John Major: The Autobiography

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 and Germany in doing so was certainly one of which we would have been proud. Nor did I accept blindly that membership of the ERM was inevitable. One of my first acts as chancellor was to commission a paper on alternative approaches to the exchange rate. I had not gone native at the Foreign Office, as Margaret Thatcher later liked to claim, but I recognised that the pro-ERM tide was strong. Most political opinion favoured entry. So did economic commentators. So did business opinion. A poll of the corporate sector in Financial Weekly revealed that 97 per cent of executives wanted sterling to join the ERM, and 66 per cent did not care at what rate we went in.

As at home, so it was abroad. Both the Foreign Secretary Douglas Hurd and I were repeatedly pressed to join by our European partners. Their pleas echoed concern about the domination of the deutschmark. Bonn and Paris were seen as too close – ‘two threats in a single skin’, as one Italian minister put it to me – and sterling’s entry into the ERM would weaken this domination. More true, however, was the fact that only Britain and France in tandem could counter-balance Germany, and although the French always chatted amicably with the British, they invariably ended up siding with Germany, largely because the Germans so often capitulated to French demands. Nevertheless, the European pressure for entry was there. I gradually warmed to membership because logic was pushing inexorably in that direction.

Meanwhile, the economy was slowing down, and our economic difficulties, together with European disputes and the Poll Tax, were sapping confidence in the government and the Prime Minister. The pound was almost continually under pressure as speculation ebbed and flowed in accordance with the likelihood or otherwise of our joining the ERM. We had no alternative anchor for economic policy. One after another, the possibilities had been knocked away. Following the boom of the late 1980s, the monetarist orthodoxy and the Medium Term Financial Strategy had lost credibility. The money-supply targets were no longer credible; we could hardly shadow the deutschmark as Nigel had done – even he had abandoned this approach. We examined credit controls only to confirm their uselessness. I considered giving the Bank of England independence over interest rate policy, as Nigel had wished to do, and as Gordon Brown has since done. I dismissed the idea because I believed the person responsible for monetary policy should be answerable for it in the House of Commons.

If we let the exchange rate float freely, it was clear that the value of the pound would fall and push up inflation. If that happened, our choices would be bleak. We could raise interest rates, or we could raise taxes. Neither appealed. We were dangerously fettered. I knew that we had to re-establish economic credibility if we were to bring down inflation – and win the next general election, which, as we were now in mid-term, was already on the horizon. The ERM, with its emphasis on exchange rate stability, was no panacea, but it looked to me like the best – if not the only – way forward. Each morning at Number 11, I woke up between 4 and 5 a.m. and lay awake wondering how sterling would perform that day. Each hour I received market reports. The foreign exchange screen became a focal point of the day. A pfennig up or down influenced thinking far too much. I knew this could not go on.

The Prime Minister was as frustrated as I was over rising inflation and sky-high interest rates. No prime minister likes these twin horrors, and Margaret Thatcher was no exception. She feared the impact they had on her natural constituency of homeowners and small businesses, but she had no policy to combat them. Perversely, she opposed policies necessary to bring inflation down – whether higher interest rates, or exchange rate management, or tax increases. She knew what she disliked, but had no coherent strategy for achieving what she wanted – a strong pound and low interest rates. This, however, was a horse and carriage that did not go well together. Economic management was adrift.

Margaret Thatcher was always a mixture of shrewd political calculation and emotional responses. When her political judgement was to the fore, she recognised that we might have little choice but to join the ERM. But when her emotions took over, she tried to delay our joining. As emotion battled with judgement, policy-making was often two steps forward and one back. It was very debilitating, and my year as chancellor was to be peppered with reassuring briefings and statements, confirming that the Prime Minister really did agree with her own government’s policies. Her deepest hostility was to a single currency and the political implications of surrendering monetary authority. Her opposition to sharing authority in the ERM, though acute, was less, and could, I sensed, be overcome by her wish for a stable economic environment. But not easily – especially as the powerful voices of Nicholas Ridley and Alan Walters still urged her not to yield. She was also intransigent because she felt she had been bounced into a commitment to join the ERM by Geoffrey Howe and Nigel Lawson before the Madrid summit. She would never forgive this.

In early February 1990, Nick Ridley learned that I was warming to the ERM. He did not approve, and sought to buttress the Prime Minister’s opposition. He put to her the argument that German reunification, which she strongly opposed but which was now a certainty, provided a good excuse for abandoning our undertaking to join the ERM. The Prime Minister was very fond of Nick and agreed with him that Germany was dangerously powerful, but she did not fall for his argument, and stuck to her existing position. Nor did she encourage him to hope that she would change her mind, although he went away with a sense that he could raise their shared doubts in Cabinet, but not in public, unless they were cleared directly with her.

By early March, when inflation had risen above 8 per cent, I was convinced that entry to the ERM was a sensible option. I asked for a checklist to be established of how close we were to the Madrid criteria for entry. I recognised that if we went in, we could not do so at the expense of the Prime Minister’s credibility. We had to be able to argue that her conditions had been met. The March assessment of this was encouraging, but there was still a long way to go. I also commissioned papers on the risks of early entry, as well as the advantages. If we were to go in, I had to be convinced it was right, and that I could advocate entry to the Prime Minister, in good faith, and defend it with conviction.

Discussion about European policy came increasingly to dominate my discussions not only with Margaret, but with Douglas Hurd. My working relationship with Douglas had always been very easy. We had begun meeting regularly at Mijanou’s restaurant in Ebury Street for lunch when he was home secretary and I was first at the Treasury as chief secretary. When Douglas became foreign secretary, we met at his official residence in Carlton Gardens for breakfast, where Judy Hurd would fend off the children while we talked.

Douglas looked instinctively towards improving our European relationships, rather than simply using them for domestic advantage. We both believed the Prime Minister needed to be coaxed, and not browbeaten. We knew she could not afford to lose another chancellor or a foreign secretary but we never considered playing that card. We wished to convince her of the merits of entry into the ERM, and we believed persuasion and logic would achieve what an ultimatum would not. Nevertheless, Nick Ridley, remembering the Howe – Lawson axis, was deeply suspicious of us, and thought that our breakfasts were ‘mysterious’. The only real mystery was how we managed to do any work as Douglas’s children got ready for school.

On 29 March 1990, my forty-seventh birthday, I set about the task of talking round the Prime Minister. I knew it would not be straightforward, but I now saw entry as inevitable. Douglas agreed with me that Margaret would have to be persuaded on economic grounds. With his wry sense of humour, he joked that Napoleon had conquered most of Europe, so getting the Prime Minister to enter a small part of it should not be too difficult.

My first discussion with her launched the process, but resulted in a stand-off. I was fortunate in that so far as the ERM was concerned, I was far closer to her thinking than Nigel Lawson had been. I argued that we should not publish a future date for joining, since that would put us at the complete mercy of the markets. I also argued that we should enter within wide bands for rate fluctuation, and not confined in a narrow straitjacket. She agreed. I also made it clear that the pound was very vulnerable, and that the foreign exchange markets were getting used to high interest rates to sustain it. This was dangerous, and had a real impact on Margaret, who wished to reduce interest rates as soon as possible.

At this meeting we also discussed the forthcoming Inter-Governmental Conference 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 Minister and I met on 4 September. We agreed that, while we could not yet cut interest rates, we would soon be able to do so without 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.’