Bill Keegan of the Observer – who had been a constant thorn in Nigel Lawson’s side – was very prescient. He said outright that we had entered at too high a rate. When we left the mechanism two years later he, at least, was one of the few entitled to say ‘I told you so.’ He did not set out, however, how we could have negotiated entry at a lower rate.
We entered the mechanism at the market rate – DM2.95 to the pound. There was no real option of much divergence from this, though it later became politically useful for critics to claim that there was. If we had sought to enter at a markedly lower rate we would have been rebuffed by our European partners. They would not have allowed us to gain a competitive advantage upon entry by an artificial devaluation. Even if we had got away with it, the upward pressures on the pound would have been dramatic and we would have had to cut interest rates substantially to resist them, long before it would have been economically safe to do so. Any suggestion that we could have entered at a significantly lower rate is utterly unrealistic. Nor was it proposed by anyone closely connected with the negotiations. The Bundesbank favoured entry at the marginally lower rate of DM2.90, while others actually favoured a higher rate. The Banque de France wanted DM3.00. So did the CBI. And the Prime Minister and the Bank of England wanted a firm rate, so that interest rates could fall. DM2.95 was around the average rate for the previous decade, and, according to the OECD’s calculation of the pound’s ‘purchasing power’, actually a 17 per cent undervaluation of sterling’s worth.
We did ruffle a few feathers by not ‘negotiating’ our entry rate with the Monetary Committee in Brussels. Mario Sarcinelli wanted us to say ‘We are not going against the tide of the market,’ rather than specify an entry rate. This might have been polite, but there was nothing to negotiate, because no real flexibility in our rate at entry was possible. Two years later, after our exit from the ERM, with inflation driven from the system, the pound found its value well within the original margins at which we had entered.
We didn’t get it all right. The decision to cut interest rates at the time of entry was certainly a mistake. It was fiercely attacked by Nigel Lawson in the House and by commentators outside. ‘For reasons best known to himself – one can guess at them –’ said Nigel, ‘my right honourable friend’ – he meant me – ‘did not address the possibility of joining the ERM before reducing interest rates … This is not a small point because sadly the conjunction of the two has led to a degree of cynicism in the financial markets for which we will have to pay a price.’ Ken Baker wrote that the cut in interest rates was Margaret’s ‘fig leaf’ for entry, and there is some truth in this. It is, however, not the whole truth – she was desperately keen to see interest rates fall, and no one was prepared to give her a guarantee that they would do so shortly after entry. The Bank of England expressly refused to commit itself on this, so she took the comfortable option of a cut when she knew she could get it.
I was more concerned when the Prime Minister privately began telling colleagues critical of entry that we could easily realign, and that she wouldn’t use significant reserves to defend the exchange rate. This was not credible: a realignment – in essence a devaluation – would not be easy to obtain, and we would have no choice but to use our foreign-exchange reserves to defend our exchange rate if it began to fall too far. The Prime Minister’s remarks showed a startling lack of commitment (or understanding) of the system she had just agreed we should enter. It was not even consistent with her own objectives: she had urged a high rate of entry to curb inflation (and hasten cuts in interest rates). She could hardly therefore be a ready devaluer, cutting the value of sterling at the first hint of difficulty and undermining our anti-inflation policy. Nonetheless, her remarks did raise a doubt in my mind about whether she would stick with the policy when it began to hurt – which it was likely to do as it squeezed inflation out of the economy – or whether she would distance herself from it and let it be known that it had been forced upon her. I dismissed such thoughts, as the pound remained strong and my concerns seemed academic.
During the year there had been some pleasant interludes. In September I attended the Commonwealth Finance Ministers’ meeting in Trinidad – my first visit to the West Indies. I took the opportunity to visit the Test cricket ground at Port of Spain. Alas, there was no play at the time, but as usual the sight of a cricket pitch put me in a very sunny mood. So did an enjoyable afternoon with David Saul, the Finance Minister of Bermuda, who introduced me to rum punch. ‘The second one is better than the first,’ he joked, and it certainly seemed so.
The main business of the meeting was for me to launch a debt initiative for the world’s very poorest countries that I had been working on for nearly six months. Many of these countries were in dire poverty, and the rise in the price of oil as a result of Iraq’s invasion of Kuwait had dealt them a further blow. I proposed a substantial package of relief: a rescheduling of the whole stock of debt; a doubling in the amount of relief from one-third to two-thirds; the capitalisation of interest due on the debt, with no further payment for five years; and an increase in the repayment period to twenty-five years.
The Commonwealth finance ministers were delighted, and the package was endorsed later by the IMF Conference in Washington and warmly welcomed by the Secretary General of the United Nations. The net effect was to write off over US$18 billion in debt from the poorest and most highly indebted countries at a UK ‘cost’ of US$900 million – which was, of course, largely nominal, as it was highly unlikely it would ever be repaid. Britain had a good record in debt relief. Nigel Lawson had set the trend some years earlier, and later Ken Clarke and Gordon Brown would bring forward further debt alleviation. I hope it gave them as much satisfaction as it gave me: these poor countries need help, and it is unforgivable to let them fall further and further behind the rest of the world.
Despite all the difficulties, political and economic, I was enjoying my time as chancellor. Against a challenging background of high inflation and interest rates, an uncertain pound and a static economy, I felt I had picked up the pieces which had been broken and scattered in October 1989, and had put together an effective economic policy.
I delivered my second Autumn Statement on 8 November 1990, though the event rather lost out, in terms of press coverage, to the guessing game underway about the Prime Minister’s future. If the party was hoping for early tidings of economic spring, it was disappointed. I forecast slightly increased growth for the year ahead, though I suspected that recession might also be on the cards. But this was not certain, and no advantage could accrue to anyone from a forecast that could only make it more likely. Meanwhile the impact of rising unemployment and a slowing economy had pushed up expenditure on social security by £3 billion, while the voracious demands of the NHS reforms added a similar sum.
Twenty-five days after ERM entry Geoffrey Howe resigned from the Cabinet. The combination of dissatisfaction with the Poll Tax and widening splits in the Cabinet over European policy were about to create an explosion that would sweep Margaret Thatcher from Downing Street. By the end of the month I had succeeded her as prime minister.
CHAPTER EIGHT An Empress Falls
WITHIN THE FOLKLORE of the Conservative Party a myth has taken root which so confounds reason and reality that psychoanalysts may understand it better than historians. Its grip has been so strong that a false history has arisen in some Conservative circles and in the media. The myth is that in a moment of inexplicable folly and conspiracy, even madness, Conservative MPs ejected a leader at the height of her powers, presiding over a healthy party, a quiescent nation and a benign set of outside circumstances. It really was not like that.
In the autumn of 1990 the British economy was in deep-seated trouble; huge internal disputes were raging over Europe; the Community Charge, known and hated by millions as the Poll Tax, had proved unworkable and hugely costly; the Prime Minister was barely on speaking terms with the Deputy Prime Minister; a long-standing chancellor had resigned over policy; the party was far behind Labour
