The one reserve which Britain had entered was in an area which would prove troublesome later. The other member states wanted qualified majority voting over matters concerned with health and safety at work (Article 21), but Mrs Thatcher was concerned that rules made in this way would impose heavy burdens on small businesses. Her colleagues and officials calmed her fears, and Britain belatedly signed up, but in fact, as some of the same officials later admitted, she was right: ‘She was suspicious that it would extend into other areas. It turned out that QMV on health and safety was abused to impose social legislation which Britain did not want.’127 ‘We didn’t deliberately mislead her,’ recalled Stephen Wall, ‘but we didn’t want to see its consequences.’128 This Trojan-horse effect would contribute greatly to Britain’s sense of being imposed upon by European legislation in future years.
Returning to Britain, Mrs Thatcher encountered no serious political opposition to what she had achieved at Luxembourg. The press, with the solitary exception of the Spectator, was in favour. In Parliament, the Labour MP Bryan Gould made the point that Mrs Thatcher had just returned from ‘a meeting which she did not want to take place, on an agenda which she did not want to discuss, and on agreements which she did not want to make’.129 But because Mrs Thatcher put her own name to the resulting parliamentary Bill, rather than leaving it to Geoffrey Howe alone, she was able to quell all but a tiny group of opponents in her party, and turn the Bill into law. Only seventeen Conservative MPs rebelled against the Single European Act. The fact was that Margaret Thatcher, alone of all leading British politicians, was capable of carrying pro-European legislation without much difficulty in the country or her party. Being a sceptic herself, she could marginalize the sceptics: if she said it was all right, who would listen to their objections? In that sense, if in no other, Mrs Thatcher was the most effective promoter of European integration Britain has ever known.
The Single European Act (SEA), which was formally signed by the European member states in February 1986, marked the high water mark of this phenomenon. The first major revision to the 1957 Treaty of Rome, the Act established the goal of creating a single European market by the end of 1992 and provided for the extension of qualified majority voting to achieve this. In rhetoric, if not in institutional reality, the EEC had now acquired a Thatcherite tinge. David Young, at that time the Secretary of State for Employment, and, from June 1987, for Trade and Industry, became evangelical about turning the Single Market into a practical reality, getting rid of all the ‘non-tariff’ barriers which hindered EEC free trade. He spoke, oddly but arrestingly, about how he wanted to be able to travel to Paris and there screw in a light bulb which he had brought from London for the purpose. There were undoubted British successes which resulted from the SEA – the freeing up, for example, of the European airline market – but it gave much greater power to Jacques Delors and his team than it did to Mrs Thatcher and hers. They were working full time on advancing their European control, whereas she had to fight on countless other fronts as well. Delors was able to devote a great deal of energy to using the extended QMV to get round whatever restrictions the SEA might appear to place on his ambitions for the Commission. The supposed costing of every future regulation before it was introduced – a measure agreed at Luxembourg – was evaded. ‘Did anything happen?’ Robin Renwick asked himself a quarter of a century later. ‘Not at all! There was never any effective deregulation.’130 Young’s own eventual assessment was that the SEA was not a success for Britain. Its effects, in trade terms, were ‘at best neutral … Movement of labour is far more open than it used to be … but I doubt that France has changed at all.’131 And its political effects were dire.
As for Mrs Thatcher’s own attitude, Young felt that she had a ‘love-hate relationship’ with the SEA. She loved ‘the commercial aspect of Europe’, but she hated ‘the political aspects … The only aspect of the EC which Margaret was comfortable with was trade.’132 Although this assessment is essentially correct, it should be added that the ‘hate’ bit of the relationship mostly came later. At the time, as David Williamson recalled, she ‘positively wanted the Act’, and although she was worried about the political and constitutional aspects, ‘she felt that she was sufficiently protected.’133 In his view, the years of Fontainebleau and the SEA were ‘the golden years’ in which Mrs Thatcher really did achieve what she intended, redirecting much of the Community’s energies on to her agenda. Having worked closely with her throughout the relevant negotiations, he never countenanced the idea, later put about, that Mrs Thatcher did not understand the implications of the Act: ‘I totally disagree that she was misled.’134 He remembered her walking down the stairs in No. 10 early one morning at the time of ratification and saying, ‘I’ve read every single word of this treaty, and I am happy with it.’ Charles Powell, though approaching the matter with a less Europhile view than Williamson, also believed that Mrs Thatcher was genuinely, consciously in favour of the SEA: ‘In relation to the EEC, she had different periods – like Picasso in his painting. The first period was the budget row; the second was that of the SEA; the third – the violent stage – came on with the rising power of Delors and the issue of EMU.’135 During the SEA stage, ‘She was not a profound sceptic.’ Her mistake, he considered, was not that she went for the Single Market, but that she failed to realize how hostile most Continental politicians secretly were to it because of their protectionist instincts, and how they would therefore try to frustrate its intentions.136
In her memoirs, Mrs Thatcher wrote that she had been ‘wrong’ to think, as she told the House of Commons at the time, that ‘European and political union … mean a good deal less than some people over here think they mean’:137 she had underestimated the potency of the words and the political direction in which they pointed. She maintained nevertheless that ‘I still believe it was right to sign the Single European Act, because we wanted a Single European Market.’138 Those words were published in 1993. By that time, Mrs Thatcher was so upset with the pace of European integration that she had already moved further than her own words had suggested. In private conversations from that period onwards, including more than one with the present author, she said that she had been wrong to sign the SEA because it had pushed on towards the European Union which she feared. She remained circumspect, however, about saying such things in public, perhaps aware that if she were to trash her own achievements she would give licence to others to do the same. She certainly never gave credence to the idea that she had been fooled by her officials. It was true that most of them – notably, at this time, Butler, Williamson and Hannay – were strongly in favour of European integration and she, of course, was not. But neither side tried systematically, at this stage at least, to fool the other. It would be nearer the truth to say that each strove to push potential problems to one side and maximize areas of agreement. Williamson recalled: ‘It was not in the British interest, I told her, to express general views,’139 presumably because her general views, he knew, would spread alarm and despondency on the Continent. Throughout the years of tumultuous European negotiations which began in 1979 and culminated in the Single European Act of 1986, Mrs Thatcher never made time to develop systematically her own vision of Europe. She therefore stuck, in principle at least, to the inherited pro-European doctrines which the Conservatives had made their own under Heath and which had helped them against a Labour Party divided on the issue. It was only later that she worked out – and publicly declared – what she thought. The result would cause delight and dismay in roughly equal measure.
13
The death-knell of monetarism
‘She’s a moral coward when it comes to dealing with people’
At the same time as Mrs Thatcher was negotiating the Single European Act, her Chancellor of the Exchequer was changing the basis of British economic policy. Issues which at first appeared technical gradually disclosed themselves as fundamental, altering Mrs Thatcher’s relationship with Nigel Lawson and her ultimate political fate.
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Despite the economic recovery, which had begun in the wake of the 1981 Budget and continued ever since, Nigel Lawson was not happy: ‘Inflation seemed particularly difficult because monetary aggregates were all over the shop.’1 Of all Mrs Thatcher’s senior ministers, Lawson was the most technically accomplished advocate of ‘monetarism’. It was he who had first articulated the Medium-Term Financial Strategy (MTFS), and by 1984 he could point to its success. Inflation, which had stood at more than 20 per cent in 1980, was now steady at around 5 per cent; markets had faith in the government’s sense of direction; economic growth was recovering and was expected to reach 3 per cent over the course of the year.2 Yet the explosion of economic activity which came from liberalization made it hard for policy-makers to read the dials they had chosen to study. How did the abolition of exchange controls and the expansion of credit affect the money supply? How much did necessary financial innovation make the monetary aggregates impossible to interpret? How much were these phenomena one-off or permanent changes in the landscape? In November 1984, to take one example, there was a surge in personal borrowing caused by the huge oversubscription of the British Telecom privatization. This was a vote of public confidence in Thatcherite plans to spread the ownership of wealth. But it also produced a large increase in sterling M3 (£M3), the chosen measure of money supply. This, in turn, weakened the value of sterling. The monetarist doctrine was that the government should control the quantity of money, not its traded price. So it should, to use the favoured term, ‘let the exchange rate go where it will’. Lawson began to think otherwise.
His character was a complex mixture. On the one hand, he was restless, risk-taking, brilliant. On the other, he was preoccupied with the importance of rules – hence the MTFS and his famous dictum ‘Rules rule, OK?’ Temperamentally, perhaps, he was like an alchemist, seeking a scientific formula which would produce gold out of the dross of ordinary life. Mrs Thatcher greatly admired Lawson: ‘She thought he was very clever and rather gutsy.’3 She relied heavily on his intellectually self-confident advocacy of economic reform against the massed ranks of academic and media experts. She believed in his ability and his ideological soundness. But, as someone who saw economics much more in terms of moral wisdom than prestidigitation, she felt she inhabited a different mental universe from that of Lawson. ‘Brian, he’s a gambler,’4 she complained to Brian Griffiths, who became head of her Policy Unit in September 1985, just before the Prime Minister and her Chancellor had their first major clash. As the years passed, she gradually came to believe that Lawson was gambling with the success of her entire economic and political project.
Equally gradually, though starting earlier, Lawson had come to the view that Britain would be better off inside the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). Unlike most ERM supporters, he was firmly opposed to the eventual aim of European economic and monetary union. He saw the ERM not as part of a grand political project for an entire continent, but as a possible guiding star for the management of sterling and hence the control of inflation. The ERM, which linked the values of member EEC currencies within slightly variable bands, had come into being early in 1979. It was declaredly designed as a forerunner of a single European currency, but was rarely discussed in British politics in those terms. Britain, while reserving the right to enter later, had refused to join (see Volume I, Chapter 18). By his own account,5 Lawson had believed since 1981 that ERM membership was a good idea, but had waited till ‘the right opportunity’.6* He meant not only the favourable economic conditions, but the right moment to persuade the person who, he correctly believed, would be least persuadable – Mrs Thatcher. In reality, however, the first move was not really an act of persuasion, more an accident.
In January 1985, there was a run on the pound. On Friday 11 January, it fell to $1.12, less than half where it had been in 1981. Over the ensuing weekend, an atmosphere of panic set in after Bernard Ingham, for once incorrectly interpreting his boss’s wishes, briefed the Sunday papers that the government did not propose to do anything about the falling pound. Whatever Mrs Thatcher might say in theory about leaving the market alone, she would have found pound–dollar parity politically intolerable. She also tended to see a weak pound as an affront to British pride and self-confidence. So worried was she that it was she, rather than Lawson, who proposed dramatic action. Rachel Lomax, serving her very first weekend as Lawson’s private secretary, recalled listening in, in the approved official manner, to a telephone conversation between Lawson and Mrs Thatcher: ‘She was berating him for not joining the ERM. It was such an odd conversation. It was not quite true that he seized the moment to persuade her. He was not yet stuck on the exchange rate: it was she that was pushing for change.’7 Lawson nonetheless took the opportunity. Invoking the existing policy that Britain should join the ERM ‘when the time was right’ (or, sometimes, ‘ripe’), he proposed to her that the government should look at the subject again. Mrs Thatcher duly called a meeting of senior ministers and officials for 13 February. By the time they met, Lawson had raised interest rates from the previous 9 per cent to 14 per cent.
In the meantime, on 15 January, Mrs Thatcher sent a secret message to President Reagan appealing for his help to bolster sterling. ‘I have done as much as can be asked to tighten policy,’ she insisted. ‘But we are faced with continued dollar strength.’ Noting that Lawson would be travelling to Washington shortly for a meeting of the finance ministers of the world’s five leading industrialized nations (the G5), she asked whether the US would consider joining a ‘collective attempt to restore reality to the markets’.8 Throughout Reagan’s first term in office, his Treasury Secretary, Don Regan,* had resisted intervention, insisting that only the market could determine exchange rates. British pleas, therefore, fell on somewhat stony ground. Talking points, drafted for Regan’s meeting with Lawson, prepared the Treasury Secretary to dismiss the notion of a ‘dollar problem’, stressing that blame lay with the British economy. ‘In sum’, Regan was advised to tell Lawson, ‘causes of weak sterling under your control, not mine.’9
But this was not the whole story. President Reagan’s response to Mrs Thatcher was far more constructive: he reassured her that the US stood by its pledge at the 1983 Williamsburg summit to consider ‘coordinated intervention where it was agreed such intervention would be helpful’.10 When the G5 finance ministers met on 17 January, Don Regan remained, in Nigel Lawson’s view, ‘tiresomely condescending’,11 but he did agree to consider measures to address the strength of the dollar. The G5 subsequently took the unprecedented step of issuing a communiqué pledging co-ordinated intervention ‘as necessary’. This sent a clear signal to the markets and, in time, helped alleviate the pressure on sterling. It was against this backdrop of growing willingness to intervene in currency markets that Mrs Thatcher’s ministers and officials gathered to discuss the ERM.
Those present on 13 February included Mrs Thatcher, Lawson, Geoffrey Howe, Robin Leigh-Pemberton, the Governor of the Bank of England, Eddie George,* the Bank’s expert on markets, and Peter Middleton and Terry Burns from the Treasury. This would be the main cast of characters in all subsequent discussions of the subject. There was one other important player – the inveterate opponent of the ERM, Alan Walters – but he was not present at any of the meetings. He was working in the United States at the time, and had no formal role in Downing Street but a constant line in to Mrs Thatcher. He was the ghost at every feast.
The official record shows no falling out.12 Lawson put his case that the government ‘should not close the door’13 on the ERM, but was also clear that Britain should not enter at such a turbulent moment. Geoffrey Howe spoke in very similar terms. Mrs Thatcher summed up in a way which, Lawson later wrote, irritated him14 by emphasizing the common view that this was not the right moment to join, rather than recognizing the important change of opinion among colleagues, which was of growing support for entry soon. It was agreed that the government should improve its foreign exchange reserves, t
o make its money market interventions more effective. But a contemporaneous note, in rather abbreviated style, kept by Burns, shows how clearly the two camps divided. Burns himself (‘EMS … is a rigid system’)15 and George (‘EMS will aggravate speculative flows’) expressed scepticism. So did Mrs Thatcher. She did not blame the vagaries of the market, but the infirm purpose of her own government: the ‘exchange rate clearly signalled what we ought to have known earlier. That policies were lax.’16 She doubted Lawson’s case: ‘Superficially membership attractive but when looked into in detail it looks less attractive,’ and she even protested against the existing policy itself: ‘wonder if we should drop that line that we will go in when the time is ripe’.17 The key point, however, not expressed in either record, was that now, for the first time, Mrs Thatcher was confronted by agreement in favour of ERM entry (though not yet) from the three most important people concerned – the Chancellor, the Foreign Secretary and the Governor.
This was part of the rather unhappy context for Nigel Lawson’s 1985 Budget. ‘High interest rates and the weakness of sterling have upset Budget plans,’ John Redwood wrote to Mrs Thatcher.18 He feared backsliding: ‘A PSBR which is not credible means tearing up the rhetoric and ambitions of many years.’ Mrs Thatcher underlined this heavily. ‘We would stress’, Redwood concluded, ‘that the events of the last 4 weeks should not allow the Budget to become timorous or unimaginative. It has never been more vital for Chancellor and the Government that the Budget should be clear, purposeful, addressed to jobs, and pledged to lower interest rates and lower taxes.’ On the same day, Andrew Turnbull informed her that the PSBR forecast was not good, and so ‘On the reform of personal taxation he [Lawson] is stymied this year as he does not have enough revenue to give away to ease the transition to any new system.’19
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