Downing Street Years - Margaret Thatcher [449]
With the publication of the Delors Report, however, the Europeans began to regard the ERM as part of the move towards locking currencies, leading to a single currency. Accordingly, devaluations were more frowned upon than they had been. But they still occurred and would have to occur as long as we insisted on them. It was only when my successor went along with the objective of EMU as spelt out in the Maastricht Treaty and made it clear that sterling would enter the narrow band of the ERM that the pressure never to revalue ‘growed and growed’ until it became an overriding dogma. I had not the slightest doubt that if the ERM ever developed in the rigid way in which I knew many other European governments and the Commission would have liked, it would prove unworkable and would break up. I never envisaged that a Conservative government would talk itself into the trap of regarding a particular parity for sterling as the touchstone of its economic policy and indeed its political credibility.
I resisted John Major’s wish to go into the ERM in July. The monetary signals, indicating that inflation was starting to turn down so that we could enter the ERM with some confidence that the parity could be sustained, were not yet in place.
By the autumn, however, the high interest rates were clearly doing their work. The money supply fell sharply. It was clear that interest rates should now be reduced, quite apart from the question of the ERM. As regards ERM entry, the Madrid conditions had not been fully met. But the most important consideration was inflation. It was not till the end of the year that inflation as measured by the RPI (heavily distorted by mortgage interest rates and the way the community charge figured in it) began to fall. Other indicators, however, — CBI surveys, car sales, retail sales and above all the money supply — showed that we were getting on top of inflation. I insisted against the Treasury and the Bank on a simultaneous announcement of a 1 per cent cut in interest rates. They had not disputed that the monetary and other figures warranted this; but they had wanted to delay. But I for my part was determined to demonstrate that we would be looking more to monetary conditions than to the exchange rate in setting interest rates. So on Friday 5 October we announced that we were seeking entry into the ERM, and I placed heavy emphasis on the interest rate cut and the reasons for it in presenting that day’s decision.
NO COMPROMISE WITH EMU
As I have explained, the attitude taken by Britain and the rest of the Community to EMU had a bearing on the operation and development of the ERM. But, of course, EMU was a far greater question. The sense that I had had at my meeting with John Major in April that he was going wobbly on this increased when I received a further paper from him a little later, at the end of May. John’s paper contained all the now familiar phrases about the prospect of a ‘two-tier Europe’ — on which I noted ‘What’s wrong with that if the other tier is going in the wrong direction?’ — and the awful possibility of the other eleven negotiating a separate treaty for EMU — on which I wrote, ‘So be it. Germany and France would have to pay all the regional subventions — OR there would be NONE in which case the poorer nations could NOT agree.’ Quite apart from this tendency to be defeated by platitudes, which I found disturbing, it did not seem to me that John, who prided himself on his tactical political