The Downing Street Years (123 page)

At 4.30 in the morning on Wednesday 25 October the VC10 which brought me back from the Commonwealth Conference at Kuala Lumpur arrived at Heathrow. Back at No. 10 I sorted out my personal belongings, discussed my diary with Amanda Ponsonby (my indispensable diary secretary), had lunch in the flat and then saw Nigel Lawson for one of our regular bilaterals. He was exercised about Alan Walters, having been repeatedly questioned in interviews about whether Alan should be sacked. But there were many other things we had to think about. In particular, we had to agree the line which Nigel would take at the forthcoming meeting of European Community
Finance ministers on EMU. Nigel had devised an ingenious alternative approach, based on Friedrich Hayek’s idea of competing currencies, in which the market rather than governments would provide the momentum for monetary union. (Unfortunately, this proposal did not in fact get very far, not least because it was not at all in the statist, centralist model which our European Community partners preferred.) After seeing Nigel, I held a wider discussion of EMU which also included John Major (Foreign Secretary) and Nick Ridley (Trade and Industry Secretary) at which we endorsed Nigel’s proposed approach in his paper, while accepting that its purpose was mainly tactical in order to slow down discussion of EMU within the Community.

The next day, Thursday, was bound to hold its difficulties. But I did not know at this stage how many. Not only were there Prime Minister’s Questions: I also had to make a statement and answer questions on the outcome of the Kuala Lumpur CHOGM and, inevitably, on South Africa. I was under the hairdryer shortly after 8 o’clock in the morning when I received a message from my Private Office via Crawfie that Nigel Lawson wanted to see me at 8.50, that is just before I began my regular briefing session for Parliamentary Questions. Crawfie said something to me about it all being quite serious and that Nigel might be going to resign. But I said: ‘Oh no dear, you’ve got it all wrong. He’s going to Germany this afternoon for a meeting and I expect he wants to see me about that.’ So when I came downstairs to see Nigel in my study I was quite unprepared for what he had to say. He told me that either Alan Walters must go or he — Nigel — would resign. He wanted me to agree there and then to his demand.

At first I could hardly take him seriously. I told him not to be ridiculous. He was holder of a great office of state. He was demeaning himself even by talking in such terms. As for Alan, he was a devoted and loyal member of my staff who had given me frank and good advice but had always acted within the proprieties. If others, including the media, had attempted to exploit and exaggerate legitimate differences of opinion, that was no responsibility of his. There was no question of my sacking him. The meeting ended inconclusively. I asked Nigel to think again. I thought he accepted this advice. But there was little time to talk since I had to discuss the briefing for Parliamentary Questions and my statement at a meeting due to begin at 9.00 a.m.

An hour later Nigel came into a meeting with other ministers on the future of the Atomic Weapons Establishment at Aldermaston. He seemed on good form and made several acute interventions in the discussion. I hoped and believed that the storm had blown over. Then we met again — this time at Cabinet. I opened Cabinet by saying that
we must be business-like and get through the agenda promptly because two ministers had to leave for meetings in Europe. Nigel was one of them.

I was, therefore doubly surprised when I was told over the light lunch — soup and fruit — I used to have on Parliamentary Questions days that Nigel again wanted to see me. I had thought he was not even in the country. We again met in my study where he repeated his demand and said that he wanted to resign. There was nothing much new I could say and not much time to say it since I had soon to be in the House of Commons. But I made it clear that Alan Walters was not going and hoped that Nigel would reflect further. I said that I would see him after I had finished with Questions and my statement.

Over in my room in the House of Commons I was having a last look through my briefing when at 3.05 p.m. — a bare ten minutes before I was due to answer Questions in the House — Andrew Turnbull, my private secretary, came in to tell me that Nigel Lawson had decided to resign and that he wanted an announcement out by 3.30 p.m. This was out of the question. We had not told the Queen. We had no successor arranged. The London financial markets would still be open. I myself was about to face an hour on my feet answering questions and making a statement on the Commonwealth Conference. I repeated that I would see Nigel some time between 5.00 p.m. and 5.30 p.m. back in No. 10.

I only got through Questions and the Statement by relegating the crisis of Nigel’s departure to the back of my mind. About an hour later, on my way out of the Chamber, I asked John Major, who as Foreign Secretary had been sitting beside me for my Statement, to follow me to my room: ‘I have a problem.’

Ideally, I would have liked to make Nick Ridley Chancellor. But, particularly under these difficult circumstances, Nick’s scorn for presentational niceties might well have compounded the problem. John Major, who knew the Treasury from his days as Chief Secretary, looked the obvious choice. I had already thought that John might succeed me. But I would have liked him to gain more experience. He had only been at the Foreign Office for a few weeks and had not yet fully mastered this department, so very different from the Treasury where he had been an effective and competent Chief Secretary. He would have liked to stay as Foreign Secretary rather than return to pick up the pieces after Nigel. When he expressed some reluctance to go from the Foreign Office to the Treasury, I told him that we all have to accept second best occasionally. That applied to me just as much as to him. So he agreed with good grace.

I dashed back to No. 10 to see Nigel, who was still insisting that his resignation should be announced immediately. On reflection there seems to me just one explanation for Nigel’s indecent haste. I think that he feared that I might telephone Alan Walters, who was in America and quite oblivious to what was happening, and that Alan would resign. This would have deprived him of the excuse he wanted. I now told Nigel that John Major was succeeding him. There was nothing left to discuss and it was a short meeting. I was sorry that our long and generally fruitful association should end in that way. I then telephoned Alan to tell him what happened. He told me that Nigel’s resignation had put him in an impossible situation and so he insisted, against all my attempts to persuade him, on resigning too.

Nigel’s departure was a blow to me — and one which Geoffrey Howe used to stir up more trouble when, the following weekend, in a speech of calculated malice, he praised Nigel as a Chancellor of great courage and insisted on entry into the ERM on the terms outlined at Madrid. But Nigel’s going was also a boon in one respect. At least in John Major I had a Chancellor who, though he lacked Nigel’s grasp of economics, had not got personal capital sunk in past policy errors. He was psychologically more able to deal with their consequences.

The three main tasks we faced were: first, to bring inflation under control, though it was important to moderate the pressure in time to avoid recession; second, to deal with the thorny issue of the ERM, which had done so much damage to the Government’s unity and standing; and third, to avoid being sucked into European Economic and Monetary Union. On the first of these — inflation — it was mainly a matter of applying the continuing and unpalatable medicine of high interest rates. It may be that interest rates were kept rather too high for too long: they had already been 13 per cent or above for a year and had risen to 15 per cent the previous month. Yet as each month the forecast inflation figures kept on being revised upwards there was a general air of uncertainty about what precisely the underlying position was. We therefore thought it right to err on the side of financial prudence. John and I had no serious disagreements on this policy. By October 1990, when I insisted on a 1 per cent cut on entering the ERM, this was justified on the grounds that the money supply had turned sharply downwards: the RPI figure too was just on the turn,
after reaching almost 11 per cent — a figure I had never believed would be reached again while I was Prime Minister.

On the questions of the ERM and EMU, I was increasingly conscious of dealing with a very different sort of Chancellor than Nigel. John Major — perhaps because he had made his name as a whip, or perhaps because he is unexcited by the sort of concepts which people like Nigel and I saw as central to politics — had one great objective: this was to keep the Party together. To him that meant that we must enter the ERM as soon as possible to relieve the political strains. This primacy of politics over economics — an odd attribute in a Treasury minister — also meant that John was attracted by a fudge on EMU which would assuage the anxieties of the timorous Europhiles in the Party that we would otherwise be ‘isolated’. On ERM, much as I continued to dislike the system and distrust its purpose, I had agreed the principle at Madrid subject to the conditions expressed. Eventually, I was to go along with what John wanted. On EMU, which for me went to the very heart not just of the debate about Europe’s future but about Britain’s future as a democratic, sovereign state, I was not prepared to compromise.

From the spring of 1990 I discussed the ERM with John Major on a fairly regular basis. When I saw him on the morning of Thursday 29 March I said that I did not believe that the conditions for our membership had yet been met. Although the issue of the timing of membership would need to be considered in the run-up to the next election it would in any event be out of the question to publish a precise date by which the UK would join. I was glad to find that John agreed with me. Unlike Geoffrey and Nigel, he realized that to set an advance date for joining would leave us at the mercy of the markets. But it was increasingly clear that he still wanted us to join soon. He said that bearing in mind the likely favourable impact of entry into the ERM on political sentiment and in turn on sentiment in the markets, it would be easier to bring interest rates down and maintain a firm exchange rate if we were inside rather than outside the ERM. That sounded all too like Nigel’s cracked record to the effect that you should steer by the exchange rate rather than by the money supply. Alas, that policy had steered us into inflation. John’s approach was that if the Party and the Government united around the policy and we looked
like winning the next election, the economic prospect would improve as well. But I knew full well that whenever you take economic decisions for political purposes, you run considerable risks.

A few days later I discussed EMU and the Delors Report with John. He said that he would be minuting me with his conclusions on the best way forward. He said that the strategy must be to slow down the advance towards Stages 2 and 3 of Delors and the erosion of national sovereignty they entailed, but to ensure all the while that the UK was not excluded from the negotiating process. This had an indiarubber feel to it. So I said that there were serious dangers if we adopted a posture which implied that moves beyond ERM membership towards further economic and monetary integration could be contemplated. If other member states wanted to take such steps that was up to them. But the UK would not participate in that process. If we made that absolutely clear, I thought it was likely that, under pressure from the Bundesbank, Germany would also decline to move to the next stages of EMU. I sought to get John to view all this in a wider context and talked to him about the need to develop free trade relations with the USA and other countries, pointing out that centrally controlled blocs of countries — such as a federal Europe looked like being — must not be allowed to stand in the way of this.

John Major became increasingly worked up about both ERM membership and EMU. On 9 April 1990 he minuted me that he had been startled by the determination of other European Community Finance ministers to agree a treaty for full EMU. He had found little support for our new alternative approach — a ‘hard ecu’ circulating alongside existing currencies, managed by a European Monetary Fund — which we had advanced as an ‘evolutionary approach’ to EMU.
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He therefore set out a number of options as to how we might proceed. Of these the option which he recommended — and which was ultimately to be developed further at Maastricht — was to work for a treaty which gave a full definition of EMU and the institutions necessary for its final stage (together with any transitional stage, if agreed) but then allowed an ‘opting-in’ mechanism for member states. This would allow them to join in the new Stage 3 arrangements — that is the single currency — at their own pace. He believed that this should be the goal we should work for as the outcome to the IGC. At a meeting with me
on Wednesday 18 April, John rehearsed the arguments of his paper, emphasizing that the goal of full EMU as described by Delors was shared by all except the United Kingdom.

I agreed neither with John’s analysis nor his conclusion. I said that the Government could not subscribe to a treaty amendment containing the full Delors definition of EMU. Further work should be done to develop our proposal for a European Monetary Fund which we could put forward as the most that it was necessary for the Community to agree upon for now. I was extremely disturbed to find that the Chancellor had swallowed so quickly the slogans of the European lobby. At this point, however, I felt that I should hold my fire. John was new to the job. He was right to be searching for a way forward which would attract allies in Europe as well as convince Conservative MPs of our reasonableness. But it was already clear that he was thinking in terms of compromises which would not be acceptable to me and that intellectually he was drifting with the tide.