Britain’s Conservatives had an unlikely new hero last week. John Major, Prime Minister Margaret Thatcher’s chancellor of the exchequer, her finance minister, is a 47-year-old, onetime banker who is generally regarded as one of the blandest politicians in the country. And in the year since he became chancellor, Major has delivered a steady diet of bad economic reports: rising inflation, soaring interest rates and mounting layoffs. But when he stepped up to the podium at the Tories’ annual conference in the southern seaside resort of Bournemouth last week, Major received a rousing ovation. What cheered the delegates was his sudden decision, which took effect on Oct. 8, to reverse years of British policy and link the pound directly to other major European currencies. That action, coupled with a one-percentage-point cut in the nation’s bench-mark interest rate to 14 per cent, strengthened Britain’s flagging economy and lifted morale in Thatcher’s party—which may fight the next election as early as the summer of 1991.
Major’s initial announcement that Britain was joining the exchange rate mechanism (ERM) of the European Monetary System sent a wave of euphoria through the country’s financial markets.
Sterling rose sharply against other currencies, and the value of shares traded on the London stock exchange jumped seven per cent in two days. But, by week’s end, shares lost most of that gain, and there were sharp reminders that Britain still faces significant economic problems. The country’s annual inflation rate in September was 10.9 per cent—its highest level in eight years. At the same time, manufacturers said that fixing the value of the pound at its present high exchange rate will make it harder for British companies to sell products overseas. Major himself declared that the economic benefits might take years to appear. Added the minister: “This is not a quick fix.”
The decision also exposed sharp differences within Conservative ranks over attitudes towards the European Community. The debate
over joining the ERM had become a touchstone in Britain for political attitudes towards Europe and the main source of discord within Thatcher’s cabinet. The prime minister, who is often accused of adopting a standoffish and combat-
ive stance towards measures aimed at closer integration of the 12 EC member states, had long resisted joining the ERM because she said that it would undermine Britain’s economic sovereignty.
Under the ERM, Britain fixes the pound at 2.95 German marks, although it can still move by six per cent above or below that range. In the past, Thatcher claimed that Britain could not join until its inflation rate was closer to the European average of about five per cent. But after a year of unsuccessfully fighting inflation by raising the basic interest rate to a peak of 15
per cent, she finally yielded. Political analysts maintained Major and other ministers persuaded her that only by linking the pound directly to the stable German mark, and using the new discipline to get closer to Germany’s low inflation rate, could British inflation be beaten.
Still, Thatcher insisted last week that joining the ERM did not indicate that Britain was prepared to accept a common European currency. The president of the European Commission, former French finance minister Jacques Delors, has proposed that the 12 EC states agree at a December summit meeting on a plan to eventually replace pounds, marks, francs and other currencies with a single new one by 1996, to be called the ecu. Delors’s plan would involve creating a European central bank that would take direct control over key aspects of monetary policy from national parliaments—and Thatcher is one of the strongest opponents of that development. In a speech to the party convention last week, she declared: “We shall never accept the approach of those who want to use the European Community as a means of removing our ability to govern ourselves as an independent state.”
Other party leaders, however, sent out different messages. Thatcher’s foreign secretary, Douglas Hurd, for one, pointedly warned that Britain must defend its interests by participating fully in EC decision-making. He added, “There is no future in a sulky, defeatist, fog-bound membership of the Community.” But the continuing reticence towards the EC shown by Thatcher and many of her senior aides aroused suspicion that Britain may use its new position inside the ERM to delay moves towards a single currency. Hours after Major announced his decision, Delors told French journalists, “Only the future will tell whether this is a pretext for slowing down integration.” o. For Thatcher, however, it pro2 vided new hope that she might I yet recover her popularity and ° win a record fourth straight term in office. While her Tories have lagged behind the opposition Labour Party in opinion polls for the past 18 months, they have closed the gap from as much as 19 percent last spring to between seven and 12 points now. If joining the ERM brings inflation and interest rates down sharply over the next year, it will greatly improve Thatcher’s chances for victory in an election that she has to call by June, 1992. But win or lose, many analysts concluded that last week’s events made it more likely that her eventual successor could be her party’s latest favorite: John Major.
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