when matters related to economic and monetary union were to be discussed. Ken Clarke’s sharp elbows made full use of this gateway.
There were some clashes in ECOFIN that taught me much about the politics of the European Union. We won battles to restrain tax harmonisation of VAT and to establish the European Bank for Reconstruction and Development in London. This bank was designed to help send investment into Eastern Europe, and was the biggest European institution we had attracted to the UK. It got off to a shaky start under Jacques Attali, President Mitterrand’s former advisor, but rapidly became established under his successor, Jacques de la Rosière.
At ECOFIN it became clear to me that our European partners were much more set on implementing the Delors Report on Economic and Monetary Union – and moving to a single currency – than I had realised. Whilst we regarded the move as a fanciful long-term ambition faced by enormous problems, they were regarding it as more or less a fait accompli. Criticising it was as heinous as spitting in church.
When Britain entered the European Community on 1 January 1973, support for a common currency was growing among member states. But that decade’s rocky economic conditions ensured that no action was taken until 1978, when Roy Jenkins, then President of the European Commission, established the European Monetary System. From then on, monetary union was always a formal ambition of the Community, though one that many thought would never be realised. Britain’s support for the scheme was half-hearted at best. Denis Healey and Jim Callaghan had stayed outside the EMS in 1978, and Margaret Thatcher showed no enthusiasm for it in the early 1980s.
But nor did she oppose it when she had the opportunity. In 1985 European heads of government unanimously agreed the Single European Act, the treaty which established the single market, the Community’s great success story. It also committed Britain to ‘progressive realisation of economic and monetary union’, the first time this undertaking had been given so explicitly. Why Margaret Thatcher accepted this I have never understood. Whatever the answer, she made no attempt to secure an opt-out for the UK. But those words were important. Perhaps Margaret let them through because they appeared in the preamble to the treaty and she regarded monetary union as an unrealistic aspiration. That seems quite possible, but if so it was a bad misjudgement. I remember Nigel Lawson’s concern about the preamble when I was a Treasury whip, and those words were hung around our necks throughout the Maastricht negotiations. We were told we were politically committed by the Act to the progressive realisation of EMU.
The next step to monetary union came three years after the Single European Act, when the Commission President, Jacques Delors, produced his full-blown road-map to monetary union. German reunification a year later moved the scheme to the centre of Euro-politics. In return for French backing for early reunification, then far from certain, the German Chancellor, Helmut Kohl, signed up to President Mitterrand’s pet scheme for monetary union. Margaret Thatcher’s hostility to early German reunification gave a tonic to the Franco – German alliance at precisely the point when we could have benefited from German doubts about the whole single currency project.
Because of this, it was unlikely that political opposition from the UK would stop the process. Whereas our influence on most matters carried weight, we were listened to politely on EMU and then ignored. Everyone knew Margaret’s opinion. We were sidelined. We were not in the ERM. We were not in favour of a single currency. We were out of the debate.
I began to look for a way to give us more influence, so that our warnings over a single currency should be considered. In early 1990 I learned from Nigel Wicks at the Treasury of an idea being worked up by a former Foreign Office official, Sir Michael Butler, who had retired and was now a director of Hambros Bank.
The inventor of the ‘hard ecu’ was Paul Richards from Samuel Montagu, and Michael Butler became its energetic publicist and promoter. Michael Palliser, the Chairman of Samuel Montagu, passed the idea to Peter Middleton, who asked Nigel Wicks to look at it. With the active assistance of Treasury officials, led by Nigel Wicks, Michael Butler sketched out a plan for a ‘common currency’ based on the ecu that would permit ecu notes to be put into circulation.
This had real attractions. A common currency could co-exist with existing currencies, and would not require their immediate abolition. It would give business and consumers a choice, and would let the market determine whether a single currency should evolve. The Delors scheme, by contrast, was prescriptive, and depended upon the abolition of the currency of every country which entered any new currency zone.
The hard ecu had many advantages. It was market-driven, which made it difficult for ideologically-inclined Conservatives to condemn it. It was not prescriptive. It was not Made in Europe. Whilst it might lead to a single currency this was not certain, and would depend on choice exercised by many people over a long period of time. It was imaginative, it was positive, and it would surprise our European partners if we proposed it. It would ease the divisions opening up in the Conservative Party. It would put Britain back in the debate and give us a voice that would be heard as we opposed the unquestioning approach of so many in Europe towards a single currency. All these attractions drew me to the scheme. I knew we needed to enter the crucial debate in Europe, and the hard ecu was a more substantial proposal than Nigel Lawson’s ‘competing currencies’. This was a scheme with real merit that could work.
The Prime Minister was flatly hostile to a single currency, and appeared to me to have no idea of how committed our partners were to it. She was confident it wouldn’t work, and seemed to believe that if she asserted that it would fail, then fail it would. She did not see the need to confront their determination. When, in April, I suggested to her that we should agree to EMU for our partners provided we had an opt-out mechanism to enable the UK to stay out if we wished, she was dismissive. She did not accept that we could not block EMU by using our power of veto because France, Germany and the others were prepared to proceed with a Treaty of Eleven, leaving the UK outside. Later she wrote that I ‘had swallowed the slogans of the European lobby’ and was ‘intellectually drifting with the tide’. I was not. I was confronting reality, while she was letting it pass her by. To believe that the rest of Europe would dance to our tune was pure fantasy.
However, in June she agreed that I could float the hard ecu a few days before the EU summit in Dublin. I did so in a speech to an Anglo – German business dinner that I took over from Norman Lamont. I made it clear that ‘in the long term if people and governments so choose it could develop into a single currency’. To illustrate the seriousness of our intent I dispatched officials and ministers to European capitals to argue our case in the same way as myself.
It all came to nothing. On the day following the launch the Prime Minister announced in the House that our proposal ‘does not mean that we approve of a single currency’. This undercut it badly, since one attraction of the scheme was that if people chose, the hard ecu could lead to a single currency over time. Her comments made people believe that she saw it – quite wrongly so far as I was concerned – as a diversion or wrecking tactic. So, as a result of her statement, did our European partners. The French and Germans were particularly hostile, even though we heard persistent rumours that the Banque de France had suggested something similar to President Mitterrand, only for him to reject it.
As fas as the ERM was concerned, I was not, personally, a determined advocate in principle, but I believed its potential advantages were substantial. I considered, as Nigel Lawson had done, that our membership would stabilise the value of sterling and help bring down inflation. I thought this case was strengthened as I recalled our search for the Holy Grail of price stability over two decades or so through the maze of formal and informal prices and incomes policies, M0, M3, M4, exchange rate shadowing and more. I did not favour the ERM as part of the preparation for a single currency. Nor did I see it as a European plot to lead our virtuous UK policy off course. I was, no doubt, ideologically unsound in not automatically assuming that foreigners were up to no good, but such a thought never occurred to me. I was simply bent on eliminating the pernicious effects of rising prices. The record of the deutschmark
