and the consequences of an overvalued exchange rate for Britain and other countries became more serious. Finally, on Wednesday 16 September, after an estimated £11,000 million pounds of reserves had been frittered away in a vain attempt to frustrate the intentions of the money markets, and after real interest rates reached a disastrous 8.4 per cent (with 11.4 per cent in prospect for the following day), sterling was withdrawn from the ERM. Panic was palpably in the air. Politician
s and journalists behaved as if the Four Horsemen of the Apocalypse had just charged through the Bank of England. Government ministers sought to shift the blame for the crisis onto the Bundesbank. Commentators, unconvinced by this ploy, tried to shift it back onto the Government.

  By a nice coincidence, I was due to address a CNN financial conference in Washington on the Saturday following the Wednesday (‘black’ or ‘white’, according to taste) on which Britain had left the ERM. I was staying at the British Embassy in Washington, working on my speech when the news came through. My original draft had to be abandoned, and my schedule of speaking engagements was so heavy that I found myself starting almost from scratch on the Friday evening. I worked through the night in a room down the corridor from where the Chancellor of the Exchequer, Norman Lamont, in town for the IMF Conference, was fast asleep. At least I heard no singing from the bath. He may have guessed what I was going to say:

  It was not the collapse of the British Government’s policy, but the policy itself which was the problem. It may be embarrassing to go back on a pledge to defend a particular exchange rate come hell or high water. But if the pledge was misguided in the first place, the act of breaking it should provoke a round of applause, not condemnation… Nor would I myself search for scapegoats — either inside or outside Britain. What we have to do is to learn the lessons of what has happened. The first and general lesson is that if you try to buck the market, the market will buck you. The state is not there to gamble with the nation’s savings. Consequently, intervention in the exchange markets should be embarked upon with the greatest caution and within clearly understood limits. The second lesson is that the ERM in its present form, and with its present purpose, is a grave obstacle to economic progress. I do not myself believe that sterling should re-enter it and I have yet to be convinced that other currencies benefit from its combination of rigidity and fragility…