on EMU, due in December, at which many propositions unpalatable to Britain would be discussed. Our exclusion from the ERM was making us bystanders in this debate. The Prime Minister did not like this argument, not least because it was true. Yet it did register with her. I felt I was making more progress than I had expected, when she broke off the conversation, saying she did not have time to pursue it further that morning. This was not to be the last occasion on which she would shy away from the topic. At least she did not dismiss it out of hand. I said I would return to the matter.
At the Treasury, although I put work in hand on possible entry dates, officials were very sceptical about the likelihood of getting a political decision to go ahead. We began looking at specific dates for entry, on the assumption that it would need to be at a weekend, to enable the markets to absorb the change before trading began. This exercise narrowed the choices dramatically, but fortunately commentators did not realise how limited they were. Had they done so, the speculation about whether, and when, we would enter would have been even more frenetic. Even as it was, the press couldn’t resist playing a guessing game.
The first window was April to July, which was unlikely, because we would not by then have met the Madrid conditions. More promising was early September to late October. November and December were unattractive, being too close to the Inter-Governmental Conference. Entry that late would have been seen by our European partners as a belated attempt to buy influence at the conference, and if that were the case it would fail. If we wanted influence – and we certainly needed it – entry would have to be earlier, because there would be a great deal of discussion on many of the most prickly decisions before the conference began.
On 17 April, at a seminar on the economy, Peter Middleton was invited to prepare a paper on the mechanics of entry into the ERM. I sent it to the Prime Minister a few days after the dreadful local election results across the country on 3 May had made it evident that our economic problems, together with disputes in the party over European policy, were eroding our political support. The case for entry was strengthening both politically and economically.
I met regularly with Robin Leigh-Pemberton, the Governor of the Bank of England, to discuss the issue. He was an engaging man with whom to do business, jovial, well-mannered, a great cricket-lover and as English as they come. On one occasion we chuckled over a newspaper cartoon of Margaret and myself rowing together down the river past a signpost to the European Monetary System, with Margaret intoning ‘Out, out’ with each stroke while I intoned ‘In, in,’ supported by Nigel Lawson and Robin, who was bouncing up and down on the bank. Robin and I tossed a coin to see which of us would buy the original of this brilliantly spot-on drawing. He won, but a copy still hangs on my wall. Robin and I were as one on the need to join the ERM, if not in the level of our enthusiasm. He believed in it as a matter of principle, I, as I have said, as an anti-inflationary weapon.
By early June, it was apparent that the exchange rate was being propped up by the markets through their firm belief that we would enter the ERM. Treasury officials advised me that in their view we could join at any time, provided we did so with the flexibility to move 6 per cent up or down from the central rate at entry. They added that whilst it would be better if we could enter while inflation was falling, this was not essential. But politically the matter was different. The Madrid conditions that Margaret Thatcher had set called for inflation to be falling; at the very least we needed to be sure inflation had peaked.
June was a crucial month. Treasury opinion was hardening in favour of early entry. The markets were restless and difficult, and good government required a decision. I asked Treasury ministers their views. No one argued for sterling to stay out, though Andrew Tyrie suggested I consider delaying membership.
I again minuted the Prime Minister on the ‘windows for entry’, and set out the reasons for an early decision. Somewhat tongue in cheek, I proposed 20 July as a possible early date. I knew she would balk at this, but hoped it would encourage her to accept September or October.
At our next bilateral, on 14 June, the Prime Minister said, in terms, for the first time, that she no longer had reservations about entry. But she did favour further delay. She wished to see inflation falling, and she was concerned about the impact of German monetary union. She told me she hoped also to take a ‘bonus’ on entry, of either a higher exchange rate or a cut in interest rates. I knew then that her mind was moving to the advantages we could obtain from entry, and how to justify it. I agreed to consider the timing again, and to report back to her.
When I had done so, I proposed entry in September, or – depending on how the economy performed – a little later. The question of entry was now when, not if.
On 2 July, I minuted the Prime Minister suggesting that we join before the Conservative Party Conference in October. It was evident that, without a decision, it would be politically difficult to get through the conference and other set-piece occasions like the Lord Mayor’s Banquet, held in November. If there was still uncertainty, speculation would build up before each of these occasions, as the markets anticipated an announcement. We needed a definite decision – yes or no.
I was sure we should grasp the nettle and join. A positive decision to enter would enable us to use major speeches in the autumn to spell out the implications. Still the Prime Minister hesitated until her self-imposed Madrid conditions could more easily be said to be met. The July option, never my favourite, but possible, was lost.
On 4 July, American Independence Day, the Prime Minister agreed to consider specific dates for entry to the ERM. The two likeliest dates were 14 September and 5 October. To ensure that the rate of entry would put the squeeze on inflation, the Prime Minister asked me to consider the practicalities of only a 4 per cent band around the central rate, rather than the 6 per cent we had previously agreed. This was a bewildering change of tack by her, but one that would be worthwhile if it made entry possible. Business remained hugely enthusiastic about entry, and at a meeting with the CBI the Director-General Howard Davies said they were ‘still firmly committed to entry and against unilateral devaluation’.
Even at this late stage, further alarms lay ahead. In July, Germany set a rate for monetary reunion of one ostmark to the deutschmark – a politically-driven and unrealistic rate which put pressure on interest rates across Europe. Then, in early August, Iraq invaded the neighbouring state of Kuwait. As a result the price of oil shot up, boosting the pound, which was seen in the City as a ‘petro-currency’ because of our North Sea oil reserves. This market movement did not reflect the real economy, and we risked excessive deflation as exports suffered. Worried by the Gulf crisis and a possible war involving Britain – and, I think, because she sensed a good case for further delaying a decision she knew was necessary but didn’t relish – Margaret once again considered deferring ERM entry.
I wondered myself if this might be wise, but decided it was not. It seemed to me that much depended on how things turned out in the Gulf. If it became a long-drawn-out affair, then the case for early ERM entry was strong, since we would be better placed to handle turbulence within the protection of the mechanism than on our own. But if the war was to be short, then I felt we would be right to stay out until it ended. Margaret agreed: since there was no immediate solution in sight, the crisis in the Gulf would not stop us joining, and we were back on course. Even the publication of a new book by Alan Walters did not unsettle her unduly – somewhat to my surprise.
On 3 September, I summarised the position in a lengthy minute. (‘It’s the day war broke out,’ my Private Office warned. ‘Is it the right day to send that out?’ I sent it.) Earlier in the summer we had worried that sterling might be too low at entry for membership of the ERM to be a disinflationary discipline. Later, we were concerned that entry would push up the exchange rate so much that we might have to reduce interest rates when to do so would be inappropriate on domestic grounds. This fear never surfaced publicly, but by early September we were considering an entry rate around DM3, with the full agreement of the Bank of England.
The Prime
