Downing Street Years - Margaret Thatcher [446]
The three main tasks we faced were: first, to bring inflation under control, though it was important to moderate the pressure in time to avoid recession; second, to deal with the thorny issue of the ERM, which had done so much damage to the Government’s unity and standing; and third, to avoid being sucked into European Economic and Monetary Union. On the first of these — inflation — it was mainly a matter of applying the continuing and unpalatable medicine of high interest rates. It may be that interest rates were kept rather too high for too long: they had already been 13 per cent or above for a year and had risen to 15 per cent the previous month. Yet as each month the forecast inflation figures kept on being revised upwards there was a general air of uncertainty about what precisely the underlying position was. We therefore thought it right to err on the side of financial prudence. John and I had no serious disagreements on this policy. By October 1990, when I insisted on a 1 per cent cut on entering the ERM, this was justified on the grounds that the money supply had turned sharply downwards: the RPI figure too was just on the turn, after reaching almost 11 per cent — a figure I had never believed would be reached again while I was Prime Minister.
On the questions of the ERM and EMU, I was increasingly conscious of dealing with a very different sort of Chancellor than Nigel. John Major — perhaps because he had made his name as a whip, or perhaps because he is unexcited by the sort of concepts which people like Nigel and I saw as central to politics — had one great objective: this was to keep the Party together. To him that meant that we must enter the ERM as soon as possible to relieve the political strains. This primacy of politics over economics — an odd attribute in a Treasury minister — also meant that John was attracted by a fudge on EMU which would assuage the anxieties of the timorous Europhiles in the Party that we would otherwise be ‘isolated’. On ERM, much as I continued to dislike the system and distrust its purpose, I had agreed the principle at Madrid subject to the conditions expressed. Eventually, I was to go along with what John wanted. On EMU, which for me went to the very heart not just of the debate about Europe’s future but about Britain’s future as a democratic, sovereign state, I was not prepared to compromise.
DISCUSSIONS ABOUT ERM AND EMU: 1990
From the spring of 1990 I discussed the ERM with John Major on a fairly regular basis. When I saw him on the morning of Thursday 29 March I said that I did not believe that the conditions for our membership had yet been met. Although the issue of the timing of membership would need to be considered in the run-up to the next election it would in any event be out of the question to publish a precise date by which the UK would join. I was glad to find that John agreed with me. Unlike Geoffrey and Nigel, he realized that to set an advance date for joining would leave us at the mercy of the markets. But it was increasingly clear that he still wanted us to join soon. He said that bearing in mind the likely favourable impact of entry into the ERM on political sentiment and in turn on sentiment in the markets, it would be easier to bring interest rates down and maintain a firm exchange rate if we were inside rather than outside the ERM. That sounded all too like Nigel’s cracked record to the effect that you should steer by the exchange rate rather than by the money supply. Alas, that policy had steered us into inflation. John’s approach was that if the Party and the Government united around the policy and we looked like winning the next election, the economic prospect would improve as well. But I knew full well that whenever you take economic decisions for political purposes, you run considerable risks.
A few days later I discussed EMU and the Delors Report with John. He said that he would be minuting me with