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JOINING the ERM: CORE EXECUTIVE DECISION-MAKING in the UK 1979-1990 HELEN ELIZABETH THOMPSON Ph.D. Thesis London School of Econo

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JOINING the ERM: CORE EXECUTIVE DECISION-MAKING in the UK 1979-1990 HELEN ELIZABETH THOMPSON Ph.D. Thesis London School of Econo JOINING THE ERM: CORE EXECUTIVE DECISION-MAKING IN THE UK 1979-1990 by HELEN ELIZABETH THOMPSON Ph.D. Thesis London School of Economics University of London UMI Number: U062872 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U062872 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 F 7iW> ABSTRACT Core executive decision-making in economic policy in the UK is dominated by a Prime Minister-Chancellor axis and a set of constraints defined by vast flows of capital around foreign exchange markets. This thesis examines policy-making during the Thatcher governments in relation to the debate about ERM mem bership from 1979 to 1990. The analysis reconstructs the choices which faced the Thatcher governments given their economic and European policy interests and capital accumulation priorities, and investigates core executive actors' activity against this background. From the first Thatcher administration onwards, the core executive was seriously divided on ERM membership and the government was unable to pursue a coherent policy on the issue. As a result of both a power struggle between the Prime Minister and successive Chancellors and the retention of empirically untenable policy positions by core executive actors, economic policy-making falied as a judgement about effective means to ends. In this sense, decision-making became non-rational. Having renounced the potential benefits of ERM membership for most of the 1980s, the Prime Minister and Chancellor decided to enter ERM in autumn 1990 at a central rate of DM2.95 which served neither their own interests nor those of UK producers. The failure of the Conservative government to pursue an effective policy on ERM membership represented a failure to cope with or understand the implications for successful economic management of vast capital flows around foreign exchange markets. ACKNOWLEDGEMENTS During the course of this thesis, I have accumulated so many debts as to make its completion far more than the result of my individual effort. My primary debt is to my supervisor Patrick Dunleavy who provided a foil to my sometimes less than coherent thinking and writing as well as generous encouragement and kindness. I am also deeply appreciative for his practical support over an assortment of difficulties. Whatever the inadequacies of this thesis, they would have been far greater without him. In the LSE government department, I would like to thank Alan Beattie for his secondary supervision and his ongoing interest in and insight into the project. I am also grateful to George Jones for giving me the opportunity to present my ideas to the Institute of Historical Research and to my fellow students, Etain Tannam and Steven Griggs for their support and friendship. Last, but certainly, not least, I am incredibly grateful to Claire Wilkinson for her generous help in facilitating the interviews, unfailingly sorting out what no doubt seemed like an endless series of problems and enduring an awful lot of my less than amenable moods. My sincere thanks to the various people who allowed me to interview them. For reasons of confidentiality, I cannot thank them personally but I am very grateful for their time, courtesy and quite often candour. For their advice and suggestions at different times, I would also like to thank William Keegan, Peter Hennessy and Jim Bulpitt. Left to my own devices, the production of this thesis would have ceased long before its completion. To those who made it possible for me to continue, I am deeply grateful. My thanks to Brian Barry and Jenny Richards at LSE; to my parents who as always leapt to my problems with care and generosity; to Thanasis Sfikas whose late but divine intervention meant that I reached the end smiling; to Alice Thompson for unselfishly giving me so much of her time up and down the country when there were infinitely better things to do; and to Julian Reindorp who through the last year typed parts of the manuscript with the greatest interest and enthusiasm ii and shared more of the pleasures and pains of this work than I thought it possible to share with anyone. I can only dedicate the thesis to Alice and Julian with my love as a small gesture of how much what they gave meant to me. iii GLOSSARY BL British Leyland CAP Common Agricultural Policy CBI Confederation of British Industry CEE Council of Economic Experts DHSS Department of Health and Social Security DTI Department of Trade and Industry EC European Community Ecofin Economic and Financial Affairs Council of the EC Ecu European Currency Unit ERM Exchange Rate Mechanism EMF European Monetary Federation EMI European Monetary Institute EMS European Monetary System EMU Economic and Monetary Union ESCB European System of Central Banks FCO Foreign and Commonwealth Office FRN Floating Rate Notes GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GNP Gross National Product G5 Group of 5 G6 Group of 6 G7 Group of 7 ICL International Computers Limited IGC Inter-Governmental Conference IoD Institute of Directors IMF International Monetary Fund MAFF Ministry of Agriculture, Fisheries and Food MTFS Medium Term Financial Strategy NATO North Atlantic Treaty Organisation iv NEC National Executive Committee (of Labour Party) NEDC National Economic Development Council OECD Organisation for Economic Co-operation and Development PSBR Public Sector Borrowing Requirement RPR Rassemblement pour la Republique SEA Single European Act TUC Trade Union Congress v Contents Abstract Page i Acknowledgements ii Glossary iv 1. Core Executive Decision-Making 1 1.1 The Origins of the Exchange Rate Mechanism 4 1.2 The Core Executive and A Rational Actor Framework 11 1.3 A Rational Actor Framework 30 1.4 Argument, Methodology and Organisation 38 2. The First Conservative Government and ERM Membership 52 2.1 ERM as a Dirty Float 52 2.2 Constructive Europeanism? 54 2.3 ERM Resurfaces 61 2.4 How Close to Entry? 64 3. The Sterling Crisis and Thatcher's Veto 88 3.1 A Counter-Inflationary ERM 88 3.2 A Sleeping Issue 90 3.3 The Sterling Crisis of 1985 95 3.4 Thatcher's Veto 107 4. Trying to Solve the Sterling Problem 149 4.1 Competitive Disinflation and the Franc Fort 149 4.2 Devaluation and Non-Membership 151 4.3 Another Thatcher Veto 157 4.4 Shadowing the Deutschmark 166 4.5 Shadowing and ERM Membership 176 5. Economic Divergence and Monetary Union 203 5.1 ERM Dissatisfaction 203 5.2 The End of Shadowing and the Rise of Monetary Union 208 5.3 The Delors Committee and Non-Membership of ERM 227 5.4 The Road to M adrid 234 6. The Road to Entry 266 6.1 ERM, Monetary Union and German Reunification 266 6.2 : W hither the M adrid Conditions? 270 6.3 Thatcher Publicly Relents 280 6.4 : W hat Strategy? 287 6.5 Entry to ERM 295 Afterword 306 7. The Failure of Economic Policy-Making 330 7.1 Explaining the Policy Process: New Institutionalist 330 And Rational Actor Views 7.2 A 'Thin Rational Actor' Views 336 7.3 Conclusions 356 Appendix I 364 Bibliography 368 List of Figures Page 3.1 Comparative Inflation Differentials with Germany 1980-1985 90 3.2 Comparative Prime Lending Rates in January-February 1985 99 3.3 Comparative Nominal and Real Interest Rates in November 1985 109 4.1 Inflation in the ERM States 1985-1987 150 4.2 Comparative Effective Exchange Rates 1985-1986 154 4.3 Comparative Falls in Inflation 1985-1986 and Growth in 1986 155 4.4 Comparative Nominal and Real Interest Rates October 1986 159 4.5 Comparative Long Term Government Bonds November 1986 160 4.6 Comparative Fiscal Stimulus as a Percentage of GNP 1986-1987 178 4.7 Comparative Marginal Tax Rates on Average Wages June 1987 180 4.8 Sterling M3 Growth 1980-1987 183 4.9 Comparative Broad Money Growth 1985-1987 185 4.10 Household Debt to Disposable Income Ratio in Germany 186 and the UK 1983-1987 4.11 Increases in Average Earnings Compared to Inflation 1980-1987 188 4.12 Comparative Percentage Annual Increase in Unit Labour 189 Costs 1985-1987 5.1 Comparative Annual Unemployment Rates 1983-1988 204 5.2 Comparative Interest Rates March 1988 213 5.3 Exports and Imports 1983-1988 214 5.4 Comparative Interest Rates May 1989 238 5.5 Comparative Rates of Inflation and Wage Increases May 1989 239 6.1 Comparative Nominal Prime Lending Rates 1988-1990 267 6.2 Comparative Long Term Government Bond Rates 1988-1990 268 6.3 Comparative Percentage Growth of German Imports 270 Fourth Quarter 1989-Fourth Quarter 1990 6.4 Comparative Nominal Interest Rates November 1989 276 6.5. Comparative Interest Rates March 1990 282 6.6. Comparative Interest Rates October 1990 297 7.1 The Consequences of ERM Membership on GDP Growth and 338 M anufacturing O utput 1979-1981 7.2 The Consequences of ERM Membership on Annual Inflation 340 1984-1988 7.3 The Consequences of ERM Membership on Manufacturing Output 341 and GDP Growth 1984-1988 CHAPTER 1 CORE EXECUTIVE DECISION-MAKING Since states started to trade with each other, they have been forced to confront the question of how to organise payment for that trade.
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