But it was not until the autumn that events demolished far more effectively than I ever could the credibility of the European federalist project in the eyes of all but its most enthusiastic advocates. As 1992 progressed, the ERM came under increasing strain and the consequences of an overvalued exchange rate for Britain and other countries became more serious. Finally, on Wednesday 16 September, after an estimated £11,000 million pounds of reserves had been frittered away in a vain attempt to frustrate the intentions of the money markets, and after real interest rates reached a disastrous 8.4 per cent (with 11.4 per cent in prospect for the following day), sterling was withdrawn from the ERM. Panic was palpably in the air. Politicians and journalists behaved as if the Four Horsemen of the Apocalypse had just charged through the Bank of England. Government ministers sought to shift the blame for the crisis onto the Bundesbank. Commentators, unconvinced by this ploy, tried to shift it back onto the Government.
By a nice coincidence, I was due to address a CNN financial conference in Washington on the Saturday following the Wednesday (‘black’ or ‘white’, according to taste) on which Britain had left the ERM. I was staying at the British Embassy in Washington, working on my speech when the news came through. My original draft had to be abandoned, and my schedule of speaking engagements was so heavy that I found myself starting almost from scratch on the Friday evening. I worked through the night in a room down the corridor from where the Chancellor of the Exchequer, Norman Lamont, in town for the IMF Conference, was fast asleep. At least I heard no singing from the bath. He may have guessed what I was going to say:
It was not the collapse of the British Government’s policy, but the policy itself which was the problem. It may be embarrassing to go back on a pledge to defend a particular exchange rate come hell or high water. But if the pledge was misguided in the first place, the act of breaking it should provoke a round of applause, not condemnation… Nor would I myself search for scapegoats — either inside or outside Britain. What we have to do is to learn the lessons of what has happened. The first and general lesson is that if you try to buck the market, the market will buck you. The state is not there to gamble with the nation’s savings. Consequently, intervention in the exchange markets should be embarked upon with the greatest caution and within clearly understood limits. The second lesson is that the ERM in its present form, and with its present purpose, is a grave obstacle to economic progress. I do not myself believe that sterling should re-enter it and I have yet to be convinced that other currencies benefit from its combination of rigidity and fragility…
Since countries differ in their level of economic development and potential, their fiscal policies and their rates of inflation, the most flexible and realistic method of economic adjustment is a system of floating exchange rates. Each country can then order its monetary policy to suit its domestic conditions — and then there is no need for any ministerial shouting across the exchanges…
It is high time to make as complete a reversal of policy on Maastricht as has been done on the ERM. And of course the connection is very close, economically and politically. If the divergence between different European economies is so great that even the ERM cannot contain them, how would those economies react to a single European currency? The answer is that there would be chaos and resentment of the sort which would make the difficulties of recent days pale by comparison.
The Washington audience greeted this speech very warmly and the reaction even in the British media was favourable, if divergent at points: ‘Mag-nanimous’ said the Sunday Express, ‘Maggie Gets Her Revenge’ said the Mail on Sunday. ‘An elegant I told you so’ said the BBC, splitting the difference.
But partly for reasons of injured pride and partly because so much political capital had been invested in the Maastricht project, the Government refused to rule out sterling’s return to the ERM. At the time this refusal did not seem too significant. The circumstances of our departure from it convinced most Conservative MPs, a large majority of public opinion and, significantly, most of the financial world that pegged exchange rates were deeply damaging. It seemed that events themselves had ruled out a return to the ERM and therefore a formal undertaking was not needed. Almost overnight I found that the attitude towards my viewpoint had changed. I was ‘right after all’. Unfortunately, by then the damage had been done — not least to the standing of the Government and the Conservative Party.
Appropriately enough, the pursuit of a policy towards Europe designed to comply with foreign rather than with domestic expectations had now led us into the extraordinary situation whereby the controversial Maastricht Bill’s fate was itself determined by foreigners. Although the Irish, the Danes and the French were permitted referenda, the demand for one was consistently refused by the British Government. Yet it was made clear that if the French voted against Maastricht in their referendum, the Bill would not go ahead in Parliament. I had discreetly done what I could to encourage the anti-Maastricht campaign in France. I found it enormously encouraging that the three main right-of-centre opponents of Maastricht — Philippe de Villiers, Philippe Séguin and Charles Pasqua — were clearly among the most dynamic and charismatic French politicians, and that in spite of media bias their campaign quickly struck a chord with the immensely patriotic ordinary people of France. In the end, however, it was not quite enough, and by 50.95 per cent to 49.05 per cent the vote went in favour of Maastricht. And so if 269,706 French voters had voted against rather than for, Britain would never have implemented the Maastricht Treaty.
The European involvement in the agonies of ex-Yugoslavia provided in its way as devastating a commentary on Maastricht as did the collapse of the ERM. It will be recalled that Article B of the Maastricht Treaty envisaged a common European foreign and security policy leading to a common defence policy and perhaps common defence. A strengthened role for the Western European Union (WEU) was envisaged and a start on ‘common defence’ was made with the Franco-German ‘Eurocorps’. And it was immediately realized, not least by the framers of Maastricht, that the crisis in ex-Yugoslavia on Europe’s south-eastern border would be a crucial, indeed decisive, test of these aspirations. As Jacques Poos, Foreign Minister of Luxembourg, then heading the ‘troika’ of European foreign ministers responsible for directing the common foreign policy, graphically put it, this was ‘the hour of Europe’. Setting out with his Dutch and Italian colleagues to mediate, he went on: ‘If one problem can be solved by the Europeans, it is the Yugoslav problem. This is a European country and it is not up to the Americans. It is not up to anyone else.’[73]
Nor was it merely that the Europeans proved incapable of grasping, let alone altering, the realities of the war of aggression which Serbia and the communist-dominated Yugoslav national army were waging; Community diplomacy actually made the situation worse. The Community continued to support a policy of keeping Yugoslavia together long after it had become clear that what effectively amounted to a Serb coup against federal Yugoslav institutions had occurred. The Community ‘monitors’ became sucked into the complications of war and failed to denounce the aggressors clearly. Even when the Yugoslav army withdrew from Croatia it was allowed to station its heavily armed forces in Bosnia, the obvious next target for aggression. When an exasperated Germany finally insisted that Slovenia and Croatia be recognized at the start of 1992, against the wishes of most other Community members, the last nail was hammered into the coffin of an effective European foreign policy — let alone a common defence policy — based on consensus.