The Downing Street Years (122 page)

This did not mean that I was giving no thought to it. Indeed, a few days later Alan Walters sent me a paper entitled ‘When the time will be ripe’, spelling out the conditions which must be met before we would join. He suggested that all the constituent countries must have abolished all foreign exchange controls and the legal machinery through which they were imposed. All domestic banking systems and financial and capital markets must be deregulated and open to competitive entry from EC countries. Any institution, corporation, partnership or individual must be free to enter any banking or financial business, subject only to minimum prudential conditions.

These were bold suggestions. On the one hand, they would certainly give our position a much more positive aspect. The moves against corporatism in France, Germany and Italy would be valuable in their own right. Whether the ERM could for long stand the removal of all these controls, which helped give it a false stability, was to be seen. The difficulty of Alan’s approach, of course, was that it did not remove the fundamental objections which both he and I had to the system of semi-fixed exchange rates which the ERM constituted. But in the end I knew that Alan’s ingenious suggestion might be the only way in which I could resist the pressure from Nigel, Geoffrey and the European Community for early entry.

Leon Brittan — now Vice-President of the European Commission — came to see me soon afterwards to try to persuade me of the benefits of ERM membership. He argued that it would give us an important say in the next steps of economic and monetary co-operation. Indeed, he said that it would enable Britain to dictate the pace and course of further progress in this area. He had apparently been reinforced in this view by a remark made to him by M. Delors over dinner to the effect that ‘if she joins, she wins.’ I was not, however, overimpressed by the European Commission President’s table-talk. I said that I did not believe that those who wanted to advance along the route mapped out by the Delors Committee on EMU would be deterred from pressing ahead by British membership of the ERM. And so, of course, it proved.

My relations with Nigel went through another difficult patch in May when an interview I gave to the World Service came indiscreetly close to admitting that the reason why our inflation rate had increased was because we had been shadowing the deutschmark. This, of course, was true, but it was a departure from the convenient answer that it was because we cut interest rates in the wake of the ‘Black Monday’ Stock Market crash and held them down too long that inflation had begun to rise. Nigel was at a European Finance ministers’ meeting in Spain and became very upset. So I authorized a line for the press which reverted to the less accurate but more mutually acceptable explanation. But I did at this time ask the Treasury to provide me with a paper giving their explanation as to why inflation had risen. I was subsequently interested to learn that Nigel had asked that the first draft of this paper, which had focused almost exclusively on the shadowing of the ERM, should be revised to extend the analysis to cover the earlier 1985–6 period as well.
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Not surprisingly under these circumstances, I found the finished product less sharp and persuasive than some other Treasury papers.

There was worse to come. On Wednesday 14 June 1989, just twelve days before the European Council in Madrid, Geoffrey Howe and Nigel Lawson mounted an ambush. Geoffrey, I soon learnt, was the moving force. They sent me a joint minute arguing that in order to strike an acceptable compromise on the Delors EMU proposals — agreeing
to Stage 1 but with no commitment to Stages 2 and 3 or an Inter-Governmental Conference (IGC) — I should say that I would accept a ‘non-legally binding reference’ to sterling joining the ERM by the end of 1992, provided that certain conditions were fulfilled by then. The alternative was — as usual — ‘isolation’. It was a typical Foreign Office paper which Nigel Lawson in his better days would have scornfully eviscerated.

I had myself, since reading Alan’s earlier paper on the conditions for entry into the ERM, been giving a great deal of thought to this subject. It was not clear to me whether spelling out these conditions at this stage would help deflect the other Community countries and the Commission from the course towards EMU on which they seemed set. I was not convinced about the alleged political advantages. I was deeply concerned about the consequences of setting a specified date for the currency markets. However, I saw Nigel and Geoffrey on the evening of Tuesday 20 June to discuss their minute and its contents. At the end I said that I would reflect further on the way in which this issue should be handled at Madrid. I remained sceptical whether a concession on membership of the ERM would really achieve our agreed aim of blocking an IGC and Stages 2 and 3 of Delors. But this could only be judged on the spot at Madrid. In any event I remained very wary of setting a date for sterling’s membership.

I had not liked this way of proceeding — by joint minutes, pressure and cabals. But I was more than angry about what happened next. I received a further joint minute. In this Nigel and Geoffrey said that just spelling out in greater detail the conditions which would have to be fulfilled before we joined — widening these to include for example Single Market measures — would be ‘counterproductive’. There must be a date. And they wanted another meeting before Madrid.

I read their minute on Saturday morning at Chequers and almost immediately received a telephone call from my office to ask about the time for a meeting. This was extremely inconvenient. On Sunday afternoon I was due in Madrid. But they could not be deterred. I could have seen them late on Saturday night or early on Sunday morning at No. 10. They chose the latter.

I knew that Geoffrey had put Nigel up to this. He had been in a great state about the European election campaign which had not gone well for us. I knew that he had always thought that he might one day become Leader of the Conservative Party and Prime Minister — an ambition which became more passionate as it was slipping away from him. He considered himself — with some justice — as an important
contributor to our past successes. This quiet, gentle, but deeply ambitious man — with whom my relations had become progressively worse as my exasperation at his insatiable appetite for compromise led me sometimes to lash out at him in front of others — was now out to make trouble for me if he possibly could. Above all, I suspect, he thought that he had become indispensable — a dangerous illusion for a politician. There is no other explanation for what he now did and put Nigel up to doing.

Geoffrey and Nigel came to see me at 8.15 on Sunday morning, as arranged. They were shown into my study and sat down facing me on the other side of the fireplace. They had clearly worked out precisely what they were to say. Geoffrey began. He urged that I should speak first at the Madrid Council setting out the conditions on which I would have sterling join and announcing a date for entry into the ERM. He and Nigel even insisted on the precise formula, which I took down: ‘It is our firm intention to join not later than — ’ (a date to be specified). They said that if I did this I would stop the whole Delors process from going to Stages 2 and 3. And if I did not agree to their terms and their formulation they would both resign.

Whether I could have withstood the loss of both my Foreign Secretary and my Chancellor at the same time in this way I am not sure. But three things jostled together in my mind. First, I was not prepared to be blackmailed into a policy which I felt was wrong. Second, I must keep them on board if I could, at least for the moment. Third, I would never, never allow this to happen again. But this third reflection I pushed for the moment to the back of my mind. I told them that I already had a paragraph spelling out in more detail the conditions under which sterling could enter the ERM and I would be using this in my opening speech. But I refused to give them any undertaking that I would set a date. Indeed, I told them that I could not believe that a Chancellor and a former Chancellor could seriously argue that I should set a date in advance: it would be a field day for the speculators, as they should have known. I said that I would reflect further on what to say at Madrid. They left, Geoffrey looking insufferably smug. And so the nasty little meeting ended.

I shall explain shortly the rest of what happened at the Madrid Council. Suffice it to say here that on the basis of what Alan had already suggested and with some modification I spelt out what became known as the ‘Madrid conditions’ for sterling’s entry into the ERM. I reaffirmed our intention to join once inflation was down and there was satisfactory implementation of the first phase of the Delors Report, including free movement of capital and abolition of foreign exchange
controls. But I did not set a date for entry, nor was I put under any pressure at Madrid to do so.

I do not believe that spelling out the Madrid conditions significantly modified the pace, let alone the direction, of discussions on the Delors report on EMU. Only someone with a peculiarly naïve view of the world — the sort cultivated by British Euro-enthusiasts but without any equivalent among hard-headed continental Euro-opportunists — could have imagined that it would. In fact, though, the Madrid conditions did allow me to rally the Conservative Party around our negotiating position and got us away from the tired and faintly ridiculous formula of ‘when the time was right’. The outcome of Madrid was widely praised back at home. Unfortunately, in a sense the time would never be ‘right’ — because the ERM, particularly now that the Delors objective of EMU had come out into the open, would never be ‘right’. But that was something I could do little about.

Back home, Cabinet began as usual at 10.30 on Thursday 29 June. Normally, I would sit at my place with my back to the door as Cabinet ministers trooped in. This time, however, I stood in the doorway — waiting. But there were no resignations. The condition that there must be a date for our joining the ERM might never have been mentioned. Nigel Lawson even managed the remark that Madrid had gone rather well, hadn’t it. He certainly had a nerve, I thought: but then Nigel always did. That was one of his engaging characteristics.

It was from this time that tension between myself and Nigel Lawson arose over the independent economic advice that I was receiving from Alan Walters. Alan had returned to No. 10 in May 1989. I have already described his contribution to the ‘Madrid conditions’ for ERM entry. While the Treasury, thoroughly alarmed by the inflationary effects of Nigel’s policy of shadowing the ERM, kept urging ever higher interest rates, Alan now drew my attention to the danger that excessively high interest rates might drive the economy into recession.
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He was, in short, doing precisely what a prime minister’s adviser should. He also had the merit of being right.

However, during his five-year absence from No. 10, he had been
asked to give his views in all sorts of different fora; and Alan’s views were always trenchant. Various reports, articles and lectures containing his thoughts about economic policy issues in general and the ERM in particular kept on surfacing. Partly because these were exploited by the press to point up divisions between Nigel and me and partly because Nigel himself, knowing that he was being blamed for the return of inflation, was becoming hypersensitive, they became a major problem.

The important point, however, was that all this press speculation reflected an underlying reality. This was that Nigel and I no longer had that broad identity of views or mutual trust which a Chancellor and prime minister should. Nor was there any way — short of a full and totally uncharacteristic
mea culpa
on his part — that commentators were not going to hold Nigel to blame for the worsening economic outlook.

All of this was evident at the 1989 Party Conference — for which with greater optimism than caution the new Party Chairman, Ken Baker, had chosen the theme ‘the Right Team’. A German rise in interest rates had led us to follow suit and we took the unpalatable decision to raise them to 15 per cent on the eve of the conference. The
Daily Mail
duly savaged Nigel as ‘this bankrupt Chancellor’ and demanded that he go. Nigel, who never lacked courage, gave a robust and successful speech. But even now the two of us had to negotiate the wording of his and my references to the exchange rate. There was a clear difference of emphasis — if no open contradiction — between his formulation:

– a statement which implied that it was in our hands what the ultimate value of the pound in the exchange markets would be, and my own:

– a rather different point, based on a quite different economic analysis.

We survived the conference without mishap. But there was a general feeling in the press that with more unpleasant economic news to come it would be difficult for Nigel to continue. If he sought to do so, he
would have my backing and indeed protection, as he always had. However convenient it might have been, I was not going to throw him to the wolves. Perhaps slightly less charitably, I felt that since he had got us into this inflation he should face up to the unpopular requirements for getting us out of it. It would, after all, be a highly unpalatable prospect for a new, incoming Chancellor. In any case — for reasons and in circumstances I shall describe shortly — I had made what I intended to be the last major reshuffle of this Parliament, moving Geoffrey Howe from the Foreign Office to be Leader of the House. I had decided — rightly or wrongly — that Nigel should stay. But what had Nigel himself decided?

I have already mentioned the stir which Alan Walters’s comments, dragged out of the past and often torn out of context, created. Moreover, since the timing was quite unpredictable — it depended on how quickly journalists tracked down and republished past comments — there was very little my staff or Alan could do about it. The
Financial Times
published on 18 October an article in which Alan was quoted, among other things, as describing the ERM as ‘half-baked’. This article was based on an essay to be published in the
American Economist.
But what the
FT
did not say was that the latter was written by Alan in 1988, long before he returned as my economic adviser. I felt that he had nothing to apologize for and minuted: