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By Root 2870 0

’s participation in the ERM was seen partly as proof that we were ‘good Europeans’ (a phrase which in fact increasingly meant bad Europeans, as the Community adopted a selfish, protectionist stance to liberated eastern Europe). But it was also seen as a way of abdicating control over our own monetary policy, in order to have it determined by the German Bundesbank. This was what was meant when people said we would gain credibility for our policies if we were — to adopt another Euro-metaphor — ‘anchored’ to the deutschmark. Actually, the metaphor is strangely appropriate: for if the tide changes and you are anchored, the only option to letting out more chain as your ship rises is to sink by the bows; and in an ERM where revaluations were ever more frowned upon there was no more chain to let out. Which leads on to EMU.

The ERM was seen by the European Commission and others as a path to EMU — and this subtly changed the former’s purpose. But EMU itself — which involves the loss of the power to issue your own currency and acceptance of one European currency, one central bank and one set of interest rates — means the end of a country’s economic independence and thus the increasing irrelevance of its parliamentary democracy. Control of its economy is transferred from the elected government, answerable to Parliament and the electorate, to unaccountable supra-national institutions. In our opposition to EMU, Nigel Lawson and I were at one. Indeed, perhaps the most powerful critique of the whole concept was that contained in Nigel’s lecture at Chatham House in January 1989 when he said:

It is clear that economic and monetary union implies nothing less than European government — albeit a federal one — and political union: the United States of Europe. That is simply not on the agenda now, nor will it be for the foreseeable future.

Alas, by his pursuit of a policy that allowed British inflation to rise, which itself almost certainly flowed from his passionate wish to take sterling into the ERM, Nigel so undermined confidence in my government that EMU was brought that much nearer.

EARLY DISCUSSION OF THE EXCHANGE RATE MECHANISM (ERM)

To trace the course of our arguments in government about the Exchange Rate Mechanism of the European Monetary System (EMS) it is necessary to go right back to our first year in office. The Foreign Office and the Treasury both had an interest; the former regarded it as a question of European relations, the latter — rightly — as an economic question. I decided early on to be closely involved in the issue and held an initial meeting to discuss the question in October 1979. In retrospect, the balance of opinion in the Cabinet is of some significance. Geoffrey Howe as Chancellor was against membership at present, partly because of uncertainty about the effects of abolishing exchange controls. The then Governor of the Bank of England, though he agreed, was more enthusiastically in favour. Keith Joseph and John Nott were against. So was I. But since we had devised the formula that we would join when the ‘time was right’ (or ‘ripe’ as it was sometimes expressed) there seemed no need to change our basic position. The time was not ‘right’ and no one seriously thought it was. Geoffrey Howe gave no hint of his future position. Indeed, in December he came to see me to complain that in a speech he had made about the subject in Brussels Peter Carrington had been too positive about the EMS.

Even at this stage, the basic arguments for and against the ERM were known, though none of us had, of course, given as much thought to the subject as we would do later. Britain had already had an unhappy experience of trying to peg sterling in a European currency system. In 1972 Ted Heath’s Government had ignominiously been forced to leave the European ‘snake’ — the forerunner of the ERM — after a mere six weeks. So any British Government would need to be cautious.

There were two other matters which bore on the decision. First, there was no disguising, for reasons I have explained, that there was always going to be potential for