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),