damaging our counter-inflation policy. But we both saw the danger of cutting rates before ERM entry, because it would look as though we were massaging the exchange rate downwards. That was emphatically not what we wanted.
We were not yet sure when inflation would peak – the obvious peg for entry and, if appropriate, an interest rate cut. At this meeting the Prime Minister raised for the first time the possibility of simultaneous entry and a reduction in interest rates – adding, on her own behalf, sugar to a pill she knew was good for her but which she did not want to take. I did not demur at the time, because I did not want an argument that would distract her from thinking positively about entry. Afterwards, I realised that this was a mistake. In due course the Prime Minister would impose that interest rate cut, and it would be harmful.
The pace now began to quicken, and despite poor economic statistics in September we decided to press on. I noted in a meeting with Peter Middleton that there was a growing feeling that a recession was looming, and that therefore the pressure for interest rate reductions would grow. I wished for the discipline of the ERM to ensure that these were justified, and not snatched at for purely political reasons. The Bank of England also reported that the markets were more fractious and difficult to manage. Robin Leigh-Pemberton warned me that this would worsen in the run-up to the Inter-Governmental Conference in December.
On 11 September I reported to the Prime Minister that the markets were expecting entry, and that public opinion would welcome it. I added that a decision to delay would weaken the exchange rate, raise inflation and delay interest rate reductions. I set out yet again the pros and cons of the possible entry dates, noting that 5 October was the last opportunity before the party conference.
We met the next day. Margaret reiterated her wish for an interest rate reduction at the time of entry. She also felt we could not delay entry beyond December, and asked me to come forward with a firm proposal for a date. The long journey was nearly at an end.
At the Treasury I assembled key officials – Peter Middleton, Terry Burns, Nigel Wicks, Michael Scholar and Paul Gray – and we set out a timetable for entry on 12 October, the day of the Prime Minister’s conference speech, whilst being careful not to rule out the fifth. Two days later, officials advised me that inflation should peak in September (the announcement would be made in October) at 10.9 per cent, and that we could justify an interest rate cut within a fortnight of that. There were three possible timings for the cut: independently of entry and before it (which no one favoured); simultaneously (which the Prime Minister was determined upon); and post-entry (which the Bank and the Treasury favoured). Despite my knowledge of the Prime Minister’s preference I thought post-entry was right, and recommended this to her.
The next day the same group of officials, with the addition of Eddie George, the Deputy Governor of the Bank of England (in the absence of Robin Leigh-Pemberton, who was abroad), assembled at Number 10. After a spirited discussion on the interest rate cut, which everyone else opposed, the Prime Minister’s desire prevailed: no cut, no entry. We had no choice but to defer to her.
I still had three fears. First, that even at the last minute the Prime Minister might change her mind, or that some unexpected event would intervene. Unlikely, but possible. Second, that a week’s delay after a firm decision to join might lead to a leak. The media were in pursuit of a date each day. Third, that entry on 12 October had one huge drawback. The Prime Minister’s speech at the Conservative Party Conference always generated massive – and usually favourable – coverage. But if she sat down at 3.30 p.m. and I announced ERM entry at 4 o’clock, her speech would be wiped off the news. I suggested to the meeting that we should therefore examine entry the following day – 5 October. There was a pause. The advantage of not waiting a week was obvious. ‘Do it,’ said the Prime Minister. ‘Do it tomorrow.’
At 5 p.m. we trooped back to the Treasury. At 7.15 we were back at Number 10. The text of the announcement was prepared. The detailed advice on timing for the next day was ready. The arrangements for the Monetary Committee were in hand. Media packages were being prepared. It was decided who had to be contacted. We did not seek to wreck the Labour leader Neil Kinnock’s speech to his party conference, which was taking place the next day, but neither did we see any reason to delay on that account. We were ready to go. Eddie George went off to talk to European Bank governors. Nigel Wicks spoke to Mario Sarcinelli, the Chairman of the Monetary Committee, who warmly welcomed the decision.
I phoned a delighted Robin Leigh-Pemberton and Karl Otto Pöhl, the President of the Bundesbank, who congratulated me on a ‘brave and courageous decision’. He was very supportive, and made no adverse comments at all about the exchange rate at which we intended to enter.
At 4 p.m. on Friday, 5 October, after the close of the foreign exchange markets, I made the formal announcement of Britain’s entry into the Exchange Rate Mechanism. The Prime Minister made a brief statement in Downing Street, saying: ‘We have done it because the policy is right.’
The press widely welcomed the decision. ‘The time was right,’ said the Financial Times. ‘Both politically and economically, entry is shrewdly-timed,’ said the Financial Times. Most other papers also took an approving view:
‘Major plays ERM ace – shares soar as government seize political and economic initiative’ – Independent
‘No soft option’ – Daily Telegraph
‘Thank God – now down to some strong discipline’ – Sunday Telegraph
‘Business hails Britain’s entry into ERM’ – Sunday Times
‘Tories take ERM gamble. Shares rocket in market euphoria’ – Guardian
Two years later, when we were swept out of the ERM by turbulent market conditions, some of these newspapers would take a very different line. Defenders of our entry could scarcely be found, while those who claimed to have warned of the inevitability of disaster bobbed up everywhere. It was the golden age of hindsight.
Neil Kinnock welcomed the decision as ‘momentous’, while John Smith, his shadow Chancellor, attacked the fact that the Madrid conditions were not met (humbug, since he didn’t support them anyway), but heralded ‘the potential benefit that a more stable exchange rate could bring to the process of Britain’s much-needed economic recovery’. Labour supported the rate of entry, but seemed to forget this two years later, when we pulled out. John Smith, who had taunted the government for not entering, called the Tories ‘the only architects, the sole constructors, of our present dismal situation’. It was not what he had said at the time. But there were some dissidents. My PPS, Tony Favell, who had first joined me at the DHSS, resigned in protest – an unexpected departure and no doubt a straw in the wind.
In the Commons I made a statement following entry, and opened a debate on the decision a few days later. In my statement I said: ‘The mechanism has a proven record of success over recent years in producing greater stability of exchange rates and lower inflation. The government believes that Britain, too, will benefit from membership. The Exchange Rate Mechanism will reinforce our counter-inflationary policies, help to provide the stability and certainty that industry needs, and set the right framework for a resumption of soundly-based and non-inflationary growth.’ In winding up the later debate, Norman Lamont reinforced the fact that joining had become inevitable by saying it would have been ‘sheer masochism’ to wait any longer. He was right.
Whilst entry received overwhelming support, long-term European critics in the Conservative Party like John Biffen attacked the decision. Teddy Taylor raised questions about options to withdraw if necessary. Bill Cash said, ‘Thus far and no farther.’ Nick Budgen advocated a floating pound. Norman Tebbit, once in favour, now pronounced himself ‘agnostic’ on ERM entry. Later, ‘agnostic’ would seem a mild way to describe his opposition.
