Downing Street Years - Margaret Thatcher [451]
At this point it makes sense to consider how matters had been developing within the European Community itself and the stance we took in the face of the drive for federalism which was underway. But if there is one lesson which is to be learnt from the economic developments of the period of 1987 to 1990 — confirmed since by the circumstances preceding Britain’s undignified departure from the ERM in 1992 — it is that contained in the phrase I used in the House of Commons, which so infuriated Nigel and summed up the difference between us: ‘there is no way in which one can buck the market.’ I might add that if you try to do so, the market will buck you. The belief that the laws of economics and the judgements of the markets can be suspended by clever people — and Nigel Lawson was one of the cleverest people in British politics — is a perpetual temptation to folly. That folly cost us dear. But then the idea that other clever people — and Jacques Delors was one of the cleverest people I met in European politics — can build their Tower of Babel on the uneven foundation of ancient nations, different languages and diverse economies is still more dangerous. Work on that shaky construction is still proceeding.
* See pp. 96–7.
* Overfunding was the practice by which the Government sought to reduce private bank deposits — and hence £M3 — by selling greater amounts of public debt than were required merely to finance its own deficit. The ‘bill mountain’ arose from the use of the proceeds to buy back treasury bills from the market.
* See p. 706.
* In all this, it is always necessary to distinguish between nominal and real interest rates. High money interest rates are predominantly a consequence of the market’s expectations of high inflation. If inflation is expected to be high, say at 10 per cent, then, even if one ignores taxes, interest rates of 10 per cent are required just to offset the inflationary erosion of a family’s savings. In fact it is real interest rates — the excess of the percentage interest rate above the expected inflation — which affects the thrift and investment of families and businesses.
* For this and for the Madrid European Council see pp. 740–2, 750–2.
* The suggestion that the inflation which began at the end of 1988 and lasted until mid-1991 could be explained by decisions on interest rates and monetary policy in 1985 assumed almost a four-year lag in the effect of monetary expansion on inflation. We know that lags, in Milton Friedman’s words, are ‘long and variable’ with an average of about eighteen months. So three to four years is possible, but hardly plausible.
* Interest rates had gone up to 13 per cent in November 1988 and to 14 per cent in May 1989.
* Following the negative reception accorded to our original proposal for competing currencies, we began to develop this new hard ecu approach based on the suggestions made by Sir Michael Butler, Britain’s former Ambassador to the Community, now working in the City.
CHAPTER XXV
The Babel Express
Relations with the European Community — 1987–1990
I have already described how during my second term of office as Prime Minister certain harmful features and tendencies in the European Community started to become evident. Against the notable gains constituted by the securing of Britain’s budget rebate and progress towards a real Common — or ‘Single’ — Market had to be set a more powerful Commission ambitious for power, an inclination towards bureaucratic rather than market solutions to economic problems and the re-emergence of a Franco-German axis with its own covert federalist and protectionist agenda. As yet, however, the full implications of all this were unclear — even to me, distrustful as I always was of that un-British combination of high-flown rhetoric