Margaret Thatcher: The Autobiography (109 page)

I shall explain shortly the rest of what happened at the Madrid Council. Suffice it to say here that on the basis of what Alan had already suggested, and with some modification, I spelt out what became known as the ‘Madrid conditions’ for sterling’s entry into the ERM. I reaffirmed our intention to join once inflation was down and there was satisfactory implementation of the first phase of the Delors Report, including free movement of capital and abolition of foreign exchange controls. But I did not set a date for entry, nor was I put under any pressure at Madrid to do so.

In fact, the Madrid conditions did allow me to rally the Conservative Party around our negotiating position and got us away from the tired and faintly ridiculous formula of ‘when the time was right’. The outcome of Madrid was widely praised back at home. Unfortunately, in a sense the time would never be ‘right’ – because the ERM, particularly now that the Delors objective of EMU had come out into the open, would never be ‘right’. But that was something I could do little about.

Back home, Cabinet began as usual at 10.30 on Thursday 29 June. Normally, I would sit at my place with my back to the door as Cabinet ministers trooped in. This time, however, I stood in the doorway – waiting. But there were no resignations. The condition that there must be a date for our joining the ERM might never have been mentioned. Nigel Lawson even managed the remark that Madrid had gone rather well, hadn’t it? He certainly had a nerve, I thought: but then Nigel always did. That was one of his engaging characteristics.

It was from this time that tension between myself and Nigel Lawson arose over the independent economic advice that I was receiving from Alan Walters. Alan had returned to No. 10 in May 1989. I have already described his contribution to the ‘Madrid conditions’ for ERM entry. While the Treasury, thoroughly alarmed by the inflationary effects of Nigel’s policy of shadowing the ERM, kept urging ever higher interest rates, Alan now drew my attention to the danger that excessively high interest rates might drive the economy into recession.
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He was doing precisely what a Prime Minister’s adviser should. He also had the merit of being right.

However, during his five-year absence from No. 10, he had been asked to give his views in all sorts of different forums and Alan’s views were always trenchant. Various reports, articles and lectures containing his thoughts about economic policy issues in general and the ERM in particular kept on surfacing. Partly because these were exploited by the press to point up divisions between Nigel and me and partly because Nigel himself, knowing that he was being blamed for the return of inflation, was becoming hypersensitive, they became a major problem.

The important point, however, was that all this press speculation reflected an underlying reality. This was that Nigel and I no longer had that broad identity of views or mutual trust which a Chancellor and Prime Minister should. Nor was there any way that commentators were not going to hold Nigel to blame for the worsening economic outlook.

The
Financial Times
published on 18 October an article in which Alan was quoted, among other things, as describing the ERM as ‘half-baked’. This article was based on an essay to be published in the
American Economist.
But what the
FT
did not say was that the latter was written by Alan in 1988, long before he returned as my economic adviser. I felt that he had nothing to apologize for and minuted:

At 4.30 in the morning on Wednesday 25 October the VC10 which brought me back from the Commonwealth Conference at Kuala Lumpur arrived at Heathrow. Back at No. 10 I sorted out my personal belongings, discussed my diary with Amanda Ponsonby (my indispensable diary secretary), had lunch in the flat and then saw Nigel Lawson for one of our regular bilaterals. He was exercised about Alan Walters, having been repeatedly questioned in interviews about whether Alan should be sacked. But there were many other things we had to think about. In particular, we had to agree the line which Nigel would take at the forthcoming meeting of European Community Finance ministers on EMU. Nigel had devised an ingenious alternative approach, based on Friedrich Hayek’s idea of competing currencies, in which the market rather than governments would provide the momentum for monetary union. (Unfortunately, this proposal did not get very far, not least because it was not at all in the statist,
centralist model which our European Community partners preferred.) After seeing Nigel, I held a wider discussion of EMU which also included John Major (Foreign Secretary) and Nick Ridley (Trade and Industry Secretary) at which we endorsed Nigel’s proposed approach in his paper, while accepting that its purpose was mainly tactical in order to slow down discussion of EMU within the Community.

The next day, Thursday, was bound to hold its difficulties. Not only were there Prime Minister’s Questions: I also had to make a statement and answer questions on the outcome of the Kuala Lumpur CHOGM and, inevitably, on South Africa. I was under the hairdryer shortly after 8 o’clock in the morning when I received a message from my Private Office via Crawfie that Nigel Lawson wanted to see me at 8.50. Crawfie said something to me about it all being quite serious and that Nigel might be going to resign. But I said: ‘Oh no, dear, you’ve got it all wrong. He’s going to Germany this afternoon for a meeting and I expect he wants to see me about that.’ So when I came downstairs to see Nigel I was quite unprepared for what he had to say. He told me that either Alan Walters must go or he – Nigel – would resign.

I told him not to be ridiculous. He was holder of a great office of state. He was demeaning himself even by talking in such terms. As for Alan, he was a devoted and loyal member of my staff who had always acted within the proprieties. If others, including the media, had attempted to exaggerate legitimate differences of opinion, that was no responsibility of his. There was no question of my sacking him. I asked Nigel to think again. I thought he accepted this advice. But there was little time to talk since I had to discuss the briefing for Parliamentary Questions and my statement at a meeting due to begin at 9.00 a.m.

An hour later Nigel came into a meeting with other ministers on the future of the Atomic Weapons Establishment at Aldermaston. He seemed on good form and made several acute interventions in the discussion. Then we met again – this time at Cabinet. I opened Cabinet by saying that we must be businesslike and get through the agenda promptly because two ministers had to leave for meetings in Europe. Nigel was one of them.

I was, therefore, doubly surprised when I was told over lunch that Nigel again wanted to see me. I had thought he was not even in the country. We again met in my study where he repeated his demand and said that he wanted to resign. There was nothing much new I could say and not much time to say it since I had soon to be in the House of Commons. But I made it clear that Alan Walters was not going and hoped
that Nigel would reflect further. I said that I would see him after I had finished with Questions and my statement.

Over in my room in the House of Commons I was having a last look through my briefing when at 3.05 p.m. – a bare ten minutes before I was due to answer Questions in the House – Andrew Turnbull, my private secretary, came in to tell me that Nigel Lawson had decided to resign and that he wanted an announcement out by 3.30 p.m. This was out of the question. We had not told the Queen. We had no successor arranged. The London financial markets would still be open. I was about to face an hour on my feet answering questions and making a statement on the Commonwealth Conference. I repeated that I would see Nigel some time between 5.00 p.m. and 5.30 p.m. back in No. 10.

I only got through Questions and the Statement by relegating the crisis of Nigel’s departure to the back of my mind. About an hour later, on my way out of the Chamber, I asked John Major, who had been sitting beside me for my Statement, to follow me to my room: ‘I have a problem.’

Ideally, I would have liked to make Nick Ridley Chancellor. But Nick’s scorn for presentational niceties might well have compounded the problem. John Major, who knew the Treasury from his days as Chief Secretary, looked the obvious choice. I had already thought that John might succeed me. But I would have liked him to gain more experience. He had only been at the Foreign Office for a few weeks and had not yet fully mastered this department. He would have liked to stay as Foreign Secretary rather than return to pick up the pieces after Nigel. When he expressed some reluctance I told him that we all have to accept second best occasionally. That applied to me just as much as to him. So he agreed with good grace.

I dashed back to No. 10 to see Nigel, who was still insisting that his resignation should be announced immediately. On reflection there seems to me just one explanation for Nigel’s indecent haste. I think that he feared that I might telephone Alan Walters, who was in America, and that Alan would resign. This would have deprived him of the excuse he wanted. I now told Nigel that John Major was succeeding him. There was nothing left to discuss and it was a short meeting. I was sorry that our long and generally fruitful association should end in that way. I then telephoned Alan to tell him what happened. He told me that Nigel’s resignation had put him in an impossible situation and so he insisted, against all my attempts to persuade him, on resigning too.

Nigel’s departure was a blow to me – and one which Geoffrey Howe used to stir up more trouble when, the following weekend, in a speech of calculated malice, he praised Nigel as a Chancellor of great courage and insisted on entry into the ERM on the terms outlined at Madrid. But Nigel’s going was also a boon in one respect. At least in John Major I had a Chancellor who, though he lacked Nigel’s grasp of economics, had not got personal capital sunk in past policy errors. He was psychologically more able to deal with their consequences.

John – 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, 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.

Unlike Geoffrey and Nigel, John Major realized that to set an advance date for joining the ERM would leave us at the mercy of the markets. But by the morning of Thursday 29 March, it was increasingly clear that he 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 his conclusions on the best way forward. He said that the strategy must be to slow down the advance towards Stages 2 and 3 of Delors and the erosion of national sovereignty
they entailed, but to ensure all the while that the UK was not excluded from the negotiating process. This had an India rubber feel to it. So I said that there were serious dangers if we adopted a posture which implied that moves beyond ERM membership towards further economic and monetary integration could be contemplated. If other member states wanted to take such steps that was up to them. But the UK would not participate in that process. If we made that absolutely clear, I thought it was likely that, under pressure from the Bundesbank, Germany would also decline to move to the next stages of EMU. I sought to get John to view all this in a wider context and talked to him about the need to develop free trade relations with the USA and other countries, pointing out that centrally controlled blocs of countries – such as a federal Europe looked like being – must not be allowed to stand in the way of this.

John Major became increasingly worked up about both ERM membership and EMU. On 9 April 1990 he minuted me that he had been startled by the determination of other European Community Finance ministers to agree a treaty for full EMU. He had found little support for our new alternative approach – a ‘hard ecu’ circulating alongside existing currencies, managed by a European Monetary Fund – which we had advanced as an ‘evolutionary approach’ to EMU.
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He therefore set out a number of options as to how we might proceed. One – which was ultimately to be developed further at Maastricht – was to work for a treaty which gave a full definition of EMU and the institutions necessary for its final stage, but then allowed an ‘opting-in’ mechanism for member states. This would allow them to join in the new Stage 3 arrangements – that is, the single currency – at their own pace. He believed that this should be the goal we should work for as the outcome to the IGC. At a meeting with me on Wednesday 18 April, John rehearsed the arguments of his paper, emphasizing that the goal of full EMU as described by Delors was shared by all except the United Kingdom.