Review of International Studies (2003), 29, 341–364 Copyright © British International Studies Association DOI: 10.1017/S0260210503003413 Odd man out: rethinking British policy on European monetary integration

MARK ASPINWALL*

Abstract. This article examines British preferences on European monetary integration. It challenges dominant theories of preference formation, suggesting an alternative explanation focusing on governmental majority. Empirical evidence is presented on both UK economic behaviour and the views of domestic economic interests, as well as government majority. The article also analyses first and second-hand accounts of the main players involved in three cases: the decision not to join the Exchange Rate Mechanism in 1979, the decision to join the ERM in 1990, and the decision to opt out of stage 3 of Economic and Monetary Union.

Professor Hargis to Ann Vickers: ‘Politicians, my dear young lady, are merely the middlemen of economics, and you know what we all think of middlemen. They take the Economic Truth and peddle small quantities of it to the customers, at an inordinate profit.’ Ann Vickers to Professor Hargis: ‘Well, aren’t – aren’t teachers, even college professors, middlemen of knowledge?’ From Ann Vickers, by Sinclair Lewis.

It is a truism that Britain takes a persistently awkward approach to ‘Europe,’ nowhere more so than in monetary integration. By awkwardness is meant a tendency to oppose formal, binding supranational agreements which lead to or are perceived to lead to a circumscription of national power.1 What is the cause of this awkwardness? It is sometimes attributed to a combination of historical experiences, giving rise to a distinct cultural bias which is inimical to continental-inspired integration. As an alternative to this cultural/historical explanation some observers concentrate on domestic economic conditions. Functionalists claim that changes in transactions may create new demands for international cooperation, and conversely that the absence of these behavioural changes undermines the case for cooperation. This

* This research was funded by the Nuffield Foundation and the British Academy. My thanks to them, and to reviewers who have read and commented on various drafts of this paper. An earlier draft was presented at the American Political Science Association annual meeting in San Francisco in August 2001. 1 The various editions of Stephen George’s influential book An Awkward Partner are responsible for this terminology. Scepticism, by contrast, usually refers to the views of individuals, not governments. It makes little sense to invent a new definition here and I adhere to this convention. 341 342 Mark Aspinwall perspective suggests that growing interaction is a necessary but not sufficient pre- requisite for integration.2 Those who take a liberal inter-governmentalist approach suggest that powerful economic actors in the UK are less inclined to support European integration, and that for every integrative opportunity, a unique constellation of domestic interests can be identified which explains the outcome.3 Similar anti-integration interests are not present in other countries, or are contained by bargains, marginalised, or other- wise effectively silenced. Policymaking on Europe is the product of an assimilation of these social forces. I argue that these explanations fail to take into account an important intervening variable: the effects of variation in domestic decision-making institutions. The UK first-past-the-post (FPTP) electoral system provides a strong incentive for prospec- tive MPs to belong to one of the two main parties – Labour and Conservative – regardless of their views on Europe. At the same time the government must accom- modate both pro and anti-European views into government policy in order to satisfy all parliamentary MPs. Governments must ‘manage’ or balance the competing wings of the party to remain viable. This article models the party management effect and tests it in the specific context of monetary integration. It also tests competing economic explanations for British governmental preferences.

International rules or domestic autonomy?

All states face a trade-off between domestic autonomy and international cooperation. When states agree to accept binding rules supervised by international organisations, they face a corresponding reduction in their ability to act domestically. This trade- off is important for domestic politics because it affects social and economic actors in different ways. Some actors believe that binding international rules are in the best interests of the state, because they bring aggregate welfare gains or reduce the likelihood of conflict. Others believe that states should retain power, in order to solve economic or social problems, or to preserve a sense of identity. In practical everyday politics, political parties and interest groups find them- selves making decisions about whether to support international agreements or reject them in favour of domestic authority. This dilemma includes decisions about the conduct of monetary policy. One of the most important questions of mone- tary policy is whether governments will pursue exchange rate stability or opt for domestic inflation or money supply targets. The views of any given actor about the

2 Karl Deutsch et al., Political Community and the North Atlantic Area: International Organization in the Light of Historical Experience (Princeton, NJ: Princeton University Press, 1957), pp 46–59; for a more recent pro-Deutschian view in the European context, see Alec Stone Sweet and Wayne Sandholtz, ‘European Integration and Supranational Governance’, Journal of European Public Policy, 4:3 (1997), pp. 297–317; for a functionalist argument relating to European monetary integration, see Jeffry Frieden, ‘Economic Liberalization and the Politics of European Monetary Integration’, in Miles Kahler (ed.), Liberalization and Foreign Policy (New York: Columbia University Press, 1997). 3 Andrew Moravcsik, The Choice for Europe (Ithaca, NY: Cornell University Press, 1998). British policy on European monetary integration 343 appropriate choice between these two clarifies their position on the domestic- international spectrum. The distributional consequences of binding rules ensuring open trade, fixed exchange rates, liberalisation, competition, price transparency, and public sector reform affect economic actors in different ways.4 Such rules remove a host of economic and monetary policy tools from the hands of national governments, making it far more difficult to protect selected industries and reflate the economy in times of recession, among other things. It is therefore unsurprising that empirical patterns regarding support or opposition to European integration may have emerged among political parties and interests. Next I turn to another cleavage – that between Left and Right. The Left-Right cleavage is a far more common spatial reference to political scientists than the international-domestic cleavage described here. How do the two relate?

The Left-Right cleavage and international integration

Left-Right space is a remarkably resilient means of ideological identification both across time and between states. It is a widely-used metric for classifying political ideology by a variety of methods. Left-Right space does not capture all dimensions of political conflict in a uniform manner – indeed policy dimensions have differing levels of saliency among different states, as Laver and Hunt point out.5 There are diverse perceptions of what are the main conflicts within any given state at any particular time. Nonetheless, Left and Right continue to provide a landscape by which we map ideology. New cleavages that have emerged in west European politics get assimilated into the Left-Right discourse. Left and Right help us reduce the ‘transaction costs’ of understanding the positions of political parties. Even the new politics parties on the fringe of European party systems have been absorbed because, as Oddbjorn Knutsen writes, ‘the language of “left” and “right” helps citizens as well as elites to orient themselves in a complex political landscape’.6

4 For a cogent set of hypotheses about the identity of these groups, see Jeffry Frieden and Ronald Rogowski, ‘The Impact of the International Economy on National Policies: An Analytical Overview’, in Robert Keohane and Helen Milner (eds.), Internationalization and Domestic Politics (Cambridge: Cambridge University Press, 1996); Ronald Rogowski, Commerce and Coalitions: How Trade Affects Domestic Political Alignments (Princeton, NJ: Princeton University Press, 1989). It is beyond the scope of this study, but major works have addressed the causes of individual support/opposition to integration, including post-material values, cognitive mobilisation, economic self-interest. See for example Ronald Inglehart, Culture Shift in Advanced Industrial Society (Princeton, NJ: Princeton University Press, 1990); Richard Eichenberg and Russell Dalton ‘Europeans and the European Community: The Dynamics of Public Support for European Integration’, International Organization, 47:4 (Autumn 1993), pp. 507–34; Matthew Gabel, Interests and Integration: Market Liberalization, Public Opinion, and European Union (Ann Arbor, MI: University of Michigan Press, 1998). 5 Michael Laver and Ben Hunt Policy and Party Competition (London: Routledge, 1992). 6 Oddbjorn Knutsen, ‘Expert Judgements of the Left-Right Location of Political Parties: A Comparative Longitudinal Study’, West European Politics, 21:2 (April 1998), p. 63. See also Hans- Dieter Klingemann, ‘Party Positions and Voter Orientations’, in Hans-Dieter Klingemann and Dieter Fuchs (eds.), Citizens and the State (Oxford: Oxford University Press, 1995). Laver and Hunt, Policy and Party Competition,ch.3. 344 Mark Aspinwall

The Left-Right cleavage and the domestic-international cleavage are reconciled by Hix, who creates a two-dimensional space to represent party positions in the EU.7 Parties are expected to fall along an inverted ‘U’ shape, with centrist parties in Left- Right space favouring European integration (international rules) and extreme parties in Left-Right space favouring domestic authority.8 The reason is that ideologies typically associated with the two ends of the Left-Right spectrum, such as socialism and nationalism, are ones that are associated with support for domestic authority. Ideologies typically associated with the centre of the spectrum – such as liberalism – are ones that are associated with support for international rules. Therefore, parties on the two ends of the spectrum produce anti-integrationist opinion, while parties in the centre of the spectrum tends to be more favourably disposed to integration.9 Figure 1 depicts this relationship, using a Bell curve to show the anticipated decline in support for international rules as parties move from centrist ideologies to extreme ideologies.10 The exact chape of this curve is an empirical question, and will vary depending on time, place, and issue. However, Hix’s two-dimensional resolution of the two cleavages is useful as an heuristic device, because it enables us to visualise the relationship between them quite easily. Attitudinal mapping has also been done by David Baker and colleagues.11 They suggest that the two relevant dimensions for the Conservative Party’s internal conflict in the early 1990s were the sovereignty-interdependence dimension and the extended-minimal government dimension. Their work helps illuminate the specific forces at work in the party in the 1990s and how that mirrored the pressures faced by the party in the repeal of the Corn Laws during the nineteenth century and Tariff Reform in the early twentieth century. But their mapping may be criticised on two grounds. The first is that sovereignty and interdependence are not mutually exclusive, if one means by interdependence a linking of national economies. The terminology used here advances a more precise definition: international rules commit states to certain behaviour, regardless of the extent of interdependence that exists. That by definition excludes certain state choices, and consequently circumscribes domestic autonomy.

7 Simon Hix, ‘Dimensions and Alignments in European Union Politics: Cognitive Constraints and Partisan Responses’, European Journal of Political Research, 35:1 (1999), pp. 69–106. He accommodates class and sectoral interests along with ideology. This enables many of the social distinctions between member states to be related to their views on integration, an innovation which captures much variation between states, but extends beyond the model proposed here. 8 Hix, ‘Dimensions and Alignments’, p. 79; also Simon Hix and Christopher Lord, Political Parties in the European Union (Basingstoke: Macmillan, 1997). 9 Numerous works provide empirical evidence of this phenomenon. See Leonard Ray, ‘Politicizing Europe: political parties and the changing nature of public opinion about the European Union’, PhD thesis, University of North Carolina, Chapel Hill, NC (1997). Leonard Ray ‘Measuring Party Orientations towards European Integration: Results from an Expert Survey’, European Journal of Political Research, 36:2 (October 1999), pp. 283–306; Hix and Lord, Political Parties; Hix, ‘Dimensions and Alignments’; Gary Marks and Carole Wilson, ‘The past in the present: a cleavage theory of party response to European integration’. Unpublished paper, University of North Carolina, 1999; Mark Aspinwall, ‘Preferring Europe: Ideology and National Preferences on European integration’, European Union Politics, 3:1 (March, 2002). 10 It is important to note that ‘extreme’ is not used in the pejorative sense here, but the spatial sense: it connotes distance from the ideological centre, not anti-social views. 11 David Baker, Andrew Gamble, and Steve Ludlam, ‘1846 . . . 1906 . . . 1996? Conservative Splits and European Integration’, Political Quarterly, 64:4 (1993), pp. 420–34. British policy on European monetary integration 345

Figure 1. Ideology and integration preferences: two dimensions.

Note: The Bell curve represents a stylized depiction of views toward European integration in Left-Right policy space, with those on the extremes more negative, and those in the middle more positive.

The second criticism is that extant empirical research suggests there is little linear relationship of a partisan or ideological nature that correlates to views on the domestic power versus international rules dimension (or if one prefers, the sovereignty- interdependence dimension).12 In any case, Baker et al. do not provide evidence establishing a relationship between the two, which is the aim here. There is, however, a curvilinear relationship, which suggests there is something about the ‘centre’ which distinguishes it from the two extremes.

Institutionalised awkwardness

The FPTP electoral system penalises small parties and favours the two main parties (except where there is geographic concentration). Since smaller parties have little chance of gaining seats in Parliament, prospective MPs, regardless of their views on

12 There is one exception to this. Liesbet Hooghe and colleagues find a strong linear relationship between a party’s orientation on the libertarian-authoritarian dimension and their position on European integration, with the libertarian/alternative/green parties much more favourable to Europe than traditional/authoritarian/nationalist parties. See Liesbet Hooghe, Gary Marks, and Carole Wilson, Integrating Europe: How Domestic Contestation Frames Party Positions on European Integration, paper presented at the 2001 annual meeting of the American Political Science Association. This relationship of course is not the same as Baker et al.’s extended state versus minimal state dimension. 346 Mark Aspinwall

Europe, gravitate toward the two main parties.13 The Whip system ensures unity within the parliamentary party, so that the government’s line is not defied lightly. At the same time, the government (and Cabinet) must take account of this anti- integration opinion. The result is that power sharing occurs within the ruling party, and on questions of European policy the centre of balance occurs between the pro- integration centre of the spectrum and the anti-integration end of the spectrum. This is because of the need to accommodate both pro- and anti-integration opinion within government policy in order to maintain unity. The need for balance is most acute when the government majority is low. How- ever, the need to balance is also a function of the extent to which integrative proposals will lead to a loss of sovereignty. Proposals which require member states to sacrifice a high level of national authority tend to produce a highly negative reaction among political elites who are Euro-sceptic. Proposals requiring minimal or no loss of national authority do not produce a strong negative reaction. The two variables – the level of government majority, and the level of sovereignty loss – are hypothesised to explain variation in British preferences better than liberal intergovernmentalist or functional theories. Figure 2 models preference formation as a function of sovereignty loss and government majority. Where government majority is low and the potential loss of sovereignty high, the government’s autonomy on preferences will be most con- strained. Conversely, where the majority is high and the loss of sovereignty low, it has maximum autonomy. In other cases the government may have limited autonomy. For example, with a large majority, the Blair government enjoys greater autonomy than did John Major between 1992 and 1997. Yet on the question of joining the single currency, which entails a large loss of national authority, the political saliency

Figure 2. Government autonomy and majority/sovereignty variation.

13 Where anti-integrationists attempt to go it alone they have a miserable success rate. For example, the UK Independence Party, advocating withdrawal from the EU, polled a tiny percentage of the vote in the 1997 general election. The Referendum Party polled only about 3 per cent. British policy on European monetary integration 347 is so high that internal Labour Party divisions (especially those at Cabinet level) may form a considerable limitation to the leadership’s level of autonomy in spite of the large majority.14 Conversely, when the EU banned British beef exports in 1996 following a report suggesting a link between BSE and new variant Creutzfeldt-Jakob disease (the human form of mad cow disease), it did not represent a loss of sovereignty for Britain because the EU already had the authority to take this step. However, Major’s majority was so low that the EU measure was successfully portrayed as a threat to British sovereignty, and the reaction by the government was to institute a policy of ‘non-cooperation’, lasting until the Florence summit in 1996. This was not the only possible reaction: the government could have reacted in a far less volatile manner, but the low majority made it more difficult for Major to dismiss EU critics within the party. Thus, it is argued that the electoral system produces an identifiable and regular pattern of pressures upon governments which influence in predictable ways their policies on Europe. Earlier scholars also recognised that particular dynamics would follow from the FPTP electoral system, albeit not in the context of European integration. For example, Samuel Finer, in making a passionate plea for electoral reform, noted that [T]he government of the day, whichever of the two party-complexions it may be, is unduly influenced by the extremists in its ranks. In office, each party has to reach some compromise between its right and left wings, in order to preserve its unity in the face of the Opposition ... But this compromise ‘centre’ position reached by either of these parties is far removed from the central attitude of Parliament as a whole and to an even more considerable degree, from that of the electorate as a whole (1975: 12).15

Party balance and monetary integration

Monetary integration entails a high level of sovereignty loss – domestic authority over monetary policy is circumscribed or lost altogether, and fiscal policy may also be circumscribed.16 This may be contrasted to other EU decisions where little or no

14 It is sometimes assumed that New Labour had shed the intra-party divisions that plagued it in the 1970s by the time it returned to power in 1997. But survey research of MPs carried out by David Baker et al. provides strong support for the view that internal party divisions over Europe still existed in 1996. See David Baker, Andrew Gamble, Steve Ludlam, and David Seawright, ‘Labour and Europe: A Survey of MPs and MEPs’, Political Quarterly, 67:4 (1996), pp. 353–71. Moreover, there remained a significant collectivist and interventionist tendency among a large group of MPs, and though these researchers did not conduct correlation tests it is very plausible that such views would cause Labour MPs to resist European integration. 15 On party management see also Jim Bulpitt ‘Rational Politicians and Conservative Statecraft in the Open Polity’, in Peter Byrd (ed.) British Foreign Policy Under Thatcher (Deddington, Oxford: Philip Allan, 1988). Jim Bulpitt ‘Conservative Leaders and the “Euro-Ratchet”: Five Doses of Scepticism’, Political Quarterly, 63:3 (1992), pp. 258–75. Bulpitt claims that the lack of institutional pluralism and the fact of one-party government raise the stakes in Britain as nowhere else for election winners. He raises the key issue of party management and also suggests that ‘party leaders in office operate within a structural framework’ – but he does not demonstrate how the structural framework functions, nor how party management might influence the formation of policy on the EU. For the most part, the governing party is treated as a unitary actor unhindered by its own malcontents. 16 The reason for constraints on fiscal policy is that membership of the Euro entails limitations on deficit spending. 348 Mark Aspinwall sovereignty loss occurs, such as promotion of new technologies or establishment of external cultural links. In the three episodes examined below, circumscription of domestic authority is both high and consistent. Therefore, the level of governmental majority is expected to be the crucial variable determining British preferences. The empirical section below examines the extent to which leaders sought to maintain a balance between the pro- and anti-integration wings of the party, and the influence this has had on British preferences. It will also examine alternative theories of preference formation – functional and liberal intergovernmentalist. Three cases are examined – the creation of the European Monetary System (EMS), the eventual decision to join the Exchange Rate Mechanism (ERM), and the decision to negotiate an opt-out on stage 3 of Economic and Monetary Union (EMU).

The European Monetary System

The European Monetary System (EMS) began operation on 13 March 1979. It was set up to rectify the problems of floating currencies following the collapse of the Bretton Woods System and the weaknesses of the Snake (an earlier effort to stabilise European currencies), and it contained an important device – the Exchange Rate Mechanism (ERM) – which served to dampen nominal exchange rate volatility between the participating countries.17 Stabilising exchange rates was perceived to be an important objective for small open economies with high levels of economic inter- action, because it reduced transaction costs for those engaged in trade and invest- ment, and eliminated the practice of competitive devaluations.18 But agreeing to join the ERM came at a cost: a loss of domestic policy autonomy. Members’ monetary and fiscal policies would have to be conducted in a manner which maintained market confidence in the value of the currency. Capital movements would respond to (say) reflationary measures by moving away from that currency, thereby weakening it and causing a reduction in reserves as the central bank sought to defend the exchange rate. Reserves would dry up and the currency link would be broken unless govern- ment policy changed. Loss of domestic policy autonomy raised the important question of who would bear the adjustment costs when currencies diverged from their parity rates. Either weak currency countries would have to adopt the price stability of strong currency countries, or strong currency countries would have to permit inflation domestically, or alternatively the burden would have to be shared. The final agreement ensured

17 All member states of the European Community were eligible to participate in the EMS. 18 On the creation of the EMS and the motivations of the various players, see Peter Ludlow, The Making of the European Monetary System (London: Butterworth, 1982); Kathleen McNamara, The Currency of Ideas: Monetary Politics in the European Union (Ithaca, NY: Cornell University Press, 1998); John Goodman Monetary Sovereignty: The Politics of Central Banking in Western Europe (Ithaca, NY: Cornell University Press, 1992); D.C. Kruse, Monetary Integration in Western Europe: EMU, EMS and Beyond (London: Butterworths, 1980); Andrew Moravcsik, The Choice for Europe (Ithaca, NY: Cornell University Press, 1998), pp. 251ff; Jonathan Story ‘The Launching of the EMS: An Analysis of Change in Foreign Economic Policy’, Political Studies, 36:3 (1988), pp. 397–412; James Walsh ‘International Constraints and Domestic Choices: Economic Convergence and Exchange Rate Policy in France and Italy’, Political Studies, 42:2 (1994), pp. 243–58. British policy on European monetary integration 349 that the onus for adjustment was on weak currency countries. Although German Chancellor Helmut Schmidt had hoped to achieve symmetry, he was forced by domestic groups, including the powerful and independent Bundesbank, to insist upon an asymmetrical system. In practice responsibility fell on weaker currencies to adjust. This result raised important concerns in weak currency countries such as Britain because if they decided to join, they would be forced to bear the burden of adjustment, adopting German-style price stability at their own expense. The main puzzle, therefore, is why other weak currency countries – such as France and Italy – agreed to be fully bound by this system (including the ERM) but the UK did not. Everyone knew exactly what was in store: deflationary policies and economic austerity, at least relative to the profligacy of the early part of the decade. Linking exchange rates would mean that their currencies would become overvalued in real terms unless inflation was tackled by reducing public sector expenditure and controlling money supply. These measures would inevitably cause some domestic social actors to react negatively, especially those in sheltered sectors and those benefiting from public expenditure. The functional argument against joining took several forms. The energy crisis and recession had given the UK a good reason to pursue reflationary policies, and the British economic position was perceived to be out of synch with the rest of Europe. In addition, the UK trade balance was more inclined toward global, not European, activity (the UK Treasury made the same argument at the time). This would reduce the advantages of currency stabilisation with European partners and helps explain both governmental reluctance to join initially and ongoing resistance by many political elites. This mirrored the traditional British preference for a more global approach to economic management, working with the US in the IMF. Other arguments suggested that oil production and highly liquid capital markets in London made the ERM less beneficial for the British economy than for the continental member states.19 It is true that British trade with European partners was low by comparison to their levels at the time the EMS was being considered. But when the UK’s trade pattern is compared to EU partners over time, controlling for length of EU member- ship and size of the EU, it is clear that the UK’s trade structure does not differ significantly. The trade diversion effects resulting from membership of a regional trade bloc occur gradually. After 20 years as an EU member, British trade to and from the EU as a proportion of all trade was 49 per cent – less than France’s 50 per cent but more than Germany’s 47 per cent and Italy’s 45 per cent. In a similar vein Jeffry Frieden makes the case that it is the trade patterns existing in the early 1970s that determined preference on monetary integration afterwards. Where member states had a large trade balance with the EU, and especially with DM zone countries, the currency fluctuation tended to be quite small. He goes on to say that ‘higher levels of economic integration have increased political pressures for exchange rate stability’.20 Yet this does not explain British entry into the Snake in the early 1970s, when trade to the EC was relatively low, and then hostile resistance to monetary integration later, as trade to the EC was rising. British government

19 For example, Moravcsik, Choice, p. 276. 20 Frieden, ‘Economic Liberalization’, p. 261. 350 Mark Aspinwall preferences have often gone in the opposite direction of economic activity. If the functional corollary of a rising trade and investment balance with the EU was a voluntary commitment to stabilise exchange rates and forego domestic autonomy, it was missing in the British case. Moreover, the passing of the energy crisis and recession appeared to have no impact whatsoever on government policy toward monetary integration. The liberal intergovernmentalist argument focuses on the role of interests. Many British economic interests felt that membership was not their top priority. The Confederation of British Industry (CBI) wanted exchange rate stability, but this was a lower priority for them than competitive exchange rates and, by extension, low interest rates and export prices.21 The CBI believed that further coordination of economic and monetary policies were required before the UK joined.22 The Trades Union Congress (TUC) was also opposed.23 On the other hand, the City was more positive. Three of the four major UK clearing banks favoured entry, though with changes to the Franco-German proposal.24 In evidence submitted to a Commons enquiry, Robin Leigh-Pemberton, Chairman of NatWest, also emphasised the need to stabilise economic and monetary policies in the UK, with convergence being a necessary element of membership. He raised several points about the Franco- German proposal which needed clarification, but in general his attitude was one of cautious approval. He stressed the political influence to be gained by remaining committed to the proposed EMS. The position of Lloyd’s Bank was even more favourable, citing the disciplinary effect on inflation, the benefits of exchange rate stability, and the benefits of a common reserve and trading currency. Sir Jeremy Morse, chairman of Lloyd’s Bank and the deputy chairman of the clearing bankers, argued in testimony before the Commons committee investigating the EMS that ‘we need to be there fighting our corner’.25 He cautioned that the EMS should be launched in a calm period, when dollar volatility was not interfering with European exchange rates, but also suggested that there would be ‘three or four of these experiments. It is to be hoped that each time the bundle of Europe’s monetary position gets bigger and stronger, and less easily divided by dollars’.26 One of the main reasons he advocated British membership was so that the three main non-DM zone currencies (Britain, France, and Italy) would serve as a counterweight to the DM zone. The majority of the quality press also favoured entry, as did the export-oriented firms of the British Chambers of Commerce (BCC) and multinationals such as Unilever and Shell. The BCC explained that ‘flexibility in exchange rates permits monetary policies which in the long run are disastrous’.27 Underlying their push for Britain to join the EMS was a desire to bring external controls to UK economic and monetary policies:

21 House of Commons, Expenditure Committee, The European Monetary System (London: HMSO, 1978), Session 1978–79, Nov. 20, pp 1–2. 22 Confederation of British Industry, The EEC: A Handbook of CBI Policy (London, 1979). 23 Commons, European Monetary System, pp. 138–43. 24 Ludlow, Making, p. 222. 25 Commons, European Monetary System,p.98. 26 Ibid., pp. 95–6. 27 Commons, European Monetary System, p. 116; also, see pp. 115–19 generally. British policy on European monetary integration 351

It is the discipline imposed by the EMS which is the chief immediate gain from entry. No doubt in theory similar gains could be achieved by British governments adopting of their own accord sensible policies: but can they be trusted to maintain them?28 Thus, there were interests both opposing and supporting entry. Even among those interests who were cautious or sceptical, viewpoints were not unequivocal. For example, the CBI stated in 1979 that ‘a unified market with a common currency, where major economic decisions are taken collectively by the Community and not individually by member states has the CBI’s support in principle.’ Peak associations included both pro and anti interests, and the equivocation that resulted from these conflicting views can hardly have provided a solid basis for governmental preferences. The influence of party management adds explanatory value to our understanding of British preferences on this issue. Within his own parliamentary party Callaghan was constrained both by advocates of full EMS membership and by Euro-sceptics. With a minority government (see Figure 3), in a pact with the Liberals, he was obliged to balance these forces to retain a viable government. The Liberals were unequivocally supportive of the EMS, as we would expect from a centrist party, but the terms of the pact did not include influence over the formation of government policy on this matter. Labour set policy by itself, reducing the potential centripetal impact of the Lib-Lab pact. In fact the Liberal leader David Steel showed no interest in the subject. He records a meeting with Callaghan in his diary entry for 10 April 1978 which reads: ‘[Callaghan] talked about his private meetings at the weekend with Giscard and Schmidt and went on about the international financial scene at which my eyes glazed over’.29 Callaghan’s parliamentary party included Euro-hostile Labour Leftists such as Tony Benn and Bryan Gould, as well as positive Labour centrists such as Roy

Figure 3. Government majorities, February 1974–May, 1997. Sources: House of Commons Public Information Office; David Butler and Gareth Butler, British Political Facts, 1900–1994, 7th edn. (Basingstoke: Macmillan, 1994).

28 Ibid., p. 117. 29 David Steel, A House Divided: The Lib-Lab Pact and the Future of British Politics (London: Weidenfeld and Nicolson, 1980), p. 134. 352 Mark Aspinwall

Jenkins and the Labour Committee for Europe.30 In early November, 120 members of the Parliamentary Labour Party signed a motion opposing the monetary system. This view was echoed by the National Executive Committee, and of course many of those in the Cabinet, such as Tony Benn, Peter Shore, and Michael Foot, who had opposed Britain’s membership of the Common Market in the Referendum held less than four years earlier. Official Labour policy on Europe was often redolent of the language of national sovereignty, relations with the US, and preservation of national interests.31 But this masked the ever-present cleavages between leftists and centrists. Leftists had rallied behind the ‘Alternative Economic Strategy’ of Tony Benn in the mid-1970s, a policy proposal of socialist autarky.32 On the party’s right wing were a number of centrist political leaders, such as Roy Jenkins and Shirley Williams, who were convinced of the merits of economic stability and international cooperation, and who favoured full participation in the EMS. So deep was their frustration with the power the leftists had over the Labour party that by 1981 they split, forming the Social Democratic party to contest the centre ground with the Liberals, a party with whom they later merged. Thus, on the EMS, as on other issues before, the leadership had to balance the party’s warring wings. As Ludlow notes, ‘there was simply no way in which [Callaghan] could carry the measure in a Cabinet of which the majority were indifferent or hostile, or in a Parliament where he could not expect the backing of enough of the opposition (which was itself divided on the issue . . .) to offset the antipathy of a substantial number, if not the majority, of the Parliamentary Labour Party.’33 Callaghan proclaimed himself to be in favour of the Franco-German idea in general, but noted, ‘I could not travel fast. Many people in the Labour Party remained suspicious of what they thought was too close an entanglement with Europe’.34 David Owen, Foreign Secretary at the time, recalls the prime minister saying that ‘the Party would not wear entry to the Exchange Rate Mechanism’.35 Owen held out little hope for full membership: I do not believe, given the political climate at the end of 1978, that we could have come any closer to being a full member of the EMS . . . The Parliamentary Labour Party was very uneasy about the EMS issue. Well over a hundred backbench Labour MPs signed an Early Day Motion against it and at a meeting of the PLP there was an attempt to restrict Jim’s [Callaghan] freedom to sign up for any arrangement.36

30 See the statements of the Labour Committee for Europe and Bryan Gould in Commons, European Monetary System, pp. 120–2, 124–5. 31 See for example, the discussion of the official policy written for the 1977 Labour conference in Stephen George, An Awkward Partner: Britain in the European Community, 3rd edn. (Oxford: Oxford University Press, 1998), pp. 124–6. 32 Interestingly the same title was given to the Gaullist strategy of the late 1970s; it shared some common features, calling for greater nationalism, protectionism, and interventionism in order to overcome economic privation. See Diana Green with Philip Cerny ‘Economic Policy and the Governing Coalition’, in Philip Cerny and Martin Schain (eds.), French Politics and Public Policy (New York: St. Martin’s Press, 1980), pp. 160, 168–70. 33 Ludlow, Making, p. 217. 34 James Callaghan Time and Chance (London: Collins, 1987), p. 493. 35 David Owen, Time to Declare (London: Michael Joseph, 1991), p. 376. 36 Ibid., pp. 376–7. British policy on European monetary integration 353

The views of economic interests and the low levels of trade and other economic obstacles do provide plausible alternative explanations for Britain’s decision not to participate fully in the EMS. Yet, assuming Callaghan was representing economic interests and the (fairly negative) supporters of the Labour party, his actions are puzzling. It is unclear why he would reverse himself – first supporting monetary integration then changing his mind after strong opposition in the party ranks. After the Bremen Council in the summer of 1978, he expressed cautious optimism in Parliament about the EMS. Yet at the Labour party conference in 1978, delegates raised serious opposition to EMS, and Callaghan reversed himself and opposed British membership. Economic interests were equivocal and the message they sent was mildly negative, yet it did not vary as wildly as Callaghan’s position. However, even if his post hoc reminiscences about favouring EMS in general are wrong and he never was in favour of the idea, the evidence points to his strong efforts to balance party opinion by joining the EMS itself but not the more important ERM. Moreover, the striking similarities in both economic circumstances and general views of interest groups between Britain and Italy (and to a lesser extent, France), cast some doubt upon explanations relying on interests or economic conditions.37 It is not difficult to ascertain what Callaghan gained by stringing along the two main factions within his party. With a minority government, and two opposing camps of Labour MPs to satisfy, he was required to balance their views as much as possible in order to maintain a viable government. The loss of Labour’s overall majority in 1976 combined with the strict austerity measures imposed in accordance with an IMF loan, meant that the leadership had a difficult time remaining viable. The old Labour Left was deeply unhappy with what it saw as an abandonment of the tenets of socialism, and it was causing as much trouble for Callaghan as John Major’s ‘Bastards’ were to do 15 years later.38 Appearing neither overly positive nor overly negative, the impression Callaghan gave was one of indecision and muddling. In the end he argued for as close a relationship to the new system as possible, gaining Cabinet approval for partial, but not full, membership.

Joining the ERM

Participation in the ERM had been considered by Thatcher as early as 1979, but rejected because of inflation divergence between the UK and its European partners, because of the wide fluctuations in the sterling-dollar exchange rate, and because the means of controlling inflation differed from European partners, according to Geoffrey Howe.39 However, by 1985, both Howe and Nigel Lawson favoured British

37 For a more detailed analysis of this comparison, see Mark Aspinwall, ‘Creating stability: national preferences and the origins of European Monetary System’. Unpublished paper, University of Durham (2001). 38 The ‘Bastards’ were Conservative MPs on the backbenches who were outspoken in their opposition to European integration, and who caused problems for the Major government because of their willingness to defy the Whip. Several of them had the Whip withdrawn for several months. The term was given to them in an off-the-record statement by the Prime Minister to journalist Michael Brunson, and his comments were subsequently reported widely. 39 Geoffrey Howe, Conflict of Loyalty (London: Macmillan, 1994), p. 274. 354 Mark Aspinwall entry into the ERM.40 They and others had concluded that Britain’s economic interests were closely convergent with its European partners’ interests. In 1987–8 Lawson shadowed the deutschemark as a prelude to joining the ERM, with the subsequent high interest rates aggravating the growing split between those on the right, including Thatcher and some of her ministers and advisors (such as John Biffen and Alan Walters), and those in the centre.41 Meanwhile, calls for reform to the EMS began in earnest in the mid to late 1980s. At the Hanover European Council meeting in June 1988, the member states agreed to establish a committee, headed by Commission president Jacques Delors and comprising the central bankers of the member states, that would study the prospects for economic and monetary union.42 The committee reported in 1989 with recom- mendations for a stage-by-stage process toward monetary integration. In further European Council meetings and a subsequent intergovernmental conference these came to be more clearly defined: the first stage would be full liberalisation of capital movements; the second stage would see the creation of the European Monetary Institute, the forerunner of the European Central Bank; the final stage would be the creation of a single currency. Thatcher reacted negatively to the Delors Report, but faced with a revolt by both Howe and Lawson prior to the Madrid summit in mid-1989, she agreed to join Stage 1 of economic and monetary union, and to join the ERM when specific conditions were fulfilled – lower domestic inflation and progress on the single market.43 By the end of 1989 EC member states had agreed by a vote of 11–1 that an IGC should be convened to consider economic and monetary integration (with Britain opposing). A number of debates arose over how to proceed to economic and monetary union, but what united all member states (save Britain) was not their approach to monetary policy or their agreement on sharing the burden of adjustment, but the idea that a supranational solution should be achieved. Clearly there were some systemic differences between the UK economy and those of the continent, but were they the reason for British reluctance to join the ERM? Over time, the British economy was losing its distinctiveness: from 1980 to 1986 British inflation was below both Italy and France.44 Therefore one of the main obstacles to British entry, from the standpoint of those concerned with domestic economic convergence, had been ameliorated in the 1980s. Yet the government – or more accurately the right wing of the government – still had no appetite for particip- ation in either the ERM or economic and monetary union.

40 Howe later stated that many regarded him as ‘eccentrically enthusiastic’ about monetary integration. House of Lords, Select Committee on the European Communities, An EMU of ‘Ins’ and ‘Outs’. Session 1995–96, 11th Report, vols. I & II (London: HMSO, 11 June 1996), p. 129. 41 Thatcher was only the most famous in the Conservative Party in her reluctance to embrace European integration. John Biffen set out the advantages of a Gaullist nation-state approach to Europe in a 1990 article. See John Biffen ‘Peace and the Forces of Change in Europe Today’, New European Quarterly Review, 3:4 (1990), pp. 25–9. 42 For a review of events leading to EMU, see David Cameron ‘Transnational Relations and the Development of European Economic and Monetary Union’, in Thomas Risse-Kappen (ed.) Bringing Transnational Relations Back In: Non-state Actors, Domestic Structures, and International Institutions (Cambridge: Cambridge University Press, 1995). 43 John Young, Britain and European Unity, 1945–1992 (Basingstoke: Macmillan, 1993), pp. 157–8. 44 However, it increased sharply from 1988–1991; see Daniel Gros and Niels Thygesen, European Monetary Integration, 2nd edn. (Harlow: Longman, 1998). British policy on European monetary integration 355

Nonetheless, Thatcher eventually capitulated, and Britain joined the ERM in October, 1990. Why did this happen? Most observers attribute the change of heart to the persuasion of the Chancellor of the Exchequer, John Major.45 Major gave his reasons in his memoirs: ‘[T]o me, bringing down inflation was pivotal, my constant objective and not an optional extra – and . . . this was the primary reason for our entry into the ERM’.46 Major steered the middle ground between Howe, who wanted Britain in the ERM, and Thatcher, who did not. While accepting Thatcher’s conditions, he said the question of membership was ‘not whether but when’.47 The functional approach would suggest that British economic activity with Europe needed to achieve a level sufficient to justify ERM membership. But external British economic activity had reoriented itself to the EU well before 1990 when Britain joined the ERM. Trade, investment, travel, and a number of other economic indicators were showing clear changes in a European direction from at least as early as 1980 (see Figures 4 and 5). Almost without exception they pointed to greater social and economic links with the continent. The argument that the UK economy was functionally a different animal from the continental economies were weakened by these changes. Moreover, as the 1980s progressed, economic interests were beginning to advocate ERM participation in ever greater numbers which, according to the liberal intergovernmentalist approach, should explain government choice. The CBI and the Institute of Economic Affairs, a Tory-leaning group, had both been suspicious of the ERM, although by 1984 the CBI was in favour of ERM particip- ation, and by 1990 was advocating EMU and single currency participation by Britain.48 These interests certainly had no influence on Thatcher, but did they have an impact on John Major, who eventually convinced Thatcher to take the pound in?

Figure 4. Behavioural trends – travel and trade. Note: The ‘Anglo’ category comprises the US, Canada, South Africa, Australia, and New Zealand. Figures for other Commonwealth and English-speaking countries are not compiled separately for the entire period. Figures for South Africa are not available until 1976. The EU comprised France, Germany, Belgium, Luxembourg, Italy, and the Netherlands until 1973, when the UK, Denmark and Ireland joined. Greece joined in 1981; Spain and Portugal in 1986; Finland, Austria, and Sweden in 1995.

45 Geoffrey Howe, personal interview, 26 October, 2000. 46 John Major, John Major: the Autobiography (London: HarperCollins, 1999), p. 138. 47 Anthony Seldon, Major: A Political Life (London: Weidenfeld and Nicolson, 1997), p. 102. 48 Moravcsik, Choice, p. 420. 356 Mark Aspinwall

Figure 5. UK exports by destination, 1971–1999 (in millions of pounds sterling). Note: The data for Anglo countries includes Canada, New Zealand, Australia, South Africa, India, Nigeria, and Hong Kong. Nigeria data are not available after 1996. Source: Office for National Statistics.

Major’s own assessment was that ERM membership was ‘endorsed’ (in his words) by ‘business groups and commentators’, suggesting an after-the-fact approval by business, not an active lobbying effort resulting in ERM membership. He repeats on numerous occasions that inflation control was the reason for entering, although he stated in the Commons in October 1990, just after entry, that the ERM ‘will rein- force our counter-inflationary policies, help to provide the stability and certainty that industry needs, and set the right framework for a resumption of soundly-based and non-inflationary growth’.49 The Institute of Directors, which was closer to the neo-liberal thought of Mrs. Thatcher, opposed membership of the ERM. It also was proportionately more representative of the service sector, which itself tended to be less supportive of monetary integration. The Association of British Chambers of Commerce, as it was then known, became increasingly supportive of ERM membership as the decade progressed. It stated in a consultation paper in 1989 that ‘the Association has agreed, with consistent support from its members, that the twin objectives of greater exchange rate stability and lower inflation could each be more effectively pursued within the ERM . . . and at a lower cost . . .’.50 By the end of the Thatcher reign organised labour was far more supportive of European integration than it had been at the beginning. In the early 1980s the TUC bridled at the constraints placed on Britain by the EC. By 1990 its position had altered. It advocated taking sterling into the ERM at a rate of DM2.70 and a broad 6 per cent fluctuation band, giving as its reasons the need for exchange rate stability, competitive exports, and the fight against inflation.51 By 1993 its position

49 Major, Autobiography, p. 163. 50 Association of British Chambers of Commerce, European Monetary System and European Monetary Integration (London: August 1989). 51 Trades Union Congress, Managing the Economy: Toward 2000 (London, 1990). British policy on European monetary integration 357 had changed even more, calling for ‘a coordinated European growth strategy’ within the EC, including full British participation in monetary union, albeit with a strong political role for the Council of Ministers to counter the European Central Bank.52 Thus, during the 1980s, major shifts in economic and social behaviour as well as interest group views were pointing toward the efficacy of closer monetary integration. Why did Britain remain outside the ERM until 1990 given these shifts?53 One possibility is that the anti-integrationist wing of the Conservative party, which was opposed to sacrificing monetary policy autonomy in a fixed exchange rate system and also to a single currency, was far stronger than the centrist, positive wing. This seems implausible given the number of top ministers favouring ERM entry. It is more likely that the beliefs of Thatcher herself were responsible for the delayed entry. Mrs. Thatcher represented the anti-integrationist wing of the party, and she was able to gain autonomy over the more pro-integrationist elements in her own party because she enjoyed a large majority. She used it to oppose monetary integration despite the growing evidence that UK economic interests were fully committed to taking advantage of European integration and that British interests would be undermined by a consistently negative policy. Without such a majority the need to manage the factions in her party would have been far more acute, and it is likely that Thatcher either would not have survived the 1980s, or (more probably) would have suppressed her personal anti-Europeanism. By 1987–8 she had moved sharply to the right on Europe, and the full force of her increasing hostility to supranational integration was manifested in the Bruges speech in September 1988. Among post-accession British prime ministers her distinguishing feature was that she did not balance the two competing factions in her parlia- mentary party. She had clearly gone beyond what could be construed as the Tory centre of balance on Europe. She had become ‘a natural member of the gallant but misguided group of [anti-integrationists]’.54 For this she paid a heavy price, but it was not exacted for more than two years after she threw down the gauntlet at Bruges. The reason for this stay of execution was the size of her majority (see Figure 3). With a majority of 102 in September 1988, declining to 99 in late 1990, Mrs Thatcher had a great deal more autonomy on European matters than did James Callaghan. The political capital afforded by this autonomy enabled her to choose between accepting the views of a growing number of interest groups, economists, and MPs, and joining the ERM, or siding with the Euro-sceptics and taking a nationalistic anti-European line. She chose the latter, at least until October 1990 when she took sterling into the ERM. By then she had one month remaining before the political axe fell and she was removed from office. Trouble had been brewing for at least a year: she was challenged for the leadership by Anthony Meyer, a pro-European, in 1989, but won comfortably,

52 Trades Union Congress, TUC Budget Submission, 1993 (London, 1993). 53 Bulpitt states that the reasons why Thatcher did not join the ERM despite the support of Lawson and Howe for the move were that ‘sterling’s petrocurrency status made the arrangement inappropriate and membership would curtail the government’s freedom in monetary policy’. See Bulpitt ‘Rational Politicians’, p. 197. But the oil and gas issue was a red herring: by 1990 it represented only 1.7 per cent of the UK economy. The real issue was the loss of freedom, but of course Britain was no different from any other member state in losing freedom by joining. Bulpitt’s assertion is a methodological confusion between an explanation of an outcome and a statement of the outcome. 54 Howe, Conflict, pp. 537–8. 358 Mark Aspinwall with 314 votes to Meyer’s 33 (with 24 spoiled ballot papers and 3 abstentions). It took another year, and the poll tax in addition to Europe, to move large numbers of Tories against her in the annual leadership contest in late 1990. Geoffrey Howe, on behalf of the pro-integration Tory MPs, gave the push that toppled Mrs. Thatcher with a hostile statement from the backbenches on 13 November 1990. Even then she almost survived, winning well over 50 per cent of the first ballot.

Opting out of EMU

Not coincidentally, in the leadership selection process that followed her resignation, she was replaced by a balancer – John Major – rather than either Douglas Hurd or Michael Heseltine, both of whom were perceived as pro-European. The balance began to be reasserted right away. The government’s policy toward EMU member- ship shifted from outright opposition to delay. Major had the rump majority left behind by Thatcher, which gave him some autonomy, but with a bruising fight over Thatcher’s anti-Europeanism in the very recent past, he may not have wanted to risk alienating any particular wing of the party. Major faced a determined group of Euro-sceptics within his own party, not least of whom was Thatcher herself, who was still widely admired by many Tory MPs. She was joined by an increasingly vocal group including Bill Cash and Teddy Taylor, who provided passionate and powerful arguments against the continued integration of Europe. Euro-sceptics harkened to Thatcher’s warning in 1991 that ‘what is now being considered is a massive extension of the Community’s powers and competence into almost every area of our national life . . .’.55 Her steadfast opposition to a single currency, among other things, galvanised many MPs with similar inclinations. Likewise, the Danish referendum in June 1992 and the Black Wednesday debacle in September 1992 began to shift Conservative opinion in a sceptical direction. At the same time, a number of influential MPs in the Conservative party pressed for Britain to remain firmly involved in the integration process, and were far more favourable toward the single currency. Several of them, including Kenneth Clarke and Michael Heseltine, held important posts in the Cabinet. These ministers and MPs were as much a constraint on Major’s autonomy as the Euro-sceptics. Within Cabinet, the Euro-positive ministers were balanced by more sceptical Cabinet members, such as Michael Howard, John Redwood, and Michael Portillo. These distinct groups acted as de facto proxies for the parliamentary party on European integration. The most important integrative challenges during the Major governments were the Maastricht Treaty and the related and ongoing process of monetary integration, especially the question of membership of the single currency. In the Maastricht negotiations, Major succeeded in three aims: to have all references to federalism removed from the draft treaty, to have Britain excluded from the social chapter, and to maintain the right of Britain to opt out of stage three of EMU. Why did the

55 Cited in Alan Sked and Chris Cook, Post-war Britain: A Political History (Harmondsworth: Penguin, 1993), p. 563. British policy on European monetary integration 359 government choose an opt-out on EMU? It seems unlikely that a functional reason was behind British preferences, given behavioural trends. As the figures earlier show, economic and social activity was becoming ever more ‘European’. Major himself makes no mention of these as a motivation for government policies. The liberal intergovernmentalist interpretation of the EMU result is that Britain’s opt-out reflected the interests of the business community in not being locked out of future participation, but also not being locked in.56 The CBI was primarily concerned about remaining competitive (through exchange rates) and linked to the single market. The weakness of this explanation is that the CBI did endorse the single currency and argued that it would bring benefits to British business. In testimony to the House of Lords European Communities Committee in mid-1990, the chairman of the CBI working group on European monetary union, David Lees, radiated optimism on the single currency. He asserted that ‘business is really very enthusiastic about EMU. The ultimate goal of business, certainly my own view of the ultimate goal of business, is a single currency’.57 As Moravcsik shows, the CBI opposed the Major government’s reluctance to embrace the single currency. Several advantages to a single currency were cited by the CBI, including a reduction in hedging and transaction costs, reduced foreign exchange volatility, and an external control on inflation.58 Estimates of savings for British business were £300 m for hedging costs, £10 bn for transaction costs, and £3 bn for volatility costs.59 Yet the CBI also supported John Major’s ‘hard Ecu’ proposal, not as an end in itself but as a ‘critical bridge between . . . entry to the ERM and that point at which . . . we will be ready, together with our European partners, to move to the single currency’.60 It was expected to serve as a learning process, by which firms would become familiar with the new currency prior to moving to a single currency. In addition there was serious concern among business over the levels of inflation and unit labour costs in the UK, but the emphasis was on getting these under control and convergent with other European economies so that Britain would not be harmed in the prospective EMU. The CBI also cited the difficulties British business would face outside a single currency area. The IoD was more cautious, supporting only the hard Ecu, which was also advocated by a number of City banks, represented by the British Invisible Exports Council.61 The main concern was to promote price stability and economic convergence among likely participants in a monetary union while maintaining the maximum level of national policy autonomy. Meanwhile, inflation had re-emerged as a serious problem in the late 1980s, and by 1990 was well above the French, German, and even Italian levels. A British recession juxtaposed to a German reunification-spurred demand boom exacerbated the economic differences between the two countries. This provides a plausible eco- nomic reason for British negotiators to be wary of commitment to a monetary

56 Moravcsik, Choice, pp. 420ff. 57 Lords, Economic and Monetary Union, pp. 119–20; this interpretation of the CBI being positive toward a single currency is shared by the House of Lords European Communities Committee in its report. 58 Moravcsik, Choice, p. 421. 59 Lords, Economic and Monetary Union, p. 119. 60 Ibid., p. 121. 61 See the testimony and written submissions of Sir Michael Butler and Barclays Bank, ibid. 360 Mark Aspinwall system that might require severe adjustment. Yet by the early 1990s, as interviews have made clear, ‘monetary authorities and employers’ organisations in [France, Germany, and Britain] . . . favoured EMU in order to strengthen the Single Market’.62 There was a similar compatibility to the views of the major trade unions in the three countries (with a slightly more negative view on the part of British trade unions). Verdun identifies a shift in the position of the British Treasury from 1991 to 1992, moving from advocacy of EMU to ensure price stability and the proper working of the single market, to a more cautious position in line with the negotiated UK opt- outs. Otherwise, employer organisations, trade unions, and finance ministries were fairly constant in their views on the role of EMU. Thus, British economic opinion was divergent and equivocal. Important economic actors wanted the government to move to a single currency; others were more reluctant or advocated a policy which kept Britain within the game but not neces- sarily as a participant in the single currency. Moreover, as we have seen elsewhere, British business believed it had broad consensus with other national business groups within UNICE on the direction a single currency should take. True there were nuances in national positions, but European business had broadly united behind the Delors report. The CBI argued in testimony that ‘the main objective which UNICE represents in European business, about which there is no doubt [presumably includ- ing the CBI] is the need (a) to maintain price stability and (b) to get a single currency’.63 Thus, the liberal intergovernmentalist interpretation of the cause of the govern- ment’s opt-out is that it followed the bulk of business opinion and refused to be left behind but also left open the possibility of not joining Stage 3. It is possible that the equivocal signals received from interest groups, as well as high inflation, were influential in the government’s decision-making. Yet no direct participants in the process (many of whom were interviewed in the course of this research) believe that economic interests were responsible for the government’s policy on EMU in the Maastricht negotiations. Equally likely, if not more so, is that Major, when negotiating EMU as prime minister, intentionally balanced the anti-integration identity-conscious wing of the party with the pro-integration liberal wing. During the period from late 1990 to late 1991, when the treaty was being negotiated, Major’s majority declined slightly from 99 to 95. This probably afforded him enough autonomy to make some choices about the treaty outcome without reference to balancing the wings of the party. So a cautious, middle-of-the-road approach would have been his own choice. Without the need to balance, Major may have done so of his own volition, mindful of the recent difficulties the party had gone through under Thatcher’s premiership. Major himself states that his caution on EMU was due to three factors. The first was the economic disparities between member states. The second was that he considered enlargement a higher priority. The third was concern over the loss of

62 Amy Verdun ‘An “Asymmetrical” Economic and Monetary Union in the EU: Perceptions of Monetary Authorities and Social Partners’, Journal of European Integration, 20:1 (1996), p. 72. The French appeared to be the most unequivocal in their support; German and British officials, both private and public sector, had some reservations. 63 Lords, Economic and Monetary Union, p. 125. British policy on European monetary integration 361 monetary policy authority and the ensuing possibility of harmonised taxes. Of the three factors, the first and third were common to all member states, and the enlarge- ment consideration was not incompatible with EMU. Therefore, none provide a plausible motivation distinguishing British preferences from others. Major is dis- missive of the accusation that the opt-out was simply a means of managing or balancing party opinion during this period. Far from being a short-term expedient to postpone conflict, this policy was dictated by the long view. It was not influenced by the fundamental opposition to entry of Michael Howard, Peter Lilley, Michael Portillo and party elders like Norman Tebbitt, Cecil Parkinson, or Margaret Thatcher; nor was it decided by warm support for the principle from Ken Clarke, Michael Heseltine, John Gummer and prominent figures like Ted Heath or Peter Carrington. I genuinely stood apart from both sides, and decided upon the policy I believed to be right; it was coincidental that it fell smack between the two. [T]he decision . . . was seen by commentators and observers as a whips’ compromise, a piece of party management by a man without conviction or principle. The irony was that I was, in fact, procrastinating on principle, and on a principle deeply held. I have given up hope that this will ever be understood (emphasis added).64 It is impossible to know for certain if it really was coincidence as Major claims, but Norman Lamont, Chancellor of the Exchequer at the time, disagrees. ‘Party unity was the consideration for choosing the opt-out on the single currency. A consider- able amount of thought had been given to this in advance. [John Major] saw this would keep the Conservative Party together. I can understand why he thought it might’.65 After the next general election, the parliamentary arithmetic changed for John Major. He was returned to power, but with a majority of only 21, declining to nine over the five years of his government. By 1996 the question was being asked whether the UK should join in the first wave, and once again economic interests were split.66 But the political rhetoric had been turned up several notches: Major’s life was made miserable by an intensely difficult task of managing the party through numerous crises, some related to monetary integration, some unrelated.

Conclusion: party balance and British monetary exceptionalism

What causes a state to prefer international monetary integration to domestic monetary autonomy? This article has questioned functional and liberal intergovern- mentalist accounts of UK preference formation on monetary integration. British economic and social behaviour has become more ‘European’ – patterns of trade, investment, travel, and migration all point to a relative shift toward EU member states. Functionalist theory would lead us to believe that pro-integration preferences would follow from these changes. This did not occur. Government preferences appear to have moved independently of behavioural trends. This point is noted by

64 Major, Autobiography, pp. 272–3. 65 Norman Lamont, personal interview, 4 January 2001. See also Norman Lamont, In Office (London: Little, Brown, 1999), p. 111. 66 For the details of positions see House of Commons, Treasury Committee, Prognosis for Stage Three of Economic and Monetary Union, 8th Report, 23 July 1996 (London: HMSO), passim. 362 Mark Aspinwall

Wayne Sandholtz, a prominent exponent of the functionalist approach, in his examination of the creation of EMU: ‘the analytically distinctive feature of the British case is this: alone among the EC countries that converted (at least in principle) to disinflation in the 1980s, Britain opposed monetary union’.67 The liberal intergovernmentalist approach is also problematic. Though economic interests were mildly negative on joining the EMS in 1978–9, later positions do not fully accord with governmental preferences. Several factors suggest that the views of economic interests may not have been decisive in government policy. The first is that positions of interests tend to be mixed, not uniform, so it is difficult to trace policy choice to a specific and clear view of social preferences. The strong evidence from this research is that UK business held divergent views, based upon their level of international exposure and the consequent benefit or cost associated with the single currency. Greenwood and Stancich also point to the existence of different opinions among business groups on the question of joining the Euro.68 They describe the views of these competing groups though they do not explore the causes of their differences. The second is that opinion polls during the most politically hostile period (the mid-1990s) among even the uncommitted UK business associations showed a majority of member firms supporting the single currency; again, the exception was small firms, but even here the support was evenly divided, with 46 per cent sup- porting and 46 per cent opposing introduction of the single currency in a 1994 survey.69 Two-thirds of Britain’s large firms supported the single currency. The third reason to be wary of arguments asserting the importance of interests in government preference formation is that most UK economic interests, regardless of their views on British participation in the single currency, strongly supported a clear position by the government one way or another and much more information than they had been given. This was the case for the Consumers in Europe Group, trade unions, and virtually all segments of the business population. As ICI’s corporate chief economist explained, regardless of whether the UK was in or out, preparations needed to be made, for which certainty would be helpful.70 The British Chambers of Commerce was particularly forthright in its requests for certainty and information. While welcoming the opt-out, it stated that ‘the day for a decision is however drawing closer’.71 The BCC called for an ‘informative and pragmatic debate’ in which the issue was depoliticised, for more information, and a clearer statement from both main parties of their political intent.72 A government that was reflecting their views and responding to their interests would certainly have

67 Wayne Sandholtz, ‘Choosing Union: Monetary Politics and Maastricht’, International Organization 47:1 (1993), p. 9. 68 Justin Greenwood and Lara Stancich ‘Managing Complexity’ in David Baker and David Seawright (eds.) Britain For and Against Europe: British Politics and the Question of European Integration (Oxford: Clarendon, 1998). 69 The survey was comprised mainly of firms employing 50 people or fewer, but with some firms employing up to 99. See British Chambers of Commerce, The Impact of European Union: the View of the Small Firm (London, 1994). 70 Commons, Prognosis,p.80. 71 Ibid., p. 64. 72 Ibid., pp. 70, 74. British policy on European monetary integration 363 picked up on this because it is a very common theme in position documents and testimony. Interest groups have been consistently disappointed by the government’s unwillingness to provide clarity. Finally, it is likely that following the ERM debacle in 1992, monetary integration was such a high-octane issue in British politics that economic interests were keeping their heads below the parapet, prefering to put forward technical positions even if they had clear preferences in favour of integration.73 They recognised the difficult position of the government and followed its lead without taking sides, asking only that technical matters be addressed and that as much information as possible be made available. This article has suggested that a key variable influencing British preferences is the size of the government’s majority. The British electoral system produces one-party government most of the time, which forces leaders to manage, or balance, between the pro-integration and anti-integration wings of the party. When the majority is low the leader has little autonomy. When the majority is high, s/he has more autonomy. Interviews with key political leaders who were in office during these periods revealed the widely held view that other variables – principally the quality of the leadership – are likely to play a part in the autonomy of the leader as well. Strong, respected leaders gain extra autonomy. Likewise, random variables such as the Danish referendum votes in 1992 and 2000, and Black Wednesday, may influence the degree of autonomy enjoyed by the leadership. An increasingly common technique of party management is to delay making a decision. This is a feature of the policies of both main UK political parties on the Euro, for example. Labour imposed five economic conditions governed by a ‘pro- Euro realism’ (but also promised a decision on a referendum within two years of the 2001 general election); the Conservatives ruled out membership in the 2001–6 parliament as part of their election pledge. ‘Delayism’ is a manifestation of party management. Given the size of his majority, Blair’s failure to endorse the Euro might be seen as a weakness for the theoretical approach laid out here. Certainly the large majority from 1997 onward provided enough political capital to make it far easier for Blair (than Major) to make an affirmative decision, but it must be remembered that the model elaborated earlier in this essay also states that the government’s autonomy is inversely proportional to the level of domestic authority being sacrificed. No single policy area in the history of European integration has sought as much sacrifice of domestic authority as the Euro. Two cleavages have emerged in Left-Right space on international integration – (1) between the anti-integration left and the pro-integration centre; and (2) between the anti-integration right and the pro-integration centre. The reality for party leaders is that the broad-church parties institutionalised by first-past-the-post span these cleavages. Party leaders are less and less likely to enjoy a quiet life as a result. This is not simply true for Britain, but also for other EU member states with broad parties.

73 See Mark Duckenfield, ‘Getting EMU Off the Ground: The Politics of Monetary Union in Germany and Britain, 1991–97’. Unpublished paper, Center for European Studies, Harvard University (1999), pp. 27–8. 364 Mark Aspinwall

Both the Socialist party and the Gaullist party in France have felt the strains of managing members across these cleavages. It is possible that with a different set of political institutions, a more positive European policy would emerge in Britain, even without changing social inputs. The present government has toyed with the idea of changing to a proportional representation electoral system for national elections (this has already been done for Scottish, Welsh, and European Parliament elections). It is likely that such a change (admittedly remote) would produce a result where no single party had an overall majority, leading to a coalition government, with more extreme parties remaining outside government. It would also (arguably) reduce democratic legitimacy by disenfranchising Euro-sceptics, both in Parliament and in the wider public.