Since the British Government’s stance, rhetorically at least, was similarly hostile to a United States of Europe, these were, in domestic political terms, easier points to make than criticisms of economic and monetary union, where the Government’s position appeared far less clear. Indeed, actions were already speaking louder than words ever could. In 1991 it was clear that economic policy was now principally determined by the parity of sterling with the Deutschmark, rather than by considerations of domestic monetary policy. At the same time the Exchange Rate Mechanism (ERM) was being used as a vehicle towards economic and monetary union, which was quite contrary to what I at least had intended on entry. Nor was this impression diminished by anything that the authorities had to say on the matter; the possibility of currency realignment was dismissed, and indeed it became Government policy that Britain should move to the narrow (+ or-) 2.25 per cent band rather than the present 6 per cent.
Yet I was conscious that in criticizing what was now occurring, I was bound to open myself up to criticism. Just as defenders of the Maastricht Treaty maintained that it was I who had sold the pass in signing the Single European Act, and that they were merely dotting ‘i’s and crossing ‘t’s, so those who were now forcing the British economy into the straitjacket of a politically determined exchange rate claimed that I had no right to criticize this, since I had taken sterling into the ERM. I knew that I had good answers to both these charges. The Maastricht framework which now looked like emerging was fundamentally different from the — in practice unsatisfactory — arrangements reached as a result of negotiation on the Single European Act. The ERM was being used for a purpose of which I not only disapproved but which I had made clear within Government I would never implement.[66] Equally, these arguments were not likely to deter the critics.
So, speaking to the Economic Club of New York on Tuesday 18 June 1991, I put my argument against managed exchange rates both in an international context and in terms which frankly admitted the mistakes which my own Government had made.
With the Louvre and Plaza Agreements in the mid-1980s, we sought to put the objective of greater stability of international exchange rates above that of the control of inflation.[67] In Britain, we compounded this error when in 1987–88 we tried to shadow the Deutschmark. Again, the objective of a stable exchange rate was pursued at the expense of monetary discipline. These policies led to falls in interest rates to artificial and unsustainable levels, which in turn prompted excessive monetary and credit growth. That produced the inflation with which we are all too familiar, and which is the underlying cause of the present recession.[68] ‘Experience,’ said Oscar Wilde, ‘is the name we give to our mistakes.’ And the conclusion to be drawn from our experience in both the 1970s and the 1980s is that governments should commit themselves to price stability — which can only be achieved by reduced monetary growth — and leave it to companies and individuals in the marketplace to calculate the various other risks in the business of wealth creation.
Targeting exchange rates injects excessive monetary pressure when central bankers ‘guesstimate’ the wrong rate and, like fine-tuning, can produce wild swings towards inflation or deflation when the rate is either undervalued or overvalued, as East Germany is currently discovering. When that happens, the ‘stability’ that makes fixed exchange rates superficially attractive to businessmen is either abandoned in dramatic devaluation or maintained at the cost of far more damaging instabilities like rapid inflation and higher interest rates. In the ERM Britain is fortunate to have a margin of 6 per cent to accommodate variations in the exchange rate.
In general, however, I recall the words of Karl-Otto Pöhl, former President of the Bundesbank: ‘Interest rates should be set according to domestic monetary conditions and the exchange rate should be left to go where it will.’ To which I will add: if you fix the exchange rate, then interest rates and domestic monetary conditions go where they will. And finance ministers are left like innocent bystanders at the scene of an accident.
It is fair to say that this analysis was not much appreciated by the Government. But some fifteen months later it was proved to be all too correct. Yet the reaction to my interventions confirmed just how difficult it was to tread the narrow line between general support for the Government and vigorous disagreement on a central aspect of what was emerging as Government policy.
One could just about get away with such a strategy outside Westminster. But it is one of the strengths of the House of Commons that speakers are pressed in debate to reveal their true opinions; and, beyond a certain point, I had neither the intention, nor, after all those years of speaking my mind, probably even the ability to dissemble. The impossibility of the situation was brought home to me by the House of Commons Debate on the European Community on Wednesday 20 November 1991. In my speech, which would in fact be my last in the House, I supported the Government’s motion, attacked the Labour Party’s policy on a single currency and dealt with the criticisms levelled against me for signing the Single European Act. But I went on to question whether any ‘opt-out’ for sterling from a single European currency would be worth much in practice, bearing in mind that the Maastricht Treaty would still require us to sign up to the goal of a single currency and the institutions designed to prepare the way for it. Repeating an idea which I had floated in interviews during my leadership election campaign almost exactly a year earlier, I called for a referendum if there was a decision to abandon the right to issue the pound sterling. This, however, was something which the Government refused to promise.
Events now moved swiftly and, as far as I was concerned, in the wrong direction. Although for some time it would prove difficult even for Members of Parliament, let alone members of the general public, to obtain the full text of the Maastricht Treaty, its provisions were agreed and the Prime Minister made his statement on it on Wednesday 11 December. Those who knew me well also knew that I could not ultimately go along with Maastricht. I could never have signed such a treaty. There were well-meaning and increasingly desperate attempts to persuade me that I could and should remain silent. I would dearly have liked to comply.
An embarrassing little occasion the day after the Prime Minister’s statement illustrated how far wishful thinking would go. I was delighted that John Major was able to come to Denis’s and my fortieth wedding anniversary party at Claridge’s on Thursday evening. We chatted amiably about everything other than what was on our minds. But when I went out of the hotel to see the Prime Minister to his car I was faced by a whole battery of cameras and asked how I felt about his performance at the Maastricht Council. I replied that I thought he had done ‘brilliantly’. And I did indeed believe that as a political operation designed to present his approach in the best possible light he had shown great skill. But naturally my remark was taken as signifying agreement with the Maastricht Treaty itself. As I read the newspapers the following day I resolved that there could be no more misunderstandings of this sort, however painful for all concerned the consequences might be.
THE MAASTRICHT TREATY
Article A of the Maastricht Treaty — viewed superficially at least — nicely combines the two alternative views of Maastricht’s purpose and effect.
67
The Plaza Agreement (March 1985) was an attempt by international finance ministers and central bank governors to bring down the value of the dollar. The markets proved all too obliging. The Louvre Agreement (February 1987) was concluded in the hope of checking the dollar’s fall and bringing about a wider stabilization of currencies — paving the way for Nigel Lawson’s shadowing of the Deutschmark, which began the following month.
68
In saying this I was bending over backwards to be obliging to the Government, which in fact was unnecessarily worsening the recession by a monetary overkill resulting from an obsession with the exchange rate.