Downing Street Years - Margaret Thatcher [439]
In fact, I do not believe that changing well-tried institutional arrangements generally provides solutions to underlying political problems — and the control of inflation is ultimately a political problem. It can be kept down if you have the will to do so, as the Germans do because of their bitter experience of hyperinflation. We too could have kept it down if we had pursued a sufficiently tight monetary policy — without an independent central bank. What perhaps I should have taken more notice of, however, was that this proposal of Nigel’s showed his attitude to the economic difficulties now clearly visible on the horizon. He wanted to pass the responsibility for them to something — or someone — else.
The year 1989 — Nigel’s last as Chancellor — was a time of increasing political difficulty for me. It was the tenth anniversary of my becoming Prime Minister — an anniversary which I insisted should be kept as low-key as possible but which was inevitably the occasion for unflattering reviews in the press designed to leave the reader with the strong feeling that ten years of me was quite enough. It was also a time of very high interest rates — 13 per cent in January, 14 per cent from May and 15 per cent from October — and with inflation still rising and the forecast figures apparently inexorably rising too. The trade figures continued to be bad, especially July’s, which undermined confidence and weakened the pound. Alan Walters’s view was that there was now too tight a monetary squeeze which would push the economy into a serious recession. In particular, he strongly advised against raising interest rates to 15 per cent, as Nigel wanted in response to a rise in interest rates in Germany. Alan was right. But I went along with Nigel’s judgement and up went interest rates again. It is perhaps sufficient comment on the later allegation that I was undermining the Chancellor’s position by not dismissing Alan Walters, that I backed Nigel against Alan’s advice and against my own instincts just days before Nigel walked out.
THE DELORS REPORT ON EMU
Apart from the conduct of monetary policy, there were two economic issues of substance which concerned us during this period. On the first — the ERM — Nigel and I were sharply at odds. On the second — European Economic and Monetary Union (EMU) — we were in complete agreement.
As a result of the Hanover European Council in June 1988 a Committee of European Community central bank heads — serving in a personal capacity — had been set up under the chairmanship of Jacques Delors to report on EMU.* Nigel and I hoped that together Robin Leigh-Pemberton, Governor of the Bank of England, and Karl Otto Pöhl, President of the Bundesbank, would prevent the emergence of a report which would give momentum to EMU. Herr Pöhl we considered strongly hostile to any serious loss of monetary autonomy for the Bundesbank and Robin Leigh-Pemberton was in no doubt about the strength of our views — and indeed those (at this stage) of the great majority of the Parliamentary Conservative Party and of the House of Commons. Our line was that the report should be limited to a descriptive not a prescriptive document. But we hoped that paragraphs would be inserted which would make it clear that EMU was in no way necessary to the completion of the Single Market and which would enlarge upon the full implications of EMU for the transfer of power and authority from national institutions to a central bureaucracy.
Nigel and I had met the Governor on the evening of Wednesday 14 December 1988 and urged him to make all these points in the discussions on the text which ensued. We saw the Governor again on the afternoon of Wednesday 15 February. What we had seen of the draft report seemed thoroughly unsatisfactory, along lines known to be favoured by M. Delors who was clearly making the running. Nigel and I wanted the Governor to circulate his own document; but when this appeared it was something of a mouse. Most damaging of all was that