The Downing Street Years (11 page)

The background to the British budget problem is quickly described, though the precise details were extremely complicated. At the time of the negotiations for Britain’s accession we had received an assurance (as I would continue to remind other member states) that:

The reason why such an assurance had been necessary was that Britain’s unique trading pattern made her a very large net contributor to the EC budget — so large that the situation was indeed unacceptable. We traditionally imported far more from non-EC countries than did other Community members, particularly of foodstuffs. This meant that we paid more into the Community budget in the form of tariffs than they did. By contrast, the Community budget itself is heavily biased towards supporting farmers through the Common Agricultural Policy (CAP): indeed when we came into office more than 70 per cent of the budget was spent in this way. The CAP was — and is — operated in a wasteful manner. The dumping of these surpluses outside the EC distorts the world market in foodstuffs and threatens the survival of free trade between the major economies. The British economy is less dependent on agriculture than that of most other Community countries and our farms are generally larger and more efficient than those of France and Germany; consequently we receive less in subsidy than they do. Britain traditionally received a fairer share of the receipts of the Community’s non-agricultural programmes (such as the regional and social funds), but the growth of these programmes had been limited by the power of the farming lobby in Europe and by the international recession.

The previous Labour government had made a great play of ‘renegotiating’ the terms of Britain’s original entry. In 1975 a Financial Mechanism to limit our contribution had been worked out in principle: but it had never been triggered, and never would be, unless the originally
agreed conditions were changed. As a result, there was no solid agreement to which we could hold our Community partners.

One other development had worsened the overall position: Britain’s prosperity, relative to that of our European neighbours, had steadily declined. In spite of North Sea oil, by 1979 Britain had become one of the least prosperous members of the Community, with only the seventh highest GDP per head of population among the member states. Yet we were expected shortly to become the largest net contributor.

So from the first my policy was to seek to limit the damage and distortions caused by the CAP and to bring financial realities to bear on Community spending. But at the Council meeting in Strasbourg I also had two short-term objectives. First, I wanted to have the budget question raised now and to gain acceptance of the need for action, though without at this stage going into too much detail. Second, I wanted to secure a firm undertaking from other heads of government that at the next Council meeting in Dublin the Commission would bring forward proposals to deal with the problem.

I sought at the start to strengthen our ‘European credentials’. We Conservatives were welcomed in Strasbourg because we were seen as more pro-European than Labour: I tried to emphasize this by indicating that although we were not then in a position to join the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS), we were ‘minded’ — an expression used so as not to offend the House of Commons to which it had not yet been announced — to swap some of our own reserves in the Bank of England for ecus (the European Currency Unit). I knew that Chancellor Schmidt was keen that we should commit sterling to the ERM; but I already had doubts about the wisdom of this course, which subsequently were reinforced. In any case, as it happened, my announcement of our intentions as regards the ecu ‘swap’ did not receive much visible welcome from the others: like other such concessions to the
ésprit communautaire
, it appeared simply to be pocketed and then forgotten.

If the budget issue was to concentrate minds as I wished, it had to be raised on the first day, because the communiqué is always drafted by officials overnight, ready for discussion the following morning. The draftsmen would therefore have to receive their instructions before the end of the first day. This did not prove easy. Over lunch I spoke to President Giscard about what I wanted and gained a strong impression that we would be able to deal with the budget early on. The whole group of us then set out to walk to the Hôtel de Ville through Strasbourg’s narrow and attractive streets. The
bonhomie
seemed tangible.

But when we resumed, it quickly became clear that President
Giscard was intent on following his previous agenda, whatever he had given me to understand. At least I was well briefed and took an active part in the discussion about energy and the world economy. I pointed out that Britain had not flinched from the hard decisions required to ride out these difficulties and that we were making large cuts in public spending. By twenty minutes to seven that evening, we had decided, if we could, to hold Community imports of oil between 1980 and 1985 at a level no higher than that of 1978. We had agreed to stress the importance of nuclear energy. We had committed ourselves to keep up the struggle against inflation. Inevitably, I suppose, we had agreed to say something about ‘convergence’ between the economic performance of member states (a classic piece of Euro-jargon). In fact, we had done almost everything except what I most wanted us to do — tackle the budget issue.

Fortunately, I had been warned what might happen next. President Giscard proposed that as time was getting on and we needed to get ready for dinner, the matter of the budget should be discussed the following day. Did the Prime Minister of the United Kingdom not agree? And so at my very first European Council I had to say ‘no’. As it turned out the lateness of the hour probably worked in my favour: conclusions are often easier to reach when time presses and minds are turning to the prospect of French
haute cuisine
and
grands crus.
I spelt out the facts: and the facts were undoubtedly telling. It was agreed to include in the communiqué an instruction to the Commission to prepare proposals for the next Council to deal with the matter. So, a little late, we rose for dinner. Argument always gives one an appetite.

At these gatherings, the custom was that heads of government and the President of the Commission dine together; foreign ministers formed a separate group. It was also customary to discuss foreign affairs. The plight of the Vietnamese ‘boat people’ was one topic which, of course, directly concerned Britain. Another was Rhodesia. It is interesting also to note that even then we were discussing the perennial problem of the Japanese trade balance.

Strasbourg had one solid result: it had put the question of Britain’s unfair budget contribution squarely on the agenda. I felt that I had made an impression as someone who meant business, and afterwards I learned that this feeling was correct. It was at Strasbourg, too, that I overheard a foreign government official make a stray remark that pleased me as much as any I can remember: ‘Britain is back,’ he said.

Many of the wider issues discussed at Strasbourg were raised again shortly afterwards in the still grander surroundings of the economic summit of the seven principal western industrial powers in Tokyo (the Group of Seven, or G7 for short). As soon as I had finished my report to the House of Commons on the Strasbourg Council, we drove out to Heathrow for the long flight to Japan. I knew that oil prices and their effect on the economy would again be top of the agenda. I was well briefed. Denis’s knowledge of the oil industry was at my disposal and I had also had a thorough briefing by oil experts over lunch at Chequers. They knew the oil business inside out; by contrast, I was to find at Tokyo that politicians who thought they could limit oil consumption by setting out plans and targets had little practical understanding of the market.

I took the opportunity to discuss some other, equally important, matters
en route
to Tokyo. We had sought and were given permission from the Soviet Union to shorten the route to Japan by overflying Russia. In Moscow the plane landed to refuel and I was met by the Soviet Prime Minister, Alexei Kosygin, who broke off a meeting of communist prime ministers to come to the airport. To my surprise, an unscheduled dinner was laid out in the airport lounge. Hospitality in the Soviet Union was always generous for important visitors: there were two worlds, one for foreign dignitaries and the party élite, with luxuries of all kinds, and another for the ordinary people, with only the plainest of goods, and not many of them.

The motive for the Soviets’ special attention was soon clear. They wanted to know more about the ‘Iron Lady’ — as their official news agency, Tass, had christened me following a speech I made in 1976 while Leader of the Opposition.

In East-West relations this was the lull before a huge political storm. Under the guise of
détente
the Soviets and their communist surrogates had pursued for some years a policy of covert aggression, while the West had let slip its defences. At Tokyo I was to find further evidence of the Carter Administration’s overconfidence in the goodwill of the Soviet Union. The second Strategic Arms Limitation Treaty (SALT II) had been signed only days before. There was even talk of a SALT III. But the mood was about to change, for the Soviet invasion of Afghanistan was less than six months away.

Although we discussed defence, the most sensitive matter I raised
with Mr Kosygin was the plight of the ‘boat people’, who were leaving Vietnam in their hundreds of thousands. They were the victims of appalling persecution, terrible enough to make them sell all their belongings, leave their homes and risk their lives sailing in overcrowded and dangerous ships, with no certainty of escape. A large merchant fleet sailed under the British flag and naturally our ships were picking up these tragic refugees from communism to save them from the risk of shipwreck and piracy. The rule of the sea is that survivors from shipwreck can be landed at the next port of call. But it often happened that the next port of call — in Singapore, Malaysia or Taiwan — refused to take them unless we agreed that they should be allowed to come on to Britain. At home we were still experiencing all the social and economic pressures of past mass immigration and consequently this was something we were most reluctant to agree. At Taiwan, although they would be given medical attention and food on the ship, they were not being allowed to land. The boat people themselves refused to land in Canton: they had had enough of communism. So this meant that Hong Kong became their favoured immediate destination, from where they hoped to go on to the United States or elsewhere in the West. The communists, of course, knew perfectly well that this flood of emigration was a costly embarrassment to the West and doubtless they hoped it might destabilize other countries in the region.

I put it to Mr Kosygin that Vietnam was a communist country and a close ally of the Soviet Union, and that he had considerable influence there. What was happening was a disgrace not only to the regime in Vietnam, but to communism as a whole. Could he do nothing to stop it? His words were translated to me: ‘W-e-ll’, he said (or the Russian equivalent), ‘they are all drug-takers or criminals …’ He got no further. ‘What?’, I asked. ‘One million of them? Is communism so bad that a million have to take drugs or steal to live?’ He immediately dropped the subject. But the point had been made and fully understood, as the nervous looks on the faces of his staff — and indeed some of mine — indicated. I could not stop the stream of persecuted refugees but I could and would always challenge the lies with which the communists sought to justify their persecution. After an hour and forty minutes we returned to the plane and resumed the flight to Tokyo. Later I referred the matter to the United Nations — it was too big for any one country to tackle.

The round of international summits makes a prime minister’s life nowadays very different from what it was in the time of Anthony Eden, Harold Macmillan or Alec Douglas-Home. While in Opposition I had
been sceptical of the value of much of this activity. In government I still worried that summits took up too much time and energy, particularly when there was so much to do at home: within a few months of taking office I had been to Strasbourg to represent Britain in Community matters, I was at Tokyo to represent her in the wider economic forum, and I would soon be going to Lusaka for the meeting of the Commonwealth heads of government.

The G7 had its roots in international action to counter the economic crisis of the mid-1970s. The first meeting was held in 1975 at Rambouillet in France. Since then the numbers attending and the formality of proceedings have increased year by year, and the result has not been an improvement. The principal advantages and disadvantages were well summed up by Chancellor Schmidt. The G7 summits had, he believed, helped the West to avoid what he called ‘beggar my neighbour’ policies — the competitive devaluations and protectionism which had inflicted such economic and political harm during the 1930s. On the other hand, he thought that too often the summits had been tempted to enter into undertakings which could not be kept; I agreed. There was always pressure, to which some governments were all too ready to bend, to come up with forms of words and ambitious commitments which everyone could accept and no one took seriously.

However, the soaring price of oil gave the 1979 Tokyo economic summit more than usual significance. Indeed, the Organization of Petroleum Exporting Countries (OPEC, the cartel of major oil producers) was meeting at the same time as the G7, its principal customers.
^*
While we were in Tokyo the price of a barrel of Saudi oil rose from $14.54 to $18, with many OPEC crudes going higher still. Consequently, all the talk was of how to limit western dependency on oil and of deceptively specific targets to be met by particular dates. But I knew that the main way of reducing consumption was to allow the price mechanism to do its job. The danger, if we did not, was that countries would seek to accommodate higher oil prices by printing money, leading to inflation, in the hope of staving off recession and unemployment. We had seen in Britain that inflation was a cause of unemployment rather than an alternative to it, but not everyone had learned that lesson.