European Monetary Integration 1970-79: British and French Experiences (St. Antony's Studies)

European Monetary Integration 1970–79 British and French Experiences

Daisuke Ikemoto

St Antony’s Series General Editor: Jan Zielonka, Fellow of St Antony’s College, Oxford and Othon Anastasakis, Research Fellow of St Antony’s College, Oxford and Director of South East European Studies at Oxford.

Recent titles include: Daisuke Ikemoto EUROPEAN MONETARY INTEGRATION 1970–79 British and French Experiences Nayef R.F. Al-Rodhan THE POLITICS OF EMERGING STRATEGIC TECHNOLOGIES Implications for Geopolitics, Human Enhancement and Human Destiny Dimitar Bechev CONSTRUCTING SOUTH EAST EUROPE The Politics of Balkan Regional Cooperation Julie M. Newton and William J. Tompson (editors) INSTITUTIONS, IDEAS AND LEADERSHIP IN RUSSIAN POLITICS ˘ Celia Kerslake , Kerem Oktem, and Philip Robins (editors) TURKEY’S ENGAGEMENT WITH MODERNITYE Conflict and Change in the Twentieth Century Paradorn Rangsimaporn RUSSIA AS AN ASPIRING GREAT POWER IN EAST ASIA Perceptions and Policies from Yeltsin to Putin Motti Golani THE END OF THE BRITISH MANDATE FOR PALESTINE, 1948 The Diary of Sir Henry Gurney Demetra Tzanaki WOMEN AND NATIONALISM IN THE MAKING OF MODERN GREECE The Founding of the Kingdom to the Greco-Turkish War Simone Bunse SMALL STATES AND EU GOVERNANCE Leadership through the Council Presidency Judith Marquand DEVELOPMENT AID IN RUSSIA Lessons from Siberia Li-Chen Sim THE RISE AND FALL OF PRIVATIZATION IN THE RUSSIAN OIL INDUSTRY Stefania Bernini FAMILY LIFE AND INDIVIDUAL WELFARE IN POSTWAR EUROPE Britain and Italy Compared Tomila V. Lankina, Anneke Hudalla and Helmut Wollman LOCAL GOVERNANCE IN CENTRAL AND EASTERN EUROPE Comparing Performance in the Czech Republic, Hungary, Poland and Russia Cathy Gormley-Heenan POLITICAL LEADERSHIP AND THE NORTHERN IRELAND PEACE PROCESS Role, Capacity and Effect Lori Plotkin Boghardt KUWAIT AMID WAR, PEACE AND REVOLUTION Paul Chaisty LEGISLATIVE POLITICS AND ECONOMIC POWER IN RUSSIA Valpy FitzGerald, Frances Stewart and Rajesh Venugopal (editors) GLOBALIZATION, VIOLENT CONFLICT AND SELF-DETERMINATION

Miwao Matsumoto TECHNOLOGY GATEKEEPERS FOR WAR AND PEACE The British Ship Revolution and Japanese Industrialization Håkan Thörn ANTI-APARTHEID AND THE EMERGENCE OF A GLOBAL CIVIL SOCIETY Lotte Hughes MOVING THE MAASAI A Colonial Misadventure Fiona Macaulay GENDER POLITICS IN BRAZIL AND CHILE The Role of Parties in National and Local Policymaking Stephen Whitefield (editor) POLITICAL CULTURE AND POST-COMMUNISM José Esteban Castro WATER, POWER AND CITIZENSHIP Social Struggle in the Basin of Mexico Valpy FitzGerald and Rosemary Thorp (editors) ECONOMIC DOCTRINES IN LATIN AMERICA Origins, Embedding and Evolution Victoria D. Alexander and Marilyn Rueschemeyer ART AND THE STATE The Visual Arts in Comparative Perspective Ailish Johnson EUROPEAN WELFARE STATES AND SUPRANATIONAL GOVERNANCE OF SOCIAL POLICY Archie Brown (editor) THE DEMISE OF MARXISM-LENINISM IN RUSSIA Thomas Boghardt SPIES OF THE KAISER German Covert Operations in Great Britain during the First World War Era Ulf Schmidt JUSTICE AT NUREMBERG Leo Alexander and the Nazi Doctors’ Trial Steve Tsang (editor) PEACE AND SECURITY ACROSS THE TAIWAN STRAIT James Milner REFUGEES, THE STATE AND THE POLITICS OF ASYLUM IN AFRICA Stephen Fortescue (editor) RUSSIAN POLITICS FROM LENIN TO PUTIN

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European Monetary Integration 1970–79 British and French Experiences Daisuke Ikemoto Associate Professor of International Relations, Faculty of Law, Meiji Gakuin University, Japan

In Association with St Antony’s College, Oxford

© Daisuke Ikemoto 2011 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2011 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-0-230-24589-1

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This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Ikemoto, Daisuke, 1974– European monetary integration, 1970–79 : British and French experiences / Daisuke Ikemoto. p. cm. Includes index. ISBN 978–0–230–24589–1 (alk. paper) 1. Monetary policy–European Economic Community countries. 2. European Economic Community countries–Economic policy. 3. Great Britain–Economic policy. 4. France–Economic policy. 5. European Economic Community. I. Title. HG930.5.I37 2011 332.4′9409047–dc22 2011011822 10 20

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Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

For my parents

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Contents

Acknowledgements

viii

Abbreviations

ix

1

Introduction

1

2

National Political Parties and Party Systems in the Study of European Integration

25

3

Britain’s Policy on EMU During the Entry Negotiations with the EEC, 1970–71

35

4

Britain and the EEC’s First Steps Towards EMU, 1971–74

75

5

Comparing British and French Policy on European Monetary Integration (1): The Currency Crisis of 1976

115

6

Comparing British and French Policy on European Monetary Integration (2): The Establishment of the EMS, 1978–79

157

7

Conclusion

192

Notes

199

Bibliography

229

Index

241

vii

Acknowledgements This book began as a research project at the University of Oxford in October 2002. My greatest thanks, therefore, are due to Prof. Vernon Bogdanor and Prof. Jan Zielonka, to both of whom I accumulated a huge intellectual debt that can never be fully repaid. I could not have written this book, however, without everything that I have learned at the University of Tokyo, and particularly from Prof. Takeshi Sasaki and Prof. Yasuo Baba. Andrew Baldwin has kindly checked the entire manuscript of the book and has corrected my grammatical mistakes. Had it not been for his expert service, this book would have never seen the light of day. Kaoru Iokibe and Takashi Narihiro also read the original doctoral thesis, and made a number of useful comments on it. Needless to say, all remaining mistakes are mine. The Guardian, The Times, The Sunday Times, the Labour Party, the Conservative Party, the Margaret Thatcher Foundation and Lord Lawson all kindly gave me permission to make quotations from their various copyright materials. I was awarded very generous scholarships by Heiwa Nakajima Foundation and the Honjo International Scholarship Foundation, which allowed me to pursue my research in Oxford. The final stage of my research was supported by the Japan Society for the Promotion of Science, Grantin-Aid for Young Scientists (B), 21730130. I am also grateful to many scholars and friends, with whom I was fortunate enough to spend time while at Oxford; to Harumi Goto, Fumio Nagai, Makoto Onaka and Kojiro Sakamoto for their kind advice and encouragement; and to Adolf, Chikako, Chizuko, Kei, Kozo, Mariko, Nazrin, Raya, Sachiko, Sang Hun, Satoshi, Shohei, Wakao and William for their continuing friendship. Finally, my warmest thanks go to my family, and especially to my parents, who have supported me throughout my life. This book is dedicated to them. Daisuke Ikemoto Yokohama

viii

Abbreviations BIS CAP CBI CDS CERES EC ECOFIN ECSC ECU EDM EEC EMCF EMF EMS EMU EPC ERM EU EUA IGC IMF LCC MCA MLR MP MRP NATO NEC OECD PLP PS PSBR RPR SDR SFIO TUC UDF VAT

Bank for International Settlements Common Agricultural Policy Confederation of British Industry Centre des Démocrates Sociaux Centre d’études, de recherches et d’éducation socialists European Communities Economic and Financial Affairs Council European Coal and Steel Community European Currency Unit Early Day Motion European Economic Community European Monetary Cooperation Fund European Monetary Fund European Monetary System Economic and Monetary Union Economic Policy Committee Exchange Rate Mechanism European Union European Unit of Account Intergovernmental Conference International Monetary Fund Leader’s Consultative Committee Monetary Compensation Account Minimum Lending Rate Member of Parliament Mouvement Républican Populaire North Atlantic Treaty Organisation National Executive Committee Organisation for Economic Cooperation and Development Parliamentary Labour Party Parti Socialiste Public Sector Borrowing Requirement Rassemblement pour la Répubique Special Drawing Rights Section Française de l’Internationale Ouvrière Trade Union Congress Union pour la Démocratie Française Value Added Tax ix

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1 Introduction

1.

The research topic

The main purpose of this book is to trace the development of European monetary cooperation between 1970 and 1979, and explain why Britain gradually opted out of that process. The greater part of the book is dedicated to detailed case studies of British policy towards European monetary cooperation during the period. In addition, a brief but structured comparison with the French case is made for the purpose of guiding these case studies and confirming their results. The analysis shows that two countries in similar international positions and economic situations can reach opposing conclusions due to the differences in their domestic political institutions. However, before jumping to any conclusions, we need first to see how the combination of a case-study approach and a comparative method helps us explain why Britain opted out of European monetary cooperation and thereby parted company with France and the rest of the EEC on the issue. It is often argued that, ever since the Schuman Plan, France has been the driving force of European integration, alongside Germany. Britain is widely regarded as an awkward partner of the project, even after her entry into the EEC in 1973.1 Nowhere is this contrast clearer than in the field of European monetary integration, as has recently been shown by the difference between the two countries’ policies towards the euro. If so, some may wonder whether there is much point in comparing Britain with France. However, this argument is not without its problems when applied to the 1970s. First of all, Britain and France both experienced similar troubles with European monetary cooperation: sterling was forced to leave the Snake, the first stage of EMU, in 1972, while the franc was withdrawn 1

2 European Monetary Integration 1970–79

from the Snake twice, in 1974 and 1976. British and French policy began to diverge only in the late 1970s, particularly in response to the German initiative of the EMS. Yet even at that time the nature of the dissatisfaction with the proposed EMS was strikingly similar on both sides of the Channel. The two neighbours parted company, however, when Britain opted out of the ERM, the central institution of the EMS, but the French decided to make every effort to reshape Europe from within in accordance with their own interests. To date, the differences between Britain and France that first emerged in this formative period of European monetary integration have not been fully explained. Moreover, a number of the factors that are often cited to explain Britain’s opting out of European monetary cooperation, including attachment to national sovereignty and an economic policy incompatible with membership of a fixed exchange rate regime, were, to a certain extent, shared by France. Therefore, by comparing British policy with that of France, we can obtain a better insight into factors which led Britain to remain outside European monetary cooperation. Moreover, analysis of European monetary cooperation during the 1970s offers an important clue to when, why and how the parting of the ways between the two countries first occurred. The Bretton Woods regime had been gradually collapsing from the late 1960s, and gold–dollar convertibility was suspended by the Nixon administration in August 1971. This new decade witnessed two European attempts to establish a regional currency bloc, both on the initiative of West Germany. In 1970, the committee chaired by Pierre Werner, the Luxembourgian Prime Minister, published a report on EMU, an initiative which was to consist of three stages and to be completed in 1980.2 The first stage of EMU, which was called the Snake, was eventually launched in April 1972. Participants in the Snake were obliged to keep the value of their national currencies at fixed but adjustable parity within the margin of ±2.25 per cent. According to the Werner Report, in the third stage of EMU the exchange rates between participating currencies would be irrevocably fixed, and the creation of a single European currency was regarded as a desirable objective. At the Paris European summit of October 1972, the six founding members of the EEC and the four new entrants agreed to complete EMU by 1980. In March 1973, the Bretton Woods regime finally collapsed, and a number of European currencies began a joint float against the US dollar. This was the first step the EEC took towards the formation of a European currency bloc. The second and more modest plan, the EMS, was launched in 1979, after the EMU project had failed due to hyperinflation in the aftermath

Introduction 3

of the oil shock and the incongruence of the economic policies pursued by the national governments. The EMS was composed of three pillars: the ERM, the ECU and the EMCF. At the centre of the EMS was the ERM, basically the same institutional arrangement as the Snake. The ECU, a weighted average of the participating currencies, was designed to indicate which currency was most divergent from the average in the EMS. The EMCF, originally founded in 1973, was strengthened considerably.3 In the course of the 1970s, Britain’s reaction to these measures began to diverge from that of France. Under the Heath government, sterling entered the Snake, the first stage of EMU – only to leave it after seven weeks.4 Britain did not take part in a joint float of European currencies in March 1973. The Labour government led, after 1976, by James Callaghan, refused to participate in the ERM, although sterling was included in the calculation of the ECU from the outset and Britain had been a member of the EMCF since 1973. In the early 1970s, the French government was very hostile to the idea of a joint float of European currencies against the US dollar or the formation of a European currency bloc, because this would have strengthened German influence in Western Europe. French advocacy of EMU in the early 1970s presupposed that the international monetary system would continue to be based on fixed exchange rates. The French franc was forced to leave the Snake twice, in January 1974 and March 1976. Yet by contrast with the British side, Giscard d’Estaing, the French President, and Helmut Schmidt, the Chancellor of West Germany, co-sponsored the EMS proposal in the Bremen European Council of July 1978. Later, France played the central role in the development of the EMS and took the initiative in relaunching EMU in the late 1980s and the early 1990s.5 That Britain parted company with France on European monetary cooperation was striking for a number of reasons. First of all, there was a serious attempt at Anglo-French rapprochement by Edward Heath and President Pompidou at the beginning of the 1970s, and the background to this entente between the two countries was these leaders’ common interest in international monetary issues. Moreover, Britain and France confronted the same two domestic obstacles to entering the zone of European monetary stability: an economic policy incompatible with membership of a fixed exchange rate regime, and attachment to national sovereignty. It is not surprising, therefore, that at first Britain and France took a similar approach to European monetary cooperation. The question is, rather, why the policies of the two countries diverged in the late 1970s.

4 European Monetary Integration 1970–79

2. Literature review and the examination of alternative hypotheses This section will provide an overview of the existing literature and examine alternative hypotheses. In particular, it looks at four possible explanations of why Britain adopted a policy different from France in responding to the initiative of West Germany on European monetary integration: (1) key strategic objectives, namely Britain’s special relationship with the United States, by contrast with the necessity for France to achieve reconciliation with Germany; (2) the legacies of the British and French empires; (3) an economic policy incompatible with participation in European monetary cooperation; and (4) the importance of national sovereignty. It seems that these explanations are not plausible. The first and second factors, which belong to an external category, actually worked in favour of Britain’s participation in European monetary cooperation. The third and fourth – both examples of domestic factors – were shared by Britain and France. In searching for a new hypothesis, we will turn our attention to the role of domestic political institutions, namely the party systems and the structure of the pro-/anti-European coalitions in Britain and France. The parting of the ways for the two neighbouring countries came about according to whether a pro-European coalition across the left–right division was successfully formed or not. Britain’s special relationship with the United States The ‘special relationship’ with the United States is arguably the most frequently cited factor in explanations of Britain’s lukewarm attitude towards European integration. For example, Dean Acheson, US Secretary of the State in the Kennedy administration, once remarked that the special relationship is a dangerous illusion, which prevents Britain from accepting her position as a European power and causes her instead to seek after a worldwide role: Great Britain has lost an Empire and has not yet found a role. The attempt to play a separate power role – that is, a role apart from Europe, a role based on a ‘special relationship’ with the United States, a role based on being the head of a ‘Commonwealth’ – this role is about to be played out.6 By contrast, for France, reconciliation with Germany was the most urgent task after the Second World War. The question is whether these differences in strategic objectives led Britain and France to adopt contrasting policies

Introduction 5

on European monetary cooperation. From this point of view, it is surprising that in the theory-building of the EU geopolitical factors, including the relationship between the United States and Europe, have been underestimated. For example, neither of the two most important integration theories, neo-functionalism and intergovernmentalism, refers to a geopolitical explanation of European integration.7 In this subsection we deal with the British case first: France will be covered in the next. David Reynolds argued that the notion of an Anglo-American special relationship has been ‘a device used by a declining power for trying to harness a rising power to serve its own ends’.8 The hypothesis here is that the special relationship may have delayed, or even prevented, the painful adjustment in Britain’s role from a worldwide power to a largely regional, European, one. However, it is doubtful whether the relationship with the United States can explain the differences between Britain and France over European monetary cooperation in the 1970s. First of all, a logical connection between Britain’s special relationship with the United States and her semi-detachedness to Europe is unclear, not least because, ever since the Marshall Plan, successive US administrations have supported both European integration and British participation in that process. In practice, Britain’s special relationship with the United States can dictate her European policy in both positive and negative ways. In the aftermath of the Second World War, the prime objective of British foreign policy was to commit the United States to the security of Western Europe.9 The Attlee government, against US wishes, refused to enter the ECSC, because the British side suspected that American support for European integration was motivated by her desire to reduce the cost of her military presence in the Continent. Britain’s entry into the ECSC might have damaged NATO and weakened US military commitment to the security of Western Europe, the most important aspect of Britain’s special relationship with the United States.10 However, with the Cold War and the rivalry between the United States and the Soviet Union intensifying, it is doubtful that fear of US withdrawal remained a genuine fear for long. Indeed, keeping a close relationship with the United States was one of the main reasons why the Macmillan government applied to the EEC for the first time in 1961.11 The logic behind the decision was that, if Britain did not join the EEC, it would lose influence among West European countries, and could not remain as the most important strategic partner for the United States. To summarise, there were two contradictory considerations for the British government. One was that European integration might eventually

6 European Monetary Integration 1970–79

lead to US disengagement from the region. This scenario would jeopardise British interests, because Britain would have to confront the military threat of the Soviet Union without help from the United States. In such a case, it is to be expected that Britain would be hostile, or at the very least indifferent, to the measure of European integration being proposed, even if the same was welcomed by the United States. However, this consideration may also have been offset by another one: if Britain did not participate in European integration, then she might be isolated in Western Europe and lose influence. The United States might then be tempted to strike a deal directly with France and Germany, without consulting Britain first. This would lead to erosion of British power over international affairs. If this consideration prevailed, Britain would need to participate in European integration, however reluctantly, in order to avoid isolation. Therefore, we should be careful in judging the influence of the special relationship with the United States over the direction of European policy pursued by the British government. By the beginning of the 1970s, the balance of these two considerations had changed in favour of Britain’s greater involvement in European integration. The United States, now being traumatised by the failure of her military intervention in South Asia and saddled with a large balance of payments deficit, might well have withdrawn her troops from Western Europe without Britain’s entry into the EEC. The British government argued that Western Europe should ensure the maintenance of the US commitment to its security by making a greater contribution of its own. For this purpose, British membership of the EEC was considered vital.12 Moreover, the decade after Macmillan’s resignation in 1963 saw a decline in Britain’s special importance to the United States. A marked decline in closeness of the relationship occurred during 1966–68 due to Britain’s refusal to send troops to Vietnam, her withdrawal from east of Suez, and the devaluation of sterling.13 The Heath government of 1970–74 oversaw ‘a period of unusual fractiousness in UK–US relations, with rows over the decline of the Bretton Woods fixed-currency system, the India–Pakistan war of 1972, Kissinger’s Year of Europe initiative and, above all, the Middle Eastern crisis of October 1973’.14 EEC membership was envisaged as a means to offset the decline of Britain’s importance to the United States. Specifically regarding European monetary cooperation in the 1970s, Britain’s policy could also be moved in the opposite directions by her relationship with the United States. On the one hand, international monetary issues were linked with the security of Western Europe by virtue of the fact that the presence of American troops in Europe put a strain on US budgetary and balance of payments situations. If European

Introduction 7

monetary cooperation was expected to damage the position of the US dollar, the British government would be unwilling to take part in such a scheme. On the other hand, by opting out of European monetary cooperation Britain might lose influence when the United States and Europe discussed the reform of the international monetary system and the future of the Atlantic relationship. Our case study on the EMS shows that, even during the Callaghan government (1976–79), which was known for its firm commitment to the Atlantic alliance, the second consideration prevailed over the first.

Franco-German reconciliation By contrast, for the French, the lesson of the Cold War was first and foremost the necessity of achieving reconciliation with West Germany.15 The strategic importance of NATO was limited for France, because NATO could not defend the Continent against the invasion of the Soviet Union without the rearmament of West Germany. The ECSC enabled Germany to achieve reconciliation with France on equal terms. In return, supranational control of the coal and steel industries barred Germany from occupying a superior position in this (at the time) strategically vital field. It is hotly contested whether the withdrawal of troops from Suez as a result of intervention by the two superpowers, the United States and the Soviet Union, forced the French to acknowledge the decline of their power and embrace EEC membership in 1957.16 In any case, the French policy presented a sharp contrast with that of Britain, who quickly healed the rift with the United States after the Suez crisis and returned to the special relationship.17 The birth of the Fifth Republic and the election of Charles de Gaulle as President changed the course of French diplomacy. He tried to liberate Europe from what he saw as the unjustified influence of the United States.18 France withdrew her troops from the military command of NATO.19 From the mid-1960s de Gaulle directed an attack on the international role of the US dollar.20 The French argued that the United States was abusing the privilege derived from the status of the US dollar as the international currency. The United States was able to finance her balance of payments deficit simply by printing more money and did not have to deflate her economy or reduce military expenses overseas. Notably, de Gaulle referred to the close relationship between Britain and the United States in international finance and the role of sterling as an international currency when he vetoed Britain’s second application to the EEC.21

8 European Monetary Integration 1970–79

Thus, the necessity of reconciliation with West Germany and the antipathy of de Gaulle to US influence in Europe were the main elements of France’s European policy. The divergence of British and French policy on European integration until the 1960s can be explained to a large extent by their strategic objectives.22 However, at the beginning of the 1970s the relationship between France and Germany deteriorated, because of Bonn’s inclination towards a more independent foreign policy, namely the Ostpolitik of Willy Brandt.23 President Pompidou feared that Bonn might try to obtain German reunification by offering to keep the united country neutral.24 France’s dissatisfaction with the German policy led to her entente with Britain.25 In the monetary field, the French government was unhappy with Germany’s self-assertiveness, backed by her new economic strength, which was demonstrated in the unilateral floating of the Deutschmark in May 1971.26 The Nixon administration suspended gold–dollar convertibility in August 1971 as part of its new economic programme. During the subsequent transatlantic diplomatic row, the French government insisted on the devaluation of the dollar vis-à-vis gold, because this would symbolise the dethronement of the dollar as the international currency. However, this criticism of US hegemony by France should not be confused with the latter’s support for a European solution to currency instability, as is sometimes suggested.27 In the early 1970s, the value of European monetary cooperation for the French was first and foremost in increasing European (and thus French) influence vis-à-vis the United States on the reform of the international monetary system.28 The French government continued to support a fixed exchange rate system at the global level in order to avoid the emergence of a regional currency bloc in Western Europe. The French feared that the relative weight of the most powerful country, the Federal Republic, would increase inside the Community if such a bloc was formed.29 Indeed, this was precisely what happened as a result of the establishment of the EMS in 1979: thereafter France had to follow monetary policy decided by the Bundesbank, and Western Europe became a de facto Deutschmark zone. In other words, the French accepted in 1979 what they had firmly rejected in the early 1970s. The volte-face in French policy on European monetary cooperation cannot be explained simply by reference to Franco-German reconciliation. In conclusion, at the beginning of the 1970s both Britain’s special relationship with the United States and the Franco-German partnership were approaching a turning point. This was the background to the Anglo-French rapprochement at the time. The French had changed

Introduction 9

their policy and decided to accept Britain into the EEC in order to counterbalance German influence. During the meeting of Heath and Pompidou in May 1971, the French, in exchange for allowing Britain into the EEC, demanded the phasing out of the dollar guarantee which the British government had offered to the holders of sterling balances after sterling was devalued in 1967.30 The Prime Minister accepted the deal and the success of the summit paved the way for British entry into the EEC. The French President expected that, by cutting the link between the US dollar and sterling, Britain would be able to end her financial dependency on the United States and to behave more like a European state on international monetary issues. In other words, with the Anglo-French rapprochement in the early 1970s, Britain and France attempted to match the influence of the United States and West Germany, and monetary issues occupied a central place in the picture. Therefore, we cannot explain the parting of the ways by Britain and France on European monetary cooperation simply by referring to the strategic alliances of both countries, such as the special relationship with the United States and the Franco-German partnership. It was the failure of the above diplomatic efforts that eventually led the French to revert to their traditional partnership with the Federal Republic. The legacies of the British and French empires Britain and France had of course governed the world’s largest empires before the war. The question here is whether these two empires had different impacts on the European policies of the two mother countries. The British Empire rested on two pillars: imperial preference and the sterling area. Under the imperial preference system, which was created by the Ottawa Agreement of 1932, Britain enjoyed lower tariffs for the export of her manufactured goods to the Dominions and colonies (later the Commonwealth) in exchange for accepting the free entry of foodstuffs from these regions. As is well known, imperial preference was one of the principal obstacles to British membership of the EEC throughout the 1950s and 1960s. In the Common Market, member states were obliged to abolish tariffs on internal exports and to set common external tariffs against imports from third countries. Thus the common external tariff was incompatible with imperial preference. This was precisely why Britain proposed instead, but without much success, a European free trade area, in which participants could maintain their own tariffs.31 For the purpose of this research, however, it is the sterling area which was more important. The sterling area was formed after Britain left the

10 European Monetary Integration 1970–79

gold standard in 1931. The members of the sterling area kept a substantial part of their foreign reserves as sterling balances in London. Trade within the area was conducted in sterling and financed by the City which enjoyed the status of the centre of international finance, although on a diminished scale compared to the pre-1914 period. In exchange, the countries of the sterling area enjoyed privileged access to the financial market in London as the source of foreign investment. For Britain, the position of sterling as an international currency had long been one of the main obstacles to EEC membership.32 For France too, the empire was important both economically and symbolically in the 1950s. Her overseas territories accounted for no less than 31 per cent of her trade in 1957, while the figure for trade with her five European partners was only 25 per cent.33 However, France decided to participate in the EEC with her colonies. Why was the French position remarkably different from that of Britain? The answer was that, because France did not have enough capital to develop the colonies by herself, she turned to the EEC states, namely West Germany, which was emerging as the largest creditor in the world.34 This was indeed the main attraction of the EEC for France, who otherwise might lose more than she could gain within the Common Market. Soon afterwards, de Gaulle returned to power amid the crisis over the independence of Algeria. For him, ‘to resolve the vital problem of decolonisation and … make France the champion of an entirely reunited European Europe’35 became the core of his strategy to restore the greatness of the French nation. Thus de Gaulle did not withdraw France from the EEC despite his misgivings with its supranational aspects. Therefore, the Empire, and later the Commonwealth, was an important constraint on Britain’s commitment to Europe, by contrast with the French case. However, even the enduring importance of the British Empire and Commonwealth had diminished by the 1970s. The Suez affair and the mixed reaction of the Commonwealth countries to the British invasion raised a serious doubt in the mind of British policymakers about the political cohesion and utility of the Commonwealth. The devaluation of sterling in 1967 was a massive blow for the sterling area and the international role of sterling. Nonetheless, the sterling area was the most important subject of the negotiations of 1970–71 between London and Paris on the British application to the EEC.36 The French objected to the reserve role of sterling, and to British policy on the exports of capital, which discriminated against the EEC in favour of the developed Commonwealth countries. However, the existence of the sterling area was far from being an obstacle

Introduction 11

to British participation in European monetary cooperation. Rather, EMU was envisaged as an opportunity for the British government to relinquish the past legacies of the British Empire by immersing itself in the framework of European integration. As we have already seen, in exchange for allowing Britain into the EEC, President Pompidou demanded the reduction of the dollar guarantee offered by the British government to the holders of sterling balances; he envisaged a deal in which, after British entry into the EEC, Britain would participate in EMU and, in return, the rest of the EEC would assist with the running down of the sterling balances. In the end, Britain and her European partners could not reach a deal on the lines described above when European currencies began their joint float against the US dollar after the collapse of the Bretton Woods regime in March 1973 (Chapter 4). This failure was a massive blow to the Anglo-French relationship. However, the sterling area was officially abolished in 1972, and the proportion of sterling held by the central banks as foreign reserves declined sharply throughout the 1970s. Therefore, these legacies of the British Empire no longer prevented Britain from participating in European monetary cooperation when the EMS was established in 1979, and the differences between Britain and France over the issue cannot be attributed to their imperial legacies.

Economic considerations During the 1970s both Britain and France confronted the same domestic obstacles to participation in European monetary integration: namely, an economic policy incompatible with membership of a fixed exchange rate regime, and attachment to national sovereignty. First of all, the convergence of inflation rates among participating countries is one of the prerequisites for successful monetary cooperation.37 In the first half of the 1970s, the British and French governments pursued economic expansion and full employment. As a result, inflation rates in both countries were higher than that of West Germany. The balance of payments deficit led to recurrent crises for sterling and the franc in the foreign exchange market. Loss of international competitiveness as a result of high inflation had to be compensated for by periodic currency depreciation. This policy mix was clearly not compatible with participation in European monetary cooperation. Therefore, if Britain and France wanted to join the Snake or the ERM, they had to adjust their economic policy in the direction of austerity. In order to make the control of inflation a prime objective of economic policy, however, both the British and French governments had to overcome domestic opposition.

12 European Monetary Integration 1970–79

Moreover, Britain and France were concerned that, without the perfect convergence of inflation, a weak currency might bear too heavy a burden of intervention in the foreign exchange market and of economic adjustment inside the Snake or the EMS. Sterling and the franc needed to follow the upward movement of the Deutschmark, and this could lead to the loss of international competitiveness and severe deflation for both countries. This is why Britain and France tried unsuccessfully to place the ECU at the centre of the EMS. If the divergence indicator of the ECU had been used in the intervention mechanism of the EMS, then the intervention obligation would have fallen on the country with the most divergent currency, which was likely to have been West Germany. In this sense, Britain and France shared the same economic interest in respect of West Germany.38 One indication of this commonality of economic interest between Britain and France is that Andrew Moravcsik, who as the most renowned intergovernmentalist usually attributes the European policies of national governments to domestic economic interests, cannot explain the differences between the two countries over European monetary integration on purely economic terms, and is forced therefore to invoke an ideological factor, such as Margaret Thatcher’s antiEuropeanism, that he would normally dismiss as being of secondary importance.39 Attachment to national sovereignty The EEC/EC/EU is a supranational organisation membership of which requires substantial pooling or surrender of national sovereignty. Political forces of considerable strength in both countries were hostile to further loss of national sovereignty, and were therefore sceptical about the progress of European integration.40 According to the Mundell–Fleming model of international macroeconomics, a government cannot simultaneously maintain a fixed exchange rate, free capital movement and an autonomous monetary policy. Given the growing scale of international monetary movement in the 1970s, commitment to stable exchange rates through monetary integration constrained domestic economic management, although the degree of economic policy cooperation necessary for successful monetary integration was the subject of intense controversy.41 The final stage of EMU, needless to say, involves further transfer of sovereignty. In Britain, during the 1970s, the Conservative Party contained a substantial number of Eurosceptic MPs, including Enoch Powell, who was concerned about the effects of EEC membership on parliamentary sovereignty and British nationhood. According to Powell, loss of sovereignty

Introduction 13

would be the inevitable consequence of EEC membership.42 The Labour Party, for its part, was split down the middle over Britain’s EEC membership. Eurosceptic Labour MPs shared the concern about the loss of national sovereignty with their Conservative counterparts. There were also objections to subordinating the sovereign Westminster Parliament to an unelected and unrepresentative body. These sceptics were worried that membership of the ‘capitalistic’ EEC would impede the pursuit of socialism in Britain.43 In a similar vein, in France, the ‘Jacobin legacy’ – defined by Sudhir Hazareesingh as ‘the indivisibility of national sovereignty, the vocation of the state to transform society, governmental and administrative centralization, the equality of citizens guaranteed by the uniformity of legislation, the regeneration of men by republican education, or merely a fastidious attachment to national independence’44 – remains deeprooted. Since 1945, this ‘Jacobinism’ has been associated with authoritarian republican parties of the right and left, such as the Gaullists and the Communists. Therefore, it is not surprising that while the Gaullists were divided on the progress of European integration,45 the Communist Party was as a whole hostile to it. The PS also contained a small section, the CERES, led by Jean-Pierre Chevènement, that was very critical of the European project.46 The very pro-European MRP, the French version of a Christian Democratic Party (Robert Schuman was its leader), was squeezed from the bipolar political space in the Fifth Republic, as were other centrist political forces.47 Its successor, the CDS, joined the UDF, an umbrella organisation of the moderate right, founded in February 1978 by Giscard d’Estaing. A number of former MRP members entered the PS. To summarise, on issues concerned with national sovereignty, division on European integration cut across the left–right dimension in both countries: roughly speaking, while the moderate right and left supported the European project, the radical right and left were against it.48 Given these similarities between the two countries, it was hardly surprising that, at first, the British and French governments confronted quite similar problems regarding European monetary cooperation. However, the reaction of both governments to their initial policy failures diverged. The British government sat out further European monetary integration, while the French opted for the reform of a European monetary system from within. In this book we argue that the differences in policy pursued by the British and French governments can be best explained by the structure of domestic political coalitions for and against European integration, in particular the issue of whether pro-European MPs in the

14 European Monetary Integration 1970–79

left- and right-wing parties could cooperate with each other. The next section will consider this factor in more detail.

3. Hypothesis: Policy coordination between the government and opposition on European integration In this section, we articulate our own hypothesis: that the divergence of British and French policy on European monetary cooperation since the late 1970s can be best explained by the success or failure of coalition-making on European integration across the left and right. In both countries, government formation was based on the left–right division throughout the period of our research. Therefore, the making of a proEuropean coalition depended on policy coordination between the government and (a part of) the opposition on European issues. To begin with, we should emphasise that the hypothesis offered here belongs to a different category from the explanations examined above. Until now, we have dealt only with substantial factors which might encourage or discourage the British and the French governments from participating in European monetary cooperation. However, a pluralist society like Britain and France contains individuals and groups with a very wide range of ideologies and interests. As a matter of fact, the content and distribution of ideologies and interests differ in the two countries, and consequently political scientists are tempted to explain the variety of policy by referring to these differences. This is not entirely wrong. However, as historical institutionalists rightly point out, politics is an activity that aggregates various and often directly opposed demands arising from these ideologies and interests and translates them into public policy. Moreover, how politics is institutionalised not only influences what kind of actor has an advantage over others in the political process, but also changes what participants conceive as their own interests. Therefore, although political institutions are not the sole cause of outcomes, they constrain and refract politics.49 As we will see in more detail in Chapter 2, however, in the mainstream theories of European integration, such as neo-functionalism and intergovernmentalism, institutions or intermediate structures between the state and society have not attracted much attention. Even when the role of domestic institutions is the focus of interest, as in the case of multi-level governance theory, the national party system rarely captivates scholars’ eyes. Thus, by bringing the national party system back into the study of European integration, we can make a theoretical contribution to the present state of the research.

Introduction 15

Of all political institutions that exist between the state and society, we focus on the role of the national party system, especially the relationship between government and opposition in the decision-making process of European policy in Britain and France.50 Our hypothesis is that coordination of European policy between government and opposition was necessary for both Britain and France to take part in European monetary cooperation, and in particular, the ERM. The causal mechanism of our hypothesis is as follows: (1) Both left and right were divided on European integration, not only in Britain but also in France: while the attitudes of centre-right and centre-left parties in France (or moderate factions within the two main political parties in Britain) were favourable, those of radical parties (or radical factions within the two major parties) were hostile to European monetary integration. (2) As a result, governments, whether of the left or the right, cannot rely exclusively on the support of their own backbenchers or coalition partners in the pursuit of their European policy. This is especially true when the majority of the government party(ies) in Parliament is smaller than the number of Eurosceptics in its own ranks. In this case, if government and opposition do not cooperate, Eurosceptics occupy a pivotal position, as has frequently happened in Britain. (3) Therefore, only where government and opposition successfully cooperate can the government secure domestic support to involve its currency in a European-wide fixed exchange rate regime. In theory, we can postulate two different kinds of cooperation or coalition between the centre-left and centre-right. To construct a typology of coalition, we borrow analytical tools from the theories of coalition government and minority government. According to Vernon Bogdanor, coalition implies cooperation between political parties, and this cooperation can take place at one of three different levels: governmental, parliamentary or electoral.51 Since the main purpose of coalition-making here is to secure the support of the majority in a policy-making process, we limit our attention to governmental and parliamentary coalitions. Parliamentary coalitions mostly occur in situations where no single party enjoys an overall majority in Parliament, and where a party or parties choose to form and rule as a minority government, with tacit or explicit support from opposition parties to secure the survival thereof. Such an arrangement may last for a reasonable period of time. Alternatively, a minority government may seek support from different parties for

16 European Monetary Integration 1970–79

different types of legislation. This latter category deserves particular attention here. If the government’s majority in Parliament is smaller than the number of Eurosceptic MPs or deputies within its own ranks, a government cannot exclusively rely on the support of backbenchers or of its coalition partner in order to carry out its European policy. This is similar to the situation of a minority government. Even in such circumstances, however, if a government can secure the support of a proEuropean party or politicians within the opposition, then it will enjoy the backing of the majority for its stance on Europe. By contrast, coalition government, which is by far the most common form of coalition, mostly occurs when two or more parties, none of which can gain an overall majority on its own, combine to form a majority government. If a coalition government is formed to execute proEuropean policy, this purpose will be best served by a centralist coalition, which can confront opposition from the radical right and left. In these circumstances, the relationship between government and opposition ceases to be characterised by left–right confrontation. With these two possibilities in mind, we can now proceed to considering the dynamics of party politics on European monetary integration in France and Britain. In both countries, the second type of coalition, that is, a government composed of centralist political forces that can form a united front on European issues, did not materialise. In Britain, after the general election of February 1974, there was talk of a coalition government comprising the Conservatives, the Liberals and the right wing of the Labour Party. This never transpired: the Conservative and Liberal parties did not together command a majority in the House of Commons, and skilful party management by Harold Wilson delayed the open split in the Labour Party until 1981. In France, President Giscard d’Estaing may well have wanted to form a centralist–Socialist coalition; but, since the Socialists remained firmly committed to their leftist alliance with the Communists under the common programme concluded in 1972, this was not possible. Therefore, it was the result of coordination of European policy between government and opposition in Parliament and other arenas of the decisionmaking process that differentiated the paths of Britain and France. In France, after the parliamentary election of 1978, President Giscard d’Estaing successfully secured the Socialists’ support for his policy on European monetary integration. By contrast, in Britain, a similar bipartisan cooperation by pro-European MPs from the Conservative and Labour parties was tried, but failed. This contrast had profound implications for the European monetary policy pursued by the two countries.

Introduction 17

In France, after the resignation of Jacques Chirac, the Gaullist Prime Minister, in August 1976, Giscard d’Estaing appointed Raymond Barre, professional economist and ex-European Commissioner, in his place. Given the fact that the Gaullists were at that time firmly opposed to both European monetary cooperation and the policy of austerity implemented by the Barre government, domestic support for French participation in the EMS looked precarious. It is in this context that we can understand why, to Giscard d’Estaing, the role of opposition parties in the policymaking process was a matter of great importance. He held regular consultations on foreign affairs and defence with his opposition, and gave it a more substantial role in the legislative process. These efforts bore fruit when the French government struggled to bring the franc into the EMS: shortly before the Bremen European Council in July 1978, Giscard d’Estaing invited François Mitterrand, leader of the Socialist opposition, to the Elysée Palace to seek his views on what was to become the EMS, and Mitterrand promised to support the President. In this way, Giscard d’Estaing successfully secured domestic support for the EMS beyond his narrow power base of the centralist–UDF coalition.52 In Britain, after the failure of bipartisan European policy during the Heath government, the initiative within the two major political parties passed into the hands of their more radical sections. That said, when the Callaghan government was about to make a decision on the EMS, there were considerable voices inside the Conservative opposition which advocated a bipartisan approach to the issue. In the end, however, bipartisan cooperation à la France never took place, and Britain opted out of the ERM. We would like to clarify our argument on two points. First of all, we need to ascertain that it is possible to compare Britain and France by means of a focus on the relationship between government and opposition, since the political system in the two countries is characterised by a quite different relationship between the executive and the legislature. Britain has a parliamentary regime, such that the survival of the government depends on the support of a majority of the House of Commons. France, by contrast, has a semi-presidential system.53 Although, in the Constitution of the Fifth Republic, the survival of the government depends on the majority in the National Assembly, in reality foreign policy belongs to the reserved domain of the President, who, following a de facto constitutional amendment in 1962, is elected directly by the French people. Insofar as European policy is considered as a part of foreign policy, it is unclear whether the President needs the support of the majority in Parliament or even of the government for his European policy. However, as

18 European Monetary Integration 1970–79

has been most clearly demonstrated by the subsequent periods of ‘cohabitation’, the power of the President is still dependent on the nature of the parliamentary majority and the relationship between the President and that majority.54 Moreover, presidential elections have come to be dominated by political parties since the retirement of de Gaulle. De Gaulle stayed aloof from party politics by winning support not only from the traditional constituency of the right, but also from the working class. However, his successors have all owed their position to political parties. Therefore, presidents after de Gaulle have needed to pursue policy with the aim in mind of forming a winning coalition in the next election. Finally, implementation of decisions at the European level needs domestic ‘ratification’. The EMS was not a treaty, but had the National Assembly not accepted an economic policy, and especially a budget, compatible with participation in the EMS, France would not have been able to stay in for long. This certainly proved to be the case with the Snake. To conclude, the President of France still needs the support of political parties for his European policy, even if what he has in mind may be a majority in the next presidential election, rather than in the National Assembly.55 The second point concerns the originality of our argument. Mark Aspinwall argues that Britain takes an awkward approach to European monetary integration because she has a two-party system and a tradition of single-party government. MPs belong to one of the two main political parties regardless of their views on Europe. In order to maintain party unity, the government has to accommodate anti-European views among its own backbenchers in government policy. In turn, the two-party system in Britain is artificially preserved by the first-past-thepost system used for general elections. The introduction of a proportional representation system would be likely to necessitate coalition governments, which would keep more extreme parties out of government. Thus, ‘with a different set of political institutions, a more positive European policy would emerge in Britain, even without changing social inputs’.56 We cannot rule out the possibility that the introduction of a proportional system might result in a more cordial relationship between Britain and Europe. In this sense, a proportional electoral system may be a sufficient condition for pro-European policy. However, whether the existence of a proportional system and coalition government is a necessary condition is doubtful in the light of comparison with the French case. First of all, in France a double ballot system is used for the election of both the President and the National Assembly. In a double ballot system, only candidates who occupied the first and the second places (the presidential election) or who received a

Introduction 19

certain percentage of votes cast in the first round (the National Assembly) qualify for the second stage. This electoral system, which has encouraged electoral cooperation both within the left and right, and consequently has brought about the bipolar party system, is anything but proportional. Moreover, in France cooperation between the UDF and the Socialist Party on European policy in the late 1970s, which went across a left–right division, remained on an ad hoc and policy basis, and did not extend to electoral alliances or coalition governments. In the Fifth French Republic of the 1970s, both the parliamentary and presidential elections were fought between left and right, each of which had an electoral pact inside, not across, the blocs; and formation of governments reflected this division. Under the presidencies of Pompidou (1969–74) and Giscard d’Estaing (1974–81), the right occupied the presidency and the parliamentary majority, while the left formed the opposition; although after the resignation of Chirac as Prime Minister in 1976, the Gaullist Party behaved like a semi-opposition to the presidency. In fact, the period between 1974 and 1981 saw a ‘bipolar quadrille’, in which bipolarisation of French party politics into the left- and the right-wing coalitions reached its zenith, and each bloc was composed of two political forces with similar strength.57 Therefore, coalition government itself was not a sufficient condition for pro-European policy in France, and cooperation between government and opposition was necessary. In Britain, if similar cooperation between government and opposition in the House of Commons was possible, then obviously coalitions were not necessary in order for the government to take a more pro-European stance. Therefore, we should pay more attention to the role of political parties in the decision-making process, as distinct from electoral parties and the formation of governments. The next section foreshadows how this book makes the case that, if government and opposition had cooperated, the British government could have pursued a more pro-European policy on monetary issues.

4. The structure of the book and methodological issues involved Our research design consists of four case studies of British policy towards European monetary cooperation between 1970 and 1979; the latter two are accompanied by a short but structured comparison with the French case, because they are concerned with the period when British and French policy diverged. In Chapter 2 we briefly investigate how various theories of European integration have regarded (or disregarded) the influence of the national party system on the choice of European

20 European Monetary Integration 1970–79

policy by government and, indirectly, on the course of integration. Then we move onto the four detailed case studies of European monetary cooperation, where the subject of each chapter is as follows: Britain and EMU in the period of her entry negotiations with the EEC, 1970–71 (Chapter 3); Britain and the EEC’s first steps towards EMU, 1971–74 (Chapter 4); a comparison of British and French policies during the currency crisis of 1976 (Chapter 5); and the establishment of the EMS, 1978–79 (Chapter 6). In the rest of the section, we discuss methodological issues concerning this research, including data gathering, data analysis and the merits of combining a case-study approach with a comparative method. Data gathering The case studies of British policy rely on intensive archive research. Under the 30-year rule, official documents for the entire period of the Heath and Callaghan governments are now available in the National Archives at Kew, London. As the main aim of our research is to investigate the structure of political division on European monetary cooperation, and not the decision-making process per se, we focus on Cabinet papers, minutes of the Cabinet committees and prime ministerial papers. We also consult Foreign Office and Treasury papers where this is necessary in order to get background information on government policy. For the anatomy of the opposition party, the minutes of the Leader’s Consultative Committee (Conservative), and of the Parliamentary Committee and the NEC (Labour), are useful for understanding internal discussion and disagreement on European policy. Memoirs, diaries and private papers written by frontbench politicians are particularly illuminating for the purpose of gathering information about internal dissension on European monetary integration both within the government and opposition. A number of private papers, including those of Harold Wilson and Margaret Thatcher, are also consulted. For information on backbench MPs, there is a thorough survey of parliamentary divisions in the House of Commons by Philip Norton.58 As we see in the section on data analysis, the EDM offers a clear indication of backbench opinion. To study the French case, we rely on the memoirs and biographies of principal politicians, and also information from newspapers such as Le Monde. The official papers of Britain and the United States contain useful information on French policy. Data analysis The main purpose of this subsection is to explain the methods used in the book to analyse data and establish causality; in particular, how we

Introduction 21

can demonstrate that the lack of cooperation between the government and opposition in Britain led to lukewarm attitudes towards European monetary integration and contributed to her opting out of the ERM. Our analysis uses a counterfactual definition of causality. It simply means that A is deemed to have caused B, if B did not happen in the absence of A.59 In this case, we need to demonstrate that, had the government and opposition successfully cooperated on European policy as in France, Britain’s policy would have been more pro-European and Britain would have joined the ERM earlier than 1990. To do this, we need to show that (1) the government and the leadership of the opposition would have taken a more pro-European stance if they had not been forced to appease their Eurosceptic backbenchers, and (2) proEuropean MPs constituted a majority in the House of Commons, but were divided between the two political parties. According to Max Weber, one of the advantages in using the counterfactual definition of causality is that we do not need to estimate the impacts of other potential explanatory variables if we know what would happen in the absence of A (that is, either B or non-B). However, to know precisely what would happen in the absence of A, we need to control other possible independent variables. Two methods are used in our research to address this problem. The first, clearly, is to compare Britain with the French case, which, as we have seen, shares with Britain many characteristics that could be explanatory variables. The other method is to look at participants’ actions either in a forum where the government–opposition relationship was more consensual, or in a place such as the Cabinet where actors were not prevented from expressing their concerns by an adversarial relationship between government and opposition. As for Cabinet ministers and leaders of the opposition, we can find their personal opinions in official papers and party documents, as well as biographies, memoirs, and diaries and private papers. Information gathered from these private sources will be set against that from public ones, such as parliamentary speeches and the government’s White Papers. This procedure enables us to locate political pressures that were exerted on the leaderships of major political parties, including the necessity of maintaining party unity, when they made a decision on European monetary cooperation. The 1970s witnessed a gradual change in party structures. The leadership of both political parties lost its hold on its followers. In the Conservative Party, this change occurred through the declining influence of the establishment on its backbenchers. Consequently, we need to see the party as a horizontal combination of various tendencies rather than a

22 European Monetary Integration 1970–79

hierarchy.60 In the case of the Labour Party, this structural change manifested itself as the rising influence of extra-parliamentary party organisations and activists.61 In terms of parliamentary politics, this meant that left-wing politicians and factions could exert greater influence on the leadership of the party. Therefore, we should attach as much importance to the opinion of backbenchers as to that of frontbenchers. However, a survey of backbench opinion is methodologically more problematic.62 The record of parliamentary divisions in the House of Commons is commonly used to analyse backbenchers’ opinion. Samuel Finer argued, however, that this is an unreliable method, because most MPs vote in accordance with their party’s policy and therefore the record of parliamentary divisions does not reflect their real concerns. This is not necessarily true of our research, though, because party discipline is weaker on European issues: a substantial number of MPs are willing to defy their parties’ policy on Europe, as Philip Norton reports. Nonetheless, the voting record could still be heavily biased. In the Westminster system, where party unity and cohesion are essential to win the general election, government backbenchers are under pressure to vote for government policy even if they do not really endorse it. This means that Eurosceptic MPs vote for policy pursed by the government, which is too pro-European from their point of view. By contrast, opposition backbenchers are put under pressure to vote against the government. This would mean that pro-European MPs are forced to vote against the government, even if they support its policy. Therefore, we should use this kind of data carefully, keeping possible biases in mind. The EDM is another type of source that we can use for the analysis of backbench opinion on European issues, and particularly on European monetary cooperation. Because the EDM was not subject to party whipping, it was widely exploited by backbenchers to show their real concerns with government policy.63 Therefore, examining who were the signatories of any EDM on European integration is an excellent method for analysing the distribution of opinion in the House of Commons on this issue. Combining a case-study approach with a comparative method Before concluding the introduction, some final words are necessary to defend our case selection and to offer a methodological justification for combining a case-study approach with a comparative method. The existing literature on the EMS selects various sets of countries for research. Methodologically, we have to be particularly cautious, in order

Introduction 23

to avoid selection bias in the case of a small-N comparison such as this, where random selection is difficult to use. The British case has an indispensable theoretical value here: because Britain is the only country among the major powers of the EEC that did not join the ERM in 1979, her inclusion in a research design is essential in order to vary the dependent variable. Just as the study of non-occurrence of a revolution is essential to study the cause of a revolution, to study a member of the EEC which did not participate in the ERM is necessary for the study of the ERM. This point is not clearly recognised in the existing literature on the EMS.64 To use a comparative method, we need to choose a comparable case which is different from Britain as regards our key explanatory factor, but similar to her as regards other possible explanatory factors.65 France satisfies these conditions. The degree of freedom problem is often used to criticise a case-study approach and small-N comparisons. This problem exists when researchers have many independent variables but only one or a few cases, and consequently the research design is indeterminate. The criticism, however, derives partly from the lack of a clear distinction between the concept of a case and that of an observation. In any case, in order to surmount the degree of freedom problem two different strategies are used in this research. The first is controlled comparisons, namely Mill’s method of difference. The method of difference is used to explain difference of dependent variables between cases. If there are any variables which take the same value between cases, they can be eliminated as an explanatory variable. In our research, attachment to national sovereignty and economic considerations can be eliminated in this way, because they are common to both Britain and France. The second strategy is called a within-case observation method, which includes congruence procedure, pattern-matching66 and process-tracing.67 This research adopts congruence procedure and what Peter Hall called systematic process analysis, which overlaps with pattern-matching and process-tracing. Congruence procedure is used to test the same hypothesis many times within a case by dividing it into temporal or spatial subsections. Our research on the British case is therefore divided into four periods. Systematic process analysis starts from the premise that observations relevant to testing a theory are not limited to ‘ones drawn on the values of the outcome (or “dependent” variable) and on a small set of variables designated the ultimate “causes” of that outcome (often termed “independent” variables)’. According to Hall, ‘observations bearing on the process whereby an outcome is caused’ can also provide a relevant test of

24 European Monetary Integration 1970–79

that theory. In other words, more than one observation can be made even within a single case. And we can test a theory by observing whether ‘the multiple actions and statements of the actors at each stage of the causal process are consistent with the image of the world implied by each theory’.68 In this way, our research can produce valid causal inferences.

2 National Political Parties and Party Systems in the Study of European Integration

Introduction The purpose of this chapter is to overview how the existing literature analyses the impact of domestic party politics on European policy chosen by national governments and thus, indirectly, on the course of European integration. Our hypothesis is that divergence of policy between Britain and France on European monetary cooperation is best explained by whether coordination of European policy between the government and opposition was successful or not. Therefore, the main aim of this survey is to examine how the existing literature estimates the impact of either the relationships between government and opposition, or of the national party system, on the process of European integration. We begin our literature survey with (1) the theories of European integration such as neo-functionalism and intergovernmentalism, then move to (2) multilevel governance, and conclude with (3) British politics, French politics and comparative European politics. We exclude the numerous (and still increasing) works on Europeanisation of domestic policy, polity and politics from our investigation, because the direction of causality in these works is the reverse of ours.1 The review below is guided by two theoretical concerns. First of all, in the case of theoretical works, we look at how each approach formulates the relationship between the state and society and the role of intermediate institutions, to which political parties and the party system belong. Theories of European integration and multi-level governance are to a certain degree applications of the existing theoretical approaches such as group theories, the state theory and new institutionalism. Unless these underlying theories offer a place for the role of institutions and political parties, it is unlikely that political parties come into view in 25

26 European Monetary Integration 1970–79

studies of the EU. Second, analytical distinction between individual political parties and party systems is very important. A party system is defined as ‘the system of interactions resulting from inter-party competition’,2 and it can be either competitive or cooperative. The same political party can act in a different way according to its relation with other parties. As a result, we should pay attention not only to individual political parties but also the relationship between them, that is, the party system. Moreover, in the political system there are multiple places where political parties interact with each other, such as electoral and parliamentary areas.3 The fact that the relationship between political parties is competitive in one arena does not necessarily mean that the same characteristic is prevalent in another area. Therefore, we need to be specific as to which aspect of the party system we are talking about. To analyse the influence of national political parties on the process of European integration, we need to look at their role in the policy-making arena, not the electoral one. To summarise our findings in advance, most scholars of EU studies do not consider the role of national political parties, still less the national party system. Moreover, even in the literature which pays due regard to party politics, the data used, such as voting results and party manifestos, are taken from electoral studies, and consequently the activity of national political parties in the domain of European policy-making remains unexplored.

1.

Theories of European integration

It is well known that neo-functionalism and intergovernmentalism are the two most important theories of European integration. Although neofunctionalism is generally interpreted as socio-economic determinism, its architect, Ernest Haas, has enquired into the relationship between national party politics and European integration at considerable length and it is worthwhile examining his argument closely. Haas’ argument is usually interpreted as follows: European integration is understood first and foremost as a process in which social and economic groups transfer their loyalty from the nation state to a supranational organisation. European integration begins in an area that is not concerned with strategically vital fields, such as defence, and thus is acceptable to national governments. Yet once one sector has been integrated, growing awareness that the full benefits of integration can be obtained only by further integration of functionally related areas generates support for wider and deeper integration on the part of social and economic actors. This spread of integration from one area to another is called spillover. It is the leadership of the supranational executive,

National Political Parties and Party Systems 27

the High Authority in the ECSC and the European Commission in the EEC/EC/EU, that triggers this process by choosing a key area as a target of integration in the first place. From this summary, it might appear that the role of political parties in his theory is limited. In reality, however, political parties and competition between them occupy a pivotal place in Haas’ explanation of European political integration, that is, the emergence of a new political community on a continental scale. To understand his analysis, distinguishing between ideology and nationalism (national identity) is very important. The beliefs common to otherwise antagonistic groups will be called the nationalism of a given community, while the doctrines peculiar to a group will be referred to as ideology. Our political community is held together despite the internal strife of the constituent groups by the general acceptance of national identity, of nationalism, which manifests itself primarily in a consensus as to the means for achieving agreement on policy. According to Haas, ‘political integration is the process whereby political actors in several distinct national settings are persuaded to shift their loyalties, expectations and political activities toward a new centre, whose institutions possess or demand jurisdiction over the pre-existing national states’.4 What kind of role do political parties perform in this process? Haas replies to this question in his case study on the ratification of the ECSC treaty. The national parliaments of the six founding members of the ECSC successfully ratified the treaty because: The only generally valid explanation of the success of the Treaty lies in the convergence, not of six separate national interests but of a sufficiently large number of separate national party positions to push the Treaty over the top. … Paradoxically, a theory of transnational integration can derive considerable comfort from this finding. In the absence of the initial agreement of all parties to integration on the precise motives for working toward political community, the fact that a variety of motives are dominant in each national unit actually facilitates the emergence of supranational ideologies at a later stage. … In the effort to give a Socialist, Christian or Liberal stamp to the emerging pattern of interdependence, the political actor is compelled to work through the medium of new central symbols. And his doing so may suffice to make these symbols the equal of a new regional national doctrine.5 In short, competition between political parties over the type of European integration leads to a greater use of supranational organisation as a

28 European Monetary Integration 1970–79

means to realise their party programmes and, consequently, to a further pooling of national sovereignty. Kevin Featherstone, however, criticises Haas’ argument, declaring that ‘there is reason to consider his framework a poor guide for current research’.6 For Featherstone the fundamental difficulty stems from the fact that Haas does not distinguish between opposition to the form of integration and opposition to supranationality per se when talking of nationalist standpoints. If a party is opposed to participation in the process of integration, then, according to Haas, it is being nationalist. Featherstone insists that: A socialist party, however, has to make a strategic decision on the form of integration pursued by the European Community, to decide whether or not the process will help the implementation of socialist policies. If it decides that the European Community does not facilitate the achievement of socialism, then the party may either seek to reform the Community, or propose a complete alternative to it, or withdraw and maintain national sovereignty.7 It is undeniable that Haas was mostly interested in those factors facilitating the emergence of European ‘national’ identity. However, Featherstone’s criticism is not very convincing, because Haas clearly distinguishes between nationalism and ideology, such as socialism, liberalism and Christian democracy, and between nationalistic opposition and opposition to a particular aspect of integration rather than to supranationality per se.8 Moreover, he supposed that support for integration by any actor or group depends less on their stance on supranationalism per se than on whether a specific measure of integration is useful for promoting their ideological position and material interests.9 In this sense, his arguments anticipate recent scholarly debate on the issue of ‘what kind of Europe’,10 such as the choice between a neo-liberal and a social democratic Europe. This is distinct from the issue of the ‘more or less Europe’; and indeed he even offers an analysis on the relationship between the two. What we certainly should closely examine are his underlying assumptions about this relationship. He assumes (1) that ideological disagreements among political parties on what kind of Europe they prefer will lead to more supranational integration, but also (2) that, once supranational integration is achieved, ideological or political conflict becomes less important than at the national level and is largely replaced by technocratic management.11 In practice, the trajectory of European integration has followed the opposite course. Prior to the Single European Act European integration was

National Political Parties and Party Systems 29

essentially a technocratic process, in which national governments coordinated their policy around limited policy goals. This changed with the introduction of the single market in the middle of the 1980s, and even more so with domestic debates on the ratification of the Maastricht Treaty. With the advent of this politicisation, the pace of European integration apparently slowed down. How can we explain this phenomenon? As Haas admitted, European integration is a divisive issue for political parties, with the dividing line often cutting across, not between, political parties. Our hypothesis is that, in order to mobilise domestic support for supranational integration, coordination of policy among political parties with different ideological orientations was necessary. The French government was able to involve the franc in the ERM due to the successful coordination of European policy between the moderate-right UDF and the Socialists. Conversely, in Britain the failure of cooperation between the Conservative and Labour parties led to a semi-detached attitude towards Europe. Due to the stagnation of political integration in the late 1960s and early 1970s, neo-functionalism was declared obsolescent by its own architect.12 Having been impressed by the rapid integration from the 1980s to the early 1990s, some scholars invigorated neo-functionalism; but they have not also inherited Haas’ interest in domestic party politics.13 Neo-functionalists have been criticised by intergovernmentalists. Andrew Moravcsik, for example, stresses that European integration is a result of the rational choice made by national leaders.14 According to Moravcsik, intergovernmental negotiation on European integration can be subdivided into three phases: national preference formation, interstate bargaining, and institutional choice. This framework assumes that it is the nation state that individuals and groups employ as the political means to influence international negotiation. Here we focus on the first stage of his framework, national preference formation, because the main purpose of this book is to explain the difference of policy between Britain and France on European monetary cooperation. What is problematic about Moravcsik’s argument is the fact that he regards domestic institutions as agents of social interests: Both private and public institutions are treated as representative of societal interests. Where societal pressures are intense and powerful, private interests are assumed to be organized and governments narrowly constrained. Existing domestic organization is employed as a proxy: if, for example, wheat, sugar, and beef producers appear to possess disproportionate and stable amounts of political power in

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French peak agricultural interest groups, this fact is taken as given for French policy and hence for EC politics. ‘State’ actors are treated as proxies for underlying social forces. The independence and antiinflationary commitment of the Bundesbank, for example, stand in for the broadly accepted anti-inflationary preferences of the German public, which encumber any attempt to revise the bank statute.15 It is easy to see that there are at least two major problems in his framework. First of all, he ignores the role of intermediate structures between the state and society in his explanation of national preference formation. In his voluminous work, he scarcely mentions political parties. Second, there is a question about the position of the state or national government in his analysis, not least because he does not assign to the state any autonomous character independent of societal pressure. While he concedes the possibility that the influence of interest groups is indeterminate, he offers no theory which can explain the action of state officials in such a case. His argument is actually close to socio-economic determinism, and it is not unfair to say that his intergovernmentalism is a state theory without a theory of the state.

2.

Multi-level governance

Growing dissatisfaction with a state-centric viewpoint gives rise to a position called multi-level governance. Scholars of multi-level governance ‘pose two basic alternative conceptions – state-centric governance and multi-level governance – as distinctly as possible and then evaluate their validity by examining the European policy process’.16 Intergovernmentalists suppose that subnational actors like interest groups and local governments participate in European decision-making only through the national governments. In the model of multi-level governance, national government is not the gatekeeper between the domestic and European realms, and domestic players exert direct influence on the European Commission and the European Parliament. In a European decision-making process, while state-centric governance focuses on the role of national governments, scholars of multi-level governance assume that supranational institutions, such as the European Commission, the European Parliament and the European Court of Justice, have a role alongside that of the IGC (Intergovernmental Conference), the European Council and the Council of Ministers. In disagreeing with intergovernmentalists, who regard the EU as a kind of international regime, scholars of multi-level governance insist

National Political Parties and Party Systems 31

that the EU can be analysed with the same tools as can domestic politics. The idea behind this methodological orientation is that the questions of more versus less Europe, and of the fate of the nation state, are not the only issues at stake. A more immediate task is to grasp the emerging structure of integrated Europe as a polity. Unlike intergovernmentalists, advocates of multi-level governance clearly distinguish the state as an actor from an intermediate institution between the state and society.17 However, even the theory of multi-level governance has not paid much attention to the national party system.18 Rather exceptionally, Liesbet Hooghe and Gary Marks have recourse to the cleavage theory of party position that has been articulated by Lipset and Rokkan to investigate political contestation over European integration and the role of political parties therein.19 According to Lipset and Rokkan, European party systems reflect a series of historical conflicts about state-building, religion and class that took place from the Reformation to the Industrial Revolution.20 In applying the cleavage theory of Lipset and Rokkan to an analysis of political contestation over European integration, Hooghe and Marks argue that ‘political parties are not empty vessels into which issue positions are poured in response to electoral or constituency pressures; rather, they are organizations with historically rooted orientations that guide their response to new issues’.21 Using the theory linking party positions in cleavage structure and orientation towards European integration, they derive the hypothesis that political parties which belong to the same cross-frontier party family (like the Social Democrats, Liberals and Christian Democrats) will exhibit similar attitudes to European integration. It is desirable to make use of such tools in comparative politics in analysing EC/EU politics. However, the argument is not without its problems. First of all, there is a considerable variety of European policy among political parties which belong to the same party family.22 This fact itself is not overlooked by Hooghe and Marks, and they certainly try to explain different responses to European integration within the same party families. However, whether they succeed in doing so remains doubtful. The difficulty is that the factors mentioned in their work (such as the past achievement of party programmes at the national level) to explain these differences within the party family are not actually related to cleavage structures, which, according to Lipset and Rokkan, must be the historical legacies of past conflicts up to the 1920s. Moreover, their approach cannot explain the fact that each national political party or party bloc that normally forms a government is divided on Europe,

32 European Monetary Integration 1970–79

and that it is sometimes difficult to talk about any party’s ‘position’ on the issue.23 To explain the internal division of political parties on European integration in terms of cleavage theory, we have two alternative strategies. One is to argue that an old social cleavage between the centre and periphery, which was not reflected in the national party system for a long time and thus cuts across political parties, has come to the fore with the progress of European integration. This seems to be Rokkan’s own interpretation of what happened to Norwegian politics when Norway applied for EC membership in the 1970s, and is in keeping with the spirit of the cleavage theory offered by Lipset and Rokkan.24 However, apart from Simon Hix, there is virtually no scholar that follows this line of thinking.25 Another, and more popular, alternative is simply to regard European issues as a new cleavage in national politics. This is not compatible with the proposition that social cleavages can predict the reaction of political parties towards European integration. Indeed, the main aim of this strategy is to explain Europeanisation of domestic politics, rather than the impacts of domestic politics on European integration.26 Ultimately, the study of Hooghe and Marks on party contestation over European integration is motivated by their desire to differentiate multi-level governance from a state-centric approach, and this concern sets the limit to their interest in national party politics. For intergovernmentalists, European integration is first and foremost negotiation between national governments. Therefore, the dividing line of conflicts overlaps the frontiers of EU member states. By contrast, what the scholars of multi-level governance want to demonstrate is that contestation over European integration can exist not only between national governments, but also between political parties, each of which makes alliances with its counterparts over the frontier.27 Yet this preoccupation hinders the writers from making an enquiry into the internal division of national parties on European issues, or the relationship between national political parties, much less the impact of these factors on the European policy of national governments. Another difficulty of multi-level governance stems from the fact that Hooghe and Marks pay attention only to parties at the election level. This would be acceptable if we were studying political parties as one part of the Europeanisation of domestic politics. But if multi-level governance is concerned with an explanation of the process of European integration then we should examine the role of political parties and the relationship between them at the level of the policy-making process, as Haas did more than 50 years ago.

National Political Parties and Party Systems 33

3. British politics, French politics and comparative European politics At first, the field of British and French politics or comparative European politics might appear the best place to find what we are looking for. Unfortunately, however, this is not necessarily true. The style most common among the literature of British politics in connection with European integration is to study the European policy of either the Conservative Party or the Labour Party.28 Scholars have rarely considered the British party system, as distinct from individual political parties.29 The situation is not dissimilar in the study of French party politics.30 Some historians of British diplomacy have shed new light on the problem by pointing out that the division of the pro-European MPs between the two main political parties is the main cause of British Europhobia. In particular, Christopher Lord makes a survey of the balance of opinion in the House of Commons in his work on British entry into the EC under the Heath government.31 However, even this work lacks the backing of comparative studies. No literature in this field studies the role of the adversarial character of the British party system in the development of the UK’s European policy from a comparative perspective. In the field of comparative study of European politics, Michael Newman and Kevin Featherstone have tried to explain the variety of European policies among the socialist parties within the EC/EU.32 Featherstone pays particular attention to the role of the national party system in his book. Let me cite one example: in France, the SFIO of the Fourth Republic had been far more enthusiastic about European integration than was its successor, the PS, in the 1970s. These changing attitudes by the French Socialists towards European integration were attributed by Featherstone to the fact that the French party system changed from a polarised multi-party system to a bipolar one in the transition from the Fourth to the Fifth Republic, and accordingly the Socialist Party switched its coalition strategy from that of a centralist coalition with the pro-European MRP and the Radicals to a leftist alliance with the anti-European Communist Party.33 This is a very good indication of the influence on party policy exerted by party-systemic factors, such as party competition and alliance strategy. Yet of course party policy has to go through many stages before it can become the policy of the French government, and, unfortunately, the author’s preoccupation with the leftist groups left unexplored the tacit cooperation of the Socialists with the moderate-right President Giscard d’Estaing in the making of European policy in the run-up to the foundation of the

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EMS. In other words, Featherstone is not particularly interested in the relationship between government and opposition.

Conclusion Haas’ book still offers us the most promising starting point, even more than 50 years after its publication. In the first place, he made a clear conceptual distinction between the issue of political integration, that is, the transfer of power and loyalty from the nation state to a supranational organisation, and political or ideological conflicts over the type of European integration. Second, he proposed an empirically testable hypothesis about the relationship between the two. According to him, ideological conflicts over the shape of integration among political parties such as the Socialists, Liberals and Christian Democrats are the driving force for further supranational integration. The hypothesis itself, however, does not fit in with the history of European integration during the past 50 years and thus is out of date. First of all, with the possible exception of the British case, political contestation over integration was minimal until the Single European Act. Moreover, politicisation of European integration seems to have slowed its progress. Therefore, we should investigate the domestic context in which political parties operate. This includes the precise nature of internal division within political parties over European integration, the relationship between national political parties in a policy-making process and the impacts of these factors on the European policy of national governments. Unfortunately, the study of European integration after Haas has not carried out this task. Intergovernmentalists, despite their concern with national preference formation, do not exhibit interest in the role of national political parties or institutions between the state and society in the process of European integration. Although theorists of multilevel governance conduct research about political parties, they do not do so in the context of the policy-making of national governments. Consequently, the role of political parties and the impact of party systems on European policy pursued by national governments remain unexplored.

3 Britain’s Policy on EMU During the Entry Negotiations with the EEC, 1970–71

Introduction In the following two chapters, we set ourselves the task of explaining Britain’s policy towards EMU during the Heath government. In Chapter 3 we look at the development of Britain’s policy between June 1970 and October 1971, the opening of Britain’s negotiations to enter the EEC and the vote of the House of Commons which approved the principle of Britain’s entry into the European Communities. Chapter 4 will consider how Britain responded when the EEC took its first steps towards EMU. In order to explain Britain’s policy on EMU during her entry negotiations with the EEC, we will examine closely the relative importance of five factors, which are introduced as possible explanations of British policy towards European monetary cooperation during the 1970s. These five factors are: (1) Britain’s special relationship with the United States; (2) the legacies of the Empire; (3) economic considerations; (4) concern with the loss of national sovereignty; and (5) the mechanics of the national party system. For the sake of analytical simplicity, we distinguish two stages of the development of British policy on EMU: international negotiation, conducted primarily by the government, and ratification of its result in the domestic political system. Our task is made difficult, however, by the fact that we cannot explain British policy on EMU without placing it in a wider context of Britain’s entry into the EEC. This was primarily because EMU and the position of sterling were so important for the successful entry of Britain into the EEC. In fact, Britain agreed to proceed with EMU as one of the conditions of her entry into the EEC.1 Due to the importance of EMU, the British government, in making a decision on the subject, was required to take into 35

36 European Monetary Integration 1970–79

account not only the merits and demerits of EMU itself, but also its impact on the result of the ongoing negotiations for British entry into the EEC. In short, British policy on EMU was decided first and foremost in the light of the ultimate aim of securing a place for Britain inside the EEC. By briefly looking at the historical background of EMU, we can understand why EMU had so much importance for the negotiation of British entry into the EEC.2 The British government, led by Harold Wilson, applied to the EEC for a second time in 1967; this application was rejected by General de Gaulle, the French President. But Britain’s application was not withdrawn and remained on the table. The retirement of de Gaulle changed the political climate of the EEC in favour of British membership. In The Hague European summit held in December 1969, the Six agreed to proceed with the completion, deepening and enlargement of the EEC. The deepening of the EEC stood for EMU, while the completion was meant to involve the consolidation of the CAP and its financial arrangements on a permanent basis. Therefore, from the very beginning, the enlargement of the EEC to include Britain, Ireland, Denmark and Norway was a part of the same deal as the project of EMU. Since The Hague summit, negotiations on EMU inside the EEC had run parallel with Britain’s entry negotiation. The EEC requested a discussion with Britain on the position of sterling and a number of issues that would arise once Britain was accepted into the EEC and participated in EMU. The French, in particular, demanded the reduction of the sterling balances, and agreement on a concrete method for achieving this, as a precondition to accepting Britain into the EEC.3 In the Anglo-French summit of May 1971, Edward Heath, British Prime Minister, and Georges Pompidou, French President, reached agreement on both counts. This agreement, and the success of the meeting in general, paved the way for Britain to enter the EEC. So far, we have emphasised that, in order to explain British policy on EMU, it is necessary to place the issue in the context of Britain’s entry negotiations with the EEC. It is wrong, however, to assume that the British government simply paid lip service to EMU so as to secure EEC membership. EMU itself had a certain attractiveness from the viewpoint of the British government. The following is a summary of what kinds of factors worked, in the minds of British policy-makers, in favour of British involvement in EMU, and what kinds of factors were obstacles to it. EMU was envisaged primarily as a means to deal with the accumulated sterling balances, the legacy of the British Empire, and reduce financial dependence on the United States.

Britain’s Policy on EMU During the Entry Negotiations with the EEC, 1970–71 37

The British government had set out to restore the position of sterling as an international currency, alongside the US dollar, with the recovery of convertibility between sterling and the dollar in 1958.4 The effort of the British government to maintain the exchange rate between the US dollar and sterling for the above purpose, however, caused damage to the international competitiveness of British industry. The loss of international competitiveness aggravated the situation of the balance of payments, which forced the government to adopt deflationary measures and sacrifice economic growth. The existence of the sterling balances in turn often triggered a run on sterling in the foreign exchange market. Finally, the Labour government had no alternative but to devalue sterling in 1967. It was, however, impossible for Britain to run down the accumulated sterling balances by herself. How the British government ran down the balances was not so much an economic issue as a political one.5 After the devaluation, countries in the sterling area sold the bulk of their balances and put sterling under pressure. This could have derailed the recovery of the British economy and destabilised the international monetary system. In 1968, therefore, Britain concluded the Basle Agreement with the US and 11 other countries, setting up stand-by facilities that could be drawn on if the sterling balances fell below the prescribed level.6 The British government also negotiated bilateral sterling agreements with the countries of the sterling area. Under the agreements, the sterling area countries were obliged to hold a certain proportion of their foreignexchange reserves in sterling. In exchange, Britain agreed to guarantee the value of 90 per cent of their sterling holdings in the US dollar. (If sterling was further devalued vis-à-vis the US dollar, the British government would have to compensate for the loss incurred on these sterling holders.) The important fact was that, as a consequence of the above developments, Britain was reduced to a position in which she was financially, and therefore politically, dependent on the United States. This was one of the main reasons why the Wilson government expressed its support for the Vietnam War at the time.7 The French demanded the reduction of the sterling balances precisely because they were concerned with Britain’s dependence on the United States. In short, by trying to maintain the legacy of the Empire, Britain fell into a dependent status in relation to the United States. Once EMU was achieved, however, all the external assets and liabilities of participating countries could be put together into a common reserve fund, and the sterling balances would no longer be a financial burden for Britain.8 Britain could clear up the legacy of the Empire and dissolve

38 European Monetary Integration 1970–79

her dependency on the United States in one go. Therefore, it was not surprising that the British government was attracted to the plan of EMU. Moreover, the prospect of joining it was not a castle in the air. As we will see later, the French government was considering a deal in which Britain would participate in EMU, and, in exchange, the rest of the EEC would assist with the running down of the sterling balances. Even if the British government found some attractiveness in EMU from the viewpoint of international strategy, however, there were two domestic factors that could potentially become obstacles to participation in EMU: attachment to national sovereignty, and the characteristics of the national party system. Monetary cooperation requires participating countries to accept the pooling of sovereignty in making a decision on a parity of their currencies and interest rates. The British government seemed to take a pragmatic viewpoint on the issue of sovereignty, but it did not explain its exact position in public at the time. This is where the role of party politics, our main explanatory factor, comes into the picture. In the third section of this chapter we will show that, by building up a lasting political coalition on the issue with the pro-European section of the Labour Party, the government could emphasise the political merit of EEC membership and openly admit the certain loss of national sovereignty involved. The collapse of bipartisanship, however, denied the government an opportunity to pursue a European policy that it judged beneficial for Britain but which would include the loss of national sovereignty, such as EMU. Before concluding this introduction, the structure of the rest of the chapter should be outlined. The first two sections are concerned with the government’s policy towards EMU during international negotiations; and the third section with the situation of domestic party politics, which affected the ability of the government to legitimise and mobilise support for its policy in the future. Each section of the chapter begins with narrative accounts of the events and is followed by an analysis of the relative importance of explanatory factors formulated in the previous chapters regarding European policy pursued by the British government. The first section covers the period before the publication of the Werner Report in October 1970 and offers a detailed account of the link between EMU and Britain’s entry negotiations with the EEC. The second section will focus on the situation of March 1971, when debate on EMU in the aftermath of the publication of the Werner Report highlighted the importance of monetary issues for Britain’s entry negotiations. The negotiations

Britain’s Policy on EMU During the Entry Negotiations with the EEC, 1970–71 39

were almost deadlocked because of hardening French attitudes, especially on the international role of sterling. We shall then explain how the successful meeting of Heath and Pompidou, reaching agreement on these issues, achieved the breakthrough in the entry negotiation and led Britain finally into the EEC. All in all, during this period the British government showed a remarkably forward-looking attitude towards EMU. After the successful conclusion of the entry negotiations in July, the focus of attention inside and outside the UK shifted to whether the House of Commons would approve the principle of Britain’s entry into the European Communities on the basis of the arrangements negotiated. The House of Commons held the so-called ‘Great Debate’ in October, at the end of which it endorsed the government motion for Britain’s entry into the EEC with a majority of 112. It was party politics that played a central role at this stage in deciding the future relationship between Britain and the EEC. The third section of the chapter will trace the collapse of bipartisanship on European policy and its negative impact on the future policy of the government towards EMU.

1.

The start of Britain’s entry negotiations

In this first section, we look at how the issue of sterling and EMU was dealt with during the early stage of Britain’s negotiations to enter the EEC. Initially, sterling and EMU occupied only a peripheral position in the entry negotiations. As we will see later, there was disagreement between France and Germany on EMU. Apart from taking pains not to favour one side at the expense of the other, the British government did not have much trouble with EMU. But the government recognised that this issue could ultimately decide the success or failure of the negotiations. When Heath convened the first meeting of his Cabinet on 23 June, the entry negotiations between Britain and the EEC were already in progress. The British government was asked to make an opening statement about the entry negotiations on 30 June, including its view on EMU. Therefore, the new government had to decide on its European policy in quite a short period of time. Two successive meetings of the Cabinet considered a draft of the statement which was due to be made by Anthony Barber, Chancellor of the Duchy of Lancaster, who was in charge of Britain’s entry negotiations.9 In the statement, the British government accepted the Treaty of Rome given a certain transitional period, but also sought exemption from the treaty on certain matters,

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such as the dairy products of New Zealand, Commonwealth sugar and the fishery policy. The level of Britain’s financial contribution to the EEC budget and how it would increase after accession also had to be negotiated. In substance, the negotiation tactics adopted by the Conservative government were very similar to those of its Labour predecessor.10 However, as a matter of public presentation, a number of references included in the original draft statement to the policy of the Wilson government were omitted.11 The Cabinet also decided to make an effort to ‘break the back of the negotiation’ before July 1971, so that Britain could be a member of an enlarged European Community by January 1973. From the beginning, this schedule was expected to cause considerable difficulties for the leadership of the Labour Party to secure support for Britain’s entry into the EEC among its followers.12 Therefore, it seems that at this stage the government did not try very hard to win Labour’s support for its European policy. The government’s statement on 30 June contained only a brief mention of EMU: the government welcomed the initiative of EMU and expressed its willingness to go along with the rest of the EEC. In order to understand the position of the government in full, we should first look at the negotiations about EMU among the Six and the situation of the international monetary system at the time. In February 1969, the European Commission made a proposal on European monetary cooperation, which was called the Barre Plan after Raymond Barre, French European Commissioner responsible for monetary affairs.13 The arguments following the proposal and the difficulties surrounding the change of parity between the franc and the Deutschmark later in the same year led to the decision of The Hague European summit in December 1969 to commission a report on EMU. The Werner Committee submitted the interim report to the Council of Ministers in May 1970, and was due to publish its final report in September (in fact, publication of the report was postponed until October because of internal differences). From the outset it was recognised that there were two conflicting viewpoints on EMU among the Six: the ‘monetarist’ and ‘economist’ schools.14 On the one side, the French insisted on the importance of cooperation on exchange rates, which could lead to the convergence of economic policy at the later stages. The Germans and Dutch, on the other, argued that the convergence of economic management and performance (especially inflation) among participating countries should be the precondition of cooperation on exchange rates. With these developments as the background to the negotiations on Britain’s entry into the EEC, the British government was concerned

Britain’s Policy on EMU During the Entry Negotiations with the EEC, 1970–71 41

that it should not support one side of the conflicting viewpoints within the Six, because this might jeopardise the entry negotiations. This consideration explains why the British government adopted an ambiguous attitude to EMU at this stage of entry negotiations.15 It was also the reason why the government did not ask for a formal consultation procedure on the work of the Werner Committee.16 The Six also wanted to discuss Britain’s balance of payments and the problems arising from the position of sterling as an international currency.17 In December 1969, the Council of Ministers approved the list of issues that ought to be discussed with the British government. The list included the sterling balances and the Basle Agreement, the position of sterling as a reserve currency, and the problems which would arise from the obligations and rights that Britain had towards the countries inside the sterling area. The Basle Agreement and the bilateral sterling agreements were concluded in 1968 after the devaluation of sterling to avoid a sharp decline of the sterling balances. The sterling agreements were to lapse in September 1971 and the British government intended to seek their renewal between March and September 1971. From the viewpoint of the Treasury, it would be desirable if a renewal was secured before the start of negotiations on the role of sterling with the EEC.18 The French, however, were known to be hostile to the Basle Agreement and the international role of sterling.19 The sterling area countries enjoyed privileged access to the financial market in London. There was no exchange control on capital movement from Britain to the sterling area. This was the main reason why these countries continued to hold sterling.20 Britain promised to comply with the EEC regulations on capital movement provided there was a transitional period of five years. However, while a certain type of capital movement was not liberalised inside the EEC, there was no restriction between Britain and the sterling area except for the voluntary programme introduced in 1966. In other words, if nothing was to be done, Britain would discriminate against the EEC in favour of the sterling area even after the transitional period. This would be clearly unacceptable not only for France but also for other EEC countries.21 The important fact for Britain was that these issues were decided by the Six as a subject for discussion, not negotiation. The distinction between discussion and negotiation was that discussion would deal with issues which did not belong to the jurisdiction of the EEC under the Treaty of Rome. Therefore, if a particular issue was a subject of discussion, it was not necessary to solve it before Britain’s accession

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to the EEC.22 For Britain, this distinction was essential, because from the beginning of the entry negotiations it was recognised that, if any country (it virtually meant France) tried to block Britain’s entry into the Community, this was the area where it could easily cause difficulties for the British side.23 To conclude the first section, we review the relative importance of the five possible explanatory factors in Britain’s European policy during this period. (1) The special relationship with the United States The relationship with the United States had only limited influence on Britain’s European policy throughout the period. The Nixon administration supported Britain’s membership of the EEC, but did not intervene in the details of the entry negotiations, since this could have had negative effects on the French attitude.24 From a comparative perspective, it is doubtful whether Britain paid attention to American interests more than the French did. Certainly at the time French politicians like Giscard d’Estaing, then Minister of Finance, publicly argued that Europe should establish itself as ‘the second pillar’ in the monetary field and challenge the privileged position of the US dollar. However, contrary to what they said in public, there is considerable evidence that the French were careful not to damage vital US interests. For example, when Christopher Soames, British Ambassador in France, called on Pompidou in the Elysée in November 1970, the French President told him that Europe depended for its security on the United States and therefore could not afford a monetary war against the United States. His statement meant that, after Britain’s accession to the EEC, neither sterling nor any future European common currency would be able to challenge the position of the US dollar as the international currency.25 Pompidou probably made this statement because he suspected that the British government had not completely abandoned its dream of restoring sterling as an international currency, even after the devaluation of 1967. His suspicion was not wide of the mark as far as the position of the British officials was concerned. The Treasury and Foreign Office seem to have believed that, with the economic strength of the EEC behind it, sterling could maintain its international status and the sterling balances might increase after the accession.26 It was, however, doubtful as to whether this concern for maintaining the international status of sterling was shared by British politicians. For instance, Heath was sceptical about whether it was necessary to renew the Basle Agreement.27

Britain’s Policy on EMU During the Entry Negotiations with the EEC, 1970–71 43

(2) The legacies of the British Empire The issue of sterling brings us to the legacies of the British Empire, and their impacts on Britain’s European policy. The running down of the sterling balances would be a heavy burden on the balance of payments, and therefore it was not surprising that the British government was reluctant to reduce the sterling balances very rapidly. Yet if the Treasury or the Foreign Office saw the merits of keeping sterling as an international currency even after the devaluation of 1967, the balance of payments could be an excuse to hide their real motivation behind policy; namely, certain elements within the British government were still reluctant to see the disintegration of the sterling area. We will come back to this point later when we examine the Paris meeting between Heath and Pompidou in May 1971. (3) Economic considerations Two economic conditions had to be satisfied for any country to participate in a fixed exchange rate regime and to stay inside for a length of time: sound balance of payments situations, and a rate of inflation in line with that of other participants. When the Conservative Party took office in 1970, Britain’s balance of payments was in a strong position. However, the government could not be optimistic about the future. Apart from EMU, EEC membership was expected to have negative impacts on the balance of payments, which were expected to be the order of £500 million at the end of the transitional period. By contrast, the economic benefits of the EEC, in contemporary usage the ‘dynamic effects’ of membership, were very difficult to quantify. Certainly, it was believed that participation in the larger market of the EEC and tougher competition within it would improve the international competitiveness of British industry. Yet there was no way to calculate its exact effects beforehand.28 Ultimately, however, during this period the British government believed that it would be possible to participate in European monetary cooperation from an economic point of view. First of all, the government expected that the dynamic effects of EEC membership, however difficult to quantify, would exceed the cost. Moreover, we should bear in mind the fact that the international monetary system was based on fixed exchange rates until March 1973. The difference between European monetary cooperation and the international monetary system was simply the fact that the margin of exchange rate fluctuation allowed would be narrower in the former. For the British government, wider room for exchange rate fluctuation was desirable due to the existence

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of the sterling balances; but this did not diminish its willingness to join the experiment of a narrowly limited exchange rate system between European currencies.29 (4) National sovereignty The Barre Plan included coordination of economic policy. If coordination was effective, then Britain could influence the policy-making of other EEC countries, in exchange for her own policy-making being influenced by them. This sharing of sovereignty could attract critical attention. However, the plan did not go far on this point. One official paper pointed out that the level of cooperation envisaged in the plan among the EEC countries was not substantially different from that which had already existed between Britain and the EEC in the framework of the OECD.30 Moreover, the previous Labour government publicly stated that it welcomed EMU and was prepared to proceed with the rest of the EEC.31 Therefore, if the Conservative government made a similar statement, the opposition was hardly in a position to criticise it. It is not surprising that EMU remained a politically uncontroversial issue during the period. (5) Party politics This fact directs our attention to the situation of party politics over Britain’s membership of the EEC, our last explanatory variable. During this period, the Labour opposition sat firmly on the fence, and waited to see what terms would emerge from the negotiations between the government and the EEC. This situation eventually changed in February and March 1971, and intra-party strife intensified between the pro- and anti-European sections of the party. There was one incident through which we can analyse internal divisions of the Labour Party on the European issue. In July 1970, an election for the deputy leadership of the party took place shortly after the general election, in which the incumbent deputy leader, George Brown, had lost his parliamentary seat.32 The deputy leadership was contested by three candidates: Roy Jenkins, Michael Foot and Fred Peart. Jenkins, who became the de facto leader of the pro-European section of the party after the general election, comfortably won the contest with 133 votes. Jenkins made it clear during the election campaign that, for him, British membership of the EEC was more important than his loyalty to the Labour Party, and, therefore, if Labour eventually opposed entry, there would be no question of persuading him to follow party policy by invoking party loyalty. This stance did not prevent his election. Foot obtained

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67 votes, presumably from the left wing of the party. The important aspect of this contest, however, was the fact that 48 Labour MPs supported Peart, who belonged to the moderates in terms of the left–right division of the party, but nonetheless stood against EEC membership. His candidature showed that there was a clear division on the European issue within the right of the party. Because most left-wing Labour MPs were opposed to British entry into the EEC, this internal division on the right showed that the European issue had the potential to tip the balance between the left and right within the party.

2. The emergence of EMU as a key issue for Britain’s entry into the EEC The second section covers the period between the publication of the Werner Report and the successful conclusion of the entry negotiations in July 1971. The importance of the sterling issue was highlighted by the publication of the Werner Report and the subsequent debate on EMU within the EEC. As a result, sterling emerged as a key issue for Britain’s entry into the EEC. The French demanded a promise to reduce the sterling balances, and an agreement on how this could be achieved, as a precondition for British membership of the EEC. In the AngloFrench summit meeting of May 1971, Heath and Pompidou reached a settlement on both issues. The success of the meeting paved the way for Britain to enter the EEC. The publication of the Werner Report and its reception The Werner Committee published its final report on 15 October 1970.33 Its far-reaching recommendations on EMU sent shock waves across the EEC countries, especially in France but also in Britain. The following is a brief summary of the content of the report. First and foremost, the Committee envisaged a three-stage plan for the establishment of EMU by 1980. The completion of the final stage would see the emergence of a federal Europe and a single currency. Retrospectively, the Werner Report was strikingly similar to its successor, the Delors Report, on the basis of which the euro was established, but went further on certain matters, such as fiscal transfer between the member states. In the final stage of EMU, the exchange rate parity between the currencies of the member states would be irrevocably fixed, and it would be desirable if a common currency were to be created to replace national currencies. The ‘centre of decision’, empowered to issue a direction

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concerning national budgets and make decisions on exchange rate policy, would be responsible to the European Parliament. A second institution, consisting of national central banks, would also be created. The achievement of EMU should be an irreversible process. The report made it clear that the centralisation which inevitably accompanied EMU would transfer national sovereignty to the Community institutions. The Community should also have influence in deciding attitudes towards the international monetary system. To realise this ambitious objective, the first stage of EMU would start in 1971 and would be completed by the end of 1973. A proposal on monetary cooperation, which would be implemented at the same time as the first stage, was attached to the Werner Report. It provided that any participant could change exchange rate parity only after consulting with the other EEC states. The member states would take a common position within the IMF. European countries would not adopt a wider band of exchange rate being proposed for the international monetary system. Instead, central banks of the EEC countries would be obliged to intervene in the foreign exchange market so that no currency departed by more than 0.6 per cent from its dollar parity. In the future, intervention should be made in European currencies, not in the US dollar. The Werner Report received a mixed reception from the EEC countries. As expected, the French expressed concern about the ‘excessive’ supranational element of the report, which provoked strong opposition inside the government and the Gaullist Party. The European Commission tried to get French commitment, at least to stage one of EMU, by making a proposal which considerably diluted the supranational aspects of the report.34 The French Cabinet supported the proposal. But the French refused to commit themselves to any automatic process, and instead proposed to concentrate on the first stage of EMU.35 However, the Germans and the Dutch insisted that they would not introduce a narrower band for the exchange rate in stage one, unless the French made clear their commitment to the entire process of EMU from the outset. This reaction was not surprising. The Werner Report was, after all, the product of a carefully balanced compromise between the ‘monetarist’ and ‘economist’ schools. The German and Dutch governments feared that a further concession to French demands would allow the French government to get what it wanted, namely, closer cooperation on the exchange rate, without committing itself to the later stages of EMU, including the convergence of economic management. The British government took a very cautious approach to the Werner Report.36 First of all, its main concern was to avoid getting involved in

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the internal conflicts of the EEC and being asked to take sides. The government did not feel there were insurmountable difficulties with the first stage of EMU proposed in the Werner Report. Obviously, the final stage of EMU would be much more problematic, since it included a substantial transfer of sovereignty to European institutions and would have huge implications for demand management and exchange rate policy. One official paper described the plan as ‘revolutionary’ and commented that, in the final stage of EMU, the autonomy of the national governments would be even smaller than that of the state governments in the United States.37 However, the government was rightly sceptical about the degree of commitment of other governments, especially the French, to the later stages of EMU. Therefore, the government decided to repeat its commitment to the objective of EMU, express its support for stage one, and ‘wait and see’ about the stance of the EEC countries. It was calculated that, if the entry negotiations were successful, Britain would be a member of the EEC by 1973. The government would be able to participate in any decision on the second and final stages of EMU, with a veto which it could exercise on any undesirable developments. It was hardly surprising that a meeting of the EEC Finance Ministers failed to resolve differences over EMU on 24 November.38 Before the next meeting, a reference to the ‘centre of decision’ and the final date of 1980 was omitted to assuage French anxiety.39 Nonetheless, the Council of Ministers meeting on 14 December failed to reach agreement on EMU. The attempt to narrow differences on EMU was continued between the French and Germans in the new year. Pompidou and German Chancellor Willy Brandt met on 25 and 26 January at the biennial summit held in Paris, where they reached a compromise on EMU. The minimalist line taken by the French first saw the light of day when the meeting of the Council of Ministers on 10 February finally reached agreement on EMU.40 The arrangement of the first stage was decided in detail, including a narrower exchange rate band between the European currencies and closer cooperation on economic management. But the agreement remained ambiguous as to the purpose of the final stage and transfer of power to the European institutions, including the European Parliament. Instead, the Germans won the insertion of the prudence article into the agreement. If the Germans joined monetary cooperation without the convergence of economic management, they would be obliged to support the currencies of the other EEC countries whose weakness was caused by expansive (or irresponsible, from

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the German point of view) economic policies. The prudence article provided that, if the EEC did not make enough progress on the convergence of economic management, cooperation on the monetary side would be terminated after five years.

EMU and the negotiations on Britain’s entry into the EEC As far as EMU was concerned, this was the best result for the British government, since the details of EMU in the later stages would be decided only after Britain’s accession to the EEC. However, the agreement on EMU naturally turned the attention of the EEC to the sterling issue and therefore changed the course of the entry negotiations. In late February, The Times speculated that the French might take the line that Britain’s balance of payments and economic prospects should be dealt with in the context of the entry negotiations.41 Once Britain joined the EEC, the relationship between the reserve role of sterling and EMU had to be worked out. If the British government preferred to deal with the sterling balances in the framework of EMU, then it would be natural for the Six to seek, as a precondition of Britain’s entry into the EEC, clarification of the intentions of the British government on the future of the sterling balances and renewal of the Basle Agreement – not least because, since the conclusion of the Basle Agreement, the sterling balances had gradually increased.42 Events transpired exactly as the newspaper had anticipated. In March, the French government began to insist that sterling and its reserve role should be included in the negotiations for Britain’s entry into the EEC. The French Permanent Representative in Brussels officially requested inclusion of these issues as a subject for the meeting of the Council of Ministers on 30 March.43 He explained that, while the EEC aimed to build up a counterweight against the US dollar through the achievement of EMU, sterling was connected with the US dollar because of its status as a reserve currency and because of the Basle Agreement. The meeting of the Council of Ministers on 30 March decided to place the issue in the hands of the permanent representatives in Brussels. Giscard d’Estaing requested the inclusion of the issue of sterling in the agenda for the entry negotiations. The other five countries of the EEC were opposed to this but, for procedural reasons, could not refuse the French request.44 For British politicians and officials who were in charge of the entry negotiations with the EEC, this turn of events cast a dark shadow over the prospects for negotiation. The problem was that it was not clear

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whether the French government was simply trying to secure the maximum concession from the British side before major issues were settled at the ministerial sessions in May and June, or whether it was actually looking for an excuse to exercise a third veto over Britain’s application to the EEC. It seems that the British government at the time seriously considered the possibility that the application might fail. It is suggestive that the secret files on the meeting between Heath and Pompidou in May 1971, the success of which led Britain into the EEC, are entitled ‘options if application fails’.45

The summit meeting between Heath and Pompidou It was the success of the meeting between Heath and Pompidou in Paris on 20 and 21 May 1971 that brought about a breakthrough in the entry negotiations, and thus finally opened the door of the EEC to Britain. In his memoirs, Heath wrote that Soames told him in the House of Commons as early as 1 March that, in his (Soames’s) opinion, ‘President Pompidou would want to settle matters in bilateral talks with the British Prime Minister’.46 Since progress in the negotiations had been slow, Heath instructed Soames to explore the possibility of such a meeting with Pompidou’s Secretary-General, Michel Jobert. The Quai d’Orsay (the French Office for Foreign Affairs) and Maurice Schumann, French Foreign Minister, were kept completely in the dark during this arrangement process, as President Pompidou insisted. The British side requested that the meeting would be held either in late May or early June. This was because, in order to break the back of the entry negotiations before the summer recess, outstanding issues in the negotiations had to be settled at the ministerial session in July. Therefore, if the summit was to give impetus to the deadlocked negotiations, it had to be held before these ministerial meetings. Accordingly, the meeting was set for 20 and 21 May. The agenda of the meeting was more difficult to settle. Jobert gave the French proposal for the agenda to Soames on 4 May.47 The French list was striking, for it included only two subjects, institutional matters and the position of sterling, with no outstanding issues from the negotiations in Brussels being mentioned. Admittedly, this French attitude is less surprising if we consider the fact that negotiations in Brussels were being conducted on the issues demanded by the British side, and that, therefore, successful conclusion of the negotiations on these issues was more important for the British than it was for the French. Nonetheless, this episode testifies that the position of sterling was a top

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priority for the French government. In turn, the British government decided to request the addition to the agenda of ‘the decisions needed to ensure a successful outcome to the enlargement negotiations in June’ and the role of the enlarged community in the world. The government also made it clear to the French side that, ‘unless M. Pompidou was prepared to agree in detail solutions to our problems in the negotiations, the British government would see little or no advantage in a bilateral meeting’.48 This British request was accepted by the French. The first issue on the French agenda was whether the British government was willing to accept the so-called Luxembourg compromise. This question caused no difficulty for the British. The position of sterling was more problematic. The French demand was threefold: (1) an ‘undertaking by the British government that the sterling balances would be stabilised before the accession’; (2) to consider ‘what kind of mechanism with which the British government could achieve the progressive reduction of the sterling balances after the accession’ could be found; and (3) to set ‘the numerical target’49 of the reduction. In short, the French asked for the abolition of the sterling area in exchange for admitting Britain into the EEC. Soames explained the French intention in his letters sent to the Foreign Office: They [the French] are not yet convinced that we [the British] are ready to accept the role of a straight European power without strings. They see us seeking a more or less permanent arrangement for a part of the Commonwealth and as being under heavy commitment to the Americans – firstly because of our disinclination to diminish the reserve role of our currency and consequent reliance on the dollar and secondly because of our defence links.50 He [President Pompidou] is convinced that the present status of sterling compels us, whether we like it or not, to keep closely in step, financially and therefore politically, with the Americans.51 Before the summit meeting between Heath and Pompidou, preparatory talks on the meeting were held among their personal staff at the Elysée on 15 May 1971.52 The French representatives asked for a specific mechanism to reduce the sterling balances, and emphasised that a mere declaration of intent by the British government was not enough. The preparation of briefs for the Prime Minister in London went side by side with the preliminary talks in Paris. The list of briefs included: the role of the enlarged community in the world; the functioning of

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the Community and its institutions; the future of sterling; the future of the French language; and four outstanding negotiating issues.53 The ‘future of sterling’ offered detailed guidance for the Prime Minister on the line to be taken in his ‘tête-à-tête’ with President Pompidou.54 The main obstacle to the reduction of the sterling balances was that it would be a heavy burden on the balance of payments. A numerical target was not acceptable. However, if it was necessary to run down the balances, there were two options: one was to reduce the amount of the balances covered by the dollar guarantee of the British government, and another was to reduce the proportion of foreign reserves which the sterling area countries were obliged to own in sterling (the minimum sterling proportion). The brief recommended the second option, since it would be more effective in reducing the balances, and more acceptable for the countries in the sterling area. In the long run, the British government had already stated that it was not opposed to a ‘gradual and orderly’ rundown of the sterling balances. Provided that three conditions were satisfied, it would be possible to express this willingness to run down the balances in a stronger form. These conditions were: (1) it should avoid an unacceptable burden on the UK; (2) it should promote the healthy development of the international monetary system; and (3) it should protect the interests of the sterling holders. On the discrimination over capital movement against the EEC in favour of the developed Commonwealth, the Treasury brief advised the Prime Minister that the British position did not breach the provisions of the Treaty of Rome, and that he should take a firm stand against President Pompidou. The discrimination could be removed, either by abolishing restriction on capital movement to the EEC or imposing exchange control on transactions with the sterling area. Yet while the former option would cost £100 million in terms of the balance of payments, the latter would make it almost impossible for the British government to renew the sterling agreements. (The freedom of capital movement from Britain was the main reason why the sterling area countries continued to hold the pound.) It is noteworthy that the Treasury also prepared one passage entitled ‘Dollar Imperialism’ which was inserted into the brief on the role of the enlarged Community in the world.55 This was originally the idea of the Foreign Office and the Cabinet Office. The political purpose of the paper was to impress the French President with how ‘European’ the position of the British government was on the issue of international monetary reform. The brief pointed out that the fundamental problem

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of the international monetary system was the fact that the US dollar was used as a reserve currency, but was weak. The United States was unique in the sense that, since the scale of her economy was large and did not depend on international trade as much as did those of the European countries, the level of the exchange rate did not work as a mechanism of external discipline over her economic management. The US administration had, however, to take responsibility for the wider world. Britain, alongside France, supported the maintenance of the Bretton Woods regime and, if a floating rate were to be adopted in case of emergency, this would be only a temporary measure. The background to this brief was the dollar crisis in early May and the schism within the EEC caused by this crisis. The weakness of the US dollar in the foreign exchange market triggered a large-scale inflow of international capital to the Deutschmark. To maintain the exchange rate between the Deutschmark and the US dollar, the Bundesbank had to accept large amounts of dollars. Yet this policy had undesirable effects on the level of inflation, which was already alarmingly high by the standards of post-war Germany. Therefore, Bonn decided to float the mark. Karl Schiller, German Finance Minister, proposed a joint float of European currencies against the US dollar during the emergency meeting of the Council of Ministers on 8 May. However, the French rejected this proposal out of hand and, as a result, the Deutschmark floated unilaterally. Only the Dutch guilder followed suit. EMU and cooperation on exchange rates had to be suspended.56 The incident clearly showed that French support for EMU presupposed the existence of a fixed exchange rate system at the global level. The French complained that the Germans had sacrificed the solidarity of the EEC for the sake of their own domestic interests. Giscard d’Estaing warned that the French government would not take part in any discussion on EMU, as long as any currency of the EEC was floating. On the following day, the French withdrew their representative from the committee established to discuss the progress of EMU.57 Under these circumstances, the British were trying to impress upon the French that their two countries had common interests in international monetary affairs against both the Americans, whose negligence of the dollar was undermining the Bretton Woods regime, and the Germans. Heath arrived in Paris on the afternoon of 19 May 1971 to conclude the business which he had begun ten years earlier as Britain’s chief negotiator with the EEC. After two days of the summit meeting, he and Pompidou attended a joint press conference in the Salle des Fêtes of the Elysée Palace (where de Gaulle had also held a press conference to

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announce the French veto over the first British application to the EEC in 1963). According to Heath’s memoirs, Pompidou concluded his statement at the press conference with the following remark: Many people believed that Great Britain was not and did not wish to become European, and that Britain wanted to enter the Community only so as to destroy it or to divert it from its objectives. Many people also thought that France was ready to use every pretext to place in the end a fresh veto on Britain’s entry. Well, ladies and gentleman, you see before you tonight two men who are convinced of the contrary.58 Unfortunately, however, Heath’s memoirs are not very helpful about the details of the deal struck between the two. It was publicly announced at the time that the British government agreed to stabilise and then run down the sterling balances in a gradual and orderly way after accession to the EEC, provided that the three conditions already mentioned were satisfied. When Heath reported on his meeting with Pompidou in the House of Commons, he explained that the task of finding the means to achieve this objective was entrusted to the British government, and he repeated the same explanation in his memoirs. There was a rumour at the time that a secret deal had been struck during the Anglo-French summit, but this was strongly denied by both the British government and Heath himself.59 The rumour spread partly because of the way in which this issue had been resolved during the meeting of the Council of Ministers in Brussels on 7 June. At the beginning of the meeting, Giscard d’Estaing asked whether the British side intended to make a statement on sterling, and, in reply, Rippon read a statement that: (1) We [the British government] should be prepared to envisage a gradual and orderly rundown of official public balances after our accession. (2) We should be ready to discuss after our entry what measures might be appropriate to achieve a progressive alignment of the external characteristics of, and practices in relation to, sterling with those of other currencies in the Community in the context of the progress towards economic and monetary union in the enlarged Community, and we are confident that official sterling balances could be handled in a way which would enable us to take our full part in that progress.

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(3) In the meantime we should manage our policies with a view to stabilising the official sterling balances in a way which would be consistent with these long-term objectives.60 Rippon’s statement did not refer to how these commitments could be achieved, as the French had previously demanded; yet, to the astonishment of the representatives of the other five member states and the European Commission, Giscard d’Estaing accepted his statement as satisfactory.61 The reality is that there was a secret deal on how the British government would handle the sterling balances. Heath agreed to stabilise the balances before accession to the EEC by reducing the minimum sterling proportion (paragraph 3 in the above statement). This could be done unilaterally by the British government without amending the Basle Agreement. There was, however, no numerical target for the reduction of the sterling balances after accession. Instead, in the renewal of the Basle Agreement and other sterling agreements, the scope of the balances covered by the dollar guarantee of the British government should be reduced at the annual rate of 5 per cent.62 The expression ‘the external characteristics of sterling’ in the second paragraph of Rippon’s statement actually referred to this point.63 The reduction of the dollar guarantee would destabilise the sterling balances. This was clearly what Pompidou intended; he expected that the deal would make Britain more inclined to participate in EMU after her accession to the EEC, especially if, in exchange, the rest of the EEC offered a new guarantee for sterling. In any case, as we have seen, the Treasury advised the Prime Minister to avoid a commitment of this kind. Therefore a telegram was sent by Soames from Paris at one o’clock in the afternoon of 21 May to the officials of the Treasury and Bank of England waiting in London, in which the ambassador asked them to send a reply by 3:30 including whether they had any objection to the deal.64 In the telegram, Soames explained that the French President was concerned about the percentage of the sterling balances guaranteed in the US dollar. The Prime Minister felt that he could resist this demand but, in exchange for the commitment, Britain could get a concession from the French on her financial contribution to the EEC budget. The author of this book has not been able to find any record of a reply sent by the officials, assuming such exists, in the National Archives. But it was likely that the Treasury was opposed to the deal. The second issue concerning sterling was the fact that Britain discriminated against the EEC in favour of the developed Commonwealth

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on international capital movement. This issue, however, was not raised by the French President during the Anglo-French summit. In the end, it was agreed between No.10 and the Elysée that Britain would steadily progress towards non-discrimination in capital movement over the transitional period. The word ‘practices’ in Rippon’s statement referred to this point.65 If exchange control was imposed on the sterling area and the freedom of capital movement from Britain was impaired, the sterling area countries would be less inclined to hold sterling. Therefore, this agreement also encouraged the British government to look for a way to deal with the sterling balances. As before, I conclude this section with an analysis of the relative importance of the five factors over the European policy of the British government during the period. (1) The special relationship with the United States and (2) the legacies of the Empire The dollar crisis of May 1971, with increasing tension between Paris and Bonn, helped improve the Anglo-French relationship.66 The French asked the British government for a promise to reduce the dollar guarantee offered to the sterling holders, as a condition of accepting Britain into the EEC. They hoped that, by cutting the bond between sterling and the US dollar, Britain could behave more like a European state in international monetary affairs in the future. It is important to note that, in the end, the French did not demand from Britain the reduction of the sterling balances itself as much as the termination of her financial dependency on the United States. Yet the sterling balances would become unstable if both the dollar guarantee and the privileged status of the sterling holders in terms of capital movement were gradually phased out. The French President expected that, if a European solution to the sterling balances could be found after Britain’s entry into the EEC, this would offer incentives for Britain to participate in EMU. Heath, who was from the beginning sceptical about the utility of the Basle Agreement, overcame the resistance of the Treasury and accepted the deal. There was no objection to the deal struck between the two, when it was reported to the British Cabinet by the Prime Minister.67 (3) Economic considerations However, there was uncertainty about how the sterling balances could be dealt with after Britain entered the EEC. The sterling balances could be run down either as a part of the reform of the international monetary system or within the framework of EMU. In the former case, international

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agreement was necessary on the type of assets to which sterling holders could shift their reserves. If the second route were to be taken, it was unclear what kind of help would be available from the rest of the EEC for the British government to finance the burden of reducing the sterling balances. Without adequate international arrangements, a rundown of the sterling balances could be too heavy a burden on Britain’s balance of payments. Therefore, there remained the possibility that the balance of payments could become a major obstacle to Britain joining EMU. (4) National sovereignty and (5) the characteristics of the national party system The Werner Report, with all its federalist ambitions, attracted fierce criticism from the opponents of Britain’s entry into the EEC, especially from the left wing of the Labour Party. Peter Shore, for example, described the recommendation made by the report as the surrender of national economic self-determination.68 The government was afraid that EMU might become the central issue during the debate on the British membership of the EEC.69 However, a number of factors prevented this. First of all, the EEC was divided on the later stage of EMU, and it was unclear whether EMU would be really achieved by 1980, as the report had envisaged. Secondly, if Britain joined the EEC in 1973, the British government could exercise influence, including a veto, over the development of EMU. Thus EMU could have reinforced the position that Britain should join the EEC before integration made any progress in the new field.70 The final factor which prevented EMU from emerging as a politically controversial subject was the fact that bipartisanship was maintained on the issue at the time. For instance, when the role of sterling was debated in the House of Commons in late January 1971, the leadership of both main political parties took pains to avoid a division.71 However, the position of the leadership of the Labour Party on EEC membership began to waver in May. The party eventually decided to oppose the terms of entry into the EEC negotiated by the government. How the collapse of bipartisanship changed European policy of the British government will be our subject in the next section.

3. The collapse of bipartisan policy on the EEC and its consequences As we saw in the last section, the British government had successfully reached a settlement with the EEC on the main subjects of the entry negotiation by June 1971. After that the focus of attention both inside

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and outside the United Kingdom had moved to whether the House of Commons would approve the principle of Britain’s entry into the EEC and pass the enabling legislation necessary to give EEC membership effect in domestic law. The government published a White Paper in July, which was debated by the House of Commons without a division. Then, in October, the House of Commons held the so-called ‘Great Debate’ on Britain’s entry into the EEC, which lasted for no less than six days. Since the division of opinion over the issue cut across political parties, both the government and the leadership of the opposition struggled to maintain party unity. The Labour Party, which had so far supported Britain’s membership of the EEC in principle provided that acceptable terms could be negotiated, decided to oppose the terms of entry negotiated by the government. At the end of the debate, the House of Commons approved ‘Her Majesty’s Government’s decision of principle to join the European Communities on the basis of the arrangements which have been negotiated’ by a vote of 356 Ayes to 244 Noes, a majority of 112. Thirty-three Conservative MPs and 69 Labour MPs voted against the policy of their own parties. Two Conservative and 20 Labour MPs abstained. The stance of the opposition leadership signalled the end of bipartisan policy towards the EEC, which had been maintained since the application of the previous Labour government to the EEC in 1967. The collapse of bipartisanship on EEC membership is of supreme importance for our research, because, without broad domestic support, it was impossible for the Heath government to pursue a European policy that it adjudged beneficial but included the loss of national sovereignty, such as EMU. Therefore, we need to extend the scope of our research to political debates on EEC membership in general, instead of limiting our attention to EMU. In the following section we examine the division of opinion on Britain’s entry into the EEC within the House of Commons, which cut across the boundaries between the two main political parties. The members of the House of Commons will be classified into four categories: anti-European Conservative MPs; pro-European Conservative MPs; pro-European Labour MPs; and anti-European Labour MPs. We will then investigate what kinds of factors were most important for each group of MPs in coming to a decision. For this purpose, we analyse the content of the speeches made by MPs in each group during the two parliamentary debates in July and October 1971. Particular attention is paid to the relative importance of the four factors mentioned in Chapter 1: (1) the special relationship with the United States; (2) the legacies of the British Empire; (3) economic considerations; and (4) the importance attached to national sovereignty. Our analysis reveals that pro-European MPs within the two main political

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parties had broadly similar views on the issue, with the Labour Marketeers being less hesitant on the sharing of national sovereignty. The parliamentary debate, however, did not take place in a political vacuum. In the British political system, the terms of political debate are largely determined by the position of the main political parties, especially their leadership. It was here that our last explanatory variable, (5) the characteristics of the national party system, played a central role. Britain’s party system, by setting so much store on the maintenance of party unity, prevented cooperation of pro-European MPs across the party boundary. Our main task, therefore, is to examine the impact of party politics over parliamentary debates on EEC membership, and to consider how the collapse of bipartisanship affected the future direction of Britain’s policy towards EMU. First of all, the fact that the Labour Party supported Britain’s entry into the EEC in principle, but opposed the terms negotiated by the government, restricted the scope of the parliamentary debate between the two frontbenches largely to the terms of entry and their implications. Thus, little consideration was given by the leadership of both main political parties to more fundamental questions. The most notable example of these neglected questions was of course whether Britain’s entry into the EEC was really desirable in the first place. Moreover, the consequences of EEC membership that were not directly related to the terms of entry, including EMU and also the constitutional changes brought about by participation in a supranational institution like the EEC, did not attract much attention either.72 If the leadership of the Labour Party had supported Britain’s entry into the EEC or had clearly come out against entry in principle, the House of Commons could have had a genuine debate between the proponents and opponents of entry on these issues. The second question is how the collapse of bipartisanship limited the scope of the European policy that the government could pursue in the future. The immediate effect was that the government had to conduct its European diplomacy without broad domestic support. After the general election of June 1970, the number of Conservative Eurosceptic MPs was larger than the majority of the government in the House of Commons. Under these circumstances, it was difficult for the government to secure parliamentary support for its European policy without cooperation from the opposition parties. In fact, the government was able to win the vote of the House of Commons on the principle of Britain’s entry into the EEC on 28 October 1971 only because of support from 69 pro-European Labour MPs (and the abstention of another 20). Most of these Labour MPs, however, were unwilling to support the

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government after the October vote. As a result, the government had real difficulty in mobilising domestic support for its European policy. The government could emphasise the political merits of EEC membership and openly admit a certain loss of national sovereignty by building up a lasting political coalition on the issue with the Labour Marketeers across the party boundary. As we will see later, the proEuropean Labour MPs raised political merits more often than they did economic benefits as reasons for supporting Britain’s entry into the EEC. Indeed, most of them were prepared to accept the sharing of national sovereignty. The collapse of bipartisanship, however, denied the government the opportunity to pursue a European policy that it adjudged beneficial for Britain but which would have included the loss of national sovereignty. As we will see in the next chapter, EMU was exactly such a policy. The structure of the rest of the section is as follows. First, we will trace the process of policy change inside the Labour Party, since it was the stance of the opposition that had precipitated the collapse of bipartisan policy towards the EEC. The changing attitude of the Labour Party can be best explained as an effort of the party leadership to maintain party unity. During the intra-party struggle, Britain’s political institutions worked in favour of the opponents of EEC membership. Next, we will examine the content of the White Paper that the government published in July, and will try to explain why the government failed to offer important information about the economic and political consequences of EEC membership in presenting its case for entry into the EEC. Our hypothesis is that the government was able to emphasise the political merit of EEC membership and admit the transfer of sovereignty involved, by building up a broad political coalition with the pro-European Labour MPs. However, the possibility of such a coalition ended with the collapse of bipartisanship. Henceforth the terms of the parliamentary debates were obscured, and the government’s freedom of action was curtailed. Finally, we will demonstrate the above hypotheses through an analysis of the two parliamentary debates in July and October 1971.

The changing attitudes of the Labour Party There were two different ways for the government and opposition to cooperate on EEC membership. First, bipartisanship could be achieved if the leadership of the Labour Party was prepared to support the government on the issue. Alternatively, both sides could declare a free vote

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and allow their backbenchers to vote according to individual opinion. At the end of the day, neither option was taken. In this section, we first of all analyse the reason why the Labour Party decided to oppose the terms of entry into the EEC, instead of supporting the government or coming out clearly against the EEC membership in principle. We will then explain why the option of a free vote was rejected and the PLP imposed a three-line whip for the vote on Britain’s entry on 28 October 1971. These two decisions by the Labour Party shattered the possibility of continuing cooperation between the government and opposition on the issue. The changing attitudes of the Labour Party can be best explained as an effort by the party leadership to maintain party unity, regardless of the substance of the issue. On the one hand, by supporting EEC membership in principle, the party leadership tried to appease the proEuropean section of the party. On the other, by criticising the terms negotiated by the government, it tried to deflect the demand of the anti-Marketeers that the party should clearly come out against EEC membership. This conclusion is backed up by the fact that, as we will see later, the overwhelming majority of the Labour MPs who voted against Britain’s entry into the EEC opposed EEC membership in principle, and not just the terms thereof. Most importantly, in maintaining party unity, Britain’s political institutions worked in favour of the opponents of EEC membership. If there had been no such bias and the Labour MPs had been able to express their opinion freely, a greater number of Labour MPs would have voted for the principle of entry into the EEC than the actual number of 69. How, then, did the institutional framework of British party politics strengthen the position of Eurosceptics inside the Labour Party? First of all, in the context of British party politics, inter-party struggle over public office takes precedence over policy-based cooperation across political parties.73 The government monopolises decision-making power and opposition parties do not have much share in it. The priority of the main political parties therefore becomes to win a general election and form a government. Under these conditions, when a government can be defeated on a particular political issue, it is regarded as betrayal if opposition MPs vote with the government and help its survival. In other words, precisely at the moment when bipartisanship is most needed by the government, the British political system gives advantage to political forces opposing bipartisanship. Britain’s membership of the EEC was exactly such an issue. The second point is related to the internal structure of the Labour Party. According to the constitution of the Labour Party, the party con-

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ference and the NEC retain a higher status than does the parliamentary party as a decision-making organ of the party. These extra-parliamentary party organisations were dominated by party activists and the trade unionists, who were overwhelmingly hostile to EEC membership. As a result, during the intra-party strife over the issue, Eurosceptic Labour politicians could take advantage of their superiority within the party organisations outside Parliament. Bearing these factors in mind, our next task is to trace the process of policy change inside the Labour Party. From the very beginning of the 1970–74 Parliament, Harold Wilson was preoccupied with the maintenance of party unity on the issue. He had tried hard to postpone argument over the issue both inside the Shadow Cabinet (the Parliamentary Committee) and the PLP until the terms of entry were known.74 The unintended result of this approach, however, was that both antiMarketeers and pro-Europeans within the party resorted to more public methods to express their opinion. In January 1971, an EDM that virtually opposed entry on any terms was submitted to the House of Commons and attracted the signatures of around 130 backbench Labour MPs. Pro-European Labour MPs launched a counterattack by publishing a one-page advertisement in The Guardian on 10 May, which read: ‘We, the undersigned Parliamentarians, are convinced that the causes of social democracy, world peace and economic advance in both developed and developing countries would be strengthened by the addition of the United Kingdom, Norway, Denmark and Ireland to the European Economic Community.’75 The number of Labour MP signatories to the advertisement reached 100, including eight members of the Shadow Cabinet and 23 frontbench speakers. A number of the leaders in the continental social democratic parties, such as Willy Brandt and François Mitterrand, added their names. Because support for entry into the EEC was stronger among the members of the Shadow Cabinet than among the backbenchers, the position of the party leadership was crucial in deciding party policy.76 However, after the Paris meeting between Heath and Pompidou in late May, a number of Labour frontbenchers began to change their stance away from that which they had supported in office. The solidarity of the moderate part of the Labour Party broke down over the issue, giving rise to the superiority of the left wing within the party.77 It was James Callaghan who triggered off this process shortly after the successful conclusion of the Anglo-French summit. In delivering his campaign speech during the by-election in Southampton, he famously remarked, in response to the BBC Panorama interview with Pompidou

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before the summit, ‘Millions of people in Britain … have been surprised to hear that the language of Chaucer, Shakespeare and Milton must in future be regarded as an American import from which we must protect ourselves if we are to build a new Europe.’78 This speech was widely interpreted as a leadership bid against Wilson, and pro-European Labour MPs later claimed that Wilson’s attitudes towards the terms of entry negotiated by the government hardened as a result of Callaghan’s speech.79 Denis Healey made a so-called ‘somersault’ on the issue. Healey had been known originally to be sceptical about the merits of EEC membership. Accordingly, he would have had little difficulty if he had maintained this stance intact. However, he not only signed his name to the advertisement in The Guardian, but also contributed a pro-European article to the Daily Mirror on 26 May, in which he explained why he had changed his mind on this issue.80 He changed his mind back again in June amid the intensified intra-party conflict and became the focus of criticism from pro-European MPs and the press. During the intra-party strife on the European issue, anti-Marketeers tried to seize power by taking advantage of their superiority in the extra-parliamentary party organisations. For some time, Tony Benn demanded a special party conference on Britain’s entry into the EEC before Parliament debated the issue. During the meeting of the NEC on 23 July, a motion proposed by Barbara Castle calling for a special conference was carried by 13 to 11, despite fierce resistance from the proEuropean members of the committee led by Jenkins.81 The special conference was accordingly held on 17 July. Due to Wilson’s initiative, the special conference only took note of the statement issued by the NEC on EEC membership, without making a formal decision on party policy as Benn had demanded. However, the numerical superiority of anti-Marketeers within the wider party and Labour movement became abundantly clear.82 The pro-European Labour frontbenchers could speak freely during the parliamentary debate in July, because officially the party had not made a decision on Britain’s entry into the EEC. Yet the situation changed immediately after the debate for, during the meeting of 28 July, the NEC adopted a motion opposing entry into the EEC on the terms negotiated by the government.83 Wilson subsequently issued a statement that to speak publicly in favour of Britain’s entry into the EEC on the government’s terms would be incompatible with the obligations of Labour frontbenchers.84 The decision of the NEC was then overwhelmingly upheld by the party conference in October.85 Thus the Labour Marketeers lost the crucial battle.

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Our second question asks why the Labour Party did not allow a free vote on the division of 28 October 1971. It was widely argued at the time that a free vote was the best way for Parliament to reach a decision on Britain’s entry into the EEC, when both main political parties were internally divided on the issue. Indeed, a free vote was very popular among the general public.86 Obviously, a free vote would have made it possible for pro-European Labour MPs to support EEC membership without being accused of voting against their own party. This would not only have increased the number of Labour MPs voting for EEC membership, but would also have given legitimacy to such cross-party cooperation on the European issue. By contrast, if the Labour Marketeers were deemed to have acted against the interest of the party in voting with the government for EEC membership, it would be much more difficult for them to maintain cooperation with the government in the long run. At the beginning of the year, Wilson intended to allow a free vote even if the Labour Party decided against EEC membership. The chief whip of the party, Robert Mellish, assured the Labour Marketeers that a three-line whip could be imposed only ‘over his dead body’.87 What changed the situation? One important factor was the government’s position. There was discussion within the government on whether a free vote should be accepted on the Conservative side. Francis Pym, Government Chief Whip, and William Whitelaw, Lord President of the Privy Council, had argued for a free vote since July, on the grounds that this was the best way to secure maximum support for EEC membership in the House of the Commons. However, the Prime Minister was not convinced by their arguments. Heath later recalled that he and Douglas-Home, Foreign Secretary, attached great importance to the fact that the motion on Britain’s entry into the EEC would be carried with the support of the government backbenchers in the lobby. The government seemed to be afraid of the possibility that, even if it allowed a free vote for the Conservative Party, the opposition would not follow the same course.88 In this case, a free vote on the Conservative side would reduce support for the motion. On 5 October, Pym sent a ‘private and personal note’ to Heath detailing the number of rebels on each side and giving a summary of the reasons why the government should risk a free vote on an issue of such great importance.89 He estimated the number of Conservative dissidents in the division as somewhere between 30 and 45. On this analysis, the division could not be won without some Labour votes and/or abstentions. On the Conservative side, he argued, whether

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the Prime Minister had a three-line whip or a free vote, the result would be almost exactly the same. But if the Labour Party followed suit, it was difficult to believe their pros would have a smaller voting strength than 45, and this would be more likely to be 75. Pym and Whitelaw finally persuaded the Prime Minister, and Heath eventually issued a statement on 18 October that the government side would have a free vote. The timing of the announcement was intended to be in time for the meeting of the PLP on 19 October, which was due to decide party policy for the vote on EEC membership and whether a whip would be imposed on Labour MPs. The meetings of the Shadow Cabinet held on 18 October, however, not only recommended that the PLP vote against Britain’s entry into the EEC on the terms negotiated, but also rejected a free vote on the Labour side.90 The meeting of the PLP next day carried the recommendation of the Shadow Cabinet by 159 to 89. Then the motion proposed by William Hamilton, a pro-European MP, which asked the PLP to allow a free vote, was defeated by 140–111.91 There is no convincing analysis of why the leadership of the Labour Party refused to allow the PLP a free vote on Britain’s entry into the EEC. It seems that Wilson interpreted the government’s decision on a free vote as a deliberate partisan tactic to expose the internal division of the Labour Party on the issue.92 He did not allow the opposition a free vote because he feared that his efforts so far to maintain party unity would come to nothing if he did so. David Owen later insisted that, had the government declared a free vote for the Conservatives in July, the Labour Party would have had no alternative but to follow suit, and consequently a larger number of Labour MPs would have supported Britain’s entry into the EEC at the parliamentary division in October.93 There is no evidence that the intention of the government in allowing the Conservative Party a free vote was to expose the division within the opposition on the issue, as Wilson suspected. Francis Pym’s note sent to the Prime Minister rather suggests that a free vote was a last resort to secure a majority within the House of Commons in favour of British membership of the EEC. This analysis leads us to the following observation. Heath and Wilson had actually more in common than is generally understood (above all, by themselves). First of all, both hoped to secure a place for Britain inside the EEC. In hindsight it is highly unlikely that Wilson actually wanted to defeat the government on the vote of 28 October 1971.94 Secondly, they both tried to attain the above purpose without causing too much damage to the unity of their own parties. These two objectives could be achieved if both sides declared a free vote at an early

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stage. In this sense, both Heath and Wilson had common interests on this issue. The problem was that each leader suspected that his rival was trying to obtain party political benefits from the situation. Heath believed that Wilson’s opposition to Britain’s entry into the EEC was very opportunistic and based on the calculation of short-term party political interests.95 Consequently, the government spent the whole summer trying to persuade its own backbenchers. Wilson, for his part, misinterpreted the intention of the government in proposing a free vote. After having sacrificed almost all of his personal reputation for the sake of party unity, he must have found it difficult to concede a free vote in the last stage. In a political system characterised by a highly competitive relationship between political parties, it is very difficult for the government and opposition to cooperate, even for mutual gain. Hence the government declared a free vote too late and the opposition did not follow suit.

The publication of the government’s White Paper Analysis of the White Paper published by the government and of the parliamentary debates held in July and October, however, reveals that cooperation between the government and opposition was necessary for Britain to have a constructive debate and pursue a coherent European policy. At the beginning of July the government published a White Paper on Britain’s membership of the EEC.96 The result of the absence of bipartisanship can be measured by looking at the way in which the government presented its case for entry into the EEC. The manner of presentation reflected the nature of the political coalition that the government was trying to build up in support of its policy. In this case, due to the lack of bipartisanship, the government was uncertain of how many pro-European Labour MPs were prepared to support EEC membership in the House of Commons. As a result, it was necessary for the government to woo the sceptical voices inside the Conservative Party. However, the fact that the government relied on the support of sceptics in its own rank constrained the direction of European policy that it would be able to pursue in the future. The government’s case for Britain’s entry into the EEC was based on two grounds. First of all, the government argued that access to the larger market of EEC countries would bring about faster economic growth and a higher living standard. Secondly, with the EEC moving from economic integration to political unity, EEC membership would

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enable Britain to restore the worldwide influence she had lost with the demise of the British Empire. The way the Heath government presented its case for Britain’s entry into the EEC made a sharp contrast with that of its predecessor. The Wilson administration rested its case on the political merits of EEC membership, arguing that the economic costs and benefits of entry were evenly balanced.97 This change of emphasis is remarkable, since the cost of entry was much higher in 1971 than in 1967, due to the introduction of the new system for financing the CAP. This White Paper has been widely criticised for a lack of information on the economic and political consequences of Britain’s entry into the EEC. This criticism of the White Paper is not without justification. First of all, although the government based its case for entry on the economic benefits accruing from access to the larger market of EEC countries, the White Paper did not offer a detailed economic analysis of the cost and benefits of EEC membership. This omission was understandable on the benefit side: EEC membership was expected to offer an opportunity of export-led economic growth, but this so-called dynamic effect of membership could not be quantified. Omission from the White Paper of the detailed cost of entry as regards the balance of payments, however, was more difficult to justify. Entry into the EEC was expected to add a burden to the balance of payments, in many ways. The government estimated that Britain’s financial contribution to the EEC, the increased price of imported food due to the CAP, the adverse effect of changing the trade pattern, and easing of restrictions on capital movement between Britain and the rest of the EEC would amount to a burden of up to £500 million in the balance of payments at the end of the transitional period. These figures were actually included in the original draft of the White Paper. However, the Cabinet meeting held on 1 July decided to omit the detailed economic cost of entry from the White Paper.98 As a result, the concrete figures were removed from the published White Paper on the effect of tariff change over trading balance and the net cost of the financial contribution after the transition period. Instead, during the parliamentary debate, the government insisted that these costs of entry could not be quantified.99 The White Paper was also equivocal on the question of sovereignty and other political implications of EEC membership. The government argued that Britain inside the EEC could exercise a larger international influence than it could by staying outside. In the commercial field, the White Paper emphasised the fact that, as the world’s largest importer, the EEC was very influential in international negotiations on trade.

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With the political development of Europe, the EEC would change from a purely economic community to a politically unified actor in world affairs. After the Second World War, it was the United States that had guaranteed the security of Western Europe within the framework of NATO. However, because the United States was increasingly suffering from the economic burden of her worldwide commitment, European countries should accept a larger share of responsibility in their own defence. When the EEC countries conferred about the security question, it was essential for Britain to be part of the proceedings. It was argued that only by uniting could Britain and Europe keep a balance between the superpowers and contribute to the maintenance of world peace. This being so, the White Paper kept silent on the precise meaning of political cooperation within the EEC. Nor was the White Paper clear about the degree of national sovereignty which would be transferred to European institutions and shared with other members of the EEC. On sovereignty, the White Paper only made a vague assertion that there would not be ‘any erosion of essential national sovereignty’. There was no reference to the fact that the European law adopted by the Council of Ministers would be directly applicable in the UK and have superiority over domestic law. There is no better testimony to these problems in the White Paper than the fact that the Prime Minister was personally dissatisfied with its quality. Indeed, Heath went so far as to propose the publication of a second White Paper during the summer recess.100 There was also talk about the possibility of publishing a separate White Paper on the constitutional and institutional implications of EEC membership. However, the Prime Minister was opposed by Rippon and Whitelaw, on the grounds that the publication of another White Paper would be tantamount to an admission that the government was dissatisfied with the first. Rippon, in particular, was afraid that new information could change the terms of political debate on EEC membership. Heath grudgingly acquiesced to the advice of his colleagues.101 The government made these important omissions from the White Paper in order to maintain party unity. The government had to emphasise the economic case for entry into the EEC, since this appealed across a wide spectrum of opinion within the Conservative Party.102 Hence the economic cost of entry was left ambiguous. By contrast, the political aspects of EEC membership were more problematic and controversial. While the Conservative Party welcomed the prospect of the recovery of Britain’s worldwide influence, there were a considerable number of MPs

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concerned with the possible loss of national sovereignty. Therefore, the government remained equivocal on the precise meaning of political unity and the degree of national sovereignty which should be sacrificed to achieve it. Had the government stated clearly the political and constitutional consequences of EEC membership and acknowledged the loss of national sovereignty, it would certainly have alienated a number of its own supporters in Parliament. If, however, Britain was not prepared for transfer of sovereignty to the European institutions and thus a sharing of national sovereignty with other EEC members, how could she enjoy the full benefits of EEC membership and obtain greater international influence? Is it not, after all, the case that even the functioning of the Common Market requires the existence of a political authority at the Community level?103 The government could emphasise the political merits of EEC membership and openly admit a certain loss of national sovereignty, by building up a broad political coalition with the Labour Marketeers across the party boundary. To demonstrate the last point, we move to an analysis of the parliamentary debates.

The parliamentary debates on Britain’s entry into the EEC To analyse the content of the parliamentary debates, we first of all classify MPs into four groups: anti-European Conservative MPs; pro-European Conservative MPs; pro-European Labour MPs; and anti-European Labour MPs.104 Next, we investigate what kind of factors were the most important for each group of MPs in making their decision concerning Britain’s entry into the EEC. In total, 231 MPs made speeches during the parliamentary debates in July and October 1971. In the case of MPs who spoke both in July and October, to avoid a double count only the October speeches will be included in our analysis. To give a breakdown of the speakers, there were 85 pro-European Conservative MPs, 29 antiEuropean Conservative MPs, 52 pro-European Labour MPs and 65 antiEuropean Labour MPs. Throughout this section, we have made three arguments about the cause and effect of the collapse of bipartisanship on EEC membership, and can now see whether they can be supported by evidence. We first of all argued that the Labour Party changed its stance towards EEC membership to keep party unity, regardless of the substance of the issue. In other words, the structure of the parliamentary debate, in which the frontbench of the government and opposition contested the terms of entry into the EEC, was artificially created by the party

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system. This is clearly supported by our analysis of the parliamentary debates. In reality, the House of Commons was divided on the principle, not the terms, of EEC membership. Of all Labour MPs who made it clear why they were opposed to Britain’s entry into the EEC, no less than four-fifths declared that they were opposed to EEC membership in principle. By contrast, only one-fifth, mostly the frontbench speakers, opposed the motion because of the terms negotiated by the government.105 Our second argument is that, because of the stance of the Labour Party, little consideration was given by the leadership of both the government and opposition to more fundamental questions than the terms, such as EMU. Here, only a casual glance at Hansard is sufficient for one to recognise that the frontbench speakers took a disproportionately long time to debate the terms of entry and the economic aspects of EEC membership. Moreover, whenever the Labour frontbenchers raised the issues concerned with the principle of entry, the government spokesmen could easily counter their arguments by pointing out that these contradicted the Labour Party’s official policy, or that the previous Labour government had accepted these aspects of the EEC when they applied in 1967.106 Of all 11 government spokesmen, few mentioned the word ‘sovereignty’. Geoffrey Rippon used the word only in order to say that there was no loss of sovereignty because the British government would have a veto over matters concerning vital national interests. Heath rather vaguely stated that entry into the EEC was a ‘commitment involving sovereignty’, without further explanation.107 If the Labour Party had clearly come out against the principle of entry into the EEC, or the leadership of the party had decided to support the government, the parliamentary debates would have centred on the principle, and not the terms, of EEC membership. In such a case, the government would have been required to give a more convincing explanation on the transfer of national sovereignty involved as a result of Britain’s entry into the EEC. Last but not least, we contend that, by building up a broad political coalition with the Labour Marketeers across the party boundary, the government could emphasise the political merits of EEC membership and openly admit a certain loss of national sovereignty. This thesis can be demonstrated by looking at the differences between the proEuropean Conservative and Labour MPs in their attitude towards the potential loss of national sovereignty involved in EEC membership. It is also necessary to show that there was no substantial disagreement between pro-European Conservative and Labour MPs on other aspects

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of EEC membership. For this purpose, we will check the number of references made by MPs to the four factors formulated as possible explanations for Britain’s policy towards European integration in Chapter 1. By doing so, we can survey what kinds of factors were important for MPs in making their decision regarding EEC membership, and whether there were significant differences between the groups. (1) The special relationship with the United States The relationship with the United States was of minor importance during the parliamentary debate. Only around 10 per cent of Conservative and Labour anti-Marketeers expressed the fear that, as a result of Britain’s entry into the EEC, the relationship with the United States might become remote. At the same time, within the pro-European groups, one-third of Conservative and one-fifth of Labour MPs hoped that Britain’s entry into the EEC would help Britain and Europe maintain their influence in the world, which was increasingly dominated by the superpowers. (2) The Commonwealth By contrast, the Commonwealth was one of the subjects most frequently mentioned by both sides throughout the debate. Two-fifths of the Conservative anti-Marketeers stated that they opposed EEC membership because it would weaken the ties with the Commonwealth. One-third of their Labour counterparts also mentioned the Commonwealth in their speeches. The main difference between the Conservative and Labour antis, however, was the fact that the latter were more concerned with the damage to New Zealand and the sugar producers of the Commonwealth, not to Britain. The importance of the Commonwealth is also shown by the fact that one-third of the Conservative and one-fifth of the Labour supporters of EEC membership referred to the Commonwealth during the debate. Most of them, however, argued that the character of the Commonwealth had changed since the Second World War, and that the Commonwealth could no longer be the basis for Britain to achieve economic prosperity and maintain political influence in the world. One-third regarded the terms of entry as good enough to secure the interests of the Commonwealth countries. (3) Economic considerations No factor was more frequently mentioned as a merit of EEC membership than economic benefits. More than half of the pro-European Conservative MPs and three-fifths of the pro-European Labour MPs

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mentioned the prospect of faster economic growth as a reason to support Britain’s entry into the EEC. By contrast, the opponents of entry countered this argument by emphasising the cost of entry, which would become a burden on the balance of payments. More than one-third of the Conservative anti-European MPs and more than half of their Labour counterparts criticised the CAP and the consequent rise in food prices. A quarter of the Labour anti-European MPs were also concerned with VAT, which the government would have to introduce as a result of EEC membership. For the Labour anti-Marketeers, the EEC was nothing but a capitalist club. More than two-fifths of the Labour anti-European MPs held the pessimistic view that EEC membership would have negative effects on the regions. This concern with regional development was not shared by their Conservative counterparts: only one-tenth of them referred to regional problems in their speeches. There were more similarities between the pro-European Conservative and Labour MPs. More than one-third of pro-European Conservative MPs and more than two-fifths of their Labour counterparts argued that regions would be better off inside the EEC rather than outside, mainly on the grounds that regions could prosper only if there was sufficient economic growth in the country. (4) National sovereignty The issue of national sovereignty was the topic which the opponents of entry into the EEC most frequently mentioned during the parliamentary debates. More than two-thirds of anti-European Conservative MPs referred to the issue during their speeches, and more than 90 per cent of them were opposed to EEC membership because of the loss of sovereignty involved. More than two-fifths of anti-European Labour MPs were also critical of the transfer of sovereignty away from Westminster. It might appear that there was a significant difference between these two groups, with the Labour anti-European MPs being much less concerned by the loss of national sovereignty.108 Yet this is not true, if we consider the fact that the Labour anti-European MPs consisted of two different groups, one opposed to entry in principle, and another opposed to the terms of entry. If we focus on the former, then in fact 70 per cent of them raised the issue of national sovereignty during the debate, and more than 90 per cent were against EEC membership because of the loss of sovereignty. The only difference between the Conservative and Labour anti-European MPs on the issue of sovereignty was that, while the former were primarily concerned with the loss of

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national or parliamentary sovereignty, the latter were also worried about the fact that sovereignty would be transferred to a non-democratic institution. A more important fact for our current research was that there was a considerable difference between pro-European Conservative and Labour MPs in their attitude towards sovereignty. To understand this, we survey the proportion of MPs in both groups who (1) positively characterised EEC membership as the sharing of sovereignty necessary to have effective control over one’s own destiny, (2) denied there was a loss of national sovereignty as a result of EEC membership, and (3) showed concern about the loss of sovereignty as a consequence of Britain’s entry into the EEC. Of all pro-European Conservative MPs who referred to the issue of sovereignty, around a half belonged to the first category, while one-third and one-sixth belonged to the second and the third groups respectively. On the Labour side, the same analysis shows that while four-fifths belonged to the first group, there was only one MP who was concerned with the loss of sovereignty. Pro-European Conservative MPs and their Labour counterparts also differed from each other with reference to the institution of the EEC. Of all pro-European Conservative MPs who mentioned the institution of the EEC, one-third positively characterised the existence of a veto as a safeguard of national interests. This attitude made for a sharp contrast with the approach of their Labour counterparts. Of all proEuropean Labour MPs who referred to the institution of the EEC, no one mentioned a veto as a bulwark of national interests. By contrast, half advocated cooperation with social democratic parties and labour movements on the Continent; the same number supported greater control of multinational companies through the EEC; and one-third of them pressed for the democratisation of the EEC. In other words, while a certain section of pro-European Conservative MPs clung to the model of a Europe of nations or a Europe of sovereign states, their Labour counterparts showed a strong inclination towards the model of a Europe of parties. To summarise, pro-European Labour MPs were keener on the sharing of sovereignty than were their Conservative counterparts. At the same time, these two groups shared much in common on the other three issues. Moreover, there were a number of Labour MPs who would have supported Britain’s entry into the EEC if the government had declared a free vote before the summer recess and the opposition had followed suit. It is reasonable to assume that at least half of the Labour MPs who actually abstained would have supported EEC membership if a free vote had been granted on the Labour side.109 These figures, and the

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actual majority of 112 on 28 October, were large enough to make for a possible breakaway of the Conservative dissenters from the government lobby. Therefore, it was not inconceivable for the government to press the political case for EEC membership and admit the loss of national sovereignty involved, if only it could build up a stable political coalition with the pro-European Labour MPs instead of appeasing its own backbenchers. It was the worst of both worlds that the leadership of the government and the opposition contested the terms of entry during the political debate on EEC membership. Public attention was deflected from questions more important than the terms. Most MPs who voted against Britain’s entry into the EEC on 28 October 1971 were opposed to the principle, not the terms, of EEC membership. In short, a debate on the terms of entry was artificially created, and did not reflect a real division of opinion on the issue in the House of Commons. At the same time, although Britain’s entry into the EEC was endorsed by the House of Commons with the support of the pro-European Labour MPs, in the long run the collapse of bipartisanship could not but harm the relationship between Britain and the rest of the EEC. This was particularly true in the policy area which was concerned with national sovereignty, such as EMU. The highly competitive nature of the British party system played no small part in the collapse of bipartisanship on the EEC. The division of opinion on EEC membership cut across the two main political parties. The Labour Party decided to oppose the terms of entry because this was the only way to maintain party unity. When there was the possibility that the government could be defeated on the issue, it would be regarded as a betrayal if the pro-European Labour MPs voted with the government and helped its survival. Hence cooperation across party boundaries could not be maintained on a long-term basis, despite the fact that the Conservative and Labour pro-European MPs had much in common.

Conclusion EMU, and how sterling could be accommodated in it, was the most important subject of the Anglo-French summit in May 1971, the success of which paved the way for Britain’s entry into the EEC. The deal struck between Heath and Pompidou suggested that from the viewpoint of international strategy, EMU might become attractive for the British government. EMU would simultaneously allow Britain to relinquish the past legacies of the Empire (i.e. the sterling balances) and reduce her financial and political dependency on the United States. Nonetheless, our analysis

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of the parliamentary debates leads us to expect that, as a result of the collapse of bipartisanship, the government would have to confront serious difficulty in mobilising domestic support for any European policy which constituted the loss of national sovereignty, such as EMU. In the next chapter, we will be able to confirm these findings by looking at how Britain responded when the EEC took its first steps towards EMU.

4 Britain and the EEC’s First Steps Towards EMU, 1971–74

Introduction In this chapter, we attempt to explain the development of British policy regarding EMU up to the fall of the Heath government in March 1974. The chapter will consist of three case studies of British policy. Firstly, the government’s reactions to the idea of a joint float of European currencies, mooted as a solution to the crisis of the international monetary system after the global fixed exchange rates were suspended by the Nixon shock of August 1971. Secondly, the early exit of sterling from the Snake, the first stage of EMU, which restarted in April 1972, the international monetary crisis having been temporarily solved by the Smithsonian Agreement. And thirdly, and most important of all, the decision not to take part in a joint Community float against the US dollar, which was launched in March 1973 as a response to the collapse of the Bretton Woods regime. The last case was the first step taken by the EEC towards the formation of a regional currency bloc, which culminated in the creation of the euro, a single currency, 30 years thereafter. The following pages analyse what kind of factor is most important as an explanation of British policy on EMU, including (1) the special relationship with the United States; (2) the legacies of the British Empire; (3) economic considerations; (4) attachment to national sovereignty; and (5) the characteristics of the national party system. The first two case studies will offer us the opportunity to investigate the impact of the two explanatory factors, the special relationship with the United States and economic considerations, on British policy towards EMU, respectively. These two factors changed significantly over the period covered by each case study. Therefore, if they really did have an impact on British policy towards EMU, we must be able to detect a noticeable 75

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discontinuity in the policy itself. This applied in the second case but not in the first. The final case study will enable us to reconfirm our previous findings on the relative importance of each explanatory factor in explaining British policy towards EMU. Overall, it was largely because of the following two factors that the Heath government was prevented from taking a full part in the first step of EMU. First of all, the weakness of the British economy, including high inflation and a balance of payments deficit, did not allow sterling to stay within the framework of European monetary cooperation. This fact was most clearly shown up by the early exit of sterling from the Snake in June 1972. The British government itself was at least partly to blame for the failure: at the beginning of 1972, the Heath government made a famous ‘U-turn’ in its management of the economy and began pursuing a policy primarily geared towards faster economic growth and lower unemployment. The government’s policy, however, had a negative impact on both inflation and the balance of payments situations. The situation was aggravated by external factors, namely, the dramatic rise of oil prices from the end of 1973, triggered by the crisis in the Middle East. Inflation ultimately destroyed the entire project of EMU. The French franc was forced to leave the Snake in January 1974. As a result, the Snake was confined to the German economic zone, including only the Deutschmark and the currencies of the Benelux and Scandinavian countries. In essence, the first attempt at EMU failed as much because of the incongruence of the economic policies pursued by the national governments as of outside events beyond their control. The failure of EMU also left unresolved the question of which country would bear the onus of adjustment of economic policy, were such an incongruence to occur again in the future. The success or failure of European monetary cooperation, however, depended not only on economic feasibility, but also on the political will of the actors concerned. The government could commit itself to European monetary cooperation even if economic conditions would not allow the project to survive for a long time. In the long run, as long as political will persisted, a new economic environment could reopen the way forward for the project of EMU. In this regard, among our main findings is the fact that the Heath government was keen to participate in a joint Community float, especially if this could be done in exchange for the underwriting of the sterling balances by the rest of the EEC. Cabinet ministers clearly recognised that participation in such a scheme represented the transfer of a significant portion of economic sovereignty to European institutions, but they were not deterred by

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this fact from making a decision which they believed would be beneficial for both Britain and Europe. However, they were concerned about the likely reaction from the Labour Party: they expected that the opposition would seize the opportunity to criticise government policy as a surrender of national sovereignty. This concern seems to be the most important factor in the government’s inability to reach a deal with the rest of the EEC and take part in a joint Community float. Before concluding the introduction, we shall briefly look at the content of each section of the chapter. The first section deals with the period between the so-called Nixon shock in August 1971 and the Smithsonian Agreement of December 1971, during which the global fixed exchange rates system was temporary suspended. It was during this crisis of the international monetary system that what we understand as a ‘European monetary system’ first emerged as a real policy alternative. In a European monetary system, the European currencies are pegged to each other, and float as a bloc against other currencies such as the US dollar and Japanese yen. (EMU is the ultimate example since within it the margin of fluctuation between participating currencies is reduced to zero and the national currencies can be replaced by a single currency.) This was called a joint European or joint Community float at the time. West Germany had originally advocated this option during the crisis of May 1971. However, the French were adamantly opposed to the idea. French support for EMU presupposed that the international monetary system would continue to be based on stable exchange rates. The Franco-German difference prevented a joint European float against the US dollar on this occasion. The French took the initiative in the Smithsonian Agreement, which temporarily eased the monetary crisis by widening the margin of exchange rate fluctuation with the dollar to ±2.25 per cent (it was ±4.5 per cent between European currencies). The restoration of fixed exchange rates to the international monetary system made possible the progress of EMU in 1972, which will be the subject of our second section. Since the beginning of the year, the Heath government had begun a ‘U-turn’ in its economic management, and the effect of the change was immediately felt on its policy towards EMU. The first stage of EMU, the Snake, in which the width of the fluctuation of the exchange rates between the participating currencies was limited to ±2.25 per cent, officially started in April. This was called ‘the Snake in the tunnel’, since European currencies (the Snake) as a bloc rose and fell inside the tunnel of the US dollar. However, as early as June, sterling came under heavy pressure in the foreign exchange market and was forced to leave the Snake. The crisis was caused by the government’s

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economic policy, namely the budget, which aimed at faster economic growth and was incompatible with the maintenance of the fixed exchange rate of sterling. This incident had very important political implications for the British government, because the French might have insisted on postponing the enlargement of the EEC if sterling did not return to the Snake before 1 January 1973, the official date of British entry into the EEC. Therefore, the British government, especially the Prime Minister, tried hard to bring sterling back into the Snake as soon as possible. The government acknowledged that the containment of inflation was a prerequisite for doing so, but at the same time did not abandon its commitment to high economic growth and full employment. It was in order to achieve this nearly impossible task of pursuing faster economic growth and full employment while avoiding the danger of inflation that the government introduced its statutory incomes policy in November 1972. Sterling’s ability to return to the Snake depended heavily on its success. In short, economic considerations became a factor which the government had to take most seriously before deciding its policy on EMU. In the third section, we will see that the moment for the British government to make a crucial decision came in March 1973, when the outbreak of another dollar crisis led the developed countries to abandon the Bretton Woods regime. With the collapse of the international monetary system looming, the French side changed its policy and acquiesced to the German proposal of a joint Community float. The British government had to decide urgently whether or not to join the endeavour. The government was more favourably disposed to a joint Community float than is generally assumed, especially if this could be done in exchange for the underwriting of the sterling balances by the EEC. However, Cabinet ministers were afraid that the opposition party would seize this opportunity and criticise the government policy as a surrender of national sovereignty. This concern prevented the government from reaching a deal with the rest of the EEC on a joint Community float. The incident was a serious blow to the Anglo-French relationship, and to Heath’s European strategy. The above analysis suggests that, alongside economic considerations, the likely reaction from the opposition party was the key to explaining government policy towards European monetary cooperation. However, this is not enough to vindicate our hypothesis that the collapse of bipartisanship denied the government the opportunity to participate in the first step of EMU. We also have to show that, despite the official policy of the opposition, at least a part of the Labour Party took a view-

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point similar to the government on the issue. This is why, in the final section of the chapter, we shall examine the development of Labour policy on Europe after the division in the House of Commons in October 1971, which approved the principle of Britain’s entry into the EEC. The official policy of the Labour Party drifted further in a Eurosceptic direction, and EMU was designated as one of the five issues that should be renegotiated by a future Labour government. However, under the surface of the official policy, a substantial part of the party leadership actually supported the first steps of European monetary cooperation. Therefore, it was the lack of cooperation between the government and these opposition politicians that deprived the government of the chance to participate in European monetary cooperation.

1. International monetary crisis of August 1971 and a joint European float This section explains Britain’s policy towards European monetary cooperation between the Nixon shock and the Smithsonian Agreement. It was when the global fixed exchange rates were suspended in the second half of 1971 that the idea of a joint float of European currencies first surfaced as a remedy to the problem of the international monetary system. The fact that, during the crisis, the Europeans tried hard to unite themselves against the United States offers us the best case study for analysing whether Britain’s special relationship with the United States had any influence over her policy towards European monetary cooperation. If the Anglo-American relationship had a noticeable effect on British policy towards European monetary cooperation, it must have manifested itself most clearly on this occasion. In fact, during the crisis Britain consistently acted as a member of the European bloc within the wider framework of the Atlantic alliance, even though this policy sometimes caused friction with the US administration. Therefore, the special relationship with the United States was of limited importance in explaining the policy of the British government towards EMU. The US–Europe relationship and the international monetary crisis We begin this section by explaining the main cause of the recurrent dollar crises in the early 1970s. At the end of the Second World War, the United States emerged as the world’s dominant power in terms not only of military force, but also of economic scale. European countries

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were devastated by the war and needed to import from, more than they could export to, the United States for post-war reconstruction. Under these circumstances, the US administration helped the recovery of the West European economy by giving aid to the Europeans through the Marshall Plan. The policy was intended to encourage a greater degree of economic and political integration in the region.1 In other words, the United States was a principal sponsor of the project of European integration. However, with economic recovery, the competitiveness of European (and Japanese, of course!) industries caught up with their American counterparts, and the US trade accounts turned into a deficit in 1971 (her current account had already been in the red since the 1960s). The US government also had a large budget deficit, due to the military expenses of the Vietnam War and increasing social expenditure. It was this ‘twin deficit’ of the United States, coupled with the growth of international capital flows, which caused the crises of the dollar in the early 1970s.2 The Nixon administration still supported the unity of Western Europe, for political and security reasons, but the US Congress was increasingly concerned with the negative effects of European integration on US trade and balance of payments. The common external tariff of the EEC discriminated against US exports in favour of intra-community trade, and the CAP subsidised European exports of agricultural products to third countries, to the detriment of American farmers. Although these characteristics were inherent in the EEC itself, and not the result of British entry, the enlargement of the EEC acted as a catalyst for US domestic opposition to discriminatory aspects of the EEC.3 The appointment of John Connally, a conservative Democrat known as a hardliner, as Secretary of the Treasury by President Nixon in 1971 did not augur well for the US–European relationship. It was largely because of his initiative that the Nixon administration unilaterally introduced a new economic programme on 15 August 1971, including the suspension of the gold convertibility of the US dollar and the imposition of a 10 per cent surcharge on exports to the United States. The US government also demanded the revaluation of European currencies and the Japanese yen, the removal of the protectionist trade practices, and a fairer sharing of the defence burden.4 Not surprisingly, the US allies in Western Europe looked at the situation from a very different perspective. According to the Europeans, it was unfair that, under the Bretton Woods regime, the United States was able to finance balance of payments deficits simply by printing more money, without adjusting her economic policy. They argued that

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this was because of the position of the US dollar as reserve assets, and demanded reform of the international monetary system. Britain was not an exception in this regard; the British government regarded the crisis as an opportunity to establish an international monetary system which would not depend on the US dollar.5 The government envisaged that the US dollars owned by the central banks as foreign reserves would be converted into a new form of asset such as the SDR in the IMF. The United States would lose all privileges accruing from the international status of the US dollar. Moreover, if sterling was dealt with in the same way, this policy could solve the issue of the sterling balances and therefore be highly beneficial from the British point of view.6

Joint European float as a solution? It is in this context of US economic policy and the crisis of the international monetary system that we need to analyse European monetary cooperation during the period. A ‘European solution’ to the monetary crisis was pursued not only for its own sake, but also because it was expected to foster global settlement of the crisis and enhance European influence vis-à-vis the United States during the process. A large inflow of the US dollar into Europe was expected; European countries had three options to counter this inflow. Their first alternative was to accept the US dollar and, as far as possible, to maintain the exchange rate with the dollar. But this was clearly unrealistic, because of the scale of the expected inflow of the dollar. The second option was to block the inflow of the US dollar by introducing tighter exchange controls. Thirdly, the Europeans could float their currencies and allow them to appreciate against the US dollar. In the last case, European governments could choose either to float their currencies individually or to do so collectively with other currencies. For the purpose of this research, we need to pay particular attention to each country’s attitude towards the last option of a joint European float. In the following section we will first consider the position of the British government, and then move on to the attitudes of the EEC countries. (1) Britain First of all, the British government, especially the Bank of England, was reluctant to tighten exchange controls. This was mainly because of the existence of the sterling area and the position of London as the centre of international finance. This left two types of floating option

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open to the British government. Heath, Sir Alec Douglas-Home, the Foreign Secretary, and Lord Cromer, the British Ambassador in Washington and former Governor of the Bank of England, met in London on 16 August to consider actions that the government should take in response to US policy. During the meeting, Cromer strongly argued for a joint European float, on the basis of political considerations. In his view, the Nixon administration’s lack of prior consultation with the UK before the introduction of new economic measures signalled that the Americans no longer considered it necessary to consult the UK on important decisions. They consulted the British government when it was useful to them, but not because they had to. In short, according to the ambassador, Britain’s special relationship with the United States no longer existed.7 On the following day, the government decided to support a joint European float during negotiations with the Six, and to press for a meeting between Anthony Barber and the EEC finance ministers. This proposal, however, was made on the condition that the exchange rate of sterling would remain intact even if other European currencies were to be revalued against the US dollar.8 The government was concerned about the negative effects of the EEC entry on the balance of payments, and therefore needed to avoid the revaluation of sterling. (2) West Germany The Deutschmark and the Dutch guilder had already been floating since the dollar crisis of May 1971. At the time, the Bundesbank advocated exchange control to stop the inflow of the US dollar, but the Economic Ministry, led by Professor Schiller, was opposed to the measure, on both ideological and technical grounds.9 Bonn therefore decided to propose a joint European float to the EEC. From a political perspective, this was better than an individual float would be for maintaining the solidarity of the EEC, as the West German government was accused of being too preoccupied with the Ostpolitik at the cost of solidarity with the Western world.10 However, there were also commercial reasons behind the German policy. Inside a joint European float, if the Deutschmark appreciated against the US dollar, other participating currencies would be obliged to follow suit. This would help German industry to maintain international competitiveness among its European competitors. (3) France The French had been opposed to a joint European float in May, and did not change their stance on this occasion. They declared that they

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would refuse any change in the gold parity of the French franc. This formula suggested that the French government supported a reform of the international monetary system in which gold would perform a more important role, but it also had two other implications. First, unless the US dollar was devalued in terms of the price of gold, the French would maintain the current exchange rate between the French franc and the dollar. The French government introduced the dual market system to block speculative inflow of the US dollar. (The dual market system is one type of exchange control, in which the foreign exchange market for commercial transactions and capital transactions is kept separate, and the government authorities intervene only in the former, in order to maintain the parity of the national currency.) Secondly, and more importantly for the purpose of our research, the French were adamantly opposed to a joint European float. Inside a joint European float, the franc had to follow the upward movement of the Deutschmark, which would be deflationary for the French economy. The French government also feared that the formation of a European currency bloc would increase the influence of West Germany in the region.11 President Pompidou proposed a summit meeting of the heads of state and government from both new and existing members of the EEC. The main purpose of the proposed meeting was to reach a common European position on the reform of the international monetary system before negotiating with the rest of the world.12 It was largely because of this Franco-German difference that the EEC could not reach agreement on a joint European float.13 At the same time, with the prospect of an immediate solution of the crisis fading away, the British government began to display a less enthusiastic attitude towards the idea of a joint European float.14 The government also increasingly maintained its distance from negotiations within the EEC. Apart from the Franco-German difference, there were a couple of other reasons for the policy change. First of all, it turned out that a joint European float would not help the Europeans reach a better deal with the United States. The British government hoped that the EEC countries would agree to revalue their currencies against the US dollar, while sterling would remain intact. However, the EEC countries would never have accepted the British position unless the Japanese yen were revalued vis-à-vis the dollar by a larger margin. Alternatively, if Britain and the EEC had moved to a common float against the US dollar without much revaluation of their currencies, the US government would not have removed the import surcharge.15 Under these circumstances, a global realignment of national

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currencies, and thus a global solution to the monetary crisis, was actually the precondition of a joint European float, not vice versa. Moreover, as a permanent solution to the international monetary crisis, a joint European float was not without its problems for Britain. Here the British government shared the concerns of its French counterpart. Once a joint European float had started, the rise of sterling vis-à-vis the US dollar would not be offset by the revaluation of other European currencies against sterling, and it would have detrimental effects on the competitiveness of British industry and the country’s balance of payments.16 Given the confrontation between France and Germany and Britain’s increasingly lukewarm attitude, it was not surprising that a joint European float was eventually abandoned as a solution to the international monetary crisis. Instead, the three largest European countries agreed to pursue a global settlement including the United States.17 The French in particular pressed for the restoration of stable exchange rates to the international monetary system. Jean-René Bernard, Economic Adviser to President Pompidou, told his US counterpart that ‘if this [crisis] could be resolved, the United States could then resume its overall international leadership, without which … it might be difficult for European unity to survive’.18 Bernard ‘was cool to “regional solutions” (including a European regional system), and not optimistic about their workability. And he seemed concerned about longer-run relationships between France and Germany.’19 The softening US attitudes helped this change of direction. During a meeting of the Group of Ten in Rome on 30 November and 1 December, Connally for the first time agreed to consider the devaluation of the gold price of the US dollar as a part of the deal. It was also agreed that the United States would abolish the import surcharge in exchange for the realignment of currencies. However, the meeting could not reach a deal on the extent of the devaluation of the US dollar and the revaluation of other currencies, and therefore a final agreement was postponed until the next meeting of the Group of Ten in Washington, due to take place on 17 and 18 December.20 In fact, the basic agreement was reached beforehand during the US–France summit in the Azores on 13/14 December. The US dollar would be devalued against gold from $35 to $38 per ounce. As for the margin of exchange rate fluctuation between the US dollar and other currencies, the US preference was ±3 per cent from the central rate, while Pompidou insisted on ±2 per cent. In the end, in exchange for European concessions in the agricultural field, Nixon bowed on 2.25 per cent.21 The gold convertibility of the dollar was not restored, however, and a more fundamental reform of the system was

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postponed. In any case, the deal struck between the two sides clearly highlighted French support for the international monetary system with a narrow exchange rate band. Indeed, the Smithsonian Agreement was a major victory for the French President. Acting as the spokesman of the European countries on international monetary affairs, Pompidou successfully reached a deal with the Americans that was more suitable for the French than for the Germans.22 The conclusion of the section is that the relationship with the United States is of limited importance as an explanation for British policy: since the British government had consistently acted as a member of the European side of the Atlantic alliance when the relationship between the United States and Western Europe became most tense after the Second World War.

2.

The early exit of sterling from the Snake

The Smithsonian Agreement of December 1971 temporarily eased the crisis of the international monetary system and restored a fixed exchange rate to the world. The global settlement of the crisis made it possible for the EEC to resume its progress towards EMU at the beginning of 1972. Almost at the same time, the British government changed its priority in economic policy, and started introducing measures aimed at the achievement of faster economic growth and full employment. Therefore, the resumed progress of EMU offers a suitable case study for analysing the impacts of economic factors on British policy. In fact, the effect of the socalled ‘U-turn’ of the Heath government was almost immediately evident in British policy towards EMU. The Council of the Finance Ministers on 20/21 March 1972 reached agreement on EMU, and the Snake, the first stage of EMU, was officially launched on 24 April. The British government, after being formally consulted, participated in the Snake on 1 May. However, sterling came under pressure in the foreign exchange market as early as 16 June, and the government was forced to float sterling on 22 June. Thus sterling left the Snake only seven weeks after its entry. The government made an unsuccessful attempt to return sterling to the Snake first by the Paris summit of the enlarged EEC in October 1972, and then by 1 January 1973, the official date of British entry into the EEC. The situation of inflation and the balance of payments, which was expected to deteriorate because of the government’s new policy, triggered the run on sterling. Things had not been helped by the Budget speech of March 1972, in which Barber stated that the government was not prepared to sacrifice its commitment to full employment and

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high economic growth in the defence of the ‘unrealistic exchange rate’. Therefore, some may wonder whether the British government was really committed to the Snake. Our answer to the above question is unambiguously ‘yes’. First of all, in introducing the economic measures that were later dubbed the ‘U-turn’, the government actually intended to renovate the old-fashioned structure of British industry by making the most of the opportunities offered by British entry into the EEC. The Prime Minister, who took the initiative in the policy change, was not fully aware of how this would affect the position of sterling in the foreign exchange market. Moreover, the government made substantial efforts towards bringing sterling back into the Snake, in a way that would have been unconceivable if the government had not actually been committed. Most notably, the government began a tripartite consultation with industry and trade unions, and then introduced a statutory prices and incomes policy in November 1972. By doing so, the government tried to recover confidence in sterling without abandoning its commitment to economic expansion. Ultimately, however, the attempt to contain inflation by introducing a statutory prices and incomes policy, whilst pursuing full employment and faster economic growth at the same time, was doomed to fail. Membership of a regional currency bloc, such as the Snake and later the EMS, requires a government to maintain inflation at approximately the same level as other participants. In that sense, it is not unfair to conclude that the Heath government did not fully understand the implications of its commitment to EMU, and that it thus pursued an economic policy incompatible with membership of the Snake. In the remainder of the section, we will see the progress of EMU and British policy towards it in the following order: the agreement of the EEC members on EMU; the decision of the British government to participate in the Snake, the first stage of EMU; the circumstances under which the above reference to the exchange rate was included in the Budget speech by the Chancellor of the Exchequer; the process which culminated in the forced exit of sterling from the Snake; and the unsuccessful attempt made by the British government to return sterling to a fixed exchange rate before the official date of British entry into the EEC. The rebirth of EMU The road to the decision on EMU by the Council of Ministers in March 1972 followed a very familiar course: the French side argued for greater monetary cooperation; the Germans replied that monetary cooperation

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should be accompanied by economic harmonisation; and there was a compromise between the two.23 On the monetary side, the Council of Ministers agreed to limit the margin of fluctuation of the exchange rate between European currencies to ±2.25 per cent, instead of 4.5 per cent as provided in the Smithsonian Agreement. At the time, this most important part of the agreement was called the Snake. On the economic side, a steering committee was established in exchange for monetary cooperation. The committee would consist of senior officials from the governments of the EEC members, and its main purpose was the coordination of economic policy. West Germany was afraid that she might be forced to support a currency whose weakness was caused by the inflationary policy of the country concerned. That was why the Germans made coordination of economic policy a precondition of monetary cooperation. Loukas Tsoukalis argued that these measures were adopted to challenge the position of the US dollar as the international currency.24 But it would probably be more accurate to describe European monetary cooperation as an attempt to make Europe independent of the US dollar, so that the European economy would be more insulated from the undesirable effects of US policy.25 Similar considerations were behind the agreement that the central banks of the EEC would use the Community currencies, not the US dollar, to intervene in the foreign exchange market. With this agreement, the EEC countries attempted not to use the US dollar as an intervention or reserve currency. At the same time, they attempted to avoid the situation wherein any particular currency (particularly the Deutschmark) would replace the position of the US dollar in the region. For a multilateral settlement of debts incurred as a result of intervention among the central banks, the EUA (European Unit of Account) was created.

The British government’s decision to take part in the Snake The British government reacted favourably to the progress of EMU in this period. An ad hoc Cabinet Committee was convened on 15 March to consider the matter.26 During the meeting, Barber explained the proposal of the EEC: for Britain a wider margin of exchange rate fluctuation was better, because the value of sterling might go down as a result of the Budget and this could be a burden on the foreign exchange reserves. There was, however, a strong consensus within the Six on this point: Britain had to decide whether to participate in the Snake from

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the outset, or at the official date of British entry into the EEC, that is, on 1 January 1973. As for the steering committee, the Chancellor said that the proposal was acceptable for the government. In discussion, it was decided to participate in the Snake from the outset, since delay might be interpreted as a proof that the government did not have confidence in its ability to maintain the exchange rate of sterling. This new system eventually came into force on 24 April.

The U-turn and the 1972 Budget speech Our next task is to examine the 1972 Budget and to ask why the problematic passage on the exchange rate quoted above was included in the Chancellor’s Budget speech on 24 March. This analysis will reveal the government’s thinking on the relationship between economic management and exchange rate policy, including policy towards the Snake. The Prime Minister was not fully aware of how the expansionary budget would affect the position of sterling in the foreign exchange market. The 1972 Budget was a part of a much broader change in the government’s economic policy in the direction of interventionism in 1972. The change of government policy began with the rescue of Upper Clyde Shipbuilders, which occurred despite the government’s initial insistence that it would not spend public money on a lame-duck company. Subsequently, an Industry Bill offering regional development grants of up to £250 million a year was proposed to the House of Commons at the end of the 1972 Budget debate. Finally, a statutory incomes policy was introduced in November 1972. With hindsight, it is ironic that the 1972 Budget was attributed to Barber at the time, and the upswing of the economy as a result of the Budget was called the ‘Barber boom’, since in fact it was the Prime Minister who had taken the initiative regarding the expansive Budget, overriding the more cautious stance of the Chancellor and the Treasury.27 There has been heated (and sometimes politically motivated) debate on the cause and background of the change in direction of government policy, including the 1972 Budget. One important factor was undoubtedly the rise in unemployment from the end of 1971. However, more recently, a number of contemporary historians have argued that the main cause of the government’s interventionist strategy lay in its determination to prepare British industry for the challenge of EEC membership.28 The Prime Minister hoped that British industry would actively make investments and renew its old-fashioned infrastructure before facing more intense competition from the Continent, and thus secure

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the maximum benefits accruing from access to a larger market. Official papers suggest that the 1972 Budget and the Industry Act were actually intended to encourage industry to act in this way.29 Therefore, the abovementioned explanation for the U-turn seems very plausible. Unfortunately, however, these scholars pay attention only to the relationship between the U-turn made by the Heath government and EEC membership in general; and, as a result, EMU remains outside their picture. This is the reason why their explanation of the U-turn is incomplete; in particular, the connection between the introduction of statutory incomes policy and the government’s European strategy is not clearly recognised by them.30 As we will see later, the incomes policy was introduced by the government to tackle inflation and bring sterling back to a fixed exchange rate, without changing economic priorities. The origin of the passage on the exchange rate in the budget speech preceded the budget itself and even the Smithsonian Agreement. It first appeared in the draft statement prepared by the Treasury, in anticipation of the Rome meeting of the Group of Ten in November 1971 reaching agreement on the realignment of national currencies and the abolition of the US import surcharge. The draft statement read: ‘For our part HMG [Her Majesty’s Government], while paying full regard to our international commitments, do not propose to allow a rigid attitude to exchange rates to frustrate our intention of reducing unemployment and restoring healthy economic growth in the United Kingdom on a continual basis.’31 The passage did not confine itself to the Snake and EMU but addressed also the rigidity of a fixed exchange rate in general. This stance reflected a growing awareness inside the Treasury that flexibility of the exchange rate would help maintain the national autonomy of economic management when the world was witnessing increasingly large-scale international capital movement. It should be noted that this was not an objection to a particular rate of sterling, but instead to the notion of a fixed exchange rate per se. There was also a historical background that helps account for the Treasury’s position. During the late 1950s and 1960s, the economic policy of successive British governments had aimed at economic growth and full employment, but had been repeatedly frustrated by the deterioration of the balance of payments and a run on sterling in the foreign exchange market. As a result, the government had been forced to introduce deflationary measures. This so-called ‘stop and go’ policy had damaged business confidence and discouraged investment, and had therefore been widely perceived as one of the main causes of Britain’s economic malaise at the time. However, if the government no longer needed to defend

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the exchange rate of sterling, this might allow it to continue its expansionary policy. This draft statement never saw the light of day, because the Prime Minister was ‘not convinced of the need to say this’ on priorities between growth and the balance of payments.32 Why, then, did the Prime Minister change his mind and agree to include the statement in the Budget speech? The clue to answering this question lies in the fact that Heath was very frustrated with the slow reaction of British industrialists to the opportunity opened up by British entry into the EEC and access to a larger European market. The Prime Minister had the impression that a good many industrialists were still doubtful about the prospects for growth, because if balance of payments difficulties recurred, the government would deflate rather than devalue. Therefore, Heath hoped Barber would send a public message on the balance of payments, suggesting that ‘in the new monetary world parity changes should be minor affairs …, sometimes in one direction and sometimes in another; so that exchange rate changes will not be a sort of traumatic shock to the system that they were in 1949 or 1967’.33 Barber proposed that such a message should be included in his Budget speech, and Heath agreed.34 It was the Prime Minister’s optimism about the British economy that lay behind the decision. In the letter quoted above, he requested the Chancellor to work out lines which would not have the effects of frightening the hot money. However, his caution was reserved for other people, not for himself. The letter ended with the following sentence: ‘If it did frighten some, we are for the present in a situation where we could stand that up to a point with equanimity.’35 The result of the optimistic decision soon became clear, when sterling came under pressure in the foreign exchange market and was forced to leave the Snake. The forced exit of sterling from the Snake Sterling first came under pressure in the foreign exchange market on 16 June. On 21 June, the interest rate was raised from 5 to 6 per cent to halt the outflow of the dollar.36 However, on the following day, it became clear that the rise of the interest rate and the intervention by the Bank of England could not stem the tide of outgoing money. Barber, accompanied by senior Treasury officials, called on Heath at 4.15 p.m.37 The Chancellor explained that the choice was either to devalue or to float sterling, and he recommended the latter option. The Prime

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Minister accepted it. During the emergency meeting of the Cabinet, Barber explained to his colleagues why floating was more desirable than devaluation: namely, it would not make sense to devalue sterling in the face of the strong performance of the economy and a balance of payments surplus. However, this explanation was contrary to the Treasury’s view on the strength of the British economy at the time. A more plausible reason was that it would be much easier to deflect criticism of the opposition if sterling were floated instead of being devalued. The Cabinet unanimously supported the Chancellor.38 Accordingly, sterling left the Snake only eight weeks after the start of the first stage of EMU. The government decided to introduce exchange controls on the sterling area to prevent further outflow of capital. This was the end of the sterling area, since freedom of capital movement from Britain, the most important attraction of the membership of the area, was impaired by this introduction of exchange controls. It may not have been as dramatic as the withdrawal from the east of Suez, but it was an equally important step towards the final liquidation of the legacy of the British Empire.39 Prices and incomes policy The run on sterling was widely attributed to inflation and unstable industrial relations. As a result of the floating of sterling, it became urgently necessary for the government to curb inflation. Inflation had already been a major concern for the British public and the government, who had won the last election with the promise of stabilising prices. This concern was not alleviated by the recurrent industrial disputes, most notably the miners’ strike at the beginning of 1972, which forced the government to concede generous pay settlements. However, before sterling’s forced exit from the Snake in June 1972, the government remained sceptical about the utility of a tripartite meeting with industry and trade unions and prices and incomes policy, as an instrument to deal with inflation. For example, when the Cabinet committee in charge of pay and prices policy met as late as May 1972, statutory policy was removed from the agenda.40 Therefore, sterling’s exit from the Snake was the turning point for the government, which, after the incident, began to negotiate with the TUC and CBI on a voluntary incomes and prices policy, and then later decided to introduce statutory arrangements.41 The fact that the government tried to tackle inflation with these measures, however, did not necessarily mean that it was committed to

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a fixed exchange rate or to the Snake, because there could be two contradictory motivations behind the attempts to contain inflation. First of all, if sterling were to return to the Snake and stay inside, inflation had first to be brought close to the level of other participating countries. Alternatively, if sterling were to continue floating, its depreciation would lead to a higher cost of imported goods and have negative effects on prices. To tackle inflation was as necessary in the second case as it was in the first. Therefore, we cannot infer the government’s commitment to the Snake simply from the fact that the government tried to negotiate incomes and prices policy. However, close examination of both economic and historical evidence shows that the government actually adopted these new measures in order to bring sterling back into the Snake, and not simply to curb inflation based on the assumption that sterling would continue floating. First of all, the level of inflation in Britain actually showed some improvement during the second half of 1972, and thus, from a purely domestic perspective, there was no compelling reason to introduce measures as dramatic and controversial as a statutory prices and incomes policy. However, Britain’s inflation was still higher if compared with that of its neighbours, a fact which would matter if sterling were to return to the Snake. Moreover, the Prime Minister emphasised the government’s commitment to a fixed exchange rate in negotiation with industry and trade unions.42 The preparation for a statutory policy had also been underway within the government since late July, alongside negotiations concerning voluntary cooperation by both labour and management, on the assumption that sterling had to return to the Snake before 1 January 1973, the official date of Britain’s entry into the EEC.43 In this way, whether the British government could bring sterling back into the Snake depended on the result of its incomes and prices policy. It was the lack of support for this policy that prevented the government from re-entering the Snake before Britain’s entry into the EEC. In deciding whether Britain should take part in European monetary cooperation, economic considerations became a factor that the government could not afford to ignore. The Paris summit of October 1972 In concluding the section, I will briefly describe what was agreed on EMU during the Paris summit of October 1972, and explain the policy of the British government running up to the summit.

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The Paris summit is known to have made a decision to achieve EMU by 1980. However, apart from the symbolic value attached to the meeting of the heads of state and government, the importance of the summit should not be overemphasised in the history of EMU. In fact, as far as EMU was concerned, the Paris summit was of a backward-looking nature: its main role was to confirm decisions previously made by the Council of Ministers in March 1971 and March 1972. The meeting of the foreign ministers, which was held in September to prepare for the summit, agreed to establish the EMCF. But the summit itself made only minor new commitments to EMU, including a transition to the second stage in 1974, with its content left to be decided in the next year. The main purpose of the British government during the summit was to reach agreement on regional policy, which would be funded by the Community’s own budget. Since Britain would be a major beneficiary of regional policy, the success of the negotiations was vital if the government was to reduce its net financial contribution to the EEC. The government tried to legitimise its position by arguing that the reduction of economic imbalances between regions would be essential to achieving EMU. The narrowing of the exchange rate fluctuation deprived national governments of a policy instrument to restore external economic disequilibrium. The Community’s regional policy was envisaged as an alternative to exchange rate changes. Floating of sterling, however, was a major obstacle to securing agreement on regional policy, since it was promoted as a part of EMU. The government carefully avoided, during the summit, any explicit commitment to returning sterling to the Snake by January 1973. But the government chose to make its European partners expect that it would do so, by describing the issue as a matter of trust, even though it was not sure of how to satisfy such an expectation.44 The government successfully won the agreement of the EEC to establish the regional fund. (Its size was to be decided later.) However, a dangerously wide gulf opened up between the government’s European strategy and the level of domestic support for sustaining it. The government would confront more serious difficulties in legitimising and mobilising support for its European policy after Britain’s entry into the EEC, as we will see in the next section.

3.

‘The Snake left the tunnel’

Britain, Ireland and Denmark officially entered the EEC at the beginning of 1973.45 In February and March 1973, not long after the enlargement of the EEC, the international community witnessed the outbreak of fresh

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monetary crises, triggered by the weakness of the US dollar. As a result of the crises, the Bretton Woods regime finally came into an end. The dollar crises posed a serious challenge to the solidarity of the enlarged EEC. Had European currencies started floating not only towards the US dollar but also against each other, it would have been a heavy blow to the project of EMU. Moreover, without a fixed exchange rate between the currencies of the EEC members, the Common Market would be impaired and the CAP could not function properly. The EEC tried to solve the international monetary crisis by launching a joint float of European currencies against the US dollar. This move was described as ‘the Snake left the tunnel’ at the time, since European currencies floated together (the Snake) without a fixed exchange rate against the US dollar (the tunnel). The main purpose of this section is to single out those factors which can explain the decision of the British government not to participate in a joint float of European currencies. To study the policy of the British government towards a joint Community float, and the underlying factors behind it, is essential for the following two reasons. First of all, by starting a common float of its currencies, the EEC took its first steps towards the formation of a regional currency bloc, the process that ultimately culminated in the creation of the euro, a single currency, 30 years on. This episode set the precedent for Britain’s isolation from European monetary integration, something that would be repeated at the establishment of the EMS in 1979 and the creation of the euro in 1999. Although Britain could join European monetary integration at a later stage, the hurdle would become doubtlessly higher, thanks to the progress of monetary integration within the rest of Western Europe. In this sense, whether the Heath government decided to participate in a joint Community float would have long-term effects on British policy towards European monetary integration. Secondly, it is important because the international monetary crisis occurred after Britain’s entry into EEC. The British government had so far displayed a forward-looking attitude towards EMU, but this policy could be interpreted as lip service for the purpose of securing a position inside the EEC, rather than as an expression of its willingness to participate in European monetary cooperation per se. Therefore, a Community float offers a suitable case study for revealing the real intentions of the British government. In fact, the British government was more favourably disposed than is generally assumed to participation in a Community float.46 Britain and other EEC countries, especially the Federal Republic, tried to make a deal in which sterling would participate in a Community float, in

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exchange for the underwriting of the sterling balances by the rest of the EEC. As we saw in Chapter 3, the possibility of such a deal was first envisaged by the British government, and then by President Pompidou during the Anglo-French summit in May 1971. It would have allowed Britain to dispose of the sterling balances, which had hampered her economic growth during the past decades and led her into a dependent status vis-à-vis the United States, within the framework of the EEC. Therefore, the question before us is why Britain and the rest of the EEC could not reach agreement on the line described above. Broadly speaking, there were two obstacles in the negotiations, one economic and the other political, which prevented Britain from taking part in a Community float. First of all, the British government was concerned with the economic consequences of a proposed Community float. At the beginning of 1973, the British economy satisfied neither of the two conditions of monetary cooperation, namely, inflation rates in line with other participants, and a sound balance of payments situation. The second problem for the British government in deciding its policy towards a joint Community float was related to the issue of national sovereignty and the likely reaction from the Labour Party. If Britain was to participate in a Community float, henceforth the government would be required to consult its partners in the EEC before changing the exchange rate of sterling. In the long run, pressure would intensify within the EEC to coordinate economic management more closely. In other words, a Community float would set in train the process of the pooling of economic sovereignty within the EEC. Yet these effects on sovereignty did not deter the British government from trying to negotiate satisfactory conditions which would allow sterling to participate in a Community float. However, the government was concerned with the prospect that, if it decided to participate in a Community float, the opposition party would no doubt criticise this as a surrender of national sovereignty. Under these circumstances, the British government was unable to make a commitment that could not be defended against domestic criticisms. As a result, in searching for an agreement with its EEC partners, the scope of concessions that the government could make was considerably narrowed down. In this way, the collapse of bipartisanship on the European issue denied the British government the chance of participating in a joint European float, which it judged beneficial for Britain but which would have included the substantial loss of national sovereignty.

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The February crisis After the Smithsonian Agreement, the United States, Western Europe and Japan failed to reach agreement on more fundamental reform of the international monetary system. Therefore, it was not very surprising that in February 1973 the Bretton Woods regime came under renewed threat from the weakness of the US dollar and a large inflow of the dollar into the Federal Republic. In tackling the crisis of the international monetary system, there were a number of options available to European countries. The French government preferred to counter a speculative movement of international capital with the introduction of a tighter exchange control and a two-tier market system throughout the EEC.47 However, this option was rejected by West Germany, and the United States was also opposed. Alternatively, the Deutschmark could switch to floating individually, as in May 1971; but this could cause serious repercussions for the solidarity of the enlarged EEC and the relationship between Bonn and Paris. Therefore, the West German government was very reluctant to take this course, on political grounds. This left a joint float of European currencies against the US dollar as the only ‘European’ solution to the international monetary crisis. The major obstacle to a Community float, however, was the fact that the French government had been very hostile to the idea. Therefore, it is noteworthy that the French approached the idea in a more constructive way on this occasion. As before, their first priority remained to find a global solution to the crisis in the international monetary system. However, Giscard d’Estaing said during the meeting of the financial ministers of Britain, France and West Germany that, if such a solution was impossible, the French would participate in a Community float provided that all members of the EEC joined the endeavour.48 This change of French policy put pressure on the British government to make up its mind urgently on a joint Community float. The Federal Republic, which had been on the front line of international monetary crises caused by the weakness of the US dollar, was prepared to pay a high price to achieve her political objective. Helmut Schmidt, German Finance Minister, promised ‘a very generous assistance’, if sterling were to participate in a joint float of European currencies.49 However, officials in the British Treasury and Bank of England were half-hearted about the proposed Community float. They argued that it might prompt the sterling area countries to diversify their foreign reserves (i.e. the sterling balances) away from sterling to the Deutschmark and other European

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currencies. The (at least partial) pooling of foreign reserves by the EEC countries would be necessary for Britain to protect sterling inside a Community float. To emphasise the problem with the sterling balances, however, was merely negotiation tactics,50 and the real concern of the British officials lay elsewhere, that is, with domestic economic management. A prices and incomes policy and the framework of tripartism, both introduced by the government to keep down inflation without changing the priority of economic management, did not bring about the result the government hoped for. Under these circumstances, if sterling had returned to the Snake and a joint European float had started, either the government would have been required to abandon its ‘dash for growth’ policy, or it would have had to defend the rate with massive borrowings. Sooner or later, sterling would be forced to leave the Snake.51 To conclude, the main hindrance to Britain’s prospect of joining a common European float was not the sterling balances, but the situation of the British economy and the way the government managed it. The stance of the British government thwarted a plan by the EEC to launch a joint European float as a solution to the international monetary crisis at this stage. Instead, the British government promoted a worldwide settlement, according to which the United States would devalue the dollar by 10 per cent, Japan would revalue the yen by 10 per cent, while European currencies would remain intact. This proposal was eventually accepted by all countries concerned.52 Thus the February crisis was temporarily solved without a joint Community float. There is a very important question which demands an answer, namely, why the French government changed its policy and decided in favour of a joint Community float against the US dollar.53 The French had supported EMU, but only within the framework of a global fixed exchange rate system. This French attitude derived from the fact that a fixed exchange rate system has a more or less ‘asymmetrical’ character in assigning the responsibility of maintaining parity between currencies. As long as the international monetary system was based on fixed exchange rates, a monetary crisis was first and foremost a problem between the United States and West Germany. Under the Bretton Woods regime, if the Deutschmark reached the upper limit of its margin of fluctuation against the US dollar, it was West Germany that would bear the responsibility for adjusting her economic management to maintain the Deutschmark within the limit, who would otherwise have to accept a revaluation. Yet once European currencies started floating against the US dollar, the Federal Republic was no longer obliged to maintain the

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exchange rate of the mark in terms of the US dollar. Then, if the Deutschmark appreciated in the foreign exchange market, it was the French who would have to maintain the value of the franc against the mark, by adjusting their economic policy. In short, if the international monetary system ceased to be based on fixed exchange rates, and European currencies started a joint float against the US dollar, this would shift the onus of economic adjustment from the Federal Republic to France. The French would more or less have to follow in the footsteps of German economic policy. Given the fact that the German economy was stronger than its French counterpart, and also that keeping the currency stable was the priority of German economic management, this would create deflationary pressure on the French economy. Besides, if France continued to have a higher rate of inflation than the Federal Republic, a Community float would weaken the international competitiveness of French industry. Therefore, it is not at all surprising that the French government had been very critical of a joint float of European currencies. What is truly surprising is the fact that France changed her policy and accepted a joint Community float. Why? The French were forced to change their attitude due to a deterioration of the crisis in the Bretton Woods regime. In the dollar crisis of May 1971, the German policy of moving the Deutschmark into a float was widely criticised, and it was regarded as a temporary measure. Yet in February/March 1973, what was at stake was the future of the international monetary system itself. The American government showed no inclination to reduce its military expenditure abroad or cut back its domestic social programme, the measures that would be necessary to stabilise the value of the US dollar in the foreign exchange market. Without US cooperation, the maintenance of global fixed exchange rates was a hopeless business.54 If the collapse of the Bretton Woods regime were taken for granted, the choice open before Europe was between a joint Community float, and the individual floating of European currencies. Given these two alternatives, the French had a number of reasons to prefer the first option to the second. First of all, in France, the idea of the franc stable traditionally enjoyed widespread support. If monetary stability could not be maintained on a global scale, a Community float would at least guarantee it within Western Europe.55 Moreover, the French government was concerned that, without a fixed exchange rate between European currencies, it would become technically very difficult to manage the CAP. But, compared with the issue of how to maintain the balance of monetary power in the face of the increasingly self-assertive Germans, these consider-

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ations seemed to be of secondary importance.56 Here it was the smaller EEC countries that held the balance. Due to the higher degree of dependence of their economies on international trade, the rapid fluctuation of an exchange rate, which was inevitable once European currencies started floating individually, would cause too much disruption for the management of their domestic economies. Under such circumstances, they were likely to bilaterally peg their currencies with that of their largest trading partner, the Deutschmark. If this happened, it would amount to a formation of a de facto Deutschmark zone encompassing the Federal Republic, the Benelux countries, the Danes and the Swedes and also, possibly, Italy. The influence of Germany would be greatly strengthened, not only in economic but also in political spheres, and the French would be left isolated. Compared with such an alarming possibility, a joint float of European currencies had some attraction from the perspective of the French authorities. First, European monetary cooperation would offer joint resources to protect European currencies, including the franc, against speculation. More importantly, it would enable the French to check German power within a multilateral framework, however insufficient such a control might be from the French viewpoint. If this was the case, then British participation was highly desirable, because of its possible contribution to the containing of German influence. Therefore, it was understandable that the French initially made their support for a Community float conditional on the participation of all EEC member states. The March crisis: The end of the Bretton Woods regime, the start of a joint European float The realignment of currencies in February 1973 merely postponed the finding of a more fundamental solution to the crisis of the international monetary system. This point immediately became clear with the outbreak of another crisis of the US dollar at the beginning of March. The fact that the US dollar was massively sold against the Deutschmark in the foreign exchange market less than a month after its devaluation clearly showed that another realignment of currencies under a global fixed exchange rate system was no longer a valid option. Britain and the rest of the EEC had inevitably to look once again for a joint float of European currencies as a possible remedy for the crisis of the international monetary system. In the following part of the chapter, we at first offer a detailed narrative of Britain’s policy-making process on a joint Community float and of international negotiation within the EEC. Then we will analyse why Britain and the rest of the EEC could

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not reach agreement on a joint Community float and, why, consequently, the British government decided not to participate in the new European venture. It was, it becomes clear, the likely reaction from the opposition party against the transfer of sovereignty involved in a joint Community float that largely determined government policy. Britain’s policy-making on joint Community float The outbreak of the dollar crisis accidentally coincided with the visit of the British Prime Minister to Bonn. As a result, a substantial part of the meeting between Heath and Willy Brandt, the German Chancellor, was spent discussing the crisis of the international monetary system, and a joint float of the European currencies against the US dollar as a possible solution.57 Brandt made it clear that West Germany favoured a Community float for the sake of the solidarity of the EEC, and expressed his willingness to pay a very high price to turn the idea into reality. He proposed that the British Prime Minister should make a deal combining (1) fixed exchange rates between European currencies, (2) a joint float against the US dollar and (3) substantial financial assistance for the British. The German side also accepted a revaluation of the Deutschmark before the start of a Community float, which they had refused a month earlier. On his part, Heath explained that the main obstacles to sterling’s return to the Snake had been the state of industrial relations and also high inflation. Once industrial relations were settled, however, he was confident that sterling would recover in the foreign exchange market and inflation would fall. He argued that a joint float of European currencies should be accompanied with an (at least) partial pooling of foreign exchange reserves. This demand implied that financial assistance should be available without payment of interest, or a term of repayment. It is noteworthy that Heath emphasised that he should press this point for domestic political reasons, since otherwise he would be criticised by the opposition for accumulating a new debt to the EEC in order to maintain a fixed exchange rate. There were also preliminary talks between officials as to the detailed conditions of financial assistance, including whether the German side would demand a change of Britain’s economic policy in exchange for aid. Heath met Barber and the Governor of the Bank of England on his return from Bonn.58 During the meeting, the Prime Minister observed that, because the Germans were looking for a Community or ‘European’ solution to the crisis, Britain could demand a high price in exchange

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for participation in joint float of European currencies. The Chancellor of the Exchequer, in his reply, confirmed that at their previous meetings Schmidt had also pledged unlimited financial support without payment of interest. If this was true, sterling could participate in a joint Community float. He also suggested that Britain should demand maximum conditions at this stage of the negotiations with the rest of the EEC. The Governor of the Bank of England stated that a Community float would be very attractive if it were to be connected with a disposal of the sterling balances. It was agreed that Britain should express her willingness to participate in a joint float of European currencies, on condition that it would be accompanied by the pooling of foreign exchange reserves and the sterling balances would be covered by the agreement. The Prime Minister invited his senior Cabinet colleagues to Chequers to sound their opinion on the matter. Heath started the conversation by recounting his meeting with Brandt, and then explained possible alternatives and the German stance in negotiations.59 West Germany was in favour of a joint Community float on political grounds. If the Germans unilaterally floated the Deutschmark, other European countries would probably follow Germany and the French would be isolated. They recognised that a Community float would cause a problem for the British, particularly in relation to the sterling balances. However, they claimed that they were prepared to pay a high price economically to achieve a politically acceptable solution. There was some discussion of the conditions under which Britain might take part in a Community float, including the pooling of reserves and unlimited financial support available free of interest and for an indefinite period. In the later stage of his visit, the Germans had started to harden their attitudes marginally and to prepare for negotiations between Community finance ministers. The government had to decide whether Britain should let the Germans float unilaterally, or instead join in a serious attempt to reach agreement on acceptable conditions for a Community float. On political grounds, the Community should be able to act as one and protect itself; a joint float seemed to be the only way to achieve this. Moreover, Britain could get rid of the long-term problem of the sterling balances. Yet, it would not be easy to negotiate acceptable conditions. Heath invited his colleagues to express their opinion. In discussion, it was argued that ‘there would be considerable advantages in a joint Community float on the right terms’.60 By moving into a Community float, the Community as a whole would be insulated from the volatility of the US dollar, while joint resources were available to defend any particular currency against speculation. Moreover, a failure to reach agreement on the issue might throw the EEC into a continuous crisis.

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There would be particular dangers in individual floating or a float in which not all members joined. The CAP could not be administered under such circumstances and it might seriously harm the Franco-German relationship. The ministers were fully aware of the fact that Britain would have to share a substantial part of her economic sovereignty with the rest of the EEC, once sterling participated in a joint float of European currencies. But they were not deterred by this fact from making a decision which they believed to be beneficial for both Britain and Europe. They were, however, concerned with the prospect that the opposition party would seize this opportunity to criticise government policy as a surrender of national sovereignty. The meeting also acknowledged that, if agreement could be reached, it would represent progress towards EMU in a matter of days or weeks, whereas it might otherwise have taken years. This was to be welcomed, but it had to be recognised that future changes of parity would have to be discussed in detail with the Community and there would be pressure for harmonisation of economic management. The opposition would no doubt argue that it would represent a further undesirable shift of sovereignty … If therefore agreement were possible very careful attention would need to be given to its presentation in this country.61 The Prime Minister, in summing up the discussion, stated that the meeting had agreed that a joint Community float would be the right course, if satisfactory conditions could be obtained. The issue was of such importance that it needed to be discussed by the Cabinet as a whole. During the meeting of the Cabinet on 5 March, Heath gave a report on his meeting with the German Chancellor: Brandt was willing to accept the pooling of the reserves as a condition of a joint Community float; if this was agreed, Britain could solve the long-term problem of the sterling balances; and EMU would be achieved at one stroke in 1973, instead of 1980. The Cabinet decided unanimously that the government should try on its own initiative to obtain the above condition and take part in a joint Community float.62 On the following day, the British government declared its willingness to join a Community float, provided that (1) there would be financial assistance of a far-reaching kind, without limit of amount, condition or term of repayment, (2) a part of the financial loan would be available without the payment of interest, and (3) after consulting with the Council of Ministers, each member state would maintain the right to change its parity.

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There remains an incomprehensible part in the political process which led to the above proposal of the British government. It seems that the government had scarcely discussed what kind of conditions should be at the minimum satisfied if sterling was to join a Community float: in particular, to what degree and on which point the government could make a concession to reach agreement, if the conditions attached to its own proposal were not accepted by the rest of the EEC in full; and at what point the government should break off negotiations, to avoid sacrificing its vital interests. The conditions of a joint Community float could be divided into two categories. The first category was concerned with the nature of the financial assistance, that is, the amount of the loan available, the payment of interest, the term of repayment, and so on. The second was related to coordination of monetary and economic policy: whether a member could change its parity only after obtaining the agreement of the Council of Ministers, or whether prior consultation would be enough; whether adjustment of economic policy would be necessary to receive financial assistance or not; and so forth. Needless to say, how much a member of a joint Community float had to pool its economic sovereignty depended on this second category. It does not require much ingenuity to understand that the British demands were extravagant but, as a starting point of negotiation, were not so unreasonable. As we will see below, what offended other Community members was the fact that the British government was not willing to contemplate a compromise. At first, it was argued that ‘the conditions should at this stage be stated at their maximum …, and if they [the rest of the Community] were prepared to make a considerable move, we [Britain] could go in’.63 The government also recognised that ‘there was … conflict between the promise of support and need for flexibility [in a parity change]’,64 the two elements of the condition attached to the proposal. At that point, however, the attitudes of the government somehow hardened, and the Treasury, which was in charge of negotiations, began to insist that ‘it would be important not to depart from them [the conditions attached to the British proposal]’.65 The senior Cabinet ministers tacitly accepted the position of the Treasury. Because of the government’s tough stance in negotiations, it has sometimes been suggested that the government made a proposal only to evade blame for the failure to reach agreement afterwards, and that it did not actually intend to join a Community float. But this interpretation is highly implausible, for the following reasons. As we have seen, the government clearly acknowledged the merits of the plan, and there is nothing in the official papers which could support the above

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interpretation of the government’s action. Overall, the government policy was characterised by a rather strange combination of enthusiasm for the project and reluctance to contemplate a compromise, and this needs to be explained. Moreover, as we will see below, the government, especially the Prime Minister and the Foreign Secretary, made last-minute efforts to reach agreement with the rest of the EEC by accepting a compromise. They were unlikely to have done this if the government had actually not intended to participate in a joint Community float. The reason why the government was unwilling to contemplate a compromise, at least in the early stage of negotiations, is fairly clear from the official papers, on which our account of the events is based. The British politicians had two concerns about a proposed joint Community float. First of all, the Prime Minister feared that the government would be criticised as being indebted to the EEC in its effort to maintain a fixed exchange rate. This is why he insisted that the conditions of financial assistance should be something capable of being described as a pooling of foreign exchange reserves. Secondly, the senior Cabinet ministers were in no doubt that the opposition party would seize this opportunity to condemn the government policy as a surrender of national sovereignty. These two domestic considerations led the government to propose generous financial support and a relatively minimal sharing of economic sovereignty as a condition of a joint Community float, a combination of demands which even the Treasury officials acknowledged as unlikely to be accepted by Britain’s partners in the EEC. In short, the negotiating position of the government was largely determined by the domestic circumstances, and in particular by the likely reaction from the opposition, not by what the government itself considered to be the merits of the case.66 Negotiations within the EEC The British negotiators were praised by their counterparts for the boldness of the proposal, but criticised for not contemplating a compromise to reach agreement.67 At the time a number of possible deals were mooted. The first option was that, in exchange for unlimited financial support, a member of a joint Community float would accept collective decision-making on exchange rates more substantial than prior consultation. This idea was conveyed by the Belgian Ambassador in London to the Prime Ministerial Office and probably was in line with the French and Italian thinking.68 The alternative was to reduce financial assistance to a more modest scale. Wilhelm Haferkamp, European

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Commissioner for Economic and Monetary Affairs, met Barber and the Governor of the Bank of England on 8 March. He suggested a plan according to which financial assistance to the order of $12 billion (10 billion EUA) would be available without payment of interest and with no demand for repayment until the completion of EMU.69 In fact, it would not actually need to be repaid once EMU was completed, because all external assets and debts would be transferred to a European central bank. The Germans retreated from the initial offer of unlimited financial assistance without conditions or term of payment, but still promised considerable help. In his letter to Heath, Brandt justified his change of stance by arguing that unlimited support would cause inflationary pressure throughout the EEC. West Germany did not like the idea of her assistance being used to finance deficits caused by expansionary economic policy. But the German Chancellor confirmed his previous commitment to the underwriting of the sterling balances by the EEC, and also offered a bilateral medium-term loan to Britain alongside the community framework of assistance.70 It was at this last stage of the negotiations that the British government finally started making serious efforts to reach a compromise. The Prime Minister wrote a letter to the Chancellor of the Exchequer who was in Brussels for negotiations. Heath pointed out that the issue of a Community float should be considered in the wider context of Britain’s Community policies. If Britain could not participate in a joint Community float, so he feared, there would be repercussions throughout the Community: namely, loss of any prospect of a regional policy advantageous for Britain (on which the Prime Minister thought negotiations had been going well); an impasse in other Community developments; and a loss of confidence in the Community by Germany and other countries. The problem was that the government had not considered whether it could make any concession. The Prime Minister suggested that the government should urgently examine the proposals that had been floated, ‘to see if they would provide a basis for continuing discussion of the possibility of a joint Community solution in which we could participate fully and at once’.71 These last-minute efforts from both sides did not bear fruit. During the meeting of the ECOFIN on 11/12 March, Schmidt, coming under pressure from Giscard d’Estaing, accepted the Haferkamp plan on the condition that the UK and Italy would participate in a Community float, but the meeting failed to agree on the plan.72 As a result, the EEC decided to start a joint European float without the UK, Italy and Ireland.

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European central banks would no longer be obliged to intervene to maintain the parity of their currencies with the US dollar. The UK, Italy and Ireland expressed their intention to take part in a Community float as soon as possible.73 Heath was not satisfied with the result. He recognised that the economic difficulties prevented Britain from joining the Community float immediately. But he also emphasised that Britain ‘did not join the Community in order to behave like little Englanders’.74 The economic gap widened between Britain and the rest of the EEC after March 1973. In West Germany, the Bundesbank and the federal government adopted tough measures to combat inflation. Huge capital outflows from the pound to the Deutschmark resulted in a 16 per cent depreciation of sterling against the Deutschmark between June and July. The correspondence between Heath and Brandt on this matter was dubbed as an ‘interest rate war’ by commentators.75 Yet even as late as September 1973, Heath still pressed for sterling’s return to the Snake, only to be dissuaded by his officials and particularly Barber.76 The possibility of sterling joining the Community float ended with this incident. Before concluding the section, we need to analyse the key determinant of the British decision not to take part in the joint European float. (1) The special relationship with the United States The relationship with the United States was a relatively major concern at the initial stage of policy-making within the British government, but ultimately its impact on British policy was of minor importance only. If a joint Community float damaged US economic interests, it could lead to the reduction of US military commitments abroad, including a withdrawal of US troops from Western Europe. This was precisely the kind of situation which the British government was trying hard to avoid at the time. But was this linkage between finance and security a real possibility? Our answer is, potentially, yes, but ultimately, no. After meeting Heath in March, Chancellor Brandt wrote to President Nixon that the British Prime Minister and he had agreed to make every conceivable effort to strengthen European integration by launching a joint European float.77 Brandt’s letter aroused fears in Washington that the EEC might be heading for a unilateral solution, and would confront the United States and Japan with a fait accompli. In his message to Heath, President Nixon complained that the Americans could not accept the proposition that a strengthening of European integration was the sole criterion in looking for a solution to the crisis of the international monetary system. He asked for full consultation with countries whose

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interests were involved, including especially the United States and Japan.78 Heath tried to allay these fears by arguing that a Community float would not need to damage the United States: by strengthening the cohesion of the Community, Western Europe would be a more useful partner within the Atlantic alliance.79 The meeting of the G10 was also set for a consultation with the United States and Japan prior to that of the ECOFIN, which was due to take place on 11 March. It eventually turned out that the US administration was not concerned with a Community float per se, but with the future exchange rate of its participating currencies against the US dollar.80 Consequently, the British government believed that it had succeeded in allaying US fears through these efforts.81 Indeed, Cromer went so far as to suggest that, if no joint EEC action was achieved, the UK would incur much of the blame from Washington.82 Therefore, the relationship with the United States played only a minor part when the British government and its EEC partners failed to reach a compromise on a joint Community float. Throughout the crisis of the international monetary system in the early 1970s, the government had acted as a member of Western Europe, and its policy on this particular occasion seems to have been consistent with the broad line. Finally, in tackling the March crisis, there was virtually no possibility of reaching a global solution that included the United States. The British government was fully aware of this fact,83 as was the French government, which, until the last moment, would have preferred a global solution to the question of currency instability rather than a regional currency bloc. This is noteworthy, because preference for a global solution is often mentioned as a factor in Britain’s lukewarm attitude towards European integration. On this occasion, this solution was not an option. (2) The legacies of the Empire During the February crisis, the British government referred to the existence of the sterling balances as a major obstacle to Britain’s participation in a joint Community float. However, as we have seen, this was merely an excuse. In fact, the possibility that the sterling balances could be disposed of within the European framework was a major incentive for the British government to take part in negotiations on a Community float. This point was acknowledged even by the officials of the Treasury and the Bank of England, who were, for the following reason, opposed to sterling’s participation in a joint Community float. In this sense, President Pompidou was far-sighted when, in exchange for accepting Britain into the EEC, he asked Heath to reduce the dollar guarantee that the British government offered to the sterling area countries, thus

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leaving the sterling balances in an unstable position (Chapter 3). What the French President did not foresee in May 1971, however, was that even if the EEC underwrote the sterling balances this would not be a strong enough incentive for Britain to participate in European monetary cooperation. If the Anglo-American relationship was not an impediment to Britain’s participation in a joint Community float, and if it would have helped in the disposal of the sterling balances, then why did the British government, led by a Prime Minister widely regarded as more pro-European than any of his predecessors or successors, ultimately decide against it? (3) Economic considerations Any member of a joint Community float had to maintain inflation at approximately the same level as other participants, as well as keep a sound balance of payments. The British economy at the time satisfied neither of these conditions. The government saw faster economic growth and the reduction of unemployment as its priorities, which resulted in worsening inflation and balance of payments. After sterling was forced to float in June 1972, the government introduced a statutory prices and incomes policy to tackle inflation, without changing the priority of economic management. However, the government could not secure the support of the trade unions for its policy, and failed to stabilise industrial relations. The other EEC countries, whilst being inclined to offer help to deal with the sterling balances, did not like to see their financial assistance used to finance inflationary policy. This was especially true in countries which took the economist viewpoint on EMU, such as the Netherlands and the Federal Republic. If Britain had joined a Community float under these circumstances, either sterling would have been forced to leave it sooner or later, or the government would have had to introduce deflationary measures. It was no surprise that Treasury officials were not enthusiastic about participation in a joint Community float. During the February crisis, these concerns with economic management largely dictated British policy. However, with the politicisation of the issue in March, the arena of decisionmaking moved to the highest political level and more strategic and political considerations came to the fore. (4) National sovereignty Whilst officials were worried about the economic consequences of membership of a joint Community float, Cabinet ministers were more concerned with the transfer of sovereignty involved in European monetary

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cooperation. If sterling participated in a joint Community float, the British government would be required to consult its EEC partners on a parity change; and in the long run, there would be growing pressure for harmonisation of economic management. Interestingly, throughout the Cabinet discussions on the issue, no Cabinet minister was opposed to participation in a joint Community float on the grounds of loss of economic sovereignty. In other words, the government took a pragmatic attitude towards the issue of national sovereignty. However, ministers were anxious about the reaction of the opposition.84 Labour would no doubt seize the opportunity to attack the government’s policy as a surrender of national sovereignty. This analysis suggests that, in addition to economic considerations, the stance of the Labour Party was crucial for the government in deciding against a joint Community float. To demonstrate our hypothesis that the collapse of bipartisanship denied the government the opportunity to pursue a policy which it judged beneficial for Britain but which included the loss of national sovereignty, however, it is not enough to say that the government was afraid of criticism from the opposition party; we also have to show that, despite the official policy of the opposition, at least a part of the Labour Party actually either supported the government policy, or took a viewpoint similar to the government on European monetary cooperation. This is why, in the last section of this chapter, we shall examine the ideological division of the Labour Party on EEC membership in general and on European monetary cooperation in particular.

4.

The Labour Party and Europe

In this section, we examine the development of Labour policy on Europe after the vote of the House of Commons in October 1971, which approved the principle of Britain’s entry into the EEC. The Labour politicians who had helped the government on that occasion could not continue to do so, due to the institutional characteristics of the British political system. As a result, the policy of the Labour Party shifted further in a Eurosceptic direction; the opposition party now pledged that the next Labour government would renegotiate the terms of entry into the EEC, and give the electorate an opportunity, through a general election or referendum, to decide whether Britain should remain within the EEC thereafter. EMU was regarded as one of the five issues designated for renegotiation, alongside the CAP and Britain’s financial contribution. Despite the hostility towards EEC membership and EMU manifested in official party policy, however, the greater part

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of the Labour leadership either supported European monetary cooperation or took a viewpoint quite similar to that of the government on the subject.

The European Communities Bill, renegotiation and referendum The House of Commons voted in favour of Britain’s entry into the EEC on 28 October 1971, with 69 Labour MPs supporting the motion. However, in order to give EEC membership domestic legal effect, the government needed to secure parliamentary support for the enactment of the European Communities Bill. It is noteworthy that the passage of this Bill through the House of Commons was marked by a complete collapse of bipartisanship between the government and the opposition on the issue. Most pro-European Labour MPs voted against the Bill, both at the second reading and during the committee stage, in accordance with official party policy. This was because of the difference between a vote on a particular motion (such as the one on the principle of Britain’s entry into the EEC on 28 October 1971) and a parliamentary bill (like the European Communities Bill). The latter takes much more parliamentary time than does the former, with numerous occasions on which one must cast a vote. Here it is important to remember that, in the House of Commons, time is a precious and limited resource for the government. If the pro-European Labour MPs voted for the European Communities Bill and helped the government pass it quickly, the government would have extra time to introduce other politically controversial legislation to Parliament. This was clearly a more serious act of treachery against the party than was voting with the government for one parliamentary motion. Pro-European Labour MPs recognised beforehand that they had to vote differently on the principle of Britain’s entry into the EEC and the European Communities Bill.85 Roy Jenkins, for example, when running for the deputy leadership of the party, pledged to vote with the party on the Bill.86 Other Labour MPs justified themselves by arguing that ensuing legislation was the responsibility of the government; but their action was clearly based on political necessity, not logic. In this case again, the competitive character of the British party system discouraged cooperation between the government and opposition politicians on Europe. Yet if the most pro-European Labour MPs voted against the European Communities Bill, how did the government successfully secure the passage of the Bill through the House of Commons? In fact, there was secret

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cooperation between the government and a small number of proEuropean Labour MPs, with John Roper as their unofficial whip. Whenever the government judged that the support of their own backbenchers was insufficient to guarantee a majority for the Bill on a particular vote, one of the government whips, usually Kenneth Clarke, would contact Roper and secure enough abstentions on the Labour side.87 In other words, there was low-level cooperation between the two political parties, which helped the government secure the passage of the European Communities Bill through the House of Commons. Most of these abstaining Labour MPs, however, were not running at the next election, and therefore did not need to fear disciplinary action by the party.88 That only MPs in such a position could afford to defy party policy was testimony to the fact that the Bill marked the end of bipartisanship, at least during the Heath government. It was also in the middle of the parliamentary debate on the European Communities Bill that Jenkins decided to resign from the position of deputy leader and from the Shadow Cabinet. In February 1972, Enoch Powell tabled an amendment to the Bill requiring a consultative referendum before Britain’s entry into the EEC. Originally, the idea of a referendum was advocated by Tony Benn on constitutional grounds. James Callaghan recognised that it might one day become a lifeboat to save the unity of the party, but the idea did not at first attract much support within the party. Harold Wilson explicitly rejected the possibility when he was Prime Minister, and the Labour left initially preferred outright rejection of EEC membership to a referendum, the result of which could go either way. However, the amendment tabled by the Conservative backbencher was tempting, since it gave an opportunity for the opposition to defeat the government. Nevertheless, when the Shadow Cabinet considered the matter for the first time on 15 March, the majority of those attending were opposed to the idea of a referendum on EEC membership.89 The next day, President Pompidou unexpectedly announced that France would have a referendum on the enlargement of the EEC, and his announcement strengthened political pressure for a similar exercise in the UK.90 It was again the NEC that forced the Shadow Cabinet to change course: on 22 March, the NEC passed a motion proposed by Tony Benn, which urged the PLP to vote for an amendment to the Bill requiring a referendum before Britain’s entry into the EEC.91 On 29 March, the Shadow Cabinet reversed its own judgement of two weeks previously, and decided to support the amendment by 8 to 6.92 In protest against the decision, Jenkins, George Thomson and Harold Lever resigned from the Labour frontbench on 10 April. In his resignation letter Jenkins

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expressed his concern that a referendum campaign, in which the members of the Labour Party would fight on opposite sides, would be too divisive. However, his resignation can probably be better understood as a result of the long intra-party struggle, with the issue of a referendum being the final straw. Due to the declining influence of pro-European groups within the party, Labour policy continuously shifted in a Eurosceptic direction. In 1972, the NEC issued a report to the party conference, which listed the matters that should be renegotiated by the next Labour government. During the conference, Wilson summarised these requirements as follows: (1) major changes in agricultural policy; (2) fairer methods of Community financing; (3) the right to full employment policies, which would be precluded by EMU; (4) the retention by Parliament of powers over the British economy, and (5) rejection of the necessity to impose VAT. If renegotiations were successful, then the people should have the right to decide the issue through a general election or consultative referendum.93 Therefore, EMU became one of the issues to be renegotiated by the next Labour government.

The Labour Party and European monetary cooperation By 1972, the Labour Party had adopted a policy which placed many hurdles before EEC membership and was hostile to European monetary cooperation. However, it is not so easy to judge whether the public stance of the Labour frontbenchers on European monetary cooperation reflected their true policy preference or merely political calculation. Indeed, our case studies on the currency crisis of 1976 and the establishment of the EMS in the next two chapters will reveal that not only Jenkins but also those Labour politicians who held the key to the balance of power inside the party, such as Callaghan and Denis Healey, took a viewpoint quite similar to the Heath government on the subject. Nonetheless, as we have seen, opposition politicians who helped the government could not continue to do so, due to the institutional characteristics of the British party system. Bipartisan cooperation between the government and opposition therefore collapsed after the vote of the House of Commons in October 1971. Consequently, the government could not rely on the support of the opposition politicians for a policy which it believed to be beneficial for Britain but which included the loss of national sovereignty. This seemed to be the case with European monetary cooperation.

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Conclusion In concluding the chapter, we will summarise our main findings on EMU and the British policy towards it. First of all, if we define European monetary cooperation as a joint float of European currencies against the US dollar, it was West Germany, not France, which favoured this option. It is true that the French advocated EMU, but only on the assumption that the international monetary system would continue to be based on fixed exchange rates. One corollary of this finding is that, though European monetary cooperation was presented as a European solution to the transatlantic conflict over the reform of the international monetary system, it was not as anti-American a move as some commentators suggest. It is true that, in the long run, a single European currency would be created and might become a serious competitor to the US dollar as the international currency (a scenario that still remains to be seen); in the meantime, a joint Community float removed a source of conflict in the US–Europe relationship by cutting the link between the US dollar and European currencies and giving both sides more autonomy in economic management. The second question is why Britain and France parted ways on European monetary cooperation. In the British case, participation in European monetary cooperation was deemed desirable from the viewpoint of the government’s international strategy; by disposing of the sterling balances in the framework of EMU, Britain could simultaneously reduce her dependency on the United States and relinquish the legacies of the Empire. Thus our analysis vindicates Henry Kissinger’s description of Heath as ‘a more benign British version of de Gaulle’.94 In the end, however, sterling did not take part in a joint Community float. This was partly because the weakness of the British economy at the time forced the government to pursue a ‘dash for growth’ policy. But it was also because the government could not secure domestic support for its European policy due to the lack of cooperation by the opposition. For the French, a joint float of European currencies or the emergence of a regional currency bloc was not the favoured option, since this would increase German influence in Western Europe. France eventually supported a joint Community float only because, compared with an individual float, it was the lesser evil of the two. As we stressed in our account of the summit meeting of Heath and Pompidou in May 1971, cooperation on monetary issues was the key to the attempt at Anglo-French rapprochement at the beginning of the 1970s. From the French viewpoint, the collapse of the Bretton Woods

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regime, and the emergence of a regional currency bloc as a result, increased rather than reduced the necessity of such cooperation to counterbalance German influence. Therefore, it was not at all surprising that the French were disappointed by the failure of the British government to return sterling into the Snake, a fact which eventually cooled the relationship between the two countries. It has been suggested that the distance between London and Paris became remote in the middle of the decade because of the change in personnel within both governments. Whilst Giscard d’Estaing, who succeeded Pompidou as French President after his predecessor’s death in 1974, reconfirmed the importance of the Franco-German relationship, the British government led by Callaghan, who was appointed Prime Minister in 1976, returned to its traditional relationship with the United States.95 These explanations based on the personality of the politicians concerned, however, should be qualified by the fact that the Anglo-French relationship had deteriorated even before both Heath and Pompidou left office. The French President did not doubt that the Prime Minister was personally committed to the European cause, but it was also clear that the latter was not able to mobilise domestic support for his European policy. It was this fact which set limits to the possibility of cooperation between the two neighbouring countries.96 However, the gulf that had opened up across the Channel was still not impassable. After all, the French franc was forced to leave the Snake in January 1974, and the first attempt at EMU virtually came to an end with this incident. The French government confronted domestic difficulties in tackling inflation, as its British counterpart did. Our next task in the following two chapters will be to compare British and French policy on the establishment of the EMS, and explain why the ways of both countries finally parted on the issue.

5 Comparing British and French Policy on European Monetary Integration (1): The Currency Crisis of 1976

Introduction In March 1979, European monetary cooperation was given new impetus by the establishment of the EMS, which was largely the result of a West German initiative. Having been at first indecisive, the British government now chose not to participate in the ERM, the central institution of the EMS. France, by contrast, opted for full membership, despite misgivings as to the details of the scheme. In this chapter, we will conduct a detailed study of British policy towards European monetary cooperation, from March 1976 until the beginning of the negotiations on the EMS, comparing it with the French case. British and French policy on the establishment of the EMS will be closely looked at in the next chapter. By building on these case studies, we will be able to explain why these two neighbouring countries parted ways on European monetary cooperation. In explaining a process that culminated in the establishment of the EMS, the choice of March 1976 as a starting point requires some justification. It was during the Copenhagen European Council in April 1978 that a new EMS was first proposed, and negotiations proceeded subsequently within the EEC on the detailed arrangements thereof. Thus it is commonplace for the literature to begin the story of the EMS in either early 1978, or October 1977 when Roy Jenkins, as President of the European Commission, used his Jean Monnet Lecture in Florence to relaunch a debate on monetary union.1 However, we shall defy this academic convention by choosing March 1976 as our starting point. At this time, both Britain and France were confronted with a severe currency crisis; the Labour government in Britain had to apply for an IMF loan to restore confidence in sterling, and the French franc was forced to leave the Snake for the second time. Analysis of the 1976 crisis and its aftermath is of 115

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crucial importance in explaining why Britain and France adopted contrasting policies on the EMS. (1) Firstly, it reveals a strategic aspect of British and French policies that is often ignored or only casually referred to in the literature on the establishment of the EMS. This point is related to our first and second explanatory factors, namely the special relationship with the United States and the legacy of the Empire. In the middle of the decade, all three major West European countries witnessed a change in top governmental personnel. In Britain, the Labour Party formed a minority government after the general election of February 1974 called by Prime Minister Edward Heath. Harold Wilson, the new Prime Minister, called a second election in October and this time secured a small majority. Wilson eventually retired from politics in March 1976, and James Callaghan succeeded him. Meanwhile, in France President Georges Pompidou passed away in April 1974. Valéry Giscard d’Estaing, a non-Gaullist, centre-right Minister of Finance, narrowly defeated François Mitterrand in the second round of the ensuing presidential election. Almost at the same time, Helmut Schmidt replaced Willy Brandt as Chancellor of West Germany. These personnel changes are often regarded as catalysts for the reorientation of foreign policy that took place in the three countries. First of all, it is frequently argued that the new Labour government laid renewed emphasis on the relationship with the United States and the Commonwealth, instead of regarding Britain as ‘a part of Europe’ as the previous Conservative government had done. Within Western Europe, West Germany now replaced France as Britain’s closest partner, in marked contrast to the Heath–Pompidou era. Finally, Giscard d’Estaing and Schmidt successfully restored the Franco-German partnership, which had often been strained during the tenure of their predecessors. However, our analysis of the 1976 currency crisis shows that these arguments need to be qualified in a number of ways. Most significantly, the policy adopted by the British Labour government on international monetary issues cannot simply be described as Atlanticist.2 Nor was its policy towards European monetary cooperation as different from that of Heath’s Conservatives as is generally believed. During the IMF crisis, Callaghan tried hard to negotiate a ‘Common Market loan’ with the rest of the EEC to run down the sterling balances, which, he believed, were the main cause of the crisis.3 The attempt was reminiscent of the negotiations that had taken place between Heath and Brandt prior to the start of a joint European float in March 1973.4 This finding supports our argument that, had the leadership of the

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Conservative and Labour parties cooperated on the issue, Britain would have participated in European monetary cooperation. Callaghan’s aim was to avoid the rigour of cuts in public expenditure necessary for the government to receive a loan from the IMF. However, the US Treasury and the Federal Reserve were very hostile to his policy, and made sure both that the British government had recourse to the IMF and that the conditionality of the IMF loan was applied to the UK in the same way as to other countries. In other words, the US administration used the IMF as a surrogate, and compelled the reluctant British government to change its economic policy by refusing special treatment for the UK.5 In the end, Callaghan was forced to abandon his plan and confessed to his Cabinet colleagues that ‘it was the first time in his life that he felt anti-American’.6 By contrast, Schmidt was more helpful to Callaghan than anyone else throughout the crisis; he helped the British ‘for political reasons and because of the partnership in Europe’.7 The IMF crisis offers background information for understanding British policy towards the EMS. As we saw in Chapter 1, it was the growing asymmetry of power within the Anglo-American relationship that had driven the British political elites to embrace EEC membership in the 1960s. In similar vein, the IMF crisis revealed in the most painful way the fact that the British government had only limited influence in Washington. Yet it also showed that the lack of leverage with the United States could be offset by Britain’s new partnership in Europe. Therefore, it was not surprising that the Prime Minister thought that participation in the EMS would be necessary to avoid further erosion of influence in international monetary affairs: if the UK were completely left out of the EMS, then the United States might be tempted to make a deal on the reform of the international monetary system with West Germany and France over the heads of the British policy-makers. These concerns explain why Britain, even while opting out of the ERM, participated in the other two pillars of the EMS, the ECU and the EMCF. On the French side, the most intriguing question is why the French government decided to participate fully in the EMS. The decision was surprising, not least because, as we will see, the EMS gave the German Bundesbank de facto power to set monetary policy throughout the EC. From the viewpoint of economic management, it was certainly true that Raymond Barre, French Prime Minister since August 1976, was keen to contain inflation with the help of the external discipline of a fixed exchange rates system. Nonetheless, in the absence of perfect Franco-German inflationary convergence, the EMS was too deflationary

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for the French economy. Politically, the EMS did not restore the equality of status between Paris and Bonn, but rather consolidated the leading role of West Germany.8 The French policy on the EMS makes sense only if we look at the unhappy experience of the French government outside the Snake during the decade. French policy on European monetary cooperation was actually quite consistent throughout the Pompidou and Giscard d’Estaing presidencies. Although Britain, France and Italy had left the Snake (indeed, France left the Snake in January 1974, rejoined in June 1975 and left again in March 1976), it remained popular among smaller European states because of the monetary stability it offered. However, after the franc had left the Snake, the French government was excluded from a circle of consultation on monetary policy among the participants in the system. Moreover, under German leadership, the Snake as a group increasingly tended to speak with one voice.9 In short, the French lost their influence in international monetary affairs due to the franc’s exit from the Snake. These developments were exactly as expected when the Bretton Woods regime collapsed in March 1973. It was not the EMS, but the collapse of Bretton Woods that changed the balance of power between France and West Germany in favour of the latter. For the French, therefore, the best alternative was to maintain a global fixed exchange rate system. Even after the collapse of Bretton Woods regime, the French government did not abandon the pursuit of a global solution to currency instability. Indeed, this was the major point at issue when Giscard d’Estaing hosted the first meeting of the Global Economic Summit at Rambouillet in November 1975. However, the French proposal for a global system of stable exchange rates, including the US dollar, ended in failure because of the reluctance of the US government. In January 1976, the IMF ratified the reality of the world of floating currencies by changing the Articles of Agreement. According to the new agreements, a fixed exchange rate system can be reintroduced only with the support of more than 85 per cent of the total voting power, which means that the US government has a veto over any proposal. Although the United States promised to intervene in case of erratic fluctuation of the US dollar, this agreement put an end to the French hope of returning to a par value system in the foreseeable future.10 It is only in this context of the lack of an alternative that we can understand French support for the EMS. It was impossible to persuade the United States to commit herself to an international monetary system based on stable exchange rates. Alternatively, if the franc had continued an individual float, the Federal Republic would have established

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hegemony within Western Europe as the leader of the Snake zone. Compared with an individual float of the franc, the EMS was the lesser evil of the two, because it offered the French an opportunity to check the influence of West Germany within the framework of multilateral cooperation. To summarise, from the viewpoint of international strategy, both Britain and France felt it necessary to participate in European monetary cooperation. It is unlikely that the special relationship with the United States (and whether this even really existed was dubious) prevented the UK from taking a full part in the EMS. Callaghan, like his Conservative predecessor, hoped that the sterling balances could be dealt with inside the framework of European monetary cooperation. Thus, our analysis reveals that the strategic background was not a decisive factor when we explain why Britain and France chose a different policy on the EMS. (2) In the second place, through the experience of the 1976 currency crisis both the British and French governments recognised the necessity to pay more attention to the stability of their currencies in economic management. This point is related to our third factor, economic considerations. The convergence of inflation rates among participants is one of the prerequisites for the success of European monetary cooperation. During the early 1970s, Britain and France could not become long-term partners in European monetary cooperation, partly because the priority of their economic management was to achieve faster economic growth and full employment. Consequently, both countries had inflation rates higher than the OECD average, and the loss of international competitiveness as the result of inflation had to be compensated for by depreciating their currencies. But this economic policy mix became unsustainable due to two factors: the transition of the international monetary system to floating exchange rates and the quadrupling of the oil price from November 1973. In the 1960s, critics of Bretton Woods argued that, under a floating exchange rate system, no country would any longer be required to use monetary policy to achieve external equilibrium, and monetary policy could thus be used for domestic purposes. It was certainly true in practice that floating rates gave more discretion to medium-sized countries like Britain or France in deciding monetary policy. After the collapse of Bretton Woods, the monetary policies of the major West European countries initially diverged, with the US, West Germany and Japan opting for stabilisation, and Britain and France for expansion. However, floating did not allow the monetary authorities to ignore exchange rates. In particular, the depreciation of any country’s currency fuelled inflation by

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raising the price of her imported goods, and the loss of international competitiveness and a balance of payments deficit as a result of inflation would trigger a further fall of her currency. In other words, under a floating system, the use of exchange rates as a policy tool to expand the economy became more costly in terms of its negative effects on the balance of payments and on inflation.11 Moreover, after November 1973 the quadrupling of the oil price and the rise of other commodity prices not only turned the external balance of oil-importing countries into a large deficit, but also pushed the world economy into stagflation, a combination of high unemployment and an inflationary spiral. Under these circumstances, Britain and, to a lesser degree, France continued to pursue high economic growth. Yet this policy led to rapid deterioration in the external balances of both countries; while their imports increased as a result of expansion, exports failed to catch up due to the deflationary policy of their trading partners. Instead of introducing deflationary policy, Britain and France relied on foreign borrowing to finance their external deficits, and postponed economic adjustment.12 This was the economic background to the currency crisis that both countries faced in March 1976.13 The currency crisis of 1976 resulted in two significant changes of economic policy by Britain and France. First, the balance between two major objectives of economic management, lower inflation and full employment, shifted in favour of the former. Both the British and French governments began publicly announcing target figures for domestic monetary growth. Nonetheless, these changes should not be regarded as a move away from Keynesianism to monetarism, as is sometimes suggested. Not only was the actual policy far short of what monetarists advocated, but it was also based on ideas quite different from monetarism, such as exchange rate stability and the strategy of export-led growth. This point is related to the second change. After the crisis, both Britain and France engaged in more serious efforts to stabilise the value of their currencies in the foreign exchange market. Barre attached great importance to the stability of the exchange rate between the franc and the Deutschmark.14 What is less well known is that the British government set a target for the exchange rate of sterling after the IMF crisis. Initially, government policy took the form of a target zone against the US dollar; but, in the latter half of 1977, the British government stabilised the value of sterling vis-à-vis the basket of currencies used by Britain’s major trading partners.15 Needless to say, these two changes removed, or at least reduced, one of the most important obstacles to Britain and France participating in

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European monetary cooperation. But if both the British and French governments felt it necessary to participate in the EMS on strategic grounds, and if economic hurdles to doing so were lowered, one might wonder why the two neighbouring countries eventually reached contrasting conclusions on the issue. (3) Last but not least, the above changes in economic policy led to a political realignment in both countries. This point is related to our fourth and fifth factors, attachment to national sovereignty and the characteristics of national party systems. It was because of the last factor that Britain’s path diverted from that of France (and the rest of the EEC) on the issue. In Britain, there was a possibility that, if it was unable to reach agreement on conditions for the IMF loan, the Labour government might collapse and a government of national unity would be formed, as in 1931. The Prime Minister managed to avoid this scenario by carefully appeasing dissidents within the Cabinet and obtaining terms from the IMF that were less strict than those the organisation had initially demanded. Nevertheless, left-wing Labour MPs refused to support the government’s policy in the House of Commons, and the government had to conclude a pact with the Liberals to secure its own survival. However, the ‘Lib–Lab’ Pact did not have a noticeable effect on the government’s policy. By contrast, if a government of national unity had been formed between the right wing of the Labour Party and the Conservatives, it would, among other things, have provided the Prime Minister with domestic backing to pursue closer cooperation with Britain’s European partners.16 The fact that the political realignment in the aftermath of the currency crisis had only limited policy effects in the UK makes for a sharp contrast with the following French case. In France, after the franc had left the Snake in March 1976, President Giscard d’Estaing clashed with Jacques Chirac, his Gaullist Prime Minister, over the government’s economic policy. Chirac insisted that economic expansion was the only way to halt the advance of the Communist and Socialist parties, who had been gaining support since adopting the Common Programme in 1972. His position was broadly in line with the Gaullist policy since the events of May 1968, which were regarded by the French authorities as a reaction against economic austerity imposed during the early days of the presidency of Charles de Gaulle.17 But Giscard d’Estaing refused to back Chirac. After Chirac resigned in August, the President appointed Barre, who introduced a policy of austerity. Chirac reorganised the Gaullists into a new political

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party, the RPR, which officially remained as a part of the presidential majority, but increasingly assumed a semi-opposition character. The President, who led the coalition of the non-Gaullist right, the Republican Independents, reacted to the move by opening up the majority to the centrists.18 The defection of the Gaullists may appear to have weakened political support for Giscard d’Estaing, but this was not necessarily the case. Being liberated from the nationalistic mantle of Gaullism, the President was now able to commit France to closer regional integration by making an alliance with other pro-European forces, including the centrists and even the Socialists. As we will see in the next chapter, it is because of this political realignment that the French government was able to build up domestic support for full membership of the EMS. To conclude, by studying the currency crisis of 1976 and its aftermath, we are able to put Britain and France’s reactions to the German initiative on the EMS two years later in the right perspective. The difference between the two neighbouring countries concerning the EMS can best be explained by the political realignment that both countries experienced in the aftermath of the crisis. The decisive factor was whether or not such a realignment allowed the pro-European political forces, which had previously been divided between the left and right, to cooperate. The answer was in the affirmative in France, but in the negative in Britain. The first section of the chapter explains the domestic and international contexts of the IMF crisis, and the reason why the crisis began in March 1976. Then, in the next section, we will look at Callaghan’s diplomatic efforts to obtain a safety net for the sterling balances as an alternative to the IMF. Having failed to achieve his objective, the Prime Minister was forced to negotiate a loan with the IMF. The details of negotiations with the IMF and subsequent Cabinet discussions will be the subject of the third section. Finally, we will examine the Lib–Lab Pact, which the government concluded with the Liberals after the crisis in order to secure support for its economic strategy. We conclude the chapter by explaining why the pact had only limited influence on the government’s economic and European policy.

1. The IMF crisis as a case study of European monetary cooperation By briefly looking at the IMF crisis of 1976, we are able to uncover previously unknown aspects of British policy on European monetary cooperation. The existing literature on the IMF crisis tends to focus on

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a change in economic policy as a result of the crisis, including whether the episode can be described as the decisive moment of British postwar history, when the paradigm of economic management shifted from Keynesianism to monetarism.19 By contrast, what the Prime Minister attempted to achieve through his diplomatic efforts has attracted relatively minor attention.20 In fact, Callaghan kept in close contact with US President Ford and West German Chancellor Schmidt throughout the crisis. His aim was, first of all, to negotiate a safety net for the sterling balances, and then to reduce the scale of public expenditure cuts necessary to receive the IMF loan. In particular, Callaghan contemplated receiving an EEC loan for the funding of the sterling balances, in exchange for the re-entry of sterling into the Snake. This episode reminds us of the negotiations that had taken place between Heath and Brandt before a joint float of the European currencies started without sterling in March 1973. It not only justifies our attempt to treat the IMF crisis as a case study of European monetary cooperation; more than that, the similarity between the two cases allows us to confirm that the leadership of both main political parties was broadly in agreement on the issue. For a historical account of the IMF crisis, the relative lack of attention to Callaghan’s diplomacy is unfortunate; it was, after all, because of his efforts that the IMF relaxed the condition of the loan. His success was vital for the survival of the Labour government.21 For our research, paying attention to the diplomatic aspects of the crisis is mandatory. Therefore, we will attach as much importance to the Prime Minister’s top-level diplomacy as we do to the economic aspect of the IMF crisis. The rest of the section is designed to supply the background to the IMF crisis. We will first see how the IMF crisis arose. Then we will examine alternative explanations for the crisis; namely, whether it was the government’s mishandling of the economy or the existence of sterling balances that was to blame. Secondly, we will look at the leadership contest in the Labour Party, which coincidentally took place just after the outbreak of the crisis. Analysis of the election reveals a balance of power between different factions within the PLP, which was to restrict the freedom of Callaghan, the winner, in his attempt to find a way out of the crisis without splitting the Cabinet and the party. Lastly, we will examine the international and European contexts of the crisis: the changing role of the IMF, which largely reflected US policy, and the situation of European monetary cooperation. It will help us to explain why the Germans were keen on the idea of a safety net for sterling when the Americans were not.

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The outbreak of the sterling crisis: Mishandling of the economy or the sterling balances? The IMF crisis began as sterling came under pressure in the foreign exchange market from the beginning of March 1976. Until February, sterling had stayed around $2.10, but it fell below $2 for the first time on 4 March. The Bank of England then lowered the interest rate on the following day. Within a few days, sterling had fallen to approximately $1.90. It is often questioned whether the British government did not in fact initially intend to depreciate the currency.22 Within the Treasury, there were certainly voices advocating a strategy of currency depreciation on the grounds that it would help British industry recover its international competitiveness.23 In his memoirs, Callaghan, then Foreign Secretary, wrote that ‘the Chancellor and the Bank of England had apparently agreed during February 1976 that the exchange rate of sterling …was unrealistically high and the Bank set out to edge it down …’24 By contrast, Wilson’s own memoirs deny the allegation that a formal decision was taken in this regard.25 Even the official record is elusive. Nonetheless, it seems that the government decided to embark on a gradual depreciation of sterling sometime between December 1975 and February 1976.26 The situation moved beyond their control soon afterwards, however. The second question is why the sterling crisis did occur, and why it started in March 1976. Was the government’s economic management to blame for the currency crisis, or was it the existence of the sterling balances that precipitated a run on the currency, as Callaghan thought?27 On the one hand, there was certainly a considerable problem with the British economy and the way in which the government managed it. On winning the general election in February 1974, the Labour government inherited from its Conservative predecessor the legacies of expansionary policies; that is, public spending, fiscal deficits and, most of all, the money supply all sharply increasing.28 During the first year of the Labour government, the Social Contract took the place of statutory incomes policy, but wages continued to rise by over 20 per cent.29 Public spending was also increased by 12.2 per cent.30 On the other hand, the government adopted a couple of measures to stabilise the economy before March 1976, and the performance of the British economy was thus actually improving when the crisis struck. First of all, the government successfully negotiated an incomes policy with the TUC over the summer of 1975. Additionally, during the expenditure survey of 1975, the government made a number of changes in order to keep the level of public expenditure under control. Most important of all

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was the introduction of cash limits; under the new system, even if inflation was higher than expected, public expenditure would not be automatically adjusted upwards.31 The economic forecasts for inflation and the balance of payments in 1976 projected an improvement on the previous two years, although the government still needed to finance a large anticipated balance of payments deficit for 1977. These facts direct our attention to the existence of the sterling balances as an important factor behind the crisis. We can demonstrate the influence of the sterling balances on the way in which the IMF crisis unfolded by distinguishing the official balances, which were held by foreign central banks as part of their reserves, from the balances owned by non-resident private actors for commercial transactions. These two types of sterling balance made strikingly different movements during the IMF crisis. The official balances (the sterling balances in the narrow sense) had been increasing since the late 1973, because of a large inflow of petrodollars from the Middle East, which helped the government to finance balance of payment deficits in 1974 and 1975, the worst period of the British economy. This trend, however, was reversed in 1976, and official sterling holders started to diversify their surplus oil money away from the pound. The official balances, after reaching a high point of £4.86 billion in March 1975, went down to £4 billion a year later, and made a sharp decline to as low as £2.64 billion in December 1976. By contrast, the private balances remained stable at £3 billion throughout 1976.32 In short, sterling faced the crisis not because private actors or the market lost confidence in the currency, but because official sterling holders, particularly oil-producing countries such as Nigeria and Kuwait, decided to reduce their holding of sterling.33 These countries seem to have done so for reasons not particularly related to the performance of the British economy.34 It was true that the official sterling balances were kept at a high level before the IMF crisis in order to finance the UK’s external deficit, and we therefore cannot completely separate the sterling balances from economic management. Nonetheless, the sterling balances undoubtedly made a significant contribution to the currency crisis. In particular, we cannot explain the timing and magnitude of the crisis without referring to the official sterling balances. Therefore, Callaghan’s obsession with the sterling balances was not entirely groundless. The British government was actually well aware of the risk of diversification before the outbreak of the 1976 crisis. Indeed, during 1975 there was a Cabinet discussion about whether the government should offer a new guarantee to the largest sterling holders.35 However, the Treasury

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was critical of the idea, not only because it was costly, but also because it might weaken the government’s counter-inflationary efforts.36 Harold Lever, Chancellor of the Duchy of Lancaster and a financial adviser to the Prime Minister, was also opposed to the proposal on the grounds that the government should reduce the sterling balances in due course.37 This was why the sterling balances were left without protection, and, when the difference in the interest rates between the UK and the United States narrowed in March 1976, it precipitated a large-scale sale of sterling. The election of Callaghan as leader of the Labour Party On 16 March 1976, while sterling was enjoying a brief period of tranquility, Wilson issued a statement that he would resign as Prime Minister once the Labour Party had chosen his successor. His resignation came as a surprise to almost everyone, and a leadership contest was fought over the following three weeks. Analysis of the election is indispensable to knowing the relative strength of factions within the PLP. In total, six candidates entered the leadership contest, four from the right (Callaghan, Roy Jenkins, Home Secretary, Denis Healey, Chancellor of Exchequer, and Tony Crosland, Environment Secretary) and two (Michael Foot, Employment Secretary, and Tony Benn, Energy Secretary) from the left. The first round of voting was counted on 25 March. Foot came in first with 90 votes and Callaghan was the runner-up with 84. Jenkins gained only 56, Benn 37, Healey 30, and Crosland 17. Crosland was therefore automatically eliminated from the competition. Benn, who had performed better than expected, immediately withdrew from the next round in favour of Foot. Jenkins also decided to withdraw after failing to consolidate support even within his former followers. The second round was therefore contested by Foot, Callaghan and Healey. This time Callaghan won first place with 141 votes. Foot was close behind with 133 votes, Healey trailing with 38. Callaghan eventually became leader of the party and therefore Prime Minister after beating Foot by 176–137 in the final ballot on 5 April. The result of the leadership contest clearly showed the strength of the left-wing faction within the parliamentary party. Callaghan was elected as a leader who could hold the party together. The right was weak and divided. Healey supported the reduction of public expenditure, to which Crosland was opposed. Jenkins, who did not get the Foreign Secretary’s portfolio as he had hoped, became President of the European Commission in the autumn of 1976 and left British politics. Hereafter, Crosland led what could be broadly called the moderate and pro-European section of the party, but its cohesion remained fragile.

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On becoming Prime Minister, the first task Callaghan carried out was a reshuffle of the Cabinet. Crosland, despite his dismal result in the leadership contest, was promoted to Foreign Secretary instead of Jenkins, who was regarded as too controversial for the party by the new Prime Minister.38 Foot, who became the number two inside the government after the election, was appointed Leader of the House of Commons and took charge of negotiations with the TUC. Overall, the reshuffle moved the Cabinet to the right. This made it the source of a potential conflict with more left-leaning backbenchers. Having said that, the most important task awaiting the new Prime Minister was to maintain the solidarity of his Cabinet throughout the IMF crisis, and to avoid ministerial resignations as much as possible. For the sake of analytical simplicity, the Callaghan government could be divided into four groups: (1) the Treasury group made up of Healey and Joel Barnett, Chief Secretary, and supported by Dell; (2) the group loyal to the Prime Minister; (3) the Keynesian and largely pro-European group loosely organised around Crosland (Lever also belonged to this group); and (4) the leftist group, such as Benn and Foot. The respective strength of each group limited the scope of political manoeuvre open to Callaghan in his attempt to steer the government and the Labour Party through the IMF crisis. On the one hand, if the Croslandite and leftist groups united against his policy, he would be forced either to resign the premiership or to form a coalition government, with serious consequences for the unity of the Labour Party. On the other hand, if he found a solution to the currency crisis acceptable to both Healey and Crosland, thus leaving the left isolated, then his government could survive the crisis without inflicting too much damage on the party. In other words, if we are to explain Callaghan’s response to the IMF crisis, we cannot ignore the political context in which he had to operate. The changing role of the IMF Next, we need to look at the international and European contexts of the IMF crisis. This helps us to explain the US and West German responses to the crisis, i.e. why the Germans were keen on the idea of a safety net for the sterling balances but the Americans were not. An important factor behind the IMF crisis in 1976 was the changing role of the Fund.39 Throughout the whole crisis, the IMF adhered to the stance that the British government had to change economic policy if it wanted to receive a loan. This, in turn, reflected how the United States, the largest contributor to the Fund, viewed the state of the British economy. Nowadays, only a developing country applies for an IMF loan. It

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is generally regarded as a national humiliation to accept economic surveillance by the IMF in exchange for a loan.40 Yet this was not necessarily the case before 1976. At the time, the IMF did not impose strict conditions on developed countries, and it was more common for them to have recourse to the IMF in the case of financial difficulties. For example, Britain obtained $1.4 billion as a loan from the IMF with relatively generous conditions after the devaluation of sterling in 1967. This fact made a sharp contrast with the case of any developing country, for which the United States would use the IMF as a surrogate to enforce a change in economic policy. The novelty of the IMF crisis in 1976 lay in the fact that, by insisting on the principle of conditionality, the US administration used the IMF to force a developed country like Britain to change her economic management. To understand the changing role of the IMF, therefore, we need to go back to the period before 1976. From 1974 onward, the IMF was at the centre of political debate on how oil-importing countries could deal with the huge balance of payments deficit that they were suffering as a result of the oil shock. Broadly speaking, two lines of policy were advocated. Firstly, it was argued that these countries could improve their balance of payments and contain inflation by a combination of deflation and currency depreciation. But this policy was likely to slow down economic growth and worsen already high unemployment. Nor could balance of payments disequilibria be eliminated by a competitive devaluation. Instead, proponents of the alternative approach demanded that all governments concerned should expand their economies. In this case, a balance of payments deficit would be financed by recycling the petrol dollar from the oil producers; that is, by foreign borrowing. Initially, the second approach was more popular among member states, and was supported by both the British government and Johannes Witteveen, IMF Managing Director.41 The 1974 annual IMF meeting adopted a resolution calling for burden-sharing and economic expansion. Despite US opposition, Britain, France and Italy successfully took the initiative in setting up the oil facility, which would be administered by the IMF and allow a deficit country to draw from the IMF with loosened conditionality. However, the situation had changed by the time of the 1975 annual meeting of the IMF. It was only Britain and Italy that had followed the resolution adopted the previous year, while the US, West Germany and Japan had successfully contained inflation and made a significant improvement on the balance of payments (France occupied a middle position

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between the two camps). Healey argued that countries with better balance of payments situations should take special responsibility for the recovery of the world economy by adopting reflation measures. But William Simon, US Secretary of the Treasury, disagreed. Instead, he argued for the principle of conditionality, and urged a deficit country to adjust her economic management through the stabilisation programme of the IMF. Witteveen gradually changed his stance, and by the time of the 1976 annual meeting, arguments for burden-sharing were hardly heard. The above change is testament to the influence that the Fund’s largest contributors, the United States and, to a smaller degree, West Germany, had over the IMF stance. This is not surprising at all, because the voting power within the Fund is allocated according to the proportion of each member’s contribution. In fact, ‘the IMF crisis’ was a quite misleading expression. If the scale of a required loan is large, as was the case in the sterling crisis of 1976, the IMF does not have enough sufficient resources of its own. In such a case, the monetary authorities of the G10 and Switzerland make a contribution in accordance with ‘the General Agreement to Borrow’ concluded in 1962, and the IMF works only as the administrator of the loan. During the 1976 sterling crisis, the US money men, in particular, Simon, Edwin Yeo, Undersecretary of the Treasury for Monetary Affairs, and Arthur Burns, Chairman of the Federal Reserve Board, urged the Fund to impose strict conditions on the British government in exchange for a loan. They were hostile to the idea of a safety net for sterling, because this would allow the British government to bypass the IMF. The United States put pressure on other creditor institutions, including the EEC, to make economic adjustments as a condition when lending money to a deficit country.42 The fall of sterling that began in March developed into not only an economic but also a political crisis, because the IMF attempted to impose conditionality on the British government. The stance of the Fund closely reflected that of its largest sponsor, the United States. The Tindemans Report and European monetary cooperation Another important context of the currency crisis in 1976 was the state of European monetary cooperation at the time, which explains why Schmidt was more willing than anyone else to help the British during the crisis. As we have already seen, the Snake, which was originally intended as the first stage of EMU, was, by the middle of the decade, confined to West Germany and other small countries. The EEC was both economically and

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politically divided into two groups of Snake and non-Snake countries. There was widespread pessimism about the future of European integration itself. It was not surprising, therefore, that overcoming the division within Western Europe and resuming progress towards EMU was high on the Community agenda. In particular, West Germany tried to narrow the gap between the two groups by tying her economic assistance to non-Snake countries with their commitment to a future membership of the Snake and the pursuit of economic policies compatible with that purpose. These facts shed new light on the role of Schmidt during the IMF crisis. It is unlikely that he would have helped Callaghan as much as he did had he not believed that his efforts would encourage the British government to bring back sterling into the Snake. However, before coming to this point, we first need to see the situation of European monetary cooperation at the time in more detail. In January 1974, the French franc was forced to leave the Snake amid the inflation triggered by the oil shock. The heads of state and government quietly abandoned the target date of 1980 for achieving EMU during the Paris European summit in December 1974.43 It was because of these developments that, when the Labour government was renegotiating the terms of British entry into the EEC, EMU did not become a major subject. However, this fact did not mean that European monetary cooperation was off the agenda during the period. On the contrary, there were at least two initiatives aimed at reinvigorating the project. The first was called the Fourcade Plan, which was originally submitted to the meeting of the ECOFIN in September 1974 by Jean-Pierre Fourcade, French Finance Minister.44 He renewed his proposal after the French government had expressed its intention to return the franc to the Snake in May 1975, the twenty-fifth anniversary of the Schuman Plan. In his plan, Fourcade urged greater symmetry of obligation between strong and weak currencies whenever participants of the Snake needed to intervene in the foreign exchange market. At the same time, he urged joint intervention by European countries to stabilise the value of their currencies against the US dollar. In the longer term, the margin of exchange rate fluctuation within the Snake should be widened. These proposals were clearly intended to ease the route back to the Snake, but West Germany refused to support them. More noticeable was that Britain and Italy, who could benefit from the French proposals, kept low profiles. For the British government, EMU was the least welcome of subjects, with a referendum campaign on continued British membership of the EC just around the corner. The franc eventually returned to the Snake in its original form, but was able to stay there for less than a year.

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The second initiative of European monetary cooperation took the form of a report written by Leo Tindemans, Belgian Prime Minister (the Tindemans Report). The Paris summit of December 1974 commissioned Tindemans to make a report on the definition of a European Union, whose formation the heads of state and government had originally agreed to complete by 1980. Tindemans’ Report was submitted to the meeting of the European Council in December 1975. In his report, Tindemans did not indulge himself in talking about ‘the Constitution for the future European Union’, or ‘the final phase of European development’.45 Instead, the report took a pragmatic and realistic approach to solving the problems that the EEC was currently facing, and it made a number of modest proposals over a wide range of issues, such as Europe’s role in the world, economic and social questions, and institutional reform. In the following, we will summarise the part of the report which dealt with European monetary cooperation, and the reaction of EEC countries to the report, including that by Britain. Tindemans’ Report made two new proposals on how to proceed with European monetary cooperation. First of all, it urged the EEC to adopt a two-tier or two-speed approach to EMU. This approach meant that ‘those states which are able to progress have a duty to go ahead’, while ‘those states which have reasons for not progressing’ ‘will nonetheless receive from the other states any aid and assistance that can be given them to enable them to catch others up’. In the second place, Tindemans recommended that the Snake should be used as the starting point for EMU. According to his report, ‘the machinery of the Snake, which has proved itself by maintaining the stability of exchange rates, must be used to seek a convergence of economic and monetary policies between those States which are in a position to achieve it’. In this respect, he followed the ‘monetarist’ approach to EMU proposed by the Werner Report.46 These two proposals posed a considerable problem for the British government. First of all, if a two-tier approach to EMU was adopted, there would be a risk that important technical questions would be solved in ways which would not suit Britain when sterling later rejoined the Snake. Moreover, the Tindemans proposal ‘could strengthen and institutionalize the already present tendency of the Snake countries gradually to evolve into an inner core within the Community’.47 Secondly, as we saw above, in Tindemans’ Report the Snake was regarded as the appropriate method of progression towards EMU. However, it was not possible for Britain to rejoin the Snake for the foreseeable future. A more fundamental objection was that the convergence of economic performance across the EEC should take precedence over the Snake to achieve EMU.48 In this sense,

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the Treasury supported the ‘economist’ approach to EMU.49 At the same time, the Treasury recognised that joint intervention against the US dollar and widening the margin of currency fluctuation within the Snake, both of which were proposed by the French, would lessen the cost of participation in European monetary cooperation.50 This fact supports our argument that the lack of domestic support prevented the British government from forming a united front when Fourcade made the proposals. Most other EEC countries also criticised the two-tier approach to EMU that the Tindemans Report proposed, although there was a clear difference nonetheless between Snake and non-Snake members. NonSnake countries, such as Italy and Ireland, were unequivocal in their criticism of Tindemans’ proposal.51 By contrast, the reaction of Snake countries, such as the Netherlands and Denmark, revealed the dilemma that smaller European states faced. On the one hand, the Dutch government was sceptical about a two-tier EMU, because it could divide the Community. One Dutch official went as far as to characterise the two-tier approach as being ‘liable to perpetuate present German dominance within [the] Snake and thus upset balance which British accession had brought to [the] Community’.52 On the other hand, ‘although [the] Dutch did not want to set any new deadlines, they saw EMU as [the] key to make progress towards European unity’.53 The Danes also made similar responses.54 In short, while smaller European states resented German dominance within the Snake, their economic welfare depended on monetary stability guaranteed by the Snake. The British government was very concerned with the German response to the Tindemans Report, not least because the two-tier approach to EMU was originally proposed by Brandt. Schmidt was also known to be keen on the idea.55 It was further known that the Germans were tying their economic assistance to non-Snake countries with future membership of the Snake and domestic policies judged for this purpose.56 During the German Chancellor’s visit to London in early February 1976, The Times, quoting from his speech before the Foreign Affairs Club, reported that ‘Schmidt thought the two-speed solution, allowing stronger member states to move faster towards economic and monetary union – advocated in the recent Tindemans report – had “severe negative implications”’.57 In fact, however, the Tindemans proposals closely reflected the German stance on EMU. Therefore, Schmidt’s public statement should not be taken at face value. Rather, the publication of the Tindemans Report allowed West Germany to air her own idea of a two-tier approach to EMU without becoming the focus of criticism. The main purpose of these diplomatic manoeuvres was, of course, to encourage countries like

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Britain, Italy and Ireland to rejoin the Snake; if economic assistance was a carrot, the two-tier approach to EMU was a stick. In the speech quoted by The Times, Schmidt did not forget to add that ‘if … the [British] government would get inflation down to 10 per cent by the end of this year, it would considerably improve Britain’s chances of joining the “Snake”’.58 The above is a summary of the situation surrounding European monetary cooperation on the eve of the currency crisis in March 1976. It is surprising that, within the vast literature on the IMF crisis of 1976, only scant attention is paid to the question of why Schmidt helped Callaghan more than did anyone else to negotiate a safety net for the sterling balances and better conditions for the IMF loan. In Schmidt’s own words, his government’s action was because ‘Germany needs the EEC and it needs Britain in the EEC’.59 He attached particularly great importance to the Snake and to the framework of European monetary cooperation.

2. Looking for the alternative to the IMF: The June stand-by and a safety net for sterling Our next task is to observe the government’s attempts to look for an alternative to an IMF loan and to escape from the rigours of IMF conditionality. The government obtained a stand-by credit of $5.3 billion from the major developed countries in early June. However, the value of sterling continued to fall, and because the June stand-by was for three months and renewable only once, by the autumn of 1976 the British government had no choice other than to apply for the IMF loan in order to recover confidence in the currency. Yet this application did not mean that the government was resigned to accepting deflationary policy as the price of receiving money from the Fund. On the contrary, Callaghan was determined to seek a medium-term loan for the funding of the sterling balances as a substitute to, or at worst in parallel with, the IMF loan. It seems that the Prime Minister was prepared to contemplate a deal whereby, in exchange for such a loan from the EEC, Britain would return sterling to the Snake. This fact shows that Heath and Callaghan, the former a Conservative and the latter from Labour, pursued surprisingly similar deals when they were in power. The June stand-by and the July packages Our main purpose in this section is to see how the British government obtained the stand-by credit of $5.3 billion in June. This is essential for

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our research, because the negotiation process of the stand-by resembled that of a safety net for sterling: the Labour government initially sought financial assistance from the Americans, but because of US reluctance, had to turn to the Europeans for help. The value of sterling continued to fall in the foreign exchange market, reaching $1.70 on 3 June. The idea of obtaining a stand-by credit to recover confidence in sterling began to circulate both inside and outside the British government. After some twists and turns, the government successfully negotiated the stand-by credit of $5.3 billion from the major developed countries, which was announced on 7 June: $3.3 billion from the European and Japanese central banks and the BIS, and $2 billion from the US Treasury and Federal Reserve. Opinions have varied as to who came up with the idea of a stand-by credit first, and who was instrumental in organising it.60 Official papers reveal the following story. Lever proposed to negotiate a stand-by credit on 24 May. During the meeting held on 3 June, his proposal was opposed by most Treasury officials and Gordon Richardson, Governor of the Bank of England, who argued that the government should apply for the IMF loan immediately. Healey, however, backed Lever’s proposal, and this was why Richardson rang his American counterpart, Burns.61 On the following day, Jelle Zjilstra, President of the Netherlands Central Bank and of the BIS, also suggested arranging a stand-by credit to Richardson, and quickly secured the total of $3 billion from the nonAmerican G10 countries. Initially, the US authorities were not hostile to the idea,62 but the US attitude hardened soon afterwards. Yeo flew to London and met Healey on 5 June. During the meeting, he told Healey that the United States preferred the British government to apply for the IMF loan immediately. Healey replied that to do so would destroy incomes policy (which was renewed in May on the understanding that the government would not make further cuts in public expenditure in 1976–77) and partnership with the TUC. It would not, therefore, be acceptable to the Cabinet.63 Healey was due to make a parliamentary statement on 7 June, and, if there was nothing new in his statement, sterling was then expected to come under heavy pressure. Something needed to be done urgently to save the pound. He thought that, if EEC support could be arranged quickly, ‘that would be good for Europe and might put pressure on the USA’.64 Healey therefore urged Richardson to talk to Zjilstra about ‘the possibility of lining up a declaration and a financial contribution by the non-American members of the G10’.65 The Governor was sceptical about whether such a declaration would be useful without full American participation, but agreed notwithstanding. In the

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end, the Americans gave in, and Healey was able to present the standby credit of $5.3 billion to the House of Commons on 7 June. Burk and Cairncross argue that the question of who was the architect of the June stand-by is ‘not all that important’.66 This might be the case from the viewpoint of economic research. Nonetheless, we need to bear in mind that the choice of partner from whom the British government obtained financial assistance could have lasting political ramifications. This was particularly true in the case of a safety net for the sterling balances, the subject of our later analysis, which covered a much longer period than the stand-by and would inevitably, therefore, have more important political consequences. In the case of the June stand-by, the British government contacted the United States first, but ended up turning to the Europeans for help. A similar pattern was repeated during the negotiation of a safety net for sterling. The June stand-by was due to last for three months, and could be renewed only once. Moreover, the Americans attached a couple of conditions to the credit. First of all, the British government publicly committed itself to applying for the IMF loan if it could not repay the stand-by before the time limit. In the second place, the government informally agreed to cut public expenditure in exchange for receiving the stand-by credit. There was a serious disagreement within the Cabinet on the size of cuts required, and how the burden of the cuts would be divided between different departments. In the end, the Cabinet agreed with the Chancellor’s proposal to reduce planned public expenditure in 1977/78 by £1 billion. It also decided to increase employers’ contribution to the national insurance scheme by 2 per cent. In total, these July measures reduced the PSBR forecast in 1977/78 from £10.6 to £9 billion. As part of the July package, the government announced the projected growth of monetary supply in 1976/77 as 12 per cent. Yet this fact cannot be regarded as a proof that the government was now committed to monetarism. First of all, the announcement was merely a public relations exercise to pacify financial circles, with only a small minority inside the Treasury and the Bank of England believing in the doctrine themselves.67 Secondly, it was not a target, but a projection of monetary growth. Treasury officials regarded the figure as feasible only if the trade unions cooperated with the government on wage settlements.68 In short, for the Labour government, the publication of a monetary growth forecast was no more than a policy tool complementary to the Social Contract. The purpose of the June stand-by and the July package was to gain time until the new economic policy took effect. Despite the

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government’s efforts, however, confidence in sterling was not restored. The market expected that the government would be forced to raise the interest rate to meet the publicised figure of monetary growth, and therefore refrained from purchasing government bonds. The Bank of England raised the minimum lending rate (MLR) to 13 per cent on 10 September and then to 15 per cent on 7 October in an attempt to return the market to normal. Meanwhile, sterling came under renewed pressure in the foreign exchange market with the outbreak of new industrial action. In late September Healey was due to fly to East Asia to attend the annual meeting of the IMF in Manila. However, when he arrived at Heathrow, the news that sterling was rapidly falling came in, and, after ringing the Prime Minister, he decided to return from the airport. Now the IMF was the only way for the government to halt a run on sterling. Healey therefore issued a statement that the government would apply for the loan on 29 September. On the previous day, Callaghan gave his most famous speech during the Labour Party conference in Blackpool. This speech deserves a long quotation, not least because it has been the centre of the debate about how the nature of Labour’s economic policy changed as a result of the IMF crisis. For too long, perhaps ever since the war, we postponed facing up to fundamental choices and fundamental changes in our society and in our economy. … For too long this country – all of us, yes this Conference too – has been ready to settle for borrowing money abroad to maintain our standards of life, instead of grappling with the fundamental problem of British industry. Governments of both parties have failed to ignite the fires of industrial growth in the ways that countries with different political and economic philosophies have done. Take Germany, France, Japan – different countries, different philosophies. We are, as you know, still borrowing money. But this time we are … borrowing … partly to pay for our high investment in the North Sea. We are borrowing, too, because other industrial nations volunteer credits, so that our strategy and our proposals for regenerating British industry need not be thwarted by short-term speculative movements of sterling balances – a load we have still been unable to shed. We are determined that this borrowing will be used to act and to press on with the task of rebuilding a regenerated manufacturing industry. This time we are not going for a consumer boom on borrowed money: we are going to invest it in our future. The cosy world we were told would go on forever, where full employment would be guaranteed by a stroke of the Chancellor’s pen, cutting

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taxes, deficit spending – that cosy world is gone. … The rate of unemployment today – there is no need for me to say this to you – cannot be justified on any grounds, least of all the human dignity of those involved, but, Mr Chairman and Comrades, still less did I become the Leader of our Party to propound shallow analyses and false remedies for fundamental economic and social problems. When we reject unemployment as an economic instrument – as we do – and when we reject also superficial remedies, as socialists must, then we must ask ourselves unflinchingly: what is the cause of high unemployment? Quite simply and unequivocally it is caused by paying ourselves more than the value of what we produce. There are no scapegoats. … It is an absolute fact of life which no government, be it left or right, can alter. … We used to think that you could spend your way out of recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and that insofar as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by higher unemployment at the next step. Higher inflation followed by higher unemployment. We have just escaped from the highest rate of inflation this country has known; we have not yet escaped from the consequences: high unemployment. That is the history of the last 20 years. Each time we did this, the twin evils of unemployment and inflation have hit hardest those least able to stand them. Not those with the strongest bargaining power, no, it has not hit those. It has hit the poor, the old and the sick. We have struggled, as a Party, to try to maintain their standards, and indeed to improve them, against the strength of the free collective bargaining power that we have seen exerted as some people have tried to maintain their standards against this economic policy. Now we must get back to fundamentals. First, overcoming unemployment now unambiguously depends on our labour costs being at least comparable with those of our major competitors. Second, we can only become competitive by having the right kind of investment at the right kind of level, and by significantly improving the productivity of both labour and capital.69 Did Callaghan’s Blackpool speech amount to the acceptance by the Labour Prime Minister of the monetarist critique of Keynesian economic management? Did the economic policy pursed by the Callaghan government since the IMF crisis foreshadow the ‘Thatcher revolution’ in the 1980s? One important caveat is that we need to distinguish

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between the policy the government actually implemented and the logic it used to legitimise such a policy. Here we will only point out a number of characteristics in Callaghan’s speech that anticipated the policy his government carried out after the crisis. It was doubtless true that in his speech the Prime Minister criticised the Keynesian technique of demand management and deficit spending using language quite similar to that used by monetarists at the time. This was partly because the speech was drafted by Peter Jay, Callaghan’s son-in-law, who was sympathetic to monetarism, and partly because the Prime Minister had to pacify overseas opinion to recover confidence in the government’s ability to tackle the situation. Yet, beyond this similarity, neither his analysis of the problem the British economy was facing, nor the solution he offered, can be described as monetarism. First of all, he continued to attach great importance to the restraint of pay settlements. Hence incomes policy and partnership with the labour movement remained vital parts of the government’s strategy. By contrast, according to monetarists, inflation is a monetary phenomenon caused by the excessive growth of domestic monetary supply. All the government needs to do is to publish a target for its growth, and stick to it by adjusting interest rates and reducing the size of a fiscal deficit. If management concedes inflationary pay agreements to labour, then the government must be prepared to raise interest rates, even to a level that will make the cost of investment prohibitive. Both industry and the trade unions will thereby realise that such a pay settlement is not in their best interests, and will change their behaviour accordingly.70 Monetarism was politically attractive for the Conservatives precisely because it emphasised the importance of monetary and fiscal policy in tackling inflation: the logical consequence of this emphasis is that incomes policy or relationships with the trade unions were not as important as previously understood. If this argument were accepted, Labour’s ability to maintain good relationships with the unions would no longer be their electoral asset. Callaghan, however, did not have this outlook. In the second place, Callaghan advocated the path of export-led growth sustained by high levels of investment in manufacturing industry. This point is important for the purpose of our research, because it explains the government’s exchange rate policy after the IMF crisis. Once the British government had successfully negotiated the loan from the IMF and a safety net for sterling, confidence recovered and the value of sterling rose rapidly in the foreign exchange market. The government struggled to stabilise the value of sterling to maintain the international

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competitiveness that British industry had obtained by the large depreciation of sterling during the crisis.71 As part of these efforts, the government lowered interest rates step by step in 1977, arguably faster than the situation of domestic inflation justified.72 By contrast, the first Thatcher government allowed sterling to appreciate, which lowered the price of imported goods and helped the government contain inflation. Yet this policy caused lasting damage to the industrial base of Britain, and made the future of the British economy more dependent on the financial sector. Britain became increasingly reliant on inward foreign investment in order to finance her trade deficit.73 It was not surprising, therefore, that the Thatcher government put the liberalisation of international capital movement ahead of exchange rate stability, and did not participate in the ERM until 1990. The third characteristic of the speech was its stress on the fact that the British government would be able to carry out the above economic strategy more easily if the sterling balances did not exist. Accordingly, Callaghan attempted to negotiate with the United States and West Germany a medium-term loan for the funding of the sterling balances, which will be the subject of the next section. To conclude, what Callaghan tried to do during and after the IMF crisis was considerably different from the policy later pursued by the Thatcher government. Kenneth Morgan describes Callaghan’s stance during the IMF negotiations as the attempt to ‘bypass a more fundamental restructuring of the economy’, meaning therefore that it ‘was not in line with his Blackpool speech’.74 However, if our analysis is correct, Callaghan’s speech was not so much the embrace of monetarism as the criticism of Keynesian economics in the first place. More importantly, Morgan’s view of Callaghan’s policy can be sustained only if we assume that the only way to implement a fundamental restructuring of the British economy was one based on monetarism. It is striking that scholars like Morgan, who are critical of many aspects of Margaret Thatcher’s economic reform, nonetheless use it as the criterion to judge her predecessor’s policy. In fact, Callaghan’s policy was based on considerably different ideas from Thatcher’s.75 A Common Market loan as an alternative to the IMF? In this section, we will trace the Prime Minister’s diplomatic efforts to negotiate a safety net for sterling as an alternative to, or in parallel with, the IMF loan. The question of particular interest is why Callaghan, who described himself as a man of the Atlantic alliance, became attracted

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to the idea of a Common Market loan for the funding of the sterling balances, something negotiable only in exchange for sterling’s return to the Snake. The negotiating team of the IMF, which was led by Alan Whittome, the head of the European division within the Fund, was due to arrive in London on 1 November. Initially, the IMF requested that the British government reduce public spending by £3 billion in 1977/78 and by £4 billion in 1978/79, which roughly amounted to 6 and 8 per cent of the total expenditure respectively.76 As Pliatzky testified, ‘it was never on the cards that Treasury ministers would put such proposals to Cabinet, let alone succeed in getting approval for them’.77 This was the context in which Callaghan sought a top-level diplomatic solution to the crisis by negotiating directly with Ford and Schmidt over the head of the IMF. His aim was twofold. First of all, the Prime Minister pleaded with both men to agree with a safety net for the sterling balances, which he believed to be at the root of the currency crisis. Secondly, he tried to mitigate the conditions of the IMF loan by emphasising the political consequences of the Fund’s demands and specifically mentioned Britain’s contribution to NATO and the presence of the British Army on the Rhine.78 As the negotiating position of the IMF reflected the attitudes of the financial ministries in both lending countries, it was not surprising that Callaghan thought that only political pressure from the highest level of the US and West German governments could make a difference in the policy of the Fund. At first, the Prime Minister hoped that negotiations on a safety net for sterling could be concluded earlier than those on the IMF loan. This aroused suspicion within the US administration that Callaghan was trying to bypass the discipline of the IMF altogether. In November he pressed hard for the government to be able to announce a safety net for sterling at the same time as the IMF loan. In the end, Britain could obtain a safety net only after the successful conclusion of negotiations with the IMF. What exactly was a safety net for sterling? From an economic perspective, it was a simple proposition. The sterling balances were unstable, and often caused disruption in the foreign exchange market, because they were a short-term liability owed by the UK, and their holders could diversify from sterling at any time. However, the reserves owned by the Bank of England were not large enough to cover the entire balances. A safety net would allow the British government to convert the sterling balances into a medium-term debt denominated in a foreign currency, which would not be as disturbing for the British economy as the sterling balances. Therefore, the problem was: from whom could the British government obtain

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such a loan? In other words, it was not so much an economic issue as a political one.79 Not surprisingly, the Prime Minister initially wished for American cooperation on the issue. The Americans had previously offered a long-term loan to deal with the sterling balances right before sterling was devalued in 1967, when Callaghan was in charge of the defence of the currency as Chancellor of the Exchequer.80 During the Puerto Rico Summit in June 1976, Healey raised the issue with Simon, US Secretary of the Treasury, but the latter was clearly unsympathetic.81 Yet Callaghan did not abandon his idea. On 29 September he called Ford, who was fighting his re-election campaign against the Democratic candidate Jimmy Carter. Ford showed more understanding for Callaghan’s cause than did his Treasury Secretary, but ultimately could not offer Callaghan much help.82 Burk and Cairncross attribute Ford’s inability to help Callaghan to his defeat in the presidential election in November and the fact that he was surrounded by very conservative financial advisers who were suspicious of a Labour government.83 But their account misses a more fundamental change in the Anglo-American relationship which had taken place between 1967 and 1976. This point becomes clear if one compares the situation of 1967 with that of 1976. According to Callaghan’s own account, the American offer of a longterm international loan in 1967 failed to materialise for the following two reasons. First of all, the prospect of taking up this offer did not sit easily with the visits that the Prime Minister [Harold Wilson] and the Foreign Secretary [George Brown] were making to various European countries to advance Britain’s application to join the Community. General de Gaulle certainly would have believed his suspicions proven: that Britain would be a Trojan horse in the European Community.84 Secondly, the Americans demanded that ‘Britain should continue to play a substantial role in the defence of the Far East’.85 However, for the British government ‘this was unacceptable. It was clear that if Britain was to reduce government overseas expenditure significantly it would be necessary for us to withdraw from Malaya and Singapore’.86 To begin with, the US was willing to offer a financial loan in 1967 because at that time Britain was still the centre of the sterling area, and sterling was in the front line of defence of the US dollar. The pound had been pegged to the US dollar since 1949, and its devaluation could trigger speculation on the dollar.87 But none of these considerations existed when a crisis of sterling occurred again nearly ten years later. The US became less cooperative on the sterling balances and urged the British government to apply for an IMF loan with full conditions attached. From the American perspective the

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strategic importance of the UK had declined with the withdrawal of the British troops from east of Suez and the dissolution of the sterling area – in short, with the end of the British Empire. Yeo succinctly remarked: ‘we could not operate a double standard – one for Anglo-Saxon, exImperial powers, and another for the rest of the world’.88 Because of the US attitude, Callaghan was forced to turn to Schmidt, the German Chancellor, with whom he was more successful. When Schmidt stayed at Chequers on 9 and 10 October: I [Callaghan] enquired what help Germany could give to assist the long-term stability of Britain’s overseas sterling holdings, in reply Helmut Schmidt unfolded the picture of the German currency reserves. They were largely held in dollars and financed the American deficit, a subject on which he was lengthily and disapprovingly vocal. If Germany were to recall part of her dollar reserves this, together with similar assistance from the United States and one or two other countries, would make it possible to devise a plan that would offset the instability of the sterling overseas balances, and bring much needed relief. He promised to follow up this idea with the Americans.89 The above quotation suggests that, at this point, Callaghan was still trying to make arrangements to finance the sterling balances, in which not only the Germans but also the Americans would participate, as had been the case with the Basle Agreement in 1968. The US Treasury, however, had been extremely hostile to such a deal. According to Lever, who originally recommended the idea of a sterling balance deal to the Prime Minister, he was warned by Yeo: ‘Oh Harold, I hear you’ve got some lunatic notion of getting the renewal of [the 1968] Basle [Agreement], it’s a total nonstarter.’90 In any case, Callaghan’s efforts suffered a serious blow because of Ford’s defeat in the presidential election on 2 November. Yet this setback did not end negotiations for a safety net for sterling. Three days after the US presidential election, Callaghan had a long telephone conversation with the German Chancellor. From this emerged an unexpected offer that was to be of tremendous reassurance during the difficult weeks that followed. It was this. Without any request or prompting from me, Helmut Schmidt said he felt Germany must be ready to act when required, in order to make the British government feel a little more secure. Therefore, on a personal basis, he undertook that if ever an acute danger of necessity should arise, Britain could draw upon Germany within 24 hours, and the Ger-

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man government would make whatever improvised arrangements were necessary.91 Unfortunately, in his memoirs, Callaghan does not go into the details of the conversation between the two. But the official record reveals that Callaghan was now negotiating with Schmidt for an EEC loan for the funding of the sterling balances. In exchange, Britain would ‘get back into the Snake if sufficient stability had been achieved for sterling’.92 The Americans might not take any part in it (although their acquiescence would still be necessary), or might be pressurised into participating at a later stage.93 Moreover, the stance of the Prime Minister had broader support within the government than previously thought. Tony Benn’s diaries record that ‘the FO [Foreign and Commonwealth Office] and the Treasury were out of touch with Jim [Callaghan]’s line’.94 However, Crosland was in fact pressing the same course,95 and Healey, who had initially opposed the plan, was also involved in the negotiations.96 On the same day as Callaghan had his telephone conversation with Schmidt, The Times published a very curious article, which described the major components of a possible deal between the two sides: There is a strong case for funding the remaining sterling balances. This could be done by the EEC without too much difficulty, on the line of the 1968 Basle agreement. But what would be the advantage to our partners – especially Germany, which would be the main underwriter of any such fund? The main advantage would be that this would be the first achievement of the much-vaunted but so far not very successful economic and monetary union (EMU). A Europeanization of the sterling balances would be a first step towards the creation of a European reserve currency as the partner of the dollar on the world stage … There is a chance that such a plan might be saleable to our partners – but only on one condition. In addition to taking the necessary steps to put our domestic house in order – which will in any case be a condition of the IMF loan – Britain will have to put sterling into the EMU ‘Snake’. In other words, we will have to stop floating the pound and align it … with the deutschmark and the other Snake currencies like the Swiss, the Austrians, the Danes and the Beneluxers … In short, therefore, a package deal to rescue sterling and strengthen European unity can be put together if there is the will on both sides to do it. The evidence is that the will exists.97 Assuming that Callaghan was contemplating a deal whereby, in exchange for an EEC loan, Britain would return sterling to the Snake, we can make

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a couple of interesting observations. First of all, Callaghan attempted to make a deal with Schmidt that was essentially the same as that which Heath had attempted with Brandt. In other words, both the Conservative and Labour leaderships were broadly in agreement on European monetary cooperation, even though it was probably out of necessity that Callaghan tried to do what Heath had done out of conviction. This is particularly noteworthy if we consider the fact that, when the party was out of office, Callaghan had triggered Labour’s turnaround on British membership of the EEC through his notorious ‘Chaucer’s language’ speech. In his speech, the criticism of EMU loomed large. The Americans, however, remained a formidable obstacle to Callaghan’s attempt. The US government had not only been unwilling to participate in any sterling balance deal, but was also strenuously opposed to the European option. Yeo flew to West Germany at the end of October after hearing the reports that ‘Schmidt had been won over at Chequers to the idea of a sterling balance deal as an alternative to the IMF’.98 The Americans were afraid that West Germany might even be prepared to agree with a scheme that did not include the United States. According to Fay and Young, ‘Yeo found, to his relief, that he was preaching to the converted. Schmidt’s own advisers had been insisting that Germany must not undermine the IMF… Schmidt remained worried and sympathetic, but not willing to act unilaterally to help the British.’99 However, Yeo probably misunderstood the depth of the German Chancellor’s commitment. It was only a few days after Yeo flew back to the United States that Schmidt made the above offer to Callaghan over their telephone conversation, and the German Chancellor even revealed Yeo’s visit during the talks.100 While the British Treasury dealt with the IMF team, therefore, Callaghan dispatched Lever as a personal envoy to Washington on 14 November. The purpose of Lever’s visit was, first and foremost, to make arrangements for the funding of the sterling balances, with the task of obtaining a more generous condition for the IMF loan regarded as of only secondary importance. He was charged with persuading the Americans to agree to the simultaneous announcement of the IMF loan and a safety net for sterling. On his arrival in Washington, Lever first called on Simon and Burns. Not surprisingly, both treated him coldly, and these visits were little more than a courtesy. However, Lever gained a more sympathetic ear from Henry Kissinger, Secretary of State. Both Kissinger and the State Department were concerned with the political consequences of the currency crisis. Nonetheless, the encounter with Kissinger on the

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morning of 15 November was a difficult one for Lever. According to his recollection reported by Burk and Cairncross: He [Kissinger] says ‘Harold, you’ve come on a hopeless mission. You’ve been sent to fail.’ ‘Why do you say that, Henry?’ He said, ‘Because the President told me yesterday that he has it from the highest intelligence authority that you’re the only member of the Cabinet who’s in favour of this.’ I said, ‘But the Prime Minister sent me here. And I’ve got a letter to give to the President.’ And he said, ‘Harold, you’ve read your Hamlet.’ So I said, ‘When you say that I’m only member of the Cabinet in favour of this, it’s true. No other member of the Cabinet knows about it, only Denis Healey who’s opposed to it, and he’s only opposed because he’s a bloody stooge of his Treasury officials. Jim [Callaghan] is very enthusiastic, he’s at least as enthusiastic as I am.’ So he said, ‘If that’s really true, get Jim to telephone the President … on the hot line, tell him how keen he is, if you’re right.’101 This testimony actually invites more questions than it answers. First of all, it is rather strange that both Ford and Kissinger thought that Callaghan was not firmly committed to what Lever was trying to do in Washington, given that the Prime Minister had already raised the issue of the sterling balances with Ford during his telephone call on 30 September. If we are to believe Lever’s recollection, then it seems likely that the framework of a sterling balance deal under discussion was considerably different from that which Callaghan had initially envisaged in September. One interpretation is that, following instructions from Callaghan, Lever was referring to the possibility of unilateral European action on the sterling balances, and Kissinger, in the exchange of words quoted above, regarded it as a bluff. Lever was due to meet Ford on the following day. The US government had a high-level interdepartmental meeting to decide its policy beforehand, and a delicately balanced compromise was reached: the US herself would be a party to a sterling balance deal, provided that the IMF loan was successfully negotiated first.102 There was confusion about timing, but President Ford appeared to have agreed with a simultaneous announcement of the IMF loan and a sterling balance deal.103 To conclude, Lever’s mission produced mixed results for Callaghan. On the positive side, Washington finally accepted the principle of a sterling balance agreement. This was an important achievement for the Prime Minister, given the previous attitude of the US administration.

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Yet at the same time, the British government was told to conclude negotiations with the IMF first, and the Americans refused to participate in talks on a safety net until the British government and the IMF reached a substantial agreement. Therefore, our next task will be to look at negotiations between the British government and the IMF, and how the Prime Minister won Cabinet support for the terms of the loan.

3. Negotiations with the IMF and Cabinet discussion on the terms of the loan In negotiating with the IMF, Callaghan was confronted with the difficult task of finding a solution which was tough enough to satisfy the Fund, but not so tough as to destroy the government: the second half of the requirement meaning that the terms should be acceptable to the Cabinet, the Labour Party and the TUC.104 Here is the summary of our findings. First of all, it was again West Germany, not the United States, that was most helpful to Callaghan in obtaining better conditions for the IMF loan. Secondly, the Prime Minister managed to maintain the unity of the Cabinet and the Labour Party, so that a repetition of 1931, when James Ramsay MacDonald formed a government of national unity after the Labour Cabinet had failed to reach agreement on public expenditure cuts, was avoided. Callaghan’s task was made easier by the fact that, because of his own diplomatic efforts, the conditions of the IMF loan became more generous than those that the Fund had initially demanded. Last but not least, the Labour government decided not to cut social security expenditure in order to maintain the unity of the Cabinet and the Social Contract with the TUC. This decision, however, was not compatible with what the government proclaimed as one of the two pillars of its economic strategy, namely, achieving economic recovery and improving the balance of payments by maintaining high investment in manufacturing industry. The IMF was mainly concerned with the level of the PSBR and domestic credit expansion. The PSBR could be reduced either by increasing tax or by cutting public expenditure, but it was quite obvious that both the Fund and overseas creditors favoured the second option. Therefore, the size of public expenditure cuts necessary to receive a loan loomed large during negotiations with the IMF and subsequent Cabinet discussions on the condition of the loan. The full Treasury team met the negotiating team from the IMF for the first time on 19 November. The IMF initially demanded that the British government reduce public expenditure by £3 billion in 1977–78

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and by £4 billion in 1978–79. Meanwhile, the Treasury estimate of the PSBR in 1977–78 was revised upwards from £9 billion (the figure at the time of the July package) to £10.5 billion. Before long it became clear that the Prime Minister was facing a daunting task if he was to find a solution acceptable to both the IMF and the Cabinet. Callaghan told the IMF team that he was not prepared to accept a PSBR in 1977–78 lower than £9 billion, and this was taken badly by the Fund.105 However, the Cabinet meeting of 23 November failed to agree even on this figure. Healey told the Cabinet that he would be able to persuade the IMF to accept the PSBR of £9 billion in 1977/78, and £6.5 billion in the year after. However, Crosland led opposition by arguing that the package would destroy the Social Contract and cause disquiet within the PLP far beyond the Tribune group.106 In the end, the overwhelming majority of the Cabinet opposed authorising the Chancellor to discuss £9 billion with the IMF. Rival factions began to take shape within the Cabinet. Both the social democratic and the leftist groups had their own meetings to consider the strategies that they would pursue. If these two groups were to coalesce, they would form a majority within the Cabinet and the Chancellor would not have support for his position. As Callaghan wrote in his memoirs, ‘the government would not have survived the resignation of the Chancellor’.107 If this coalition had actually materialised, therefore, Callaghan would have been confronted with an extremely difficult choice: either he would have formed a government of national unity with the Conservatives to obtain the IMF loan, or he would have been forced to resign the premiership. Over the weekend, negotiations with the IMF were almost broken off, with only two of the original IMF team staying in London, in order to avoid an impression of complete collapse. To break the deadlock, Callaghan telephoned Schmidt and Ford, and requested that they talk to their representatives in the IMF.108 Schmidt, who recognised Callaghan’s political difficulties, asked Karl-Otto Pöhl to go to Washington and talk to the Americans, to try and weaken the conditions. Pöhl had ‘instructions to tell … that we are supporting Callaghan and the British for political reasons and because of the partnership in Europe’. Schmidt also wrote a personal letter to the US President himself, suggesting that ‘they should give up their tough position via London’.109 It remains unclear whether or to what degree the German manoeuvre affected US attitudes. In the end, however, the British government obtained the best possible deal with the IMF on the conditions of the loan, and it was unlikely to have been able to do so without German assistance.110

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Callaghan told Crosland that he was going to support Healey, on their way back home from the European Council at The Hague between 29 and 30 November. After all, the government had to repay $1.6 billion (the amount the Bank of England had spent from the June stand-by) on 9 December. It would also need to finance a large deficit of the current account in 1977, which was expected to be in the order of £3 billion.111 The crucial Cabinet meeting on 1 December was delayed because of an unexpected visit: Johannes Witteveen, the managing director of the IMF, flew to London suddenly, and asked to see the Prime Minister. As the head of the IMF, he was regarded as the only person who could persuade Callaghan, and according to one account, he visited London at the request of none other than Ford. The meeting between the two, however, was highly unpleasant. Witteveen demanded an even larger reduction of public expenditure than that which Healey had envisaged. Callaghan retorted that his government could not survive if he tried to meet the IMF demand. Their talks ended without reaching any agreement.112 No less than 14 papers were submitted to the Cabinet meeting. Apart from the Treasury plan proposed by Healey, the papers of Crosland, Benn and Shore came under the most intense scrutiny.113 The introduction of import controls played a central role in both Benn’s proposal, which was based on the Alternative Economic Strategy (AES),114 and Shore’s paper. Crosland put forward a proposal that the government would reduce the PSBR in 1977/78 by £2 billion with the introduction of import deposits (advance payments for imported goods). He argued that, if the IMF persisted with its demand for public expenditure cuts, the government should threaten the Fund with the possibility of troop withdrawals from West Germany. By referring to an import deposit scheme and omitting public expenditure cuts from his proposal, he was clearly making an appeal to the leftist group within the Cabinet.115 By the time the social democrats had a private gathering after the Cabinet meeting, however, it became clear that support for his position was crumbling within his own group.116 Crosland’s proposal had a problem both as an alternative to the IMF loan and as a negotiating tactic. Lever made clear that, as a free trader, he was opposed to the import deposit scheme.117 Moreover, it was highly doubtful whether the government, even with the introduction of import deposits, could finance a balance of payments deficit in the next year without the IMF loan. Finally, to use Britain’s commitment to NATO as a bargaining chip was not very convincing.118

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After the gathering, Crosland admitted his defeat by promising support to Callaghan in the Cabinet meeting planned for the following day. The Prime Minister was relieved of the need to threaten the Cabinet with the possibility of his resignation or even a coalition government.119 The Prime Minister also met the leaders of the labour movement, Len Murray, General Secretary of the TUC, and Jack Jones. The latter was particularly helpful, giving Callaghan ‘every encouragement to maintain a Labour government, even if it meant taking some decisions the TUC would not like and would oppose’.120 Apart from the Cabinet and the TUC, the most important constituency that the Prime Minister had to win over to his side was the PLP, so it was no surprise that his last caller of the day was the Chief Whip, Michael Cocks. He reported that ‘a left-wing group [was] almost certain to vote against a piece of legislation which involved a reduction in public expenditure’. But they might support ‘the package as a whole, if it was an issue of confidence in the government’.121 On the following morning, 2 December, the Cabinet finally brought the matter to a conclusion. Healey opened the discussion by saying that the previous day there had been a general feeling against the alternative strategy and the siege economy, and that, therefore, the government would have to seek agreement with the Fund. He asked permission to make the following proposal to the IMF as the condition of the loan: a £500 million sale of BP (British Petroleum) shares and a net reduction of public expenditure by £1 billion in 1977–78, with another £1.5 billion reduction the year after. As a result, the PSBR in 1977–78 would be reduced from £10.5 to £8.7 billion.122 Knowing that he could count on Crosland, the Prime Minister was now able to back the Chancellor without hesitation. He drew an analogy between his strategy and a three-legged stool (the other two legs being a safety net for sterling and import deposits).123 Foot began very quietly by saying that he was grateful to the Prime Minister, and then continued ‘but I must tell you that your proposals are not satisfactory’.124 He was concerned with the effects of the package on unemployment and the relationship with the TUC. The next speaker was Crosland, who said that Healey’s proposal was wrong both economically and socially, and ‘destructive of what he had believed in all his life’.125 Nonetheless, for him the Prime Minister’s view was a new factor. To reject it would destroy the unity of the Labour Party and confidence in sterling. Therefore, he would support the Prime Minister and the Chancellor. This was a turning point in Cabinet discussion, since the anti-deflationist right, the group led by Crosland, followed suit.

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In the end, the majority of the Cabinet approved the Chancellor’s proposal. Three days after the Cabinet meeting, the British government and the IMF reached an agreement on the size of public expenditure cuts.126 Another Cabinet meeting was convened on 7 December to consider programme reductions in order to keep the PSBR in 1977/78 below £8.7 billion. The government had more discretion over a breakdown of public expenditure cuts than it did over the scale of cuts, so the reductions are a good indication of what Labour tried to do in the post-crisis period. Unfortunately, the issue has attracted less attention in the literature than it deserves. The government was forced to apply for the IMF loan and accept a significant reduction in public expenditure because of a large deficit in the current account expected in 1977. Therefore, a satisfactory package needed to fulfil the aim of achieving a significant improvement in the balance of payments and the PSBR yet with limited effects on employment and the price levels.127 This was exactly what Denis Healey declared in the Letter of Intent which was sent to the IMF on 15 December.128 The programmes actually abolished or cut back by the government, however, were hardly the best choice to achieve these objectives. According to a Treasury paper, the cuts that would best contribute to improving the balance of payments were in foreign aid, defence, food and housing subsidies, and above all, social security. By contrast, the moratorium on construction programmes scored worst in terms of negative effect on unemployment.129 The Prime Minister clearly had this advice in his mind when he suggested to the Cabinet a postponement of upgrading social security payments, in order to rescue the construction industry.130 The problem with this, however, was that it would require new legislation and put the government’s survival in danger. His proposal was criticised by Foot on the grounds that if the government ‘tried to deal with benefits by statute it would destroy TUC support’.131 In the end, the main social security benefits were excluded from the final package agreed by the Cabinet on 8 December. Instead, new construction was curtailed or suspended in various central and local government programmes, which accounted for more than a quarter of the budget squeeze. To leave social security untouched more than halved the positive effect of a reduction in public expenditure. The original Treasury plan was calculated to improve the current balance by £500 million in 1977 and by £1000 million in the year after.132 The corresponding figures were only £50 million and £500 million respectively, after the fiscal measures actually taken by the government.133 As we saw above, the government’s economic strategy was based on two pillars: to maintain good relations with the TUC, and to pursue

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export-led economic growth. The above episode during the IMF crisis exposed the potential conflict between the two facets of government strategy. By applying for the IMF loan, the Labour government rejected the option of the siege economy, and showed itself determined to stick with the objective of export-led growth. Yet efforts to achieve this objective were compromised by the fact that the Social Contract remained as a top priority for the government. On 14 December, the Cabinet considered a draft version of the Letter of Intent that the government was due to submit to the IMF. The Letter provided for the performance criteria over the next two years that the government was required to satisfy in exchange for the loan. The PSBR would be reduced to £8.7 billion in 1977/78, and to £8.6 billion in 1978/79. The ceiling of domestic credit expansion was set at £9 billion in 1976/77 and £7.7 billion in 1977/78. In addition, the government pledged not to introduce import restraints or exchange controls in the Letter. To make matters worse, the Americans reneged on their promise of a sterling balance deal at the last moment, and therefore the British government could not announce the IMF loan and a safety net at the same time.134 Benn’s diary recorded: ‘Callaghan said he was disappointed. Ford and Schmidt had let him down and it was the first time in his life that he felt anti-American.’135 His anger was understandable. But, as far as the conditions of the loan were concerned, the government could hardly obtain a better deal. The IMF would have never agreed to a figure of more than £9 billion for the PSBR in 1977–78. To do so would have allowed the British government to claim that the IMF granted a loan on the basis of the current economic policy, and the government decided to cut public expenditure only in accordance with the latest economic forecast (according to the forecast in July, the PSBR was expected to be £9 billion in 1977/78). The Fund could never tolerate such a claim. In any case, there was little room for manoeuvre left to the Cabinet at this stage, and the draft Letter was approved. In the end, no ministers resigned from the Cabinet in protest against the deflationary measures introduced as the price of the IMF loan. The remaining question was whether the Labour Party could stay united. On 16 December, the PLP had a meeting, and Callaghan’s skilful winding-up speech ensured that the party would not split. In the Cabinet all the views were expressed, and the alternative strategy and the papers to back it up were presented to the Cabinet, and the great majority of the Cabinet agreed to reject. We didn’t agree about the outcome but we came out intact … I must warn the Party you can’t support the government in general and vote against individual

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measures because of our credibility … Remember this, unlike the Tories we haven’t cut the social benefits, that’s the first thing the Tories would have gone for. I shall need help from the PLP, from the NEC, from the Tribune Group and from the Manifesto Group. Let’s have unity and get together.136 The irony was, of course, that Callaghan himself had argued for a delay in upgrading the social benefits during Cabinet discussion. The Prime Minister managed to get over the IMF crisis without splitting the Cabinet and the party, and that was quite an achievement, to say the least. Yet it came at a price: namely, his strategy for the economic recovery of Britain was substantially compromised. Indeed, he could not rely on the support of his own party even in pursuit of a diluted version of the economic strategy, as we will see next.

4.

The Lib–Lab Pact

It did not take long before it became clear that the government lacked support in the House of Commons to carry out its economic strategy. The government, for the sake of its own survival, had to negotiate arrangements with the Liberals to work in partnership, which later became known as the Lib–Lab Pact. The pact, however, did not change the government’s policy essentials. Since the general election of October 1974, Wilson’s government had narrowly survived with a majority of three in the House of Commons. After Callaghan became Prime Minister, even this small majority evaporated.137 The lack of a majority in the House of Commons was compounded by the fact that the Labour left frequently refused to vote with the government, even on central planks of the government programme. In March 1977, the Chief Whip reported to the Prime Minister that a number of left-wing MPs were likely to abstain in a debate on the Cabinet’s public expenditure plan for 1977/78.138 To lose this vote would be a major blow for the government’s strategy, not least because ‘the public expenditure proposals were an essential ingredient of the plan to keep the government’s borrowing requirement in line with … target of £8.7 billion’.139 To make matters worse, Margaret Thatcher, the opposition leader, took advantage of the government’s trouble with the Labour backbenchers by tabling a motion of no confidence. The government narrowly escaped defeat by making a deal with the Ulster Unionists and, more importantly, with the Liberals, who had 13 members in the House of Commons.140 The Lib–Lab Pact set up a joint consultative committee under the chairmanship of the Leader of the House, which was to ‘examine gov-

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ernment policy and other issues prior to their coming before the House, and Liberal policy proposals’.141 There would also be regular meetings between the Chancellor and the Liberal Party economic spokesman. It was agreed that progress must be made on legislation for Scottish and Welsh devolution. In exchange, the Liberal Party pledged to support the government in any subsequent motion of no confidence. The pact was certainly a novel phenomenon in British politics: Vernon Bogdanor has described it as ‘the only example in British twentiethcentury experience of a minority government operating through an explicit agreement with another party on a long-term basis’.142 In the British constitutional tradition, the opposition parties are reluctant to help the government survive, even in exchange for a temporary increase of influence over the policy-making process. The background of the pact was a change in political strategy that was taking place within the Liberal Party. Michael Steed wrote: during the leadership of Jo Grimond (1956–67), the Liberals ‘retained the sense of a majoritarian party which had temporarily lost its natural place in the system … and it found it easiest to think in terms of a realignment of the left which would restore its position as the radical party in an essential[ly] twoparty world’.143 If such attitudes had prevailed within the party until the late 1970s, it is highly unlikely that the Liberals would have concluded a pact with a Labour government. However, in the summer of 1976, David Steel was elected leader on the platform that the party could take a forward step by cooperating with other like-minded political elements. The political situation of March 1977 gave him a golden opportunity to test his new strategy. In short, the pact became necessary for the Labour government due to the lack of a majority and rebellions by its own backbenchers. It was made possible because the Liberals became more cooperative with the two main political parties as a result of the strategic changes. The Lib–Lab Pact, however, had only limited effects on the government’s policy. The terms of the pact were debated and approved by the Cabinet beforehand, but there was no prior consultation with the PLP. The impact of the pact was reduced by the fact that the PLP was not involved. For example, the Liberals could not secure the introduction of proportional representation for the European Parliament, a high priority for them. In this sense, Labour paid a relatively cheap price for the partnership which allowed them to cling to office for almost another two years. The Liberals’ influence was limited because, despite its novelty, the pact did not represent a fundamental departure from the established practice of British politics. The Liberals’ influence was actually restricted more

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than anything else by the fact that the Labour backbenchers were prepared to vote against the government, if, from their viewpoint, the government made too many concessions to its partner.144 The issue, therefore, comes down to why the Labour left was willing to defy the party leadership at the cost of the popularity or even the survival of its own government. It was because they regarded the Lib–Lab Pact and the situation of a hung Parliament, which made such a pact imperative in the first place, as temporary. Rather than making a success of the pact and giving legitimacy to the partnership with the Liberals, the leftist MPs preferred to maintain the prospect of a single-party government in the future. To conclude, although the Lib–Lab Pact was innovative in British politics, it did not usher in a revolutionary shift from the political tradition that had prohibited cooperation between government and opposition. Neither was it the kind of cooperation that would allow the Prime Minister to embark on a policy of which the left wing of his own party did not approve.

Conclusion We are going to conclude the chapter with an overview of how the five factors singled out in the introductory chapter as possible explanations of British policy towards European monetary cooperation changed during the course of the IMF crisis. Some indications are also given as to how these changes were to affect Britain’s reaction to the establishment of the EMS two years later. (1) The relationship with the United States and (2) the legacies of the Empire In the last chapter we looked at a deal that Heath tried hard to negotiate with Brandt in March 1973, when the collapse of the Bretton Woods system was imminent. It was envisaged that the UK would participate in a joint float of the European currencies in exchange for receiving a longterm loan from the EEC for the funding of the sterling balances. The possibility of such a grand bargain had already been implied in the agreement between Heath and Pompidou during the Anglo-French summit in May 1971, the success of which paved the way for British entry to the EEC. Among our main findings in this chapter was that Callaghan contemplated making a similar deal with Schmidt as an alternative or in parallel to the IMF loan. It was a surprising move from a Labour Prime Minister who was known for his firm commitment to the Atlantic alliance. Our

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analysis has revealed that he had to do so because of a major change in US policy that had taken place since the last major sterling crisis in 1967. Unlike the previous occasion, the Americans were determined to impose tough conditions on the British government in exchange for the IMF loan. They were also very reluctant to offer help on the funding of the sterling balances. In other words, the US government refused to treat the UK differently from other countries. It seems likely that, with the demise of the British Empire, the US had lost the strategic incentives to offer special treatment to the UK. It was noteworthy that the Germans helped Callaghan more than did anyone else in his pursuit of more generous conditions for the IMF loan and a safety net for the sterling balances. In Pöhl’s words, they did so ‘for political reasons and because of the partnership in Europe’. The IMF crisis revealed that, having turned the Empire into a relic of the past, the British government, if it acted alone, lacked leverage over the superpower across the Atlantic. Yet it also showed that Britain’s new partnership in Europe could be a valuable contribution to compensating for such a decline of influence. In the introduction to the book, we argued that Britain’s relationship with the United States could affect the course of her European policy in both positive and negative ways. On the one hand, if a new stage of European integration was expected to weaken US commitment to the Atlantic alliance or the security of Western Europe, Britain was most unlikely to participate in such a measure. On the other hand, the United States might pay less regard to the British view if Britain stayed out of a scheme for further integration of Europe and isolated herself from the rest of the EEC. In such a case, the British government might feel compelled to take part in the plan. Both considerations were important when the British government had to decide whether sterling would be a part of the EMS. But the experience of the IMF crisis accentuated the second half of the equation. (3) Economic considerations The lesson of the IMF crisis was as follows. First of all, it became impossible for the government to achieve faster economic growth by a combination of inflationary fiscal and monetary policy on the one hand, and a limited depreciation of the currency on the other. It remains unclear whether the Treasury and Bank of England initially engineered the fall of sterling in March 1976 to recover the international competitiveness of British industry. Certainly, however, the experience of 1976 taught the authorities the lesson that, once sterling began to fall, the

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situation could easily get out of control; the government could not afford to embark on such a risky policy in the future.145 If the option of currency deprecation no longer existed, how to achieve lower inflation became a key to the prospect of faster economic growth. Hence the Labour government began to announce the target of the monetary supply during the course of the IMF crisis. Moreover, Callaghan, unlike Thatcher, his monetarist successor, committed himself to the objective of export-led economic growth and endeavoured to improve the balance of payments. These commitments made him more concerned with the stability of sterling’s exchange rates, as we will see later. In the past, even if the British government wanted to participate in European monetary cooperation, economic factors, such as inflation rates higher than those of other European countries, and a persistent balance of payments deficit, remained major obstacles to doing so. Now, as a result of the IMF crisis, the government’s economic strategy became more in line with the requirements of European monetary cooperation. The Labour government, however, continued to regard the Social Contract as the cornerstone of its economic strategy. This was hardly surprising if we consider the following facts. Economically, most people at the time still considered pay restraint to be the key to lower inflation. Politically, the Labour Party regarded closer relations with the TUC as its valuable electoral asset. Yet it was ultimately the trade unions, combined with the strength of the leftist group within the Party, that prevented the Prime Minister from pursuing his new economic strategy. (4) Attachment to national sovereignty and (5) the characteristics of the party system Last but not least, we have witnessed the realignment of Britain’s party politics in the aftermath of the IMF crisis. The Labour government concluded a pact with the Liberals, which not only allowed it to stay in office for another two years, but also offered it indispensable support for executing an economic policy designed for national recovery. However, the pact was regarded as only temporary. Consequently, the leftist wing of the Labour Party maintained its hold over the government, and the Liberals had only limited influence on the government’s policy. In other words, the tradition of British politics, which had prohibited cooperation between government and opposition, remained largely intact. The influence of the Labour left could not only compel the Prime Minister to make compromises in pursuit of his economic strategy, but was also destined to tie the government’s hands when European monetary cooperation was later revived in the form of a newly proposed EMS.

6 Comparing British and French Policy on European Monetary Integration (2): The Establishment of the EMS, 1978–79

Introduction The establishment of the EMS in March 1979 is the last subject of our case studies. The personal leadership of Roy Jenkins, the new President of the European Commission, did much to ensure that EMU came back onto the agenda of the EEC in late 1977. The establishment of the EMS, however, was largely the result of the initiative of Helmut Schmidt, the German Chancellor. Having been dissatisfied with the fall of the US dollar, Schmidt made a proposal to create a zone of monetary stability in Europe during the Copenhagen European Council in April 1978. The new EMS had three pillars; the ERM, the ECU and the EMCF. Britain became a member of the EMS, but opted out of the ERM, its central institution, when the EMS was set up in March 1979.1 France, by contrast, opted for full membership of the EMS. Giscard d’Estaing, the French President, co-sponsored a Franco-German proposal on a new EMS with Schmidt before the Bremen European Council in July 1978. These contrasting responses of Britain and France to the German initiative, however, should not mask the similarities between the positions of the two countries on the EMS. Among other things, both Britain and France wanted the ECU to be ‘at the centre of the EMS’ so that there would be a symmetry of intervention obligations between weak currencies such as sterling and the franc, and strong currencies including the Deutschmark. Therefore, we need to ask why Britain and France could not unite in pursuit of their common interest and parted ways on the EMS. We tackle this question by investigating to what extent British and French policy regarding the EMS was affected by our five explanatory factors, including (1) strategic factors such as the relationship with the 157

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United States; (2) the legacies of the Empire; (3) economic considerations; (4) attachment to national sovereignty; and (5) the characteristics of national party systems.2 James Callaghan, the British Prime Minister, had a high regard for the Atlantic relationship, and this initially led him to propose a global settlement of currency instability involving the United States. However, once the Carter administration refused his proposal and gave its blessing to the EMS, Callaghan’s Atlanticism made him more forthcoming towards the EMS. Moreover, as a result of the IMF crisis, the British government changed the course of economic management and international monetary stability became a highly desirable goal to supplement this new economic strategy. Therefore, Anglo-French differences over the EMS cannot be attributed to their international strategies or economic considerations. Attachment to national sovereignty was a characteristic shared by both countries, and resulted in division on European integration cutting across the left–right dimension. Our analysis highlights the importance of domestic party politics, in particular, whether cooperation between the government and opposition was successful or not, for explaining why Britain parted company with France and the rest of the EC on the issue. The following is the summary of our findings. When the British government made a decision on the EMS, its hands were severely tied by a number of party political considerations. Not surprisingly, the Labour Party’s left wing, who regarded the EC as a Capitalist Club, was hostile to any proposal which seemed to threaten Britain’s national sovereignty and the future of socialist programmes. Even if Callaghan and Denis Healey, Chancellor of the Exchequer, wanted sterling to be a part of the EMS, it would be difficult to secure a majority in the Cabinet and the House of Commons. Moreover, they could not take the risk of dividing the party before the general election that was generally expected to be called in the autumn of 1978. Domestic politics not only dictated the final decision by the government on the EMS, but also coloured the choice of negotiating tactics. Negotiations on the EMS coincided with the reappearance on the Community agenda of the question of Britain’s financial contribution. It was not unreasonable that the government linked the issue with the negotiations on the EMS. Yet the tactics adopted by the government were problematic, and resulted in Britain’s isolation at the negotiating table. In particular, the British government closed off the option of forming a united front with the French by demanding reform of the CAP as a condition for sterling’s participation in the EMS. Edmund Dell, Minister of Trade at the time, later testified that these tactics were adopted

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to appease some ministers who were doubtful about membership of the EMS.3 There still remain, however, two questions before we can convincingly argue that Britain’s policy towards European monetary cooperation was negatively affected by the absence of cooperation between the government and opposition. First of all, we need to know whether Callaghan and Healey supported the substance of the proposed EMS themselves. In other words, would they have reacted more favourably to the EMS had they not had to consider the unity of the Labour Party, and if there had been the prospect of commanding the support of the majority in the House of Commons? If the answer is no, we can explain British policy without referring to the role of party politics. Evidence suggests, however, that Callaghan for one, who described the EMS as the new European Bretton Woods, was personally in favour of the new scheme.4 Testimonies on Healey’s personal position contradict each other, but according to the official record and the recollections of David Owen, Foreign Secretary, he was even keener on the EMS than was Callaghan. The second question concerns how the Conservative opposition, which at the time regarded itself as the Party of Europe, responded to the Franco-German initiative. As long as Callaghan’s problem derived from the lack of support for the EMS within the Labour Party, it could be mitigated if the Conservatives backed him on the issue. It is little known that, inside the opposition party, there were actually numerous voices advocating a bipartisan approach to the EMS, which were not confined to Edward Heath, the former Prime Minister, and the circle of his former supporters. Most vocal was Nigel Lawson, who argued during one of the party meetings on the issue that ‘there was enormous value in persuading Callaghan to go in … We [the Conservatives] should not do anything that would make his task harder.’5 Geoffrey Howe, Shadow Chancellor, was of the same opinion as Lawson.6 But the opposition was also divided on membership of the EMS. In the end, the Conservative Party expressed a moderate welcome for the EMS. Yet it was accompanied by a scathing attack on the government’s record of economic management, which put an end to any prospect that Britain might be able to enter the EMS on a bipartisan basis. It also guaranteed that Britain would not be a full member of the EMS when it started in March 1979. This lack of bipartisanship was in sharp contrast with the French case. After he became French President in 1974, Giscard d’Estaing suffered a number of setbacks in pursuit of his European vision; most notably, the franc was forced to leave the Snake for the second time in March 1976. However, the victory of the UDF in the election of

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the National Assembly of March 1978, and the relative decline of the Gaullists, gave the French President authority to pursue his European ambitions. His overture to the pro-European Socialists allowed him to counterbalance the nationalistic strand of the Gaullist Party, and to secure domestic support for the EMS. In the rest of the chapter, we first look at Jenkins’s initiative on EMU. The second section will explain the background to Schmidt’s proposal for the EMS, and then summarise the factors which shaped the policies of France and Britain on international and European monetary cooperation. In the third and fourth sections of the chapter, we will see how party political considerations dictated the choice of negotiating tactics by the British government, and led to Britain’s opting out of the ERM.

1. Roy Jenkins’s decision to make EMU the principal issue of his presidency, July 1977–January 1978 In October 1977, Jenkins used his Jean Monnet Lecture in Florence to publicly advocate EMU for the first time. We start this section by explaining the historical context of Jenkins’s new initiative on EMU. The content of his Florence speech and what he actually intended to do by delivering such a speech will also be closely examined. There are two reasons why we attach so much importance to Jenkins’s initiative, even though it remains unclear whether he had any significant impact on Schmidt’s subsequent move on an EMS. First of all, looking at Jenkins’s initiative is a convenient way to review the situation of the Community and its member states on the eve of the establishment of the EMS. Moreover, Jenkins had been the leader of the pro-European wing of the Labour Party before he moved to Brussels. Indeed, he might have become the British Prime Minister in 1976 had he not voted for Britain’s entry to the EEC on 28 October 1971. As we will see, he was not completely out of touch with British politics even when he was in charge of the European Commission. Therefore, his personal position on this issue is worthy of close examination. Jenkins regarded EMU not only as a goal in itself, but also as a vehicle to advance the project of European integration.7 He was concerned that, after the collapse of the Bretton Woods regime, the economic performance of Western Europe was falling behind that of Japan and the United States. Moreover, disparity between the strong and the weak economies widened substantially inside the Community; France, Britain and Italy had been forced to leave the Snake, and all were implementing a stabilisation programme, the latter two countries under the auspices of the IMF. Jenkins attributed the dismal state of the European economy to the fact that

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Europe was suffering from currency instability both externally and internally, while Japan and the USA suffered only externally. Monetary union, therefore, was his prescription for what he diagnosed as a European illness. At the same time, if monetary union were to succeed, it must serve the interests equally of the stronger and weaker economies.8 The text of the Florence speech reflected his strenuous efforts to strike the right balance between the stronger and weaker economies inside the Community. Jenkins put forward no less than seven arguments to support his advocacy of monetary union. His second argument was based on ‘the advantages of creating a major new international currency backed by the economic … strength of the Community’.9 This aspect of monetary union was appealing to both sides: ‘the benefits of a European currency, as a joint and alternative pillar of the world monetary system, would be great, and made still more necessary by the current problems of the dollar, with its possible de-stabilising effects’. The balancing act between the rich and the poor, however, was more difficult in his third, and arguably most controversial, argument, which concerned inflation. Jenkins, on the one hand, had to allay the German concern that monetary union might lead to higher inflation: ‘monetary union could help establish a new era of price stability in Europe and achieve a decisive break with the present chronic inflationary disorder’. On the other hand, a country like Britain or France might be unhappy with this, not least because it ‘would of course mean that national governments lost some considerable control over some aspects of macro-economic policy’. He noted that ‘governments which do not discipline themselves already find themselves accepting very sharp surveillance from the International Monetary Fund, a body far further away from them and less susceptible to their individual views than is the Community’. Still, it was undeniable that ‘the disciplines of monetary union will be more, not less demanding. The change in inflationary behaviour would not have to be greater than that observed in some recent stabilisation policies, but it would have to be permanent.’ All in all, monetary union might help lower inflation, but could turn out to be too deflationary for economically weak countries. Jenkins addressed this problem when he put forward the fifth argument, which concerned the regional distribution of employment and economic welfare in Europe. A greater transfer of resources across the frontier was envisaged as an associated system of public finance for monetary union: ‘this represents the principal offsetting factor compensating the region or state for its inability to conduct a distinct exchange rate or monetary policy … The weak regions of the Community must have a convincing insurance against the fear that monetary union would aggravate their economic difficulties.’

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Jenkins’s proposal inevitably raised the question of how monetary union would fit within the future division of functions between the Community and member states, which was the topic of his sixth argument. Monetary union, by definition, ‘would imply a major new authority to manage the exchange rate, external reserves and the main lines of internal monetary policy’. According to Jenkins, however, Europe would not need to be a federation to achieve monetary union. He relied on the authority of the MacDougall Report to support his conclusion: The overall magnitude of budgetary spending at the European level for this type of Community has recently been estimated by a group of independent economists under the chairmanship of Sir Donald MacDougall … They believed that a definitive monetary union might be viable with expenditure of the order of 5 to 7% GNP. These are of course very large sums of money … but they are quite small by the standards of the classic federations where the top tier of government takes 20 to 25% of GNP.10 Since May 1971 a joint float of European currencies had been a German policy in response to the weakness of the US dollar and the decline of the Bretton Woods regime. As we have seen in the previous chapters, Schmidt had been a major proponent of this policy throughout. European monetary cooperation had failed in the past because countries with weak currencies, like France, Britain and Italy, were reluctant to accept the external discipline of the Snake and decided to leave. Yet if Schmidt made concessions to the demand of these countries and accepted a European monetary system with a weaker discipline, it would be too inflationary from the viewpoint of the Bundesbank and he would come in for heavy criticism in his own country. Any new initiative on European monetary cooperation, therefore, had to maintain a very delicate balance between the interests of both Snake and non-Snake countries. This requirement probably made the President of the European Commission, not the head of any government or state, the best person to bring up the subject. Our detailed analysis of the Florence speech has revealed that Jenkins painstakingly tried to keep a balance when he launched his public campaign on monetary union; a European monetary union should not be inflationary, but within the Community there must be a greater transfer of resources across the frontier. This formula later became a kind of parameter within which negotiations on the EMS actually took place. But what it exactly meant was open to a variety of interpretations.

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2. The first stage of the negotiations on the EMS: Three summit meetings in Copenhagen, Bremen and Bonn, April–July 1978 On 24 April 1978, at the European Council in Copenhagen, Schmidt made a proposal on what was later to be called the EMS. In this section, we look at the initial phase of the negotiating process on the EMS that climaxed with the unveiling of the Franco-German proposal by Schmidt and Giscard d’Estaing at the Bremen European Council in July. After Copenhagen, Schmidt, Giscard d’Estaing and Callaghan agreed to set up a small group for secret talks. The group was composed of three representatives from each country and was charged with the task of drafting a joint proposal on the EMS. Ken Couzens, Second Permanent Secretary and the head of the international finance unit at the Treasury, was nominated by Callaghan as the British representative. However, in the course of the discussion he broke away from his French and German counterparts. As a result, the latter two men drew up the final plan without his participation. Needless to say, the British government lost influence over the shape of the new institution by withdrawing from the privileged circle of consultation at the early stage of negotiations. We have two main purposes in this section. First of all, we overview the background to Schmidt’s proposal for an EMS. Then we summarise the principal factors that shaped the policies of France and Britain in the field of international and European monetary cooperation, under the headings of international strategy, economic considerations and domestic party politics. In the second half of the section, we will turn our attention to the two meetings of the European Council at Copenhagen and Bremen, and investigate why Couzens fell out with his counterparts. The background to Schmidt’s proposal Schmidt’s new initiative on the monetary front must be set against two important backgrounds: a lack of confidence in American leadership, and the decline of the US dollar since the autumn of 1977. First of all, Schmidt was dissatisfied with what he saw as lack of American leadership. He had a particularly low regard for President Carter; their personal relationship was damaged almost beyond repair over issues such as the treatment of human rights in the Eastern Bloc and the deployment of nuclear weapons. The new initiative on the EMS must therefore be looked at in the context of a US–Europe relationship.11 Schmidt, however, was well aware of West Germany’s military dependence on the United States. Therefore, the Germans could not afford a direct

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confrontation with their most important ally over defence questions. For Schmidt, to propose an EMS was a circumspect way to show his distrust of the American leadership.12 Nonetheless, international monetary issues were linked with the security of Western Europe through the fact that the US military presence in Europe put a further strain on the already deficitridden US budget and balance of payments. One question is whether these ‘anti-American’ aspects of Schmidt’s proposals deterred a country like Britain, which regarded the Atlantic alliance as being of utmost importance, from participating in the EMS. We will come back to this point later. The second, and more immediate, context for the EMS was the decline of the US dollar. The US dollar had remained stable since 1975, but began to slide in the autumn of 1977. A declining dollar was a disruptive factor for the European economy and damaged the international competitiveness of German industry, because it pushed up the Deutschmark against other European currencies. If a zone of monetary stability were established in Europe, West Germany could benefit from it in a number of ways. Firstly, even if the value of the Deutschmark went up against the US dollar, it would be followed by other European currencies such as the franc and lira. This would allow German industry to maintain its international competitiveness despite the dollar’s weakness. In the long run, if exchange rates inside the Community were kept stable but a floating monetary system was maintained worldwide, it would strengthen economic ties among the members of the EEC in terms of both trade and investment. In other words, an EMS would promote the formation of a European economic zone, which in turn would make Western Europe less vulnerable to a fluctuation of the US dollar in the future. Secondly, Schmidt could divert international pressure to adopt a more growth-oriented policy by launching a new initiative on the EMS. At the time, West Germany was under pressure from the United States and, to a certain degree, Britain to reflate her economy. The logic underpinning these demands was called the locomotive theory; according to this theory, a country with a large surplus in her balance of payments should become a driving force for the growth of the world economy by stimulating her domestic demand. It was argued that this would allow other countries to expand their economies without worrying about their balance of payments. Yet from the German viewpoint, this was simply a recipe for inflation. In this context, it is important to note that Schmidt was due to host a meeting of the Global Economic Summit in Bonn only two weeks after the Bremen European Council. With a proposal for an EMS on the table, Schmidt could line up other European countries

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behind him and thereby avoid international isolation at the Bonn Summit. Inside West Germany, however, the Bundesbank had a major reservation about European monetary cooperation. The main task of the bank was to maintain internal stability (i.e. low inflation), and, as a result, it was most jealous of its control over domestic monetary supply. The French had been complaining that, under the Snake, there was asymmetry of intervention obligations between debtor and surplus countries.13 From the viewpoint of the Bundesbank, however, this was not the case, because printing money for intervention purposes could have undesirable effects on domestic liquidity policy. It was not surprising that the Bundesbank regarded the EMS with particular suspicion, since it looked to be even more problematic than the Snake should countries with higher inflation, such as France, Italy and Britain, participate. If the Bundesbank could not block Schmidt’s new proposal, it wanted the EMS to be at least as strict as the Snake. France Giscard d’Estaing’s support for EMU went back to the 1960s, when he had been President de Gaulle’s Finance Minister.14 For some, this fact, together with his firm commitment to the Franco-German partnership, may be enough to explain his joint initiative with Schmidt on the EMS. However, after he became the President the franc was forced to leave the Snake for the second time in March 1976.15 This incident was a good indication of the difficulties that Giscard had to overcome before he could bring France back into the inner circle of European monetary cooperation. Here we briefly outline these obstacles under the headings of international strategy, economic considerations, and domestic politics. The French government had suffered a number of international setbacks since the collapse of the Bretton Woods regime in March 1973. To begin with, France had to accept the American position on the reform of the international monetary system by abandoning any idea of a return to stable exchange rates in the foreseeable future.16 Within Western Europe the disparity in economic and political power between West Germany and France had widened since the oil shock. To make matters worse, the possibility of forming an alliance with Britain to counterbalance German influence, which President Pompidou had previously tried without much success, all but disappeared after the Labour Party returned to power in Britain in 1974. These international developments left Paris as a weaker partner of Bonn, a very important fact when we come to explain French policy regarding the EMS.

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Secondly, the franc was forced to leave the Snake in March 1976 because of the dismal state of the French economy, namely, high inflation and trade deficits.17 These phenomena were the results of economic reflation, a policy in which Jacques Chirac, the Gaullist Prime Minister, was taking the lead. Chirac in fact realised that reflation could not be continued for long, and asked the President to dissolve the National Assembly before the government had to reverse its economic policy. Having disagreed with both Chirac’s economic management and his political analysis, Giscard d’Estaing refused to heed this advice.18 Chirac resigned in August 1976, and was succeeded by Raymond Barre, Minister of Trade and former European Commissioner for Economic and Financial Affairs. On his appointment, Barre declared that ‘the principal objective of the policy of the new government would be to combat inflation and maintain the stability of our currency’.19 By introducing the stabilisation programme, Barre pursued export-led growth and tried to catch up with German economic performance. However, his economic policy produced only mixed results, particularly regarding inflation,20 and it was politically unpopular. With the alliance of the Socialists and the Communists gaining support with its promise of economic expansion, the Gaullists built up pressure on the President to change economic course.21 Barre later admitted that his policy remained relatively moderate out of concern for the outcome of the upcoming election for the National Assembly in 1978.22 It was also constrained by his desire to maintain peaceful industrial relations.23 All in all, Barre’s economic policy was very similar to that of the Callaghan government after the IMF crisis. Without the success of economic stabilisation, there was scant hope that the franc could return to the Snake or participate in any new scheme for European monetary cooperation. Last, but not least, Giscard d’Estaing, being caught between the Gaullists and the left-wing opposition, did not have a sufficiently strong domestic political base to achieve his European objectives. In the National Assembly, the President depended on the support of the Gaullists, who belonged to the presidential majority, but did not share the President’s enthusiasm for European monetary cooperation. Chirac was critical of the President on a number of issues, including Europe and the ratification of the Jamaica Agreement of January 1976 on the new Statutes of the IMF.24 Shortly before the franc left the Snake for the second time in March 1976, the French government had actually secured agreement from its Community partners on the devaluation of the franc inside the Snake.25 However, after the presidential coalition was defeated in local elections, Giscard d’Estaing opted for an exit from the Snake. To borrow

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the expression of Peter Ludlow, ‘politically, there was simply not enough agreement about the desirability of the end (the Snake) to tolerate the means (the stabilisation programme) that the President and his ministers devised’.26 No explanation of French policy on the EMS, therefore, is complete without reference to the election of the National Assembly in March 1978. The surprising victory of the presidential majority, combined with advances by the UDF, which Giscard d’Estaing had created only a month before the election by bringing the groups of the non-Gaullist right under one umbrella, gave the President greater discretion in carrying out European policy. The election and its result offer us a good opportunity for examining how France’s European policy was affected by the changing situation of her party politics, and therefore deserves a close examination. Having won departmental and local elections in 1976 and 1977, the left alliance of the Socialists and Communists was widely believed to be heading for a resounding victory. The belief in a left-wing victory led to the anticipation of a renewed constitutional crisis, as Vincent Wright summarised in the following terms: The fundamental question of the regime was once again fully exposed. Who was to rule? Was it to be a right-wing President of the Republic …? Or was it to be a left-wing Prime Minister and government …? Two things were made perfectly plain during the campaign. On the one hand, the President declared himself totally opposed to the left’s programme yet determined to stay in office, and on the other, Mitterrand insisted on the supremacy of the government (even in European and foreign affairs) backed by parliament and on that government’s determination to carry out its programme. A political and constitutional crisis seemed, therefore, inevitable.27 It was not surprising that, until the result of the general election was known, Giscard d’Estaing was forced to sit out talks on European monetary cooperation, let alone take the initiative on the issue himself. Thus when Jenkins launched his public campaign for the idea of monetary union in October 1977, the President showed little enthusiasm for his proposal.28 The voting results in March changed the political landscape of France. The presidential coalition of the right won the election, gaining 290 seats, compared with 201 obtained by the left opposition. The Giscardian UDF performed better than expected, winning ten more seats than its

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constituent parties as a whole had done in 1973. Having lost 39 seats, Gaullists could no longer claim the dominant position in the political system, nor a hegemony within the right. The parties of the left did better than in the previous parliamentary election in 1973. Nonetheless, they wasted their chance for a left-wing victory by their failure to reach agreement on the update of a joint programme for government, which resulted in the public breakdown of relations between the Socialists and Communists in September 1977.29 The prestige and authority of the President were enhanced, and Giscard d’Estaing obtained a freedom of manoeuvre that he had not possessed since his election in 1974. The result of the election, on the one hand, confirmed a growing tendency of the French party system towards bipolarisation at the electoral level.30 On the other hand, the emergence of two powerful centrist movements, the UDF and the Socialists, coupled with the slump of the Communists and the decline of the Gaullists, opened the way for the President to prepare the ground for formation of a centrist-left coalition.31 First of all, Giscard d’Estaing tried to improve relations between the presidential majority and opposition.32 After the election, he repeatedly met with opposition leaders to discuss a wide range of subjects, including his general programme and his proposals to the Bonn Summit meeting. Moreover, he wanted to assign the opposition the chairmanship of two of the six committees in the National Assembly, although his plan was blocked by the Gaullists.33 These measures could be interpreted as attempts to integrate the opposition parties into the French political system and give them the status of a British-style ‘loyal opposition’.34 Yet this was only a half-truth; the President’s overture to the Socialists cannot be described as the Anglicisation of French politics, since he was challenging the bipolar nature of the French political system. As Vincent Wright wrote: ‘For Giscard d’Estaing, the polarisation of French politics is artificial, a distortion of the underlying social reality, a product of historical circumstances and current institutional devices. Amongst the latter devices must be counted the present electoral system which places a premium on second ballot alliances – however unholy.’35 In other words, his vision of democracy was considerably different from the Westminster model. Needless to say, such an alliance was not something that he could achieve at one stroke, as Wright wrote: ‘Giscard’s dreams of pursuing reformist policies through the creation of a Socialist-Centralist alliance are unlikely to be fulfilled in the near future. Since 1971 the Socialist Party had moved to the left, and all sections of the party (for a variety of reasons) are too firmly committed to left-wing unity with the Com-

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munists.’36 For the time being, therefore, the possibility of cooperation with the Socialists was limited to the level of decision-making. To conclude, we cannot fully understand Giscard’s response to Schmidt’s initiative on the EMS without placing it in the context of French domestic politics. It was not only that the result of the March election allowed him to reassert presidential authority over European affairs. The EMS could also help him achieve his political vision. As Jonathan Story pointed out: ‘a major initiative with Germany in 1978 in the EC would help establish common ground between the UDF and the pro-EC Socialists, while isolating the Gaullists and the Communists’.37 Giscard d’Estaing ‘preceded [the Bremen European] Council by consultations, which were held in the Elysée Palace with … the party leaders and the presidents of the parliamentary groups: Jacques Chirac and Claude Labbé, for the RPR, who expressed their reservations about the idea of a European currency; François Mitterrand, for the Socialist Party, who … judged these consultations as “a good method if they take place with mutual respect”. Robert Ballanger, as the president of the Communist group in the National Assembly, condemned this enterprise as “purely formal”.’38 Mitterrand promised to back Giscard d’Estaing, and thus the French President successfully secured domestic support for the EMS beyond his narrow power base of the centrist-UDF coalition.39 By contrast, it was unthinkable for the British Prime Minister to weaken dissenting voices within the government by making overtures to the opposition. Britain Since we have already studied the political and economic situation of Britain in the preceding chapter on the IMF crisis, only new developments after the end of the crisis will be covered in this section. Internationally, Callaghan set himself the task of mediation between the United States and Europe amid increasing tensions across the Atlantic, a role that Kenneth Morgan described as ‘the international honest broker’.40 In view of the deteriorating personal relationship between Carter and Schmidt, this was a job suitable for the British Prime Minister. On the one hand, Britain joined the United States in urging West Germany to stimulate domestic demand and lead the growth of the world economy. On the other hand, Callaghan shared with Schmidt a deep concern over the destabilising effects of a weakening US dollar and America’s fiscal deficit on the European economy. Callaghan later recalled: The cause of the trouble was America’s reluctance to act to stabilise the dollar which, because of growing American indebtedness and

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inflation, was steadily weakening … He [Schmidt] was exasperated that the United States government seemed preoccupied with viewing economic policy through domestic eyes only, and once again suggested that, in view of my good relations with Carter, I should visit him to encourage the United States to take a broader view.41 The result was a five-point plan, which Callaghan unveiled before his informal visit to the US President in Washington in March 1978, and it later became the agenda of the Bonn Summit. The plan covered five issues, including commitment to growth, the maintenance of world trade, currency stability, the long-term use of capital surpluses, and conservation of energy. Callaghan’s aim was ‘to encourage greater exchange rate stability and this required that the United States be less passive about the future level of the dollar’.42 The gradual recovery of the British economy since the IMF crisis lay behind Callaghan’s diplomatic drive. With economic recovery in sight, there was strong upward pressure for sterling in the foreign exchange market throughout 1977. The government had struggled to keep sterling stable before allowing it to find its own rate in October 1977.43 Inflation rate dropped to 9 per cent at the beginning of 1978. The prospects for incomes policy were not all rosy, however, since it was unlikely that the acquiescence of the TUC would continue during the winter of 1978/79. The Prime Minister’s solution was to impose even tighter discipline on wage settlements. During the Cabinet meeting in December 1977, Callaghan insisted that ‘9% inflation was simply not good enough compared with the performance of other countries’, and he put forward a figure of 5 per cent inflation as the government’s objective for the next pay year.44 During a BBC radio interview in January 1978, he expressed the view that the pay norm for the next round should not be more than 5 per cent.45 This was a fateful decision, because the fall in living standards among the working class as a result of pay squeezes led to the notorious ‘winter of discontent’, and shortly thereafter the downfall of the Labour government.46 Looking back from the present, it may well have been politically imprudent for the Prime Minister to adopt a counter-inflationary policy of such severity. Yet it is important to note that the policy was the central pillar of Callaghan’s monetary diplomacy; if sterling were to take part in a new scheme for exchange rate stability, regardless of whether it would be a worldwide arrangement or a purely European framework, Britain’s inflation rate had to be in line with that of other participants. Our analysis shows that Callaghan was not only committed to the principle of stable

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exchange rates, but also prepared to take the risk of alienating the trade unions in order to implement an economic policy compatible with that goal. However, the state of domestic politics was particularly unfavourable for the Prime Minister. The general election was widely expected to take place in the autumn of 1978. With this campaign just around the corner, political parties were concerned above all with the maintenance of their internal unity. They were also tempted to attack their political opponents at every opportunity. These electioneering imperatives handicapped the Prime Minister in his attempts to play a constructive role during negotiations on the EMS and to bring sterling into the new scheme. On the one hand, within the Labour Party the Eurosceptic left became even more powerful, because the government could not run the risk of another European crisis within the party just before an election. On the other hand, the Prime Minister could not count on the Conservatives to offset the loss of support among his own backbenchers, because the opposition was more likely to yield to the temptation of political opportunism. Dell later commented that ‘Callaghan could hardly have felt gratitude to his friend Helmut Schmidt for raising the idea of a European Monetary System in 1978’.47 Callaghan eventually decided to put off the election until the following year. Yet postponement did not liberate the Prime Minister from the political pressures described above; it merely guaranteed that the pre-election atmosphere would continue indefinitely. Copenhagen European Council, April 1978 Helmut Schmidt unveiled his plan for the new EMS during the meeting of the European Council at Copenhagen on 7 April 1978. The West German Chancellor gave his colleagues a full account of his plan for ‘dissolving the Snake in the new arrangement, using the European unit of account [the EUA, which was to be renamed as the ECU] far more extensively both for transactions between member governments, for joint interventions against the dollar and third currencies, and possibly indeed for providing a full parallel currency’.48 Schmidt’s initiative on the EMS at Copenhagen came as a shock to almost everyone present, except for a small number who had been informed beforehand. Callaghan was apparently among the many who were caught unprepared by the German Chancellor’s proposal. This was surprising, given the fact that, in preparation for the European Council, Schmidt held meetings with Jenkins, Callaghan and Giscard d’Estaing, and all of them had been informed of his intention. Unlike his lukewarm

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attitude until the end of February, the French President now gave his firm support to the German Chancellor.49 Callaghan was given fair notice of Schmidt’s ‘exotic idea’ of creating another European Snake, in which participating countries would ‘each put half [of] their reserves into a new currency pool’.50 Furthermore, Callaghan’s private secretary informed the Prime Minister that ‘during the Heath administration there was a proposition somewhat similar which was explored at the highest political levels’.51 It remains unclear why the British Prime Minister went to Copenhagen without preparation. In any case, both Callaghan and Schmidt proposed a framework for the stability of exchange rates. Yet while Callaghan advocated a global approach including the United States, Schmidt’s plan was confined to Western Europe. The initial differences on the EMS between Schmidt and Giscard on the one hand and Callaghan on the other may have reflected their underlying viewpoints on the Atlantic alliance.52 Callaghan certainly regarded Schmidt’s proposal as ‘a turning away from the dollar and from the US financial policy’.53 During the meeting of the European Council, he also expressed concern about the impact of a new European monetary scheme on defence, noting that ‘the United States could not be expected to adhere to defence commitments if economically the relationship was being sundered’.54 We should not, however, overemphasise the disparity of views between the two sides of the Channel on the Atlantic relationship. First of all, West Germany and France more or less shared Britain’s concern over the strength of the US commitment to European defence.55 Moreover, as a matter of principle, Callaghan was not alone in inviting the United States to halt the decline of the dollar and to participate in a global scheme for greater monetary stability. Schmidt had initially asked Callaghan to persuade President Carter to do so. French policy was even closer to Callaghan’s idea, since all through the period covered in this book the option most cherished by the French was to maintain an international monetary system based on stable exchange rates. As a matter of fact, however, the United States was a major beneficiary of the weak dollar, and therefore the Carter administration showed little enthusiasm for Callaghan’s proposal for the global stability of exchange rates.56 Moreover, the US reaction could be easily predicted if one considered the American policy of ‘benign neglect’ of the dollar running up to the collapse of Bretton Woods and during the subsequent debate on the reform of the international monetary system. The falling dollar not only helped the US authorities improve their own balance of payments situations, but also allowed them to finance a fiscal deficit without raising interest rates too

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high.57 Knowing the US reluctance to give a firm undertaking to stabilise the dollar, West Germany and France opted for a zone of monetary stability in Europe, so that the European economy would be less affected by fluctuations of the dollar in the future. In other words, the United States, West Germany and France were all, for different reasons, in agreement that Western Europe should go ahead with its plan for an EMS. The difference between Schmidt and Callaghan was that the former was, from an earlier stage, more realistic (or pessimistic) about American policy.58 Nonetheless, there remained a possibility that the details of the EMS might be designed in a way that was harmful to American interests, which was what the Carter administration feared. Yet might not Britain be better placed to avoid this from inside a new European scheme, if the Germans and the French were determined to go ahead with their plan anyway (and Giscard d’Estaing had made it clear to Callaghan that he would go along with Schmidt even if Callaghan did not)?59 This was the question that Callaghan faced when he became aware that monetary stability could not be restored on a worldwide scale, and he was eventually converted to the European scheme. Secret talks among the three To give Schmidt’s proposal more concrete shape before the next meeting of the European Council scheduled for July, member states started technical discussions within the institutional apparatus of the EEC, including the ECOFIN, the Monetary Committee and the Committee of the Governors of Central Banks. However, in parallel with these discussions through the official channels, Schmidt, Giscard and Callaghan decided to set up a committee of three representatives, who were appointed by each head of state or government and held secret talks among themselves. Callaghan nominated Couzens as the British representative. Bernard Clappier, Governor of the Bank of France, and Horst Schulmann, Chief Economic Adviser for the German Chancellor, were appointed by Giscard d’Estaing and Schmidt respectively. Between April and June Couzens, Schulmann and Clappier met at least four times. According to the original plan, the result of their technical discussion would then be considered by the three heads of government when they met on the evening before the Bremen European Council. After the third meeting of the three representatives, however, Schmidt and Giscard met without Callaghan. They ordered Schulmann and Clappier to draft a joint proposal on an EMS, which was later presented to the European Council at Bremen.60

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The way Callaghan handled the course of these events aroused much controversy among commentators. According to Ludlow, ‘the ultimate blame for this state of affairs lay doubtless with the prime minister who chose Mr Couzens in the first place, and having appointed him, failed to check or counteract his professional scepticism’.61 Ludlow suggested that Callaghan would have been better off had he appointed Harold Lever instead, as Schmidt had hoped. Yet this suggestion seems inaccurate and misleading, on two accounts. First of all, Ludlow underestimated the pressures that, even at this early stage of negotiation, the Labour Party’s internal situation was exerting on Callaghan’s freedom of action.62 Lever was widely known to favour European monetary cooperation, and appointing a politician of his stature would surely have aroused suspicion among the left wing of the Labour Party had it been known. Lever himself suggested that Michael Butler should go along with Couzens to the group’s meeting instead. Owen raised the matter with Callaghan, but the Prime Minister rejected the idea.63 This fact leads to our second point. It was not because of the professional scepticism of the Treasury official that the British government became a passive bystander during the technical discussions. It was Callaghan who decided that Britain would not submit her own proposal to secret talks among the three representatives, even though Schmidt had initially suggested that one paper should be prepared by each country. As a result, only the German and the French papers were considered during the technical discussions.64 This may well have prompted the German Chancellor and the French President to go ahead without their British counterpart. For his part, Callaghan feared that Schmidt’s proposal might weaken American resolve to stabilise the dollar and thus undermine his five-point plan. When he had a telephone conversation with President Carter on 17 April, Callaghan referred to Schmidt’s proposal. Though he agreed with Schmidt and Giscard that technical discussions should go ahead, he would not look ‘at any of this politically until … [they] have got past the [Bonn] Summit’. Callaghan then assured Carter that ‘whatever you hear from Europe … he will not allow anything … to happen before we meet at Bonn in July’.65 The Prime Minister clearly assumed that the Americans would not like Schmidt’s scheme, and used this fact to promote his own idea of a global solution to currency instability. By adopting a sceptical attitude to Schmidt’s proposal yet implying that Britain might, however, be more forthcoming if the Bonn Summit ended as a failure, Callaghan pressurised President Carter to take the stability of the US dollar more seriously.

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It soon became clear, however, that Callaghan had badly misunderstood the American position; the Carter administration did not share Callaghan’s fear that an EMS might be divisive from the Atlantic viewpoint, and welcomed Schmidt’s proposal.66 The Prime Minister had to pay a high price for his mistake, as Butler lamented; Britain missed ‘an opportunity to secure a real position of influence alongside the French and Germans. It was before … the Franco-German axis had really become so obvious and if we’d been there, we might have managed to get the proposals into a shape which we could accept.’67 The Bremen European Council Thus Schmidt and Giscard d’Estaing submitted their joint proposal on the EMS to the Bremen European Council on 6–7 July 1978. Not surprisingly, the paper was a compromise between the two countries; in some places indeed, it looked contradictory, and it left many technical details unresolved. This was not entirely a bad thing, since it allowed the European Council and subsequent expert meetings to take the interests of other countries into consideration. The paper first declared that ‘in terms of exchange rate management the EMS will be at least as strict as the Snake’.68 However, unlike with the Snake, ‘in principle interventions will be in the currencies of participating currencies’.69 Most controversial, however, was the passage that ‘the ECU (weighted average of participating currencies) will be at the centre of the system’. What remained unclear was whether the ECU would be used only as a monetary unit and a means of settlement between EEC central banks, or as part of the intervention mechanism also. In the latter case, there would be symmetry of intervention obligation between the strong and weak currencies in the way that both Britain and France demanded. Lastly, the paper envisaged the creation of the EMF (European Monetary Fund) for which ‘an initial supply of ECUs will be created against deposit of US dollars and gold on the one hand (e.g. 20% of the stock currently held by member central banks) and member currencies on the other hand’.70 Before the European Council, Callaghan was ‘miffed that he had not been more closely consulted’.71 Nonetheless, during Cabinet discussion the Prime Minister smoothed the way to positive engagement in European monetary talks. According to Dell: Callaghan said that his line would be that the UK had always been in favour of greater stability but that, if a durable solution was to be

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found, certain principles had to be accepted. The first was that pressure for adjustment should not come only on weaker countries but that there should be symmetrical obligations on the stronger countries, for example to grow faster. Secondly, if there was to be a maximum contribution to growth, substantial transfers of resources from the richer to the poorer countries of the Community, such as already took place within the region of the United Kingdom, were essential.72 The Cabinet authorised him to agree to further studies on the possibilities of monetary integration, but not to subscribe to a specific scheme.73 As expected, the Bremen European Council was almost completely dominated by Schmidt and Giscard d’Estaing.74 On the Atlantic dimension of the EMS, Schmidt told the meeting that both Giscard and he had had discussions with Carter, and that the US President was in favour of the proposed scheme on political grounds. It was clear that Callaghan was left out of the circle of consultation across the Atlantic – a clear foretaste of what was to come if Britain stayed completely out of the EMS. With regard to the position of the US dollar, Schmidt’s ‘own feeling was that it would not suffer and that if any major currency were to be caused embarrassment by the new system it would be the yen’.75 This represented a superb insight on the part of the German Chancellor, because if, thanks to the EMS, the European economy gradually established immunity from the fluctuating US dollar, the burden of supporting the dollar would principally fall on Japan, whose economy was heavily dependent on exports to the American market. Schmidt and Giscard successfully achieved most of their purposes at Bremen. In the communiqué, the heads of state and government did not go so far as to commit themselves to the Franco-German proposal. However, the European Council declared a zone of European monetary stability as ‘a highly desirable objective’.76 It also adopted the schedule envisaged in the paper submitted by Schmidt and Giscard; as the Council ‘instructed the Finance Ministers at their meeting on 24 July 1978 to formulate the necessary guidelines for the competent Community bodies to elaborate by 31 October 1978 the provisions necessary for the functioning of such a scheme’. Final decisions would be taken at the next meeting of the European Council on 4 and 5 December. Callaghan could at least take heart from one thing in the communiqué; as he and his Italian and Irish colleagues demanded, ‘there will be concurrent studies of the action needed to be taken to strengthen the economies of the less prosperous member countries in the context of such a scheme’.

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The Bonn Summit Before concluding the section, it is opportune to look at how the United States reacted to the Franco-German initiative on European monetary cooperation during the Bonn Summit. As we have seen, the US had already given her blessing to the EMS on various occasions. However, the Carter administration was internally divided on the issue. On the one hand, the President and the State Department were in favour of a plan that would achieve monetary stability and take the project of European integration to the next stage. On the other hand, the US Treasury had a number of reservations about the implications of the EMS.77 First of all, Schmidt’s proposal derived from a lack of confidence in American economic leadership.78 In the long run, the EMS could lead to the creation of a single currency, which would challenge the position of the US dollar as the international currency. Therefore, the Americans sought ‘assurances that any new European reserve assets would not be available as a substitute for dollars to nonCommunity countries like Saudi Arabia’.79 In other words, the EMS was perceived as a potential threat to the US ability to finance her twin deficits of the federal budget and the current account without losing autonomy of domestic economic management.80 Moreover, the value of the European currencies might be kept artificially low against the US dollar so as to prevent recovery of the US balance of payments.81 The EMS could also lead to lower economic growth worldwide if the economic policy of West Germany were followed by other European countries.82 At the Bonn Summit, Carter was not as forthcoming towards the EMS as had been expected beforehand, and certainly not as much as Schmidt and Giscard had hoped.83 He refused to give the Europeans a blank cheque for the EMS scheme, and wanted to know the details of the new institution before making a final judgement. France and Germany promised to consult with the Americans on the details of the EMS. As a result, Callaghan was less isolated than he might otherwise have been. Indeed, the fact that the United States supported the general scheme of the EMS but had reservations about its details made Britain’s participation in the new scheme desirable, if the Prime Minister wanted to make sure that the EMS would not damage the Atlantic relationship.

3.

After Bremen

The European Council committed itself to a clear timetable at Bremen. A blueprint for the EMS would be produced by October, and the next European Council at Brussels on 5–6 December would take final decisions

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on whether the new institution should be established. In this section, we will investigate how the negotiating position of France and Britain was formed regarding the EMS, and the role of domestic politics in that process. This will be followed by a brief explanation of the technical discussion among experts and how politicians responded to its results. France From the very beginning of the negotiations on the EMS, the French government demanded symmetry of intervention obligation between strong and weak currencies. Since the franc had been forced to leave the Snake twice, Giscard d’Estaing was required to show that the new European scheme would somehow differ from the old Snake.84 Hence ‘the ECU would be at the centre of the EMS’, declared the paper submitted by Schmidt and Giscard d’Estaing to the Bremen European Council. If realised, symmetry of obligation would be beneficial for the French government in a number of ways. First of all, Paris could exert more influence over the monetary policy of Bonn. In addition, the EMS would not be as deflationary for the French economy as it might otherwise have been. Last but not least, the Gaullists would find more difficulty in denouncing the EMS as a surrender of national sovereignty. In the end, however, the ECU did not play a central role within the intervention mechanism of the EMS, as the French government had argued. This fact raises the questions of why, having been disappointed with the results of the negotiations, France still participated in the EMS, and whether the French had ever really believed that the ECU would become the centre of the EMS in the first place. Some commentators have suggested that, in order to lower inflation to the same level as Germany, the French government was prepared to participate in the EMS even if symmetry of obligation could not be achieved. During the Copenhagen European Council in April, Giscard d’Estaing stated that ‘France would be prepared to re-enter the Snake and stay there as from July’.85 This statement seems to support the above interpretation.86 However, this was not realised; and the French government fought hard to the very end for an ECU-based intervention mechanism. As Dorothee Heisenberg wrote: ‘although it is true that Prime Minister Barre wanted to reduce inflation and follow “Modell Deutschland” to some degree … France did not want to commit itself to achieving German inflation levels’.87 According to her interpretation, ‘weakcurrency countries like France … joined the EMS in 1978 because they believed concessions to weaker-currency countries made by Chancellor Schmidt would remain in the final document, and … it was politically

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difficult for them to back out of an initiative they had originally supported’.88 We can understand the French policy better by placing it in its historical context. Before the Bretton Woods regime finally collapsed in March 1973, the French authorities had made every effort to maintain the international monetary system based on stable exchange rates. Yet, at the same time, they preferred a joint float of European currencies against the US dollar to an individual float of the franc (Chapters 3 and 4). The order of French preferences seems to have been left untouched by subsequent events. If there had been any doubt on the issue, the unwillingness of the United States to make a firm commitment to stabilise the dollar was confirmed during the Bonn Summit in 1978. Having run out of better alternatives, Paris was left as a weaker partner of Bonn, and had to swallow its dissatisfaction with the details of the EMS. Yet French support for the ECU basket as a means to restoring equality with West Germany could have had better prospects of success if it had found an echo in Britain. For his part, Callaghan also demanded symmetry of obligations. It is therefore natural to ask why Britain and France could not form a united front against West Germany. Britain Callaghan emerged as more forthcoming towards the proposed EMS after Bremen.89 In the light of later developments, Callaghan’s conversion probably resulted from his fear of international isolation. During a parliamentary statement on 10 July, he declared that ‘a zone of monetary stability in Europe was a highly desirable objective … and the government will play their full part in the forthcoming studies’, with a particular emphasis on the importance of the concurrent studies.90 It was not only the Prime Minister who understood the issue of British entry into the EMS in terms of power politics. For example, The Daily Telegraph published an article entitled ‘Facing Relegation’ right after the Bremen European Council.91 The article used the analogy of football; if the Suez crisis was the moment when Britain had been relegated from the first to the second division, after Bremen it was now on the verge of being relegated to the third division, in the same league as Spain, Portugal and Greece (all of whom were applying for EC membership at the time). Callaghan made a report on the Bremen European Council to the Cabinet on 13 July. According to Dell, ‘there was in Callaghan’s report to the Cabinet one hint that he had not been unimpressed by … the persuasions of Helmut Schmidt. Greater monetary stability, he said, had been one of the government’s prime objectives, and if it were not

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possible to have arrangements which included the dollar, there was a serious case to be considered for a European zone of stability’.92 He also ‘endeavoured to argue that the EMS did not raise European questions of the old kind. There was here, he said, no question of a surrender of sovereignty. What was under discussion was simply a proposal for achieving exchange rate stability, something which everyone had welcomed under the old Bretton Woods system.’93 Callaghan concluded with the remark that he would set up a special committee chaired by Healey to examine these matters in detail. If strategic considerations made Callaghan more forthcoming towards the EMS, it is ironic that the Prime Minister should have simultaneously tried to persuade the sceptical Cabinet by emphasising the technical nature of the issue. He was clearly concerned that the EMS might rekindle the old debate over British membership of the EEC and thus divide the Labour Party. However, anti-Europeans within the Cabinet, including Tony Benn, failed to follow Callaghan’s request to forget their old grievances. This was not unreasonable, not least because advocates of the EMS wanted the new institution to lay the groundwork for EMU.94 Among pro-Europeans, it is notable that Dell ‘was strongly against the EMS in principle from the beginning’.95 By contrast, Lever ‘was the most articulate exponent in the Cabinet of the merits of UK membership of the EMS’.96 Notwithstanding the Prime Minister’s more positive outlook, the British government soon isolated itself by mishandling the concurrent studies that the EPC (Economic Policy Committee) had been commissioned to undertake. It was quite reasonable to argue, as Britain did, that a greater transfer of resources across the frontier was necessary as a complementary measure to the EMS; the new exchange rate mechanism would deprive a participating country of the option of currency depreciation as a policy tool to restore external equilibrium. Coincidentally, the transitional arrangements that had capped Britain’s financial contribution to the EC were due to expire during the following year. As a result, Britain was expected to become the second largest net contributor to the EC budget, behind only West Germany. Not surprisingly, the British government connected the issue of the UK’s adverse financial contribution with the negotiations on the EMS. Indeed, if properly handled, Britain within the EMS might be better placed to negotiate a long-term solution to the Community’s budgetary arrangements, which had been decided before Britain’s entry into the EC and were now clearly unfair. However, in the words of Ludlow, British ministers and officials handled ‘the budgetary problem in the context of the concurrent studies in such a way

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as to ensure maximum unpleasantness for months to come and selfexclusion from the EMS’.97 To be precise, the British government demanded reform of the CAP as a condition of Britain’s entry to the EMS, which was clearly unrealistic within the time scale of the negotiations. Dell admitted that it was a tactical mistake ‘to link the EMS with the CAP’.98 Even more important for our research is his explanation for why it was difficult to reach such a conclusion: It had appeared to some ministers who were doubtful about British membership of the EMS that one reason why the UK might consider joining was if the government could thereby achieve some rectification in the cost the UK was suffering and was about to suffer from the operations of the Community budget. If that hope was killed, the few enthusiasts for British membership of the EMS would lose its allies in their battle. There was, therefore, this motivation for keeping the argument going.99 It is not difficult to see a vicious circle here; the lack of domestic support for European integration forced the government to adopt aggressive negotiating tactics, but, in the long run, these were probably counterproductive. The more fundamental problem was that the choice of tactics was closely connected with the choice of a negotiating partner. As far as the EMS itself was concerned, France, which shared Britain’s preference for an ECU-based intervention system, was clearly a natural ally. In fact, both the French Finance Ministry and the Banque de France sounded out Britain’s willingness to form a united front, but their attempts produced no tangible result.100 Dell explains why Britain and France could not stand together: France had long-standing doubts about the reliability of the UK as a partner, and the UK was unlikely to participate in the EMS, whatever the intervention mechanism. The first point is understandable if we consider what passed between Heath and Pompidou. But the second is less persuasive. As long as it remained possible that the UK might join the EMS one day, it was reasonable for the British government to ensure that the details of EMS reflected the country’s interests as much as possible.101 The truth was that, once Britain demanded reform of the CAP as the price of her entry to the EMS, it became self-evidently impossible to cooperate with the French. Apart from reform of the CAP, where the interests of other EEC countries are strongly entrenched, there were a couple of possible ways to redress the imbalance in the Community’s budget system and reduce Britain’s net contribution. Among them was an

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increase in the Regional Fund, which would have been a less objectionable measure for France, and in fact West Germany might have accepted it as the price for Britain’s participation. The EMS had, after all, originated with a German proposal, and thus it made more sense to ask the Germans, not the French, to pay for it. Within the government, the Ministry of Trade actually seems to have advocated this course.102 In his speech on 12 July, Heath also issued a warning: ‘if the British government is seeking to destroy the Common Agricultural Policy it will fail, and in failing it will ruin Britain’s chances of securing other changes it wants to bring about in the proposed European Monetary System’.103 In short, despite similarity of views between the two countries on the EMS, the paths of the UK and France were separated because of the negotiating tactics adopted by the British government, which owed more to domestic political circumstances than to calculation. The intervention mechanism: The ECU basket or the parity grid? Technical debate on the EMS covered a wide range of subjects. Most important of all, however, was the role of the ECU in the intervention mechanism of the EMS. As we have seen, the Bremen Annex declared that ‘the ECU would be at the centre of the EMS’. The exact meaning of the phrase, however, remained ambiguous and was left for subsequent negotiations. The most controversial question was whether the ECU should play any significant role within the intervention mechanism. West Germany represented the minimalist position. She argued that the intervention mechanism of the EMS should be based on a system called a parity grid, as was the case with the Snake. In a parity grid system, each pair of participating currencies have a central parity and are required to stay within the range of ±2.25 per cent. Under this system, two currencies always reached the limit at the same time, and both of them were obliged to intervene. Intervention obligations might appear symmetrical at first glance. However, while the country at the upper limit only had to sell her own currency, the country at the lower limit was required to use her foreign reserves. Once any country with a weak currency ran out of reserves, she had to choose between three unpleasant alternatives: deflation, devaluation, or defection. The maximalist position was taken by countries that had been dissatisfied with this asymmetrical character of the Snake, including not only France and Britain but also Italy. These countries argued that, in the EMS, a parity grid should be replaced by the ECU basket as an

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intervention mechanism. The ECU was defined as a weighted average (i.e. basket) of participating currencies, each of which, in turn, would have a central rate denominated in the ECU, and would be required to observe a certain margin of fluctuation against it. The currency that was deemed to be most divergent from the average would have to intervene, and this could be the Deutschmark. In the Snake, currencies like sterling, the franc and the lira had to follow the upward movement of the Deutschmark, and this would be deflationary. By contrast, an ECU-basket system would be more symmetrical and less deflationary than the Snake. It was the Belgians who proposed a compromise formula based on a combination of the two systems. According to the Belgian compromise, while ‘the parity-grid system … would be used for fixing the intervention limits … the ECU basket formula would be used to determine “the degree of divergence” of participating currencies in order to draw certain consequences for intervention rules, and/or other policies’.104 The Belgian compromise was open to a variety of interpretations, depending on what ‘certain consequences’ would be, and whether a participating currency would trigger the divergence indicator before reaching the intervention limit under the parity-grid system. These issues were left unresolved until the final stage of the negotiations. Capitulation of France at Aachen? The ECOFIN was due to meet on 18 September to review the results of technical discussion among experts. Before this, however, Schmidt and Giscard d’Estaing had a biannual meeting of the Franco-German summit at Aachen. It was widely expected that the two leaders would settle their differences over the technical aspects of the EMS. Indeed, after the summit, some British newspapers reported that this was exactly what had happened at Aachen, with the German Chancellor gaining the upper hand.105 Yet in reality, the summit had more of a symbolic nature, and its prime importance was that the two leaders reconfirmed their political commitment to the Franco-German partnership.106 Negotiations on the details of the EMS continued until the last moment. The ECOFIN at Brussels and the position of Denis Healey Financial ministers met on 18 September to consider the report of the Monetary and Central Bank Governors’ committees. In the end, they instructed the experts to embark on further study of the Belgian formula,

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with Healey dissenting from the majority position. Ludlow argued that Healey’s behaviour during the meeting of the ECOFIN and the speeches he subsequently made in North America (where he was attending the conference of the Commonwealth Finance Ministers in Canada and the annual meeting of the IMF in Washington) shows that he had already decided against Britain’s participation in the EMS.107 However, this was not in fact the case. On 14 September, John Wicks, private secretary for the Prime Minister, reported to Callaghan regarding Healey’s letter: ‘it seems to me both from Chancellor’s minute and my reading of Gen 136 [the special Cabinet committee chaired by Healey] minutes that a considerable degree of momentum is building up in favour of our joining a new EMS’.108 In his letter, Healey went as far as to write that ‘officials are considering whether legislation would be needed for EMS purposes’, and he has ‘instructed them to do everything possible to avoid the need for such legislation’.109 This was because ‘antiEuropeans in the Labour Party might combine with the monetarists in the Opposition to defeat the Government’.110 The Prime Minister, who had just announced his decision to postpone a general election until the next year, told his Chancellor that ‘he was cooling off on the whole business of EMS’. Believing that Giscard had conceded his original negotiating position for the sake of the re-establishment of FrancoGerman solidarity, Callaghan complained bitterly: ‘the French seemed to be behaving badly on everything … and there was also the problem of consequential legislation’.111 Owen recorded in his memoirs that the Prime Minister was worried that Healey’s stance on the EMS might divide the Labour Party. On 20 September, he had a private conversation with Callaghan, who ‘was concerned about a speech which Denis Healey had made the day before in Canada which appeared to argue that we should join the Exchange Rate Mechanism of the EMS’.112 According to Owen, Callaghan ‘reiterated his view that the Party would not wear entry to the Exchange Rate Mechanism and that it would have to wait until after the election’.113 The moment at which Healey made up his mind against the EMS is important, not least because it is related to the reason for his decision; that is, after the meeting of the ECOFIN on 18 September, he could guess at how the intervention mechanism of the EMS was likely to work. The recollections of Owen, therefore, give backing to those testimonies that attribute Healey’s turning against the EMS to the situation of the Labour Party, not specific aspects of the institution.114 In other words, not only Callaghan but also Healey probably supported the substance of the EMS.

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4.

The launching of the new EMS, October 1978–March 1979

As negotiations over the details of the EMS entered their final stage, the new institution took a much clearer shape. The EMS underwent a closer scrutiny within each member state of the EEC, and domestic pressure on the political leaders multiplied. In this section, we first look at political debates in France and UK concerning the EMS. Then we will examine how differences over technical details were solved. In the end, Britain did join the EMS when it started in March 1979, but did not join the ERM. France Thanks to the March election, Giscard d’Estaing gained the authority to achieve his European vision without being troubled by domestic constraints. However, the favourable political climate which had allowed the French President to launch a joint initiative with Schmidt was changing due to two factors, neither of them directly related to the EMS. First of all, the President came under attack from the Gaullists over the introduction of direct elections to the European Parliament.115 Secondly, French farmers were angered by the Monetary Compensation Account (MCA), which had come into existence with the floating of European currencies in the early 1970s. Since this period, German farmers had gained increasingly in competitiveness, and this was attributed to the existence of the MCA by their French counterparts. The French farmers demanded that the MCA be dismantled at the same time as the establishment of the EMS. Confronted with these domestic problems, Giscard d’Estaing hardened his attitudes.116 It was largely because of his behaviour that the Brussels European Council unexpectedly failed to reach agreement on the EMS, and the establishment of the EMS was delayed until March 1979. Britain If Giscard d’Estaing felt the wind blowing against him, this was nothing compared to the domestic difficulties that Callaghan faced in connection with the EMS. As soon as full-scale public debate on the EMS started, it became abundantly clear that, if Callaghan tried to take sterling into the new EMS, he would face a revolt in both the Cabinet and Labour Party. On 1 October, the NEC carried Barbara Castle’s motion ‘denouncing and rejecting the EMS’ by 16 to 9.117 Then, on the following day, the Labour conference overwhelmingly voted for a motion condemning the government’s pay policy.118 A few days later, the Prime Minister was warned that ‘Mr Foot [Leader of the House of Commons] is getting very worried about EMS … Mr Foot rang Mr Shore [Environment Secretary],

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who shares Mr Foot’s feelings. They are both talking about adopting an “over my dead body” approach.’119 It was, therefore, no surprise that Callaghan had finally abandoned the idea of Britain becoming a full member of the EMS at its inception. On 10 October the Cabinet committee on European monetary cooperation had a meeting chaired by the Prime Minister, and decided against British entry to the EMS.120 Hereafter the government’s strategy was aimed primarily at minimising the political damage caused by Britain’s opting out of the new European scheme. Not surprisingly, the large part of the PLP came out against Britain’s participation in the EMS. Nearly 120 Labour MPs signed a motion that ‘rejected “any attempt by the EEC, its institutions or its member states” to assume control of domestic policies through a new monetary system for the community’.121 Compared with the government side, how the Conservative Party handled the issue remains relatively unknown. Both Lawson and Howe had been urging that the opposition should help Callaghan in his attempts to bring sterling into the EMS. Howe submitted a paper to the meeting of the Shadow Cabinet on 15 November which backed British participation in the EMS on both international and economic grounds: ‘the general economic philosophy of the EMS … is one we must broadly favour, with its commitment to monetary discipline, lower inflation and stability’.122 Moreover, it also argued that the party should take a bipartisan approach on the issue. In the section entitled ‘domestic political considerations’, the paper offered a succinct analysis of Labour’s policy regarding the EMS and its underlying factors: Callaghan and Healey have been basically in favour, despite their anger at being upstaged and outflanked in the preparatory work by senior officials which led to the Bremen Summit, and the further embarrassment of exclusion from the Schmidt–Giscard agreement at Aachen. The election has been postponed, it appears now that they are preparing for the UK either to delay making up its mind about entry or to stand aside from the whole venture. Perhaps they fear severe party splits on both EMS and pay throughout a pre-election year.123 The paper went on to explain why a bipartisan approach was desirable. If the Conservatives won the next election, Callaghan would have to retire from the leadership of his party. And, ‘with a change of leader, [Labour’s] official party policy could well switch to backing withdrawal [from the EEC] before very long. So should we desire to enter EMS with bipartisan support, we may not have much time in which to secure it.’124

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In his letter to Margaret Thatcher, Lawson also argued that ‘a decision to join [the EMS] by a Labour government would be an inestimable prize, and would effectively prevent Labour playing the anti-European card [against a Conservative government] with any conviction in the future’.125 In the end, the Shadow Cabinet expressed a cautious welcome of the EMS; but it also delivered a scathing attack on the government, and, by doing so, finished off the possibility of a bipartisan approach to the EMS.126 The record of the meeting does not specify why the Shadow Cabinet decided against a bipartisan approach. Certainly the Conservative Party was also internally divided between the supporters of a floating/fixed exchange rate regime and over Europe, with John Biffen known to be a severe critic of the EMS.127 To attack their political opponents was the best way to maintain the unity of the party with an election just around the corner. It might be thought surprising that, under such unfavourable domestic circumstances, Callaghan and Healey still tried to associate Britain as much as possible with the new European monetary scheme. It was actually Gordon Richardson, Governor of the Bank of England, who first stressed that Britain should not be completely left out of the EMS. His letter to the Prime Minister deserves a long quotation, as it reveals most clearly that Britain had got involved in European monetary integration out of concern that she might otherwise lose influence over the future of the international monetary system and the Atlantic relationship: There is … much more to the idea of a European Monetary System than the immediate intervention arrangements. Over the longer perspective it looks increasingly clear that the continuing relative shift in economic power between the United States on the one hand, and the EEC countries taken as a whole on the other hand, is being insufficiently reflected in political, institutional, and monetary arrangements. Both at present and prospectively, neither the US economy nor the attitudes of the US policy-makers look capable of sustaining the dollar as effectively the world’s only reserve currency and taking the preponderant responsibility – as in early postwar years they did – for the international monetary system and its stable functioning. … Over the years it looks unlikely that US performance will be stronger than that in the rest of the world by a sufficient margin to maintain the dollar’s hegemony. There would be a need for a resolution of the contradictions noted already between economic power and political and monetary institutions on opposite sides of the Atlantic. These underlying

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considerations, taken together with the evident determination of Schmidt and Giscard, probably mean that some form of European Monetary System will not only be started this winter but will grow and evolve. Its ultimate shape is at this point naturally difficult to discern; and will indeed depend on the input of all the countries involved from now on. It would seem of the greatest political importance that the United Kingdom be fully involved in these endeavours from the start. It is only from the inside that we can influence developments; and if a fully-fledged EMS is likely in the end to emerge we shall be much better off as an early rather than a late joiner … and we should be able to play an important part in ensuring that … it is complementary to rather than hostile to the US and the dollar. It might be … open to us to join the System in December, while delaying … our full adherence to the intervention arrangements. … In the meantime we would play a full part in the further development of the EMS; the moves towards pooling of reserves, the development of the ECU as a good reserve asset and the development of the credit mechanisms.128 On 23 November, Healey proposed to the Cabinet a compromise formula, whereby Britain would enter the EMS but not the ERM.129 Healey’s proposal was generally popular within the Cabinet, if not within the NEC. On the one hand, the members of the Cabinet who were opposed in principle to the EMS were relieved because the Chancellor did not propose any specific commitment to enter the ERM at some point in the future. On the other hand, the supporters of the EMS were reassured by the fact that Britain would have a place inside the system.130 In other words, in the absence of cooperation between the government and the opposition, the internal situation of the Labour Party largely determined the degree of Britain’s involvement in the new European monetary scheme. Hammering out the final blueprint for the EMS Although differences over the EMS had been considerably narrowed down in the run-up to September, details of the scheme had still to be worked out before its launch. Moreover, there had emerged a new question of how sterling could be accommodated within the EMS without being a part of the ERM. As for the intervention mechanism, the Belgian formula left unresolved what would happen when participating currencies reached the divergence indicator. For the Germans, mere consultation was enough; but non-Snake countries spoke of obligation to act. In the end, it was agreed

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that, if a particular currency crossed its divergence threshold, there would be a presumption that the authorities concerned would take corrective action. Retrospectively, it is fair to say that the ECU basket formula mattered little, and the parity grid remained the basis of the intervention mechanism in the EMS. There were a number of technical difficulties with the ECU basket.131 Moreover, the Germans, and in particular the Bundesbank, were not willing to accept anything other than the parity grid. The intervention mechanism of the EMS, however, may have been very different had the UK and France successfully formed a united front on the issue. In any case, the French were more successful with the credit facilities of the EMS. The volume of credit available under the new scheme, including short-term monetary support and medium-term financial assistance, was increased from 10 to 25 billion ECUs. Apart from this, a member of the EMS would have access to the very short-term facility of limitless amount, and its term of repayment was extended from 30 to 45 days. The Bremen Annex envisaged that an initial supply of the ECU would be created against the deposit of US dollars and gold. The term ‘deposit’ could have several different meanings and the character of the EMCF would largely depend on how it was defined. It was eventually defined as a swap that had to be renewed every three months. This result put an end to the possibility of developing the ECU into a reserve currency in the short term. In its final form, the EMS consisted of three pillars: the ERM, the ECU and the EMCF. The pound did not participate in the ERM, and therefore the UK was not obliged to keep her exchange rate within a narrow band against other European currencies. Yet when the value of the ECU was calculated, sterling was included. Britain continued to be a part of the EMCF, although it was denied full access to the credit facilities for so long as it stayed out of the ERM.

Conclusion Before concluding the chapter, we need to review how our explanatory factors (excluding the sterling balances) help us explain why the path of Britain diverged from that of France and other EEC countries when European integration took a step forward with the creation of the EMS. (1) The relationship with the United States In the introduction to the book, we argued that Britain’s special relationship with the United States may have changed the course of her

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European policy in both positive and negative directions. Our case study of the EMS definitively confirms this point. Callaghan the Atlanticist was inclined to adopt a global approach to currency instability, including that of the United States, and this led to his initial disagreement with Schmidt and Giscard on European monetary cooperation. He was particularly concerned that a new EMS might damage the US dollar and eventually prompt a withdrawal of American troops from Western Europe. Once the Carter administration had rejected Callaghan’s proposal and given its blessing to the EMS, however, the British Prime Minister became more forthcoming towards the EMS, and tried to take a full part in the negotiations, precisely because of his commitment to the Atlantic alliance. Britain eventually joined the EMS, though opting out of the ERM. Callaghan was driven by his fear that, outside of the EMS, Britain might be isolated and less influential if the United States and other European countries struck a deal on the shape of the international monetary system. (2) Economic considerations In the aftermath of the IMF crisis, Callaghan attempted to lower inflation by negotiating a moderate pay rise with the TUC and to achieve export-oriented growth. In other words, he rejected the option of tolerating higher inflation for the sake of faster economic growth and maintaining international competitiveness with periodic currency depreciation. International monetary stability would buttress the new economic strategy. As we saw in the previous chapter, the government was prevented from pursuing its economic and industrial strategy consistently because of opposition from the left wing of the Labour Party. Moreover, the EMS could be more deflationary than the government was willing to accept. However, the general thrust of the government’s economic policy was at least compatible with membership of the EMS, and could even be reinforced by it. Furthermore, the inflation rate was lower in the UK than in Italy or even France. (3) Attachment to national sovereignty and (4) the characteristics of party politics The left wing of the Labour Party opposed the EMS primarily on the grounds of national sovereignty. So did the Gaullists in France. However, his UDF having won the election for the National Assembly in March 1978, Giscard d’Estaing was able to counterbalance the influence of the Gaullists by making overtures to the pro-European Socialists.

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Callaghan did not enjoy (and probably did not seek) the support of the Conservatives, although there were considerable voices in favour of a bipartisan approach to the EMS inside the opposition. In Britain, the choice of negotiating tactics was also affected by the situation of party politics. The government demanded reform of the CAP as a condition of Britain’s entry to the EMS, and closed off thereby the option of cooperating with the French in the negotiations. It might be an overstatement to argue that Britain would have participated in the EMS (including the ERM) from the outset if only the government and the opposition had taken a bipartisan approach. At the very least, however, our analysis shows that the lack of bipartisanship damaged Britain’s relationship with other European countries, and contributed to her awkwardness towards European monetary integration.

7 Conclusion

We have completed our investigation of why Britain parted company with France and other EEC countries in the early years of European monetary cooperation between 1970 and 1979. In the introduction to the book we referred to five factors as possible answers to the above question: (1) Britain’s special relationship with the United States; (2) the legacies of the Empire; (3) economic considerations; (4) attachment to national sovereignty; and (5) the characteristics of the national party system. Then we examined their relative importance by means of four case studies: Britain’s policy towards EMU during her entry negotiations with the EEC, 1970–71 (Chapter 3); Britain and the EEC’s first steps towards EMU, 1971–74 (Chapter 4); a comparison of British and French policies during the currency crisis of 1976 (Chapter 5); and the establishment of the EMS, 1978–79 (Chapter 6). By way of concluding remarks, we first summarise our findings, and then explain the theoretical contributions of this research.

Summary of findings Among our main findings was a common thread running through the first three cases; namely, the fact that there existed the notion of a deal whereby Britain would enter EMU or the Snake and, in exchange, the rest of the EEC would help Britain run down the sterling balances. The possibility of such a deal was envisaged by President Pompidou during the Anglo-French summit of May 1971, the success of which paved the way for British entry into the EEC (Chapter 3). In March 1973, with the collapse of the Bretton Woods regime imminent, Edward Heath and Willy Brandt attempted a similar deal to start the joint float of European currencies against the US dollar (Chapter 4). And finally, during the 192

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sterling crisis of 1976, James Callaghan struggled to obtain a ‘Common Market loan’ for the funding of the sterling balances, which he believed to be the root cause of the crisis, in exchange for sterling’s return to the Snake (Chapter 5). These episodes showed that international strategic factors, such as the relationship with the United States and the legacies of the Empire, worked in favour of Britain’s involvement in European monetary cooperation. As a result of her attempts to maintain the Empire, Britain became increasingly dependent on the United States. For Heath, EMU was the project that would allow Britain to simultaneously relinquish the legacies of the Empire (i.e. the sterling balances) and to dissolve her financial and political dependency on the United States. By contrast, Callaghan probably did out of necessity what Heath had done out of conviction. Britain’s influence in Washington had declined with the demise of the Empire, and, unlike the previous occasions, the United States refused special treatment to the UK during the IMF crisis. As a result, Callaghan was forced to turn to the Europeans for help. Heath and Callaghan, the former a Conservative and the latter from Labour, pursued surprisingly similar deals when they were in office. This fact shows that the leadership of both main political parties was broadly in agreement on the issue. If so, why were all of the above diplomatic efforts in vain? Our analysis has shown that there were two domestic obstacles to sterling’s participation in European monetary cooperation; namely, an economic policy incompatible with membership of a fixed exchange rate regime, and the characteristics of the national party system. First of all, for as long as the government pursued faster economic growth and tolerated relatively high inflation, the loss of international competitiveness as a result of inflation had to be compensated for by periodic currency depreciation. This policy mix, which was adopted by the British government during the earlier half of the 1970s, was clearly not compatible with participation in European monetary cooperation (Chapter 4). However, as a result of the IMF crisis, the Callaghan government changed the course of its economic management. After the crisis, the government tried to constrain inflation by negotiating a modest pay rise with the TUC, and also to improve the balance of payments by pursuing exportled economic growth. International monetary stability was regarded as a highly desirable goal to supplement this new economic strategy (Chapter 5). Therefore, economic considerations were no longer insurmountable difficulties for Britain when the EEC started negotiations on the EMS at the beginning of 1978. The second obstacle to Britain’s engagement in European monetary cooperation was the lack of bipartisanship between the government

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and the opposition, which reflected the adversarial character of British party politics. The EEC was a supranational organisation, membership of which involved substantial sharing or loss of national sovereignty. European monetary cooperation was no exception. Because division over European integration cut across the political left and right, whether the government could mobilise domestic support for its European policy depended on the success or failure of cooperation between the proEuropean groups within the two main political parties. Such bipartisanship on European policy, however, ended after the House of Commons voted in favour of the principle of Britain’s entry into the EEC on 28 October 1971 (Chapter 3). Ironically, it was Callaghan who fostered the collapse of bipartisanship by triggering the Labour Party’s about-turn on Britain’s EEC membership. The collapse of bipartisanship denied the Heath government an opportunity to pursue a European policy that it judged beneficial for Britain but which would have included the loss of national sovereignty. As a result, when the Bretton Woods regime collapsed and European currencies as a bloc started a joint float against the US dollar in March 1973, sterling was not a part of it (Chapter 4). These findings from the first three cases were confirmed by our last case study about British policy on the establishment of the EMS (Chapter 6). Callaghan’s high regard for the relationship with the United States was certainly noticeable in his initial reaction to the EMS. He preferred a global settlement on currency instability involving the United States, and was deeply concerned by the possible impact of the new EMS on the dollar and on US commitment to the security of Western Europe. However, once the Carter administration refused Callaghan’s proposal and gave its blessing to the EMS, Callaghan was converted to the European scheme because of his commitment to the Atlantic alliance. He feared that, outside of the EMS, Britain might be excluded from the circle of consultation between the United States and Europe on reform of the international monetary system and the future of the Atlantic relationship. The lack of domestic support, however, hampered the government’s efforts to play its full part in negotiations on the EMS, and eventually led to Britain’s opting out of the ERM, the central institution of the EMS. The government’s hands were severely tied for internal party reasons; the Labour Party’s left wing, which regarded the EEC as a Capitalist Club, was hostile to any proposal that seemed to threaten Britain’s national sovereignty and the future of socialist programmes. As long as Callaghan’s problem derived from the lack of support for the EMS within the Labour Party, however, it could be mitigated to a certain degree if the

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Conservatives backed him on the issue. Within the Conservative opposition, there were actually numerous voices advocating a bipartisan approach to the EMS, including Geoffrey Howe and Nigel Lawson. In the end, the Conservative Party expressed a modest welcome for the EMS. Yet this was accompanied by a scathing attack on the government’s policy, which put an end to any prospect that Britain might be able to enter the EMS on a bipartisan basis. This lack of a bipartisan approach to European monetary cooperation contrasted sharply with the French case, and led to the two countries’ parting of ways on the issue. France’s support for European monetary cooperation is often attributed to her commitment to the FrancoGerman partnership. Before the collapse of Bretton Woods, however, the French government supported EMU only on the assumption that the international monetary system would continue to be based on fixed exchange rates. The French did not at all want to see what we nowadays understand as a European monetary system – namely, European currencies floating together as a bloc against the US dollar – because this would have strengthened the influence of West Germany in the region. They changed their stance on European monetary cooperation only after running out of alternatives. To the disappointment of the French government, the United States refused to make a firm commitment to the stable exchange rate of the dollar. President Pompidou also attempted an entente with Britain to counterbalance German influence, but without much success. Therefore, the Franco-German partnership cannot explain France’s changing stance on European monetary cooperation. Nor can the Anglo-French differences over the issue be attributed to their international strategies. France also confronted domestic difficulties similar to those of Britain in joining European monetary cooperation. Giscard d’Estaing became French President in 1974, and tried to bring France back into the inner core of European monetary cooperation. However, the President depended on the support of the Gaullist Party, which belonged to the presidential majority, but was nonetheless critical of both his European policy and his economic management. This lack of political support, and the weakness of the French economy, led to the second withdrawal of the franc from the Snake in March 1976. The result of the election for the National Assembly in March 1978, however, changed the state of French politics. The surprising victory of the presidential majority, combined with advances for the UDF, which Giscard d’Estaing had created only a month before the election by bringing the groups of non-Gaullist right under one umbrella, gave the President more discretion in carrying out European policy. By

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making overtures to the pro-European Socialists, Giscard d’Estaing successfully secured domestic support for the EMS beyond his narrow power base of the centrist-UDF coalition. The French President cosponsored a proposal on the EMS with Helmut Schmidt, the West German Chancellor, before the Bremen European Council in July 1978. France took a full part in the EMS, even though the scheme turned out to be very similar to the old Snake. Therefore, the contrasting policies of Britain and France on European monetary cooperation can be best explained by the success or not of cooperation on European policy between governments and oppositions.

Theoretical contributions Before concluding this book, it is opportune to refer to theoretical contributions which our research can make to the studies of the EU. In his seminal article on the methodology of comparative politics, Arend Lijphart distinguishes six types of case study: (1) atheoretical; (2) interpretative; (3) hypothesis-generating; (4) theory-confirming; (5) theoryinfirming; and (6) deviant. These are ideal types, and therefore any study of a single case may belong to more than one of the above categories.1 This book can contribute to the current state of EU studies by virtue of both theory-infirming and hypothesis-generating case studies. First of all, our research reveals the limitations of those explanations of European monetary cooperation that focus exclusively on the role of socio-economic factors, and which fail to demonstrate convincingly why Britain opted out of that process and thereby diverged from France on the issue. Britain and France, as we have seen, shared many economic factors. For example, Andrew Moravcsik tries to explain European monetary cooperation in the 1970s and the early 1980s as an intergovernmental bargain struck between strong-currency and weakcurrency states. France, which represented the latter category, entered the EMS because the French government needed external discipline for its counter-inflationary policy. Why, then, was this not the case for Britain too? Moravcsik concedes that almost identical conditions existed in Britain, but argues that Britain did not enter the ERM until 1990 because of an ideological factor – Margaret Thatcher’s anti-Europeanism.2 His argument, however, is problematic, on at least two accounts. Firstly, although his socio-economic theory can explain why the EMS was more successful than the Snake, it cannot explain why national governments (especially those of weak-currency states) were willing to embark on European monetary cooperation in the first place. The initial attempt

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at European monetary cooperation, the Snake, had started long before Britain and France adopted economic policies compatible with such a goal. In other words, though the adoption of counter-inflationary policy throughout Western Europe might have made the EMS more long-lasting than the Snake, it was not the original cause of European monetary cooperation. During the early 1970s, European monetary cooperation was seen mainly from the viewpoint of international strategic factors in both Britain and France, and economic considerations were more in the nature of obstacles to their participation in it. Moreover, if Moravcsik’s theory had been correct, Britain would have entered the ERM long before 1990. He attributes Britain’s opting out to the role of an ideological factor; but it is not very persuasive to explain the gap between the theory’s prediction and the actual policy by referring to a factor that a researcher usually dismisses as of secondary importance. Against this, he might reply that we should not attach too much importance to the British case. Britain was, after all, the only country that did not participate in the new ERM in 1979, and can be regarded as an exceptional case. However, as we have pointed out in the introduction to this book, the theoretical value of the British case precisely lies in the fact that, because Britain opted out of the ERM in 1979, her inclusion allows a researcher on European monetary cooperation to vary the dependent variable. Theories of European integration should be able to explain not only why one country opts for Europe, but also why another does not. In other words, a good theory needs to explain why a given country has opted out of the process of integration by referring to a factor that it regards as being of central importance to that process. This requirement, needless to say, poses a new challenge to researchers on European integration; but it also offers them an opportunity to test their theories and make them more articulate. To explain ‘opting out’ is likely to become more important because of the recent development of European integration. With the enlargement of the EU into Eastern Europe, it is highly unlikely that all member states of the EU can participate in the process of integration at the same speed in future. The EU may become a two-tier or even multi-tier organisation, in which instances akin to Britain’s opting out of European monetary integration will be a common feature.3 The second theoretical contribution of our research is that it highlights the necessity of paying more attention to the role of institutional factors, namely, the characteristics of national party systems, when making a hypothesis concerning European integration. As we have seen in Chapter 2, the mainstream theories of European integration do not pay much attention

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to the impact of domestic party politics on the choice of European policy by national governments and, indirectly, on the course of European integration. Our conclusion, therefore, opens up a new field for theoretical research. Any research dealing with only a small number of cases, such as ours, cannot establish a general theory. Nonetheless, it can posit a number of factors that need to be taken into consideration in establishing such a theory. In our case, these factors include the precise nature of the internal divisions within political parties over European integration, the existence or non-existence of cooperation between political parties in a policy-making process, and the impact of these factors on the European policies pursued by national governments. As the future of the EU currently arouses political controversy in a growing number of its member states, it is high time that studies of European integration paid more attention to these institutional factors. The policy of the Blair government towards the euro is a good concluding means of demonstrating the applicability of our argument. There is much speculation as to why Tony Blair did not call a referendum on Britain’s participation in the euro even though he was personally keen on the single currency.4 The reasons most commonly suggested are the intransigence of the Treasury and of Gordon Brown, Chancellor of the Exchequer, as well as the influence of the Eurosceptic Murdoch press.5 Yet relatively little attention has been paid to the stance of the Conservative Party. If Kenneth Clarke, well known as a supporter of the euro, had won the party leadership contest in 2001, it would have been much easier for the Prime Minister to call a euro referendum. With the leader of the largest opposition party on his side, Blair had a better chance of winning the vote, and even if the ‘yes’ campaign had been defeated, the popularity of the Labour government would have suffered much less from the result.6 Yet the reality is that Clarke’s commitment to the euro was at least partly responsible for his defeat in the leadership election, and bipartisan cooperation did not become a reality. The British political system has given the cold shoulder to opposition politicians such as Roy Jenkins and Kenneth Clarke who put Europe before party by offering help to the government, and thereby tempted others towards political opportunism.

Notes Abbreviations used in notes CAB ES EUS FCO FV PREM T TFIA

Cabinet Papers Ministerial Committee on Economic Strategy Ministerial Committee on European Strategy Foreign and Commonwealth Office Department of Trade and Industry Prime Minister’s Office Treasury Files released by the Treasury under the Freedom of Information Act

Chapter 1

Introduction

1 Stephen George, An Awkward Partner: Britain in the European Community (Oxford: Oxford University Press, 1998). For the overview of British and French policy towards European integration, see Andrew Geddes, The European Union and British Politics (Basingstoke: Palgrave Macmillan, 2004); John W. Young, Britain and European Unity 1945–1999 (Basingstoke: Macmillan, 2000); Hugo Young, This Blessed Plot: Britain and Europe from Churchill to Blair (London: Macmillan, 1998); and Alain Guyomarch, Howard Machin and Ella Ritchie, France in the European Union (Basingstoke: Macmillan, 1998). 2 The Hague European summit of 1969 commissioned the Werner Committee to draw up a report on EMU. See Werner Report, ‘Report to the Council and Commission on the Realization by Stages of Economic and Monetary Union in the Community’, Supplement to Bulletin of the European Communities, No. 11, 1970. 3 European Council, ‘Resolution of the European Council of 5 December 1978 on the Establishment of the European Monetary System and related Matters’, Bulletin of the European Communities, No. 12, 1978. 4 Alec Cairncross, ‘The Heath Government and the British Economy’, in Stuart Ball and Anthony Seldon (eds), The Heath Government 1970–74: A Reappraisal (London: Longman, 1996), 132. 5 On EMU in the 1970s, see Loukas Tsoukalis, The Politics and Economics of the European Monetary Integration (London: George Allen & Unwin, 1978). For a historical account of the process which culminated in the establishment of the EMS, see Peter Ludlow, The Making of the European Monetary System: A Case Study of the Politics of the European Community (London: Butterworth, 1982). Kenneth Dyson and Kevin Featherstone, The Road to Maastricht: Negotiating Economic and Monetary Union (Oxford: Oxford University Press, 1999) is a monumental work on the entire history of European monetary integration after the Second World War and should be the starting point for a scholar of later generations. David Marsh, The Euro: The Politics of the New Global Currency (New Haven: Yale University Press, 2009) is also a very informative book on the history and prospects of the single currency. 199

200 Notes 6 Dean Acheson, ‘Extract from a Speech at West Point’, in Ian S. McDonald (ed.), Anglo-American Relations since the Second World War (Newton Abbot: David & Charles, 1974), 181–2. 7 Ernest Haas, The Uniting of Europe: Political, Social, and Economic Forces, 1950–1957 (Stanford: Stanford University Press, 1958); Andrew Moravcsik, The Choice for Europe: Social Purpose and State Power from Messina to Maastricht (London: UCL Press, 1998). 8 David Reynolds, ‘A “Special Relationship”? America, Britain and the International Order since the Second World War’, International Affairs, 62(1) (1986), 2. 9 Allan Bullock, Ernest Bevin: A Biography (new edn; London: Politico’s, 2002). For a revisionist view, see John W. Young, Britain, France and the Unity of Europe 1945–51 (Leicester: Leicester University Press, 1984). 10 Michael Charlton, The Price of Victory (London: British Broadcasting Corporation, 1983). 11 Wolfgang Kaiser, Using Europe, Abusing the Europeans: Britain and European Integration, 1945–63 (Basingstoke: Macmillan, 1996), 130; N. Piers Ludlow, Dealing with Britain: The Six and the First UK Application to the EEC (Cambridge: Cambridge University Press, 1997), 30. 12 Cmnd 4715, The United Kingdom and the European Communities (London: HMSO, 1971), paragraph 35. 13 John W. Young, International Policy (The Labour Governments 1964–70, 2; Manchester: Manchester University Press, 2003), 20. 14 Christopher Hill and Christopher Lord, ‘The Foreign Policy of the Heath Government’, in Stuart Ball and Anthony Seldon (eds), The Heath Government of 1970–74: A Reappraisal (London: Longman, 1996), 305. 15 For France’s European strategy during the early post-war period, see William Hitchcock, France Restored: Cold War Diplomacy and the Quest for Leadership in Europe, 1944–54 (Chapel Hill: University of North California Press, 1998); Michael Sutton, France and the Construction of Europe, 1944–2007: The Geopolitical Imperative (Oxford: Berghahn Books, 2007). 16 Compare Frances M. B. Lynch, France and the International Economy: From Vichy to the Treaty of Rome (London: Routledge, 1997), 183 with Peter Mangold, The Almost Impossible Ally: Harold Macmillan and Charles de Gaulle (London: I. B. Tauris, 2006), 82. A more balanced account is available in Alan S. Milward, The Rise and Fall of a National Strategy 1945–63 (The United Kingdom and the European Community, 1; London: Frank Cass, 2002), 252. 17 Mangold, Impossible Ally, 81–2. 18 Sutton, France, Chapter 4. 19 As for French policy towards NATO, see Frédéric Bozo, ‘Détente versus Alliance: France, the United States and the Politics of the Harmel Report’, Contemporary European History, 7(3) (1998). 20 Marsh, Euro, 41–4. 21 Uwe Kitzinger, Diplomacy and Persuasion: How Britain Joined the Common Market (London: Thames and Hudson, 1973), 38–9. 22 Edward Heath, Old World, New Horizons: Britain, Europe, and the Atlantic Alliance (Cambridge: Harvard University Press, 1970), 32 pointed out that Britain’s past applications to the EEC had failed because London and Paris had opposing visions on Europe.

Notes 201 23 Haig Simonian, The Privileged Partnership: Franco-German Relations in the European Community 1969–1984 (Oxford: Clarendon Press, 1985), 5. As for the detailed explanation of the Ostpolitik, see Timothy Garton Ash, In Europe’s Name: Germany and the Divided Continent (London: Vintage, 1994). 24 Georges-Henri Soutou, ‘The Linkage between European Integration and Détente: The Contrasting Approaches of de Gaulle and Pompidou’, in Piers Ludlow (ed.), European Integration and the Cold War: Ostpolitik-Westpolitik, 1965–73 (London: Routledge, 2007), 26–9. 25 Jean-Pierre Corcelette and Frédéric Abadie, Georges Pompidou: Le désir et le destin (Paris: Editions Balland, 1994), 337. 26 Ibid. 27 For an instance of this view, see Tsoukalis, European Monetary Integration, 63–81. 28 David J. Howarth, The French Road to European Monetary Union (Basingstoke: Palgrave, 2001), 29. 29 Harold James, International Monetary Cooperation Since Bretton Woods (New York: Oxford University Press, 1996), 249. 30 Britain concluded the Basle Agreement with the United States and the other 11 countries, who offered a medium-term dollar credit for Britain. The British government also negotiated bilateral sterling agreements with the sterling area countries. Under the agreements, these countries were obliged to hold a certain proportion of their foreign exchange reserves in sterling. In exchange, Britain agreed to guarantee the value of 90 per cent of their sterling balances in the US dollar. As a consequence of these developments, Britain became financially and therefore politically dependent on the United States. France was not a signatory of the Basle Agreement. 31 Milward, Rise and Fall, Chapters 7, 9 and 10. 32 Susan Strange, Sterling and British Policy: A Political Study of an International Currency in Decline (Oxford: Oxford University Press, 1971). See also Alan S. Milward, The Reconstruction of Western Europe 1945–51 (London: Routledge, 1984), 237–8; Kaiser, Using Europe, 41; Catherine R. Schenk, ‘The UK, the Sterling Area, and the EEC, 1957–63’, in Anne Deighton and Alan S. Milward (eds), Widening, Deepening and Acceleration: The European Economic Community 1957–63 (Baden-Baden: Nomos Verlag, 1999), 123–37. 33 Simonian, Partnership, 19. 34 Lynch, France, 186–209. 35 Charles de Gaulle, Mémoires d’espoir (Le renouveau, 1958–1962, 1; Paris: Plon, 1970), 23. 36 Douglas Hurd, Memoirs (London: Little, Brown & Company, 2003), 198; JeanRené Bernard, ‘Britain into Europe’, in Richard Mayne, Douglas Johnson and Robert Tombs (eds), Cross Channel Currents: 100 Years of the Entente Cordiale (London: Routledge, 2004), 171. 37 Tsoukalis, European Monetary Integration, 33. 38 Ludlow, European Monetary System, 159–61. 39 Moravcsik, Choice for Europe, 291. 40 As for the historical background of these hostilities, see Jack Hayward, ‘France and the United Kingdom: The Dilemmas of Integration and National

202 Notes

41 42 43

44

45 46 47

48

49

50

51

52

53 54 55

Democracy’, in Jeffrey Anderson (ed.), Regional Integration and Democracy: Expanding on the European Experience (Lanham: Rowman & Littlefield, 1999); Sudhir Hazareesingh, Political Traditions in Modern France (Oxford: Oxford University Press, 1994), Chapter 5. Tsoukalis, European Monetary Integration, 33, 37–8. Philip Lynch, The Politics of Nationhood: Sovereignty, Britishness and Conservative Politics (Basingstoke: Macmillan, 1999), 39–41. Anthony Forster, Euroscepticism in Contemporary British Politics: Opposition to Europe in the British Conservative and Labour Parties since 1945 (London: Routledge, 2002), 40. Sudhir Hazareesingh, ‘Vincent Wright and the Jacobin Legacy in Historical and Theoretical Perspective’, in Sudhir Hazareesingh (ed.), The Jacobin Legacy in Modern France: Essays in Honour of Vincent Wright (Oxford: Oxford University Press, 2002), 6. Andrew Knapp, Gaullism since de Gaulle (Aldershot: Dartmouth, 1994). Michael Newman, Socialism and European Unity: The Dilemma of the Left in Britain and France (London: Junction Books, 1983). R. E. M. Irving, ‘The Centre Parties in the Fifth French Republic’, Parliamentary Affairs, 29(3) (1976); Vincent Wright, ‘Presidentialism and the Parties in the French Fifth Republic’, Government & Opposition, 10(1) (1975). David M. Wood, ‘Comparing Parliamentary Voting on European Issues in France and Britain’, Legislative Studies Quarterly, 7(1) (1982). According to him, however, the difference between the moderates and radicals on Europe was more blurred on the right. Kathleen Thelen and Sven Steinmo, ‘Historical Institutionalism in Comparative Politics’, in Sven Steinmo, Kathleen Thelen and Frank Longstreth (eds), Structuring Politics: Historical Institutionalism in Comparative Analysis (Cambridge: Cambridge University Press, 1992). Moshe Maor, ‘Party Competition in Interlinked Political Markets: The European Union and its Member States’, in Keith Dowding and Desmond King (eds), Preferences, Institutions and Rational Choice (Oxford: Clarendon Press, 1995) treated the relationship between government and opposition as a party-systemic factor. See also his later work, ‘The Relationship between Government and Opposition in the Bundestag and House of Commons Run-up to the Maastricht Treaty’, West European Politics, 21(3) (1998). Vernon Bogdanor (ed.), Coalition Government in Western Europe (London: Heinemann Educational Books, 1983). See also Kaare Strom, Minority Government and Majority Rule (Cambridge: Cambridge University Press, 1990). Dyson and Featherstone, Road to Maastricht, 99, 121. See also Jonathan Story, ‘The Launching of the EMS: An Analysis of Change in Foreign Economic Policy’, Political Studies, 36 (1988). Maurice Duverger, ‘A New Political System Model: Semi-Presidential Government’, European Journal of Political Research, 8(2) (1980). Robert Elgie, ‘France’, in Robert Elgie (ed.), Semi-Presidentialism in Europe (Oxford: Oxford University Press, 1999). R. Formesyn, ‘Europeanisation and the Pursuit of National Interests’, in Vincent Wright (ed.), Continuity and Change in France (London: George Allen &

Notes 203

56 57 58

59

60 61

62

63 64

65

66 67

68

Unwin, 1984), 220, reports that during his presidential campaign in 1974 Giscard d’Estaing restrained himself from making a statement on European issues which might alienate Gaullist supporters. Mark Aspinwall, ‘Odd Man Out: Rethinking British Policy on European Monetary Integration’, Review of International Studies, 29 (2003), 364. Andrew Knapp and Vincent Wright, The Government and Politics of France, 4th edn (London: Routledge, 2001), 241–68. Philip Norton (ed.), Dissension in the House of Commons: Intra-Party Dissent in the House of Commons’ Division Lobbies 1945–74 (Basingstoke: Macmillan, 1975) and Dissension in the House of Commons 1974–79 (Oxford: Clarendon Press, 1980). This definition of causality is most commonly used in the literature of political science, such as Gary King, Robert Keohane and Sidney Verba, Designing Social Inquiry: Scientific Inquiry in Qualitative Research (Princeton: Princeton University Press, 1994). John Ramsden, The Winds of Change: Macmillan to Heath, 1957–1975 (London: Longman, 1996). David Hine, ‘Leaders and Followers: Democracy and Manageability in the Social Democratic Parties of Western Europe’, in W. Paterson and A. Thomas (eds), The Future of Social Democracy: Problems and Prospects of Social Democratic Parties in Western Europe (Oxford: Oxford University Press, 1986). For a brief discussion on the alternative methodologies which can be employed to analyse intra-party politics, see Paul Webb, The Modern British Party System (London: Sage, 2000), 176–7. S. E. Finer, H. B. Berrington and D. J. Bartholomew, Backbench Opinion in the House of Commons 1955–59 (Oxford: Pergamon Press, 1961). For example, Kathleen R. McNamara, The Currency of Ideas: Monetary Politics in the European Union (Ithaca: Cornell University Press, 1998) attributed the success of the EMS to the convergence of national economic management, namely, the adoption of monetarism. However, her argument cannot explain convincingly why Britain did not participate in the ERM until 1990. Arend Lijphart, ‘Comparative Politics and the Comparative Method’, The American Political Science Review, 65(3) (1971), 682–93; Arend Lijphart, ‘The Comparable-Cases Strategy in Comparative Research’, Comparative Political Studies, 8(2) (1975), 158–77; Charles Ragin, The Comparative Method: Moving Beyond Qualitative and Quantitative Strategies (Berkeley: University of California Press, 1987), Chapter 3. Donald T. Campbell, ‘Degrees of Freedom and the Case Study’, Comparative Political Studies, 8 (1975), 182. James Mahoney, ‘Strategies of Causal Assessment in Comparative Historical Analysis’, in James Mahoney and Dietrich Rueschemeyer (eds), Comparative Historical Analysis in the Social Sciences (Cambridge: Cambridge University Press, 2003). Peter Hall, ‘Aligning Ontology and Methodology in Comparative Politics’, in James Mahoney and Dietrich Rueschemeyer (eds), Comparative Historical Analysis in the Social Sciences (Cambridge: Cambridge University Press, 2003), 392, 393, 394.

204 Notes

Chapter 2 National Political Parties and Party Systems in the Study of European Integration 1 As for the Europeanisation of national party systems, see Robert Ladrech, ‘National Political Parties and European Governance: The Consequences of “Missing in Action”’, West European Politics, 30(5) (2007); Peter Mair, ‘The Limited Impact of Europe on National Party Systems’, West European Politics, 23(4) (2000). 2 Giovanni Sartori, Parties and Party Systems: A Framework for Analysis (Cambridge: Cambridge University Press, 1976), 44. 3 Robert A. Dahl, ‘Patterns of Opposition’, in Robert A. Dahl (ed.), Political Oppositions in Western Democracies (New Haven: Yale University Press, 1996), Chapter 12. 4 Ernst Haas, The Uniting of Europe: Political, Social and Economic Forces 1950–57 (Stanford: Stanford University Press, 1958), 16. 5 Ibid., 154–9. 6 Kevin Featherstone, Socialists Parties and European Integration: A Comparative History (Manchester: Manchester University Press, 1988), 11. 7 Ibid., 11–12. 8 Haas, Uniting of Europe, 23. 9 Ibid., 26–31. 10 Loukas Tsoukalis, What Kind of Europe (Oxford: Oxford University Press, 2003). 11 Ben Rosamond, Theories of European Integration (Basingstoke: Macmillan, 2000), 57–8 points out that Haas was under the influence of the end of ideology thesis. 12 Ibid., 88. 13 W. Sandholtz and A. Stone Sweet (eds), European Integration and Supranational Governance (New York: Oxford University Press, 1998); George Ross, Jacques Delors and European Integration (Cambridge: Polity, 1995). 14 Andrew Moravcsik, The Choice for Europe: Social Purpose and State Power from Messina to Maastricht (London: UCL Press, 1998); Andrew Moravcsik, ‘Preferences and Power in the European Community: A Liberal Intergovernmentalist Approach’, Journal of Common Market Studies, 31(4) (1993). 15 Moravcsik, Choice for Europe, 36. 16 Liesbet Hooghe and Gary Marks, Multi-Level Governance and European Integration (Lanham: Rowman & Littlefield, 2001), 1. 17 Thomas Risse-Kappen, ‘Exploring the Nature of the Beast: International Relations Theory and Comparative Policy Analysis Meet the European Union’, Journal of Common Market Studies, 34(1) (1996). 18 Simon Hix, ‘The Study of the European Community: The Challenge to Comparative Politics’, West European Politics, 17 (1994); ‘The Study of European Union II: The “New Governance” Agenda and its Rival’, Journal of European Public Policy, 5(1) (1998). 19 Liesbet Hooghe, Gary Marks and Carole J. Wilson, ‘Political Parties Take a Stand’, in Hooghe and Marks, Multi-Level Governance, Chapter 10. 20 Seymour Martin Lipset and Stein Rokkan, ‘Cleavage Structures, Party Systems, and Voter Alignments: An Introduction’, in Seymour M. Lipset and Stein

Notes 205

21 22

23

24 25

26

27

28

Rokkan (eds), Party Systems and Voter Alignments: Crossnational Perspectives (New York: Free Press, 1967). Hooghe and Marks, Multi-Level Governance, 164. Simon Hix, ‘Dimensions and Alignments in European Union Politics: Cognitive Constraints and Partisan Responses’, European Journal of Political Research, 35(1) (1999), 79; Paul Tagaart, ‘A Touchstone of Dissent: Euroscepticism in Contemporary West European Party System’, European Journal of Political Research, 33(3) (1998). This is also true of their more recent work. See Liesbet Hooghe, Gary Marks and Carole J. Wilson, ‘Does Left/Right Structure Party Positions on European Integration?’, in Gary Marks and Marco R. Steenbergen (eds), European Integration and Political Conflict (Cambridge: Cambridge University Press, 2004), 137. Hans Daalder (ed.), Comparative European Politics: The Story of a Profession (London: Pinter, 1997), 29. See Hix, ‘Dimensions and Alignments’, 73. This is probably because to admit the existence of a social cleavage which is not reflected in the party system invites intractable questions about the ambiguous relationship between social cleavages and the party system. For example, Matthew Gabel, ‘European Integration, Voters and National Politics’, in Klaus H. Goetz and Simon Hix (eds), Europeanised Politics? European Integration and National Political Systems (London: Frank Cass, 2001). Hooghe and Marks, Multi-Level Governance, 125. This concern (and the limits accompanying it) is shared by an otherwise brilliant book, Simon Hix and Christopher Lord, Political Parties in the European Union (Basingstoke: Macmillan, 1997). On the first British application to the EEC, Ronald Butt, ‘The Common Market and the Conservative Party, 1961–2’, Government & Opposition, 2(3) (1967); David Dutton, ‘Anticipating Maastricht: The Conservative Party and Britain’s first Attempt to Join the European Community’, Contemporary Record, 7(3) (1993). On the second application by the Labour Government, see Philip Lynch, ‘The Conservatives and the Wilson Application’, and Anne Deighton, ‘The Labour Party, Public Opinion and “the Second Try” in 1967’, in Oliver J. Daddow (ed.), Harold Wilson and European Integration: Britain’s Second Application to Join the European Community (London: Frank Cass, 2003); John W. Young, International Policy (The Labour Governments 1964–70, 2; Manchester: Manchester University Press, 2003). On the internal division of the Conservatives since the middle of 1980s, D. Baker, A. Gamble and S. Ludlam, ‘1846…1906…1996? Conservative Splits and European Integration’, The Political Quarterly, 64(4) (1993); D. Baker, A. Gamble and S. Ludlam, ‘Parliamentary Siege of Maastricht 1993’, Parliamentary Affairs, 47(1) (1994); S. George and M. Sowemimo, ‘Conservative Foreign Policy towards the European Union’, in S. Ludlam and M. J. Smith (eds), Contemporary British Conservativism (Basingstoke: Macmillan, 1996); M. Sowemimo, ‘The Conservative Party and European Integration 1988–95’, Party Politics, 2(1) (1996). On the changing policy of Labour, Roger Broad, Labour’s European Dilemmas: From Bevin to Blair (London: Palgrave Macmillan, 2001); Erin Delaney, ‘The Labour Party’s Changing Relationship to Europe’, Journal of European Integration History, 8(1) (2002); S. George and D. Haythorne, ‘The British Labour Party’, in

206 Notes J. Gaffney (ed.), Political Parties and the European Union (London: Routledge, 1996); S. Tindale, ‘Learning to Love the Market: Labour and the European Community’, The Political Quarterly, 63(3) (1992). On the EMU, Philip Stephens, Politics and the Pound: The Tories, the Economy and Europe (London: Macmillan, 1996); Helen Thompson, The British Conservative Government and the European Exchange Rate Mechanism, 1979–1994 (London: Pinter, 1996); Mark Aspinwall, ‘Odd Man Out: Rethinking British Policy on European Monetary Integration’, Review of International Studies, 29 (2003). The few exceptions are Nigel Ashford, ‘The Political Parties’, in Stephen George (ed.), Britain and the European Community (Oxford: Oxford University Press, 1992); Robert J. Lieber, British Politics and European Unity: Parties, Elites and Pressure Groups (Berkeley: University of California Press, 1970). For example, Alain Guyomarch, Howard Machin and Ella Ritchie, France in European Union (Basingstoke: Macmillan, 1998); Alistair Cole, ‘The French Socialists’, and James Shields, ‘The French Gaullists’, in John Gaffney (ed.), Political Parties and the European Union (London: Routledge, 1996). However, there are very stimulating studies on the period between the late 1980s and the early 1990s, in which the minority government of the French Socialists successfully implemented the Single European Act and achieved EMU. See Alain Guyomarch, ‘The European Dynamics of Evolving Party Competition in France’, Parliamentary Affairs, 48(1) (1995); Robert Elgie and Moshe Maor, ‘Accounting for the Survival of Minority Governments: An Examination of the French Case, 1988–91’, West European Politics, 15(4) (1992). Christopher Lord, British Entry to the European Community under the Heath Government of 1970–4 (Aldershot: Dartmouth, 1993). Michael Newman, Socialism and European Unity: The Dilemma of the Left in Britain and France (London: Junction Books, 1983); Featherstone, Socialist Parties. Featherstone, Socialist Parties, 133.

29

30

31 32

33

Chapter 3 Britain’s Policy on EMU During the Entry Negotiations with the EEC, 1970–71 1

2

This agreement came to have a very important meaning later on, when the EC countries resumed their interests in EMU in the late 1980s. When the Hanover European Council of 1988 commissioned the Delors Committee to produce a detailed plan for EMU, there was no vote on the principle of EMU, and therefore Britain did not have a veto, because the decision had already been taken in 1972. Margaret Thatcher complained about this in her memoirs, but she was hardly entitled to do so, since she had been a member of the Cabinet that endorsed that decision in 1972. See Margaret Thatcher, The Downing Street Years (London: HarperCollins, 1993), 741. Notwithstanding its importance, British policy towards EMU in the early 1970s has attracted very scant scholarly attention to date. This is true both in the case of the literature concerned with the European policy of the British government during this period, and also those works investigating EMU and its failure. Among the former, Christopher Lord’s British

Notes 207

3

4 5 6 7

8 9

10 11

12

13

14

15 16

17 18 19

Entry to the European Community under the Heath Government of 1970–4 (Aldershot: Dartmouth, 1993) briefly describes Britain’s policy towards EMU. As an example of the latter, see Loukas Tsoukalis, The Politics and Economics of European Monetary Integration (London: George Allen & Unwin, 1978); otherwise a brilliant book, if focused mainly on French and German policy. Here the sterling balances mean sterling held by non-UK residents. Most of the balances were deposited in London and used for a wide range of purposes. In the following argument, we will limit our attention to the ‘official’ balances held by central banks. As for the recovery of sterling–dollar convertibility, see Alan Milward, European Rescue of the Nation State (London: Routledge, 2000), Chapter 7. Benjamin Cohen, The Future of Sterling as an International Currency (London: Macmillan, 1971), 206. It is noteworthy that France was not a signatory to the Basle Agreement. Saki Dockrill, Britain’s Retreat from East of Suez: The Choice between Europe and the World? (London: Palgrave Macmillan, 2002), Chapter 5; John W. Young, International Policy (The Labour Governments 1964–70, 2; Manchester: Manchester University Press, 2003), Chapter 3. CAB134/2598, ‘Sterling and the EEC’, Ministerial Committee on the Approach to Europe, 8 October 1970, paragraphs 12 and 18. Anthony Barber was subsequently appointed Chancellor of the Exchequer following the sudden death of Iain Macleod on 20 July, which was a major blow for the Conservative government. Geoffrey Rippon succeeded him as Chancellor of the Duchy of Lancaster and took over his responsibility for the entry negotiations. Sir Con O’ Neill, Britain’s Entry into the European Community: Report on the Negotiations of 1970–72 (London: Frank Cass, 2000), Chapter 2. CAB128/47, Cabinet Conclusions, CM(70) 1(3), 23 June 1970; CM(70) 2(4), 25 June 1970; CAB129/150 Cabinet Memoranda, CP (70) 2, 23 June 1970; CP (70) 4, 26 June. J. G. Morgan and T. McNally to Harold Wilson, 23 October 1970, Harold Wilson Papers, MS. Wilson c.904, Confidential Filing: Opposition Years 1970–74, Bodleian Library, Oxford. COM (69) 150, Commission Memorandum to the Council on the Co-ordination of Economic Policy and Monetary Co-operation, Supplement to Bulletin of the European Communities, No. 3, 1969. The ‘monetarist’ school here is unrelated to monetarism, a paradigm of monetary policy-making which became popular in the UK in the early 1980s. CAB134/2598, ‘Economic and Monetary Union’, Ministerial Committee on the Approach to Europe, 18 October 1970, paragraph 8. T312/2729, ‘United Kingdom Attitude to Economic and Monetary Harmonisation in the European Economic Community’, Cabinet Official Committee on the Approach to Europe, 25 June 1970. T312/2729, ‘Financial and Monetary Questions’, Cabinet Official Committee on the Approach to Europe, 25 June 1970. CAB134/2598, ‘Financial and Monetary Questions’, Ministerial Committee on the Approach to Europe, 13 October 1970, paragraph 22. The Times, 15 January 1971 and 23 February 1971.

208 Notes 20 21

22 23 24 25

26

27 28

29 30 31 32

33

34 35 36 37

38 39 40 41 42 43 44 45 46

CAB134/2598, ‘Capital Flows to the Sterling Area’, Ministerial Committee on the Approach to Europe, 13 October 1970, paragraph 4. PREM 15/371, Record of a Meeting held by the Prime Minister at No. 10 Downing Street to discuss sterling with relation to Britain’s entry into the EEC, 4 May 1971. CAB134/2598, ‘Financial and Monetary Questions’, paragraphs 3 and 4. T312/2729, ‘Financial and Monetary Questions’, paragraph 7. Henry Kissinger, White House Years (paperback edn; London: Phoenix Press, 2000), 89. T328/654, Extract from the record of the Ambassador’s talk with President Pompidou, 20 November 1970. President Pompidou added that, although some French officials were arguing that to have the international currency would give Britain unfair advantages after the accession to the EEC, he rather regarded the international status of sterling as a burden. T328/654, ‘Economic and Monetary Union: The Ideal, the Feasible and the Opportunity for Britain’, November 1970, paragraph 35. See also Cohen, Future of Sterling, 224. PREM15/813, Barber to Heath, 26 June 1972. CAB128/47, Cabinet Conclusions, CM(70) 45(4), 10 December 1970; CM(70) 47(1), 14 December 1970; CAB129/154, Cabinet Memoranda, CP(70) 115, 7 December 1970; CP(70) 118, 11 December 1971. CAB134/2598, ‘Economic and Monetary Union’, paragraphs 42 and 43. Ibid., paragraph 7. CAB134/2598, ‘Sterling and the EEC’, Ministerial Committee on the Approach to Europe, 8 October 1970, paragraph 14. For the deputy leadership election, see Roy Jenkins, A Life at the Centre (London: Macmillan, 1991), 309; David Owen, Time to Declare (London: Michael Joseph, 1991), 167–8. The latter includes a particularly superb analysis of the election result. Werner Report, Report to the Council and the Commission on the realisation by stages of Economic and Monetary Union in the Community, Supplement to Bulletin of the European Communities, No. 11, 1970. CAB134/2598, ‘Economic and Monetary Union’, paragraph 3. The Times, 23 November 1970. See CAB134/2598, ‘Economic and Monetary Union’. T328/654, ‘Economic and Monetary Union’, Cabinet Official Committee on the Approach to Europe, Subcommittee on Financial and Monetary Affairs, 9 November 1970, paragraph 53. The Times, 24 November 1970. The Times, 14 December 1970. The Times, 8, 9 and 10 February 1971. The Times, 19 February 1971. The Times, 15 January 1971. The Times, 19 and 20 March 1971. The Times, 31 March 1971. For example, PREM 15/369, UK application to join EEC: options if application fails; Prime Minister’s meeting with the President Pompidou; part 4. Edward Heath, The Course of My Life: My Autobiography (London: Hodder & Stoughton, 1998), 364–5.

Notes 209 47 48

49 50 51 52

53 54 55

56 57 58 59 60 61

62 63 64 65 66

67

The French agenda is included in PREM 15/371, Telegram No. 497 of 4 May from Paris. PREM15/371, Note of a Meeting held at 10 Downing Street at 4:00 pm, 4 May 1971. See also PREM15/371, Note of a Meeting held at 10 Downing Street, 5 May 1971. The author’s translation from the French agenda. PREM15/371, ‘Prime Minister’s Visit to Paris’, Soames to Greenhill, 7 May 1971. The emphasis was added by the author. PREM15/371, ‘UK–EEC Negotiations’, Soames to Greenhill, 21 April 1971. The emphasis was added by the author. PREM15/372, Preparatory Discussions about the Meeting between the President of the French Republic and the Prime Minister of the United Kingdom, 15 May 1971. T312/3251, ‘Visit of the Prime Minister to Paris’, Norbury to Robert Armstrong, 11 May 1971. T312/3251, ‘Visit of the Prime Minister to Paris 19–21 May: Future of Sterling’, 13 May 1971. T312/3251, ‘Briefs for the Prime Minister’s Visit to M Pompidou: Further Item on “Dollar Imperialism”’, Slater to Rawlinson, 11 May 1971; ‘Dollar Imperialism’, Hedley-Miller to Rawlinson, 12 May 1971. In the final draft, the title of the passage was changed to ‘the Dollar Problem’. The Times, 10 May 1971. The Times, 11 and 12 May 1971. Heath, Course, 371. House of Commons Debates, 10 June 1971; Heath, Course, 375. The statement was reprinted in the White Paper the government published in July. It was No. 10 and the Elysée that decided to settle the matter in this way. The content of the statement was agreed by both sides beforehand. Rippon and Giscard d’Estaing, both of whom had no part in the preparatory process, loyally played a role assigned to them by their superiors. PREM15/372, Robert Armstrong to Ryrie, 24 May 1971. PREM15/373, Robert Armstrong to Tickell, 5 June 1971. PREM15/372, FCO Telegram No. 264 of 21 May, Soames to Neale and Morse. PREM15/373, Robert Armstrong to Tickell, 5 June 1971. Heath seems to have believed that the deteriorating relationship between France and West Germany was a major factor in explaining his successful meeting with President Pompidou. See his report of the meeting to the Cabinet, in CAB128/49, Cabinet Conclusions, CM(71) 27, 24 May 1971. Soames shared this view. PREM15/374, ‘The Prime Minister’s Visit to Paris: 19–21 May 1971’, Soames to Douglas-Home, 9 June 1971. During the summit meeting Pompidou said: he ‘saw this not as a question of creating a new entente cordiale. That had been directed against someone [the Germans].’ Yet he did not hide his antipathy towards Schiller. Record of a Conversation between the Prime Minister and the President of the French Republic, 20 May 1971 (session 1), released under Margaret Thatcher Foundation FoI request. CAB128/49, Cabinet Conclusions, CM(71) 27, 24 May 1971.

210 Notes 68 69 70 71 72 73

74

75

76 77 78 79 80

81

82 83 84 85 86 87 88 89

90

The Times, 10 November 1970. T328/654, ‘Ministerial Committee on the Approach to Europe’, 19 November 1970, paragraph 7. Cmnd 4715, The United Kingdom and the European Communities (London: HMSO, 1971), paragraph 28. The Times, 15 January 1971. Hugo Young, This Blessed Plot: Britain and Europe from Churchill to Blair (London: Macmillan, 1998), Chapter 7. The analytical framework here is adopted from Wolfgang C. Muller and Kaare Strom, Policy, Office, or Votes? How Political Parties in Western Europe Make Hard Decisions (Cambridge: Cambridge University Press, 1999). PLP, Minutes of a Party Meeting, 13 May 1971, Labour History Archive, Manchester. See also the Minutes of Parliamentary Committee Meetings held during the period. Owen, Declare, 174. As for the preparatory process which led to the advertisement, see David Marquand, ‘The Welsh Wrecker’, in Andrew Adonis and Keith Thomas (eds), Roy Jenkins: A Retrospective (Oxford: Oxford University Press, 2004), 115; Owen, Declare, 173–5. The Times, 12 May 1971. Giles Radice, Friends & Rivals: Crosland, Jenkins and Healey (London: Little, Brown & Company, 2002). Owen, Declare, 176. Jenkins, Life, 318; Owen, Declare, 176. Healey later explained that he ‘put the arguments on each side’ in his Daily Mirror article. Denis Healey, The Time of My Life (London: Penguin Books, 1990), 359. Minutes of a Meeting of the National Executive Committee, 23 June 1971. A decisive vote for a special party conference was cast by Shirley Williams, a prominent pro-European MP, who did so on the grounds of party democracy. Jenkins, Life, 320. British Labour Party, Labour and the Common Market, Report of a Special Conference of the Labour Party, 17 July 1971. Minutes of a Meeting of the National Executive Committee, 28 July 1971. Owen, Declare, 180–1. The motion which opposed the EEC membership in principle was narrowly defeated. See George H. Gallup (ed.), The Gallup International Public Opinion Polls, Great Britain, 1937–75 (New York: Random House, 1976). Jenkins, Life, 316. Heath, Course, 378. Tim Renton, Chief Whip: People, Power and Patronage in Westminster (London: Politico’s, 2004), 290. A ‘Personal and Private’ note dated 5 October 1971 is attached as Appendix, 353–6. The Shadow Cabinet actually had two meetings on the same day. The first meeting, which was held before the government issued a statement on a free vote, decided to impose a three-line whip on the PLP. The second meeting was arranged at very short notice after the government statement and confirmed the conclusion of the first meeting. See PLP, Minutes of a Parliamentary Committee Meeting, 18 October 1971, and Minutes of a

Notes 211

91 92 93 94

95 96 97 98 99 100 101 102

103

104

105

106

Special Meeting of the Parliamentary Committee, 18 October 1971. Jenkins could not attend the second meeting and bitterly complained about Wilson’s conduct during the episode (Jenkins, Life, 329). However, if we consider Wilson’s reaction to the government’s statement, Jenkins’s attendance was unlikely to have changed the decision of the Shadow Cabinet. PLP, Minutes of a Meeting, 19 October, 1971. PLP, Minutes of a Parliamentary Committee Meeting, 19 October 1971. Owen, Declare, 181. For Wilson’s position on EEC membership, John W. Young, ‘Europe’, in Anthony Seldon and Kevin Hickson (eds), New Labour, Old Labour: The Wilson and Callaghan Governments, 1974–79 (London: Routledge, 2004), 139–53. Heath, Course, 376. Cmnd 4715. Cmnd 3269, Membership of the European Communities (London: HMSO, 1967). CAB128/49, Cabinet Conclusions, CM (71) 36, 1 July 1971; CAB129/158, Cabinet Memoranda, CP (71) 76. House of Commons Debates, 25 October 1971, 1246–7. PREM15/379, Roberts to Tickell, 21 July 1971. PREM15/380, Tickell to Roberts, 27 July 1971; Davis to Roberts, 27 July 1971; Robert Armstrong to Heath, 28 July 1971. The Macmillan government applied to the EEC in 1961 mainly as a consequence of political considerations, but highlighted the economic aspect of membership as well. Piers Ludlow, Dealing with Britain: The Six and the First UK Application to the EEC (Cambridge: Cambridge University Press, 1997); Piers Ludlow, ‘A Mismanaged Application: Britain and the EEC, 1961–63’, in Anne Deighton and Alan S. Milward (eds), Widening, Deepening and Acceleration: The European Economic Community 1957–63 (Baden-Baden: Nomos Verlag, 1999), 271–85. It was not by accident that the Single European Act, which was enacted to achieve a single European market, brought about a large-scale transfer of sovereignty through more frequent use of majority voting in the decisionmaking process of the EC. The following classification of MPs is based on the vote of October 1971 on the principle of Britain’s entry into the EEC. In the case of abstention, the Conservative MPs are included in the ‘anti-European’ category but their Labour counterparts are classified as ‘pro-European’. For the sake of simplicity, the Unionist Party is included in the Conservative Party, while the Liberals and the Scottish Nationalist Party are included in the Labour Party. A breakdown of anti-European Labour MPs (total = 65): opposition to entry in principle = 40; opposition to the terms = 10; unclear = 13; supporting entry but voted against = 2. MPs are judged against entry in principle if they stated in their speeches either (1) they were opposed to entry in principle, (2) they voted against the application in 1967, or (3) they were against entry because of the loss of sovereignty involved. The list of Labour frontbenchers who spoke against the principle of EEC membership: Shore, Foot, Douglas Jay, and Castle. The Conservative

212 Notes

107 108

109

ministers who responded by criticising these Labour speakers as contradicting the official policy of the Labour Party or the policy of the previous Labour administration included James Prior, Keith Joseph, Robert Carr and Reginald Maudling. House of Commons Debates, 28 October 1971, 2210. For instance, Anthony Forster, Euroscepticism in Contemporary British Politics: Opposition to Europe in the British Conservative and Labour Parties since 1945 (London: Routledge, 2002), 40 suggests that Labour anti-Marketeers focused on bread and butter issues. Of all the Labour abstainers, eight had the chance to make a speech during the parliamentary debates. At least six abstained because of the party policy.

Chapter 4 Britain and the EEC’s First Steps Towards EMU, 1971–74 1 Alan S. Milward, The Reconstruction of Western Europe 1945–1951 (London: Routledge, 1984). 2 Barry Eichengreen, Globalizing Capital: A History of the International Monetary System (Princeton: Princeton University Press, 1996). 3 Henry Kissinger, White House Years (paperback edn; London: Phoenix Press, 2000), 425–6. 4 As for the initial position of the United States, see PREM15/309, Note of a Meeting in the Chancellor of the Exchequer’s Room, 16 August 1971; Meeting with Mr Paul Volcker, 16 August 1971. 5 PREM15/309, Note of a Meeting at 10 Downing Street, 16 August 1971. 6 This consideration led to a proposal for the reform of the international monetary system, based on the SDR made by Anthony Barber in his famous speech during the annual meeting of the IMF in September 1971. 7 PREM15/309, ‘US Economic Measure’, 16 August 1971. See also ‘International Monetary Situation’, Lord Cromer to Douglas-Home, 15 August 1971. 8 PREM15/309, ‘Meeting with EEC Finance Ministers’. 9 Dorothee Heisenberg, The Mark of the Bundesbank: Germany’s Role in European Monetary Cooperation (Boulder: Lynne Rienner Publishers, 1999), 30. 10 Andreas Wilkens, ‘Westpolitik, Ostpolitik and the Project of the Economic and Monetary Union: Germany’s European Policy in the Brandt Era’, Journal of European Integration History, 5(1) (1995), 100. 11 Harold James, International Monetary Cooperation Since Bretton Woods (Oxford: Oxford University Press, 1996), 249. 12 The European summit was eventually held at Paris in October 1972, though for different purposes from the original intention. 13 PREM15/309, Record of the Chancellor of the Exchequer’s Visit to Brussels on 19 and 20 August 1971 for Consultations with EEC Finance Ministers, 23 August 1971; CAB128/49, Cabinet Conclusions 1971, CM(71) 45(1), 2 September 1971. 14 PREM15/310, ‘International Monetary Situation’, Note of a Meeting held at 10 Downing Street, 3 November 1971; Allen to Cromer, 5 November 1971. 15 PREM15/310, ‘International Monetary Situation’, 29 October 1971. 16 PREM15/309, Ryrie to Gregson, 18 August 1971.

Notes 213 17 PREM15/326, Heath to Pompidou, Paris Telegram No. 851 of 24 November 1971; Heath to Brandt, Bonn Telegram No. 935 of 26 November 1971. 18 Foreign Relations of the United States (FRUS), 1969–1976 Volume 3 (Washington: United States Government Printing Office, 2001), No. 204. 19 Ibid. 20 PREM15/812, Record of the Restricted Sessions of Meetings of the Group of Ten and of EEC Ministers in Rome, 30 November and 1 December 1971. 21 FRUS, 1969–1976 Volume 3, No. 220. This arrangement meant that the maximum margin between currencies other than the US dollar would be ±4.5 per cent: since if one currency reached the upper limit against the dollar and another currency the lowest limit, the difference between the two would amount to 4.5 per cent. Moreover, the relative position of the two currencies can be reversed. 22 The French explained to their European allies that the original American figure was 2.5 per cent. PREM15/812, FCO Telegram No. 1598 of 15 December, Soames to Heath. 23 The Times, 22 January, and 8 and 11 February 1972. 24 Loukas Tsoukalis, The Politics and Economics of European Monetary Integration (London: George Allen & Unwin, 1978). 25 This is because these measures would not influence the status of the US dollar outside Europe. It is not only these institutional factors but also economic reality, such as the scale of economy and the development of the capital market, which decides the position of the international currency. If Europe is to challenge the position of the US dollar as the international currency, the establishment of a single currency and the existence of a unified capital market are the minimum conditions for doing so. In this sense, President Pompidou was right when he emphasised that the French policy was to make Europe more independent, and that it was not anti-American as often described by the foreign (British) press. The Times, 30 September 1972. 26 CAB130/572, Minutes of a Meeting held at 10 Downing Street, 15 March 1971. 27 Edward Heath, The Course of My Life: My Autobiography (London: Hodder & Stoughton, 1998), 398. 28 John Ramsden, The Winds of Change: Macmillan to Heath 1957–1975 (London: Longman, 1996), 350; Robert Taylor, ‘The Heath Government, Industrial Policy and the “New Capitalism”’, in Stuart Ball and Anthony Seldon (eds), The Heath Government 1970–74: A Reappraisal (London: Longman, 1996); John Campbell, Edward Heath: A Biography (London: Jonathan Cape, 1993), 442. 29 PREM15/841, Note of a Discussion at 10 Downing Street, 3 November 1971; CAB134/3387, ES(71) 23, 22 November 1971; CAB134/3495, ES(72) 1, 19 January 1972. 30 For example, Ramsden wrote: ‘On incomes policy, Heath’s personal position is harder to divine, since this was not so clearly an issue that related directly to his central vision of a European future for Britain.’ See John Ramsden, ‘The Prime Minister and the Making of Policy’, in Stuart Ball and Anthony Seldon (eds), The Heath Government 1970–74: A Reappraisal (London: Longman, 1996), 42. 31 PREM15/812, Bailey to Robert Armstrong, 26 November 1971. 32 PREM15/812, Robert Armstrong to Bailey, 29 November 1971.

214 Notes 33 34 35 36 37 38 39 40 41

42

43 44

45 46

47 48

49 50 51 52 53

54

PREM15/818, Robert Armstrong to Bailey, 25 February 1972. PREM15/818, Robert Armstrong to Bailey, 2 March 1972. PREM15/818, Robert Armstrong to Bailey, 25 February 1972. PREM15/813, Record of the Meeting between the Prime Minister and the Chancellor of the Exchequer, 21 June 1972. PREM15/813, Record of the Meeting between the Prime Minister and the Chancellor of the Exchequer, 22 June 1972. PREM15/813, ‘Floating of the Pound’, 4 July 1972. Ibid. PREM15/819, ‘Gen 92: Pay and Prices Policy’, Memorandum to the Prime Minister, 20 June 1972. The Prime Minister was initially reluctant to introduce statutory policy ‘after the experience of the last ten years’, when it was first mentioned just before the floating of sterling (PREM15/813, Record of the Meeting between the Prime Minister and the Chancellor of the Exchequer, 21 June 1972). However, the government began to consider the possibility of a statutory policy as early as the beginning of July. PREM15/819, ‘Speaking Note for the Prime Minister’, Bailey to Robert Armstrong, 3 July 1972; Heath, Course, 410. PREM15/819, Record of a Meeting with the president of the CBI. Heath was more equivocal on this point in his meeting with the representative of the TUC. PREM15/820, Sir William Armstrong to Robert Armstrong, 27 July 1972; Robert Armstrong to Sir William Armstrong, 28 July 1972. PREM15/894, ‘European Summit’, 6 October 1972. PREM15/1518, Record of a Conversation between the Prime Minister and the President of the French Republic, 18 October 1972. Norway, one of the candidate states, did not enter the EEC as a result of a negative vote in the referendum. For an example of this view, see Kenneth Dyson and Kevin Featherstone, The Road to Maastricht: Negotiating Economic and Monetary Union (Oxford: Oxford University Press, 1999), 538. PREM15/1518, ‘Note for the Record’, 13 July 1972. PREM15/1458, Record of the Meeting between the Prime Minister and the Chancellor of the Exchequer, 10 February 1973. For the French preference of a global solution over a joint Community float, see PREM 15/1459, FCO Telegram No. 1198 of 6 March, ‘Currency Crisis: Meeting of Monetary Committee 6 March’. PREM15/1458, Record of the Meeting between the Prime Minister and the Chancellor of the Exchequer, 10 February 1973. PREM15/1458, O’Brien [Governor of the Bank of England] to Barber, 9 February 1973. PREM15/1457, ‘Exchange Rate Policy’, 6 February 1973. The Japanese yen and Italian lira moved into floating. PREM15/1518, ‘The EEC, International Monetary Reform, and EMU’, 6 July 1972, offers a very good summary of the French position on the issue. Whilst the US administration lacked the will to adjust its policy to the requirements of the international monetary system, it refrained from publicly criticising fixed exchange rates. This American policy was described as ‘benign

Notes 215

55 56

57

58 59 60 61 62 63

64 65 66 67 68 69 70

71

72 73

neglect’ and gradually undermined the Bretton Woods regime. James, International Monetary Co-operation, 210–11. Dyson and Featherstone, Road to Maastricht, 75–83. Ibid., 97. Dyson and Featherstone have rightly pointed out the shift of the French focus to the German monetary power during the period, but without connecting it to the collapse of the Bretton Woods regime, which was a serious policy failure from the French viewpoint. Whilst the emergence of a regional currency bloc strengthened German influence in Western Europe, the US dollar was off the hook. President Pompidou later confessed to Heath that ‘he was struck by the very favourable situation in which the Americans at present found themselves. The dollar had every right but no obligation.’ PREM15/1460, Extract from the Meeting between the Prime Minister and President Pompidou, 22 May 1973. PREM15/1459, Record of a Meeting between the Prime Minster and the Chancellor of the Federal Republic of Germany at Schloss Gymnich on 1 March 1973 at 5:35 pm (the first meeting) and at 10:55 pm (the second meeting); Record of a Conversation between the Prime Minister and the Chancellor of the Federal German Republic at the Federal Chancellery on 2 March 1973. PREM15/1459, Note of a Meeting held at 10 Downing Street, 2 March 1973. PREM15/1459, ‘Cabinet: Currency Crisis’, Note of a Meeting held at Chequers, 3 March 1973. Ibid. Ibid. CAB128/51, Cabinet Conclusion, CM(73) 13(2) Confidential Annexe, 5 March 1973. The quotation is from Barber’s statement. PREM15/1459, Note of a Meeting held at 10 Downing Street, 2 March 1973. The emphases are added by the author. Ibid. PREM15/1459, ‘Cabinet, Currency Crisis’. The tough stance of the Chancellor of the Exchequer received a favourable domestic reception. The Times, 6 March 1973. PREM15/1459, FCO Telegram of No. 1198 of 6 March, ‘Currency Crisis: Meeting of Monetary Committee 6 March’. PREM15/1459, Record of the Belgian Ambassador’s visit to Robert Armstrong, 10 March 1973. PREM15/1459, FCO Telegram No. 374 of 8 March. PREM15/1459, Brandt to Heath, 9 March 1973. The scale of a proposed medium-term loan was between 1 and 2 billion dollars, according to FCO telegram No. 337 of 11 March. PREM15/1459, Robert Armstrong to Barber, 10 March 1973. The Foreign Secretary was urging for a compromise as well. PREM15/1459, DouglasHome to Heath, 9 March 1973. Rainer Hellmann, Gold, the Dollar, and the European Currency Systems: The Seven-Year Monetary War (New York: Praeger, 1979), 38. PREM15/1459, FCO Telegram No. 1331 of 12 March 1973, ‘Currency Crisis: Council of Ministers, 11 March’. Sweden, Austria and Switzerland joined a common float with other EEC countries, though they were not members of the EEC.

216 Notes 74 PREM15/1459, Heath to Barber, 12 March 1973. 75 Heisenberg, Mark of Bundesbank, 40. 76 PREM15/1461, Extract from meeting: Prime Minister, Chancellor of the Exchequer and Governor of the Bank of England, 5 September 1973. 77 For the text of Chancellor Brandt’s message to President Nixon, see PREM15/ 1459, FCO Telegram No. 857 of 4 March 1973. 78 PREM15/1459, FCO Telegram No. 851 of 3 March 1973, Nixon to Heath. 79 PREM15/1459, Heath to Nixon, 4 March 1973. 80 PREM15/1459, FCO Telegram No. 382 of 9 March 1973, ‘Currency Crisis: Meeting of Enlarged Group of Ten’. This was the question of whether a Community float would be clean or dirty. If it was a ‘dirty’ float, European countries would intervene in the foreign exchange market to keep the value of their currencies artificially low against the US dollar. This could prevent the recovery of the US balance of payments. 81 CAB128/51, Cabinet Conclusion, CM(73) 13(2) Confidential Annexe, 5 March 1973. 82 PREM15/1459, FCO Telegram. No. 943 of 10 March, 1973, ‘Monetary Situation’. 83 PREM15/1459, Record of a Meeting at Chequers, 4 March 1973. 84 CAB134/3624, EUS(73) 2nd Meeting, Ministerial Committee on European Strategy, 25 July 1973. 85 This formula was known as the ‘Houghton doctrine’, named after the chairman of the PLP, Douglas Houghton. 86 Roy Jenkins, A Life at the Centre (London: Macmillan, 1991), 332. 87 Heath, Course, 383–5. See also Philip Norton, Conservative Dissidents: Dissent within the Parliamentary Conservative Party, 1970–74 (London: Temple Smith, 1978), 80. 88 Roger Broad, Labour’s European Dilemmas: From Bevin to Blair (London: Palgrave Macmillan, 2001), 89. 89 PLP, Minutes of a Parliamentary Committee Meeting, 15 March 1972, Labour History Archive, Manchester. 90 The Times, 17 March 1972. 91 The Minutes of the National Executive Committee, 22 March 1972. 92 PLP, Minutes of a Parliamentary Committee Meeting, 29 March 1972. 93 The Times, 5 October 1972. Wilson stood firm in his refusal of outright withdrawal from the EEC, once the Labour Party was elected to government. The party conference narrowly defeated the motion which urged for withdrawal without renegotiation. 94 Kissinger, White House Years, 965. 95 Haig Simonian, The Privileged Partnership: Franco-German Relations in the European Community 1969–1984 (Oxford: Clarendon Press, 1985); Kenneth Morgan, Callaghan: A Life (Oxford: Oxford University Press, 1997). 96 PREM15/1460, Record of the Meeting between the Prime Minister and Sir Christopher Soames, 25 March 1973. Soames told Heath that ‘in his recent meeting with President Pompidou, the President had used Sir Christopher as if he was still British Ambassador [Soames was appointed to the European Commissioner in January 1973] to speak in forthright terms about his disappointment at Britain’s failure to refix the parity. Events had not gone as he expected when he discussed these problems with the Prime Minister in 1971

Notes 217 … Now here we were, still outside the Community arrangements, with no definite date for coming in. President Pompidou had made it very clear that there was no prospect of any progress on other Community policies of interest to us so long as we were outside the monetary arrangement.’

Chapter 5 Comparing British and French Policy on European Monetary Integration (1): The Currency Crisis of 1976 1

2

3 4

5

6 7

8

9

For example, Peter Ludlow, The Making of the European Monetary System: A Case Study of the Politics of the European Community (London: Butterworth, 1982). Though written more than 20 years ago, this still remains the best work on the subject. Ludlow, European Monetary System, 81 and Kenneth Morgan, Callaghan: A Life (Oxford: Oxford University Press, 1997), 393 are among examples of this view. Morgan’s work is the official biography of the former Prime Minister, and makes full use of his private papers. Tony Benn, The Benn Diaries (New Single Volume edn; London: Arrow Books, 1996), 374. Kathleen Burk and Alec Cairncross, ‘Good-bye, Great Britain’: The 1976 IMF Crisis (New Haven: Yale University Press, 1996), 66. It is not our intention to deny that there were noticeable personal differences between Heath and Callaghan. In his memoirs, Callaghan critically commented that Heath’s strong commitment to Europe had weakened Britain’s relationship with the United States and the Commonwealth (James Callaghan, Time and Chance (London: Collins, 1987), 295–6). However, he also wrote that from a political perspective ‘I was sympathetic to closer cooperation with our European neighbours. I was of course a firm believer of the Atlantic alliance, but as years went by, it seemed that the strength of the Superpowers was so much greater than other individual nations that the voice of Europe was in danger of being lost in world affairs’ (ibid., 305). The following analysis will uncover this relatively unknown aspect of the Callaghan diplomacy. Mark Harmon, The British Labour Government and the 1976 IMF Crisis (Basingstoke: Macmillan, 1997). This book is based on intensive survey of the American sources, and therefore highly useful for understanding the degree of US involvement in the IMF crisis. Tony Benn, Against the Tide: Diaries 1973–76 (London: Hutchinson, 1989), 687. Burk and Cairncross, ‘Good-bye, Great Britain’, 91. The quotation is taken from Burk’s interview with Karl-Otto Pöhl, then State Secretary of the Finance Ministry in Bonn, who worked as a personal envoy for Schmidt throughout the IMF crisis. Dorothee Heisenberg, The Mark of the Bundesbank: Germany’s Role in European Monetary Cooperation (Boulder: Lynne Rienner Publishers, 1999); Michael Loriaux, France after Hegemony: International Reform and Financial Change (Ithaca: Cornell University Press, 1991). Rainer Hellmann, Gold, the Dollar and the European Currency Systems: The Seven-Year Monetary War (New York: Praeger, 1979).

218 Notes 10

11

12 13

14 15 16

17 18

19 20 21

22 23

24 25

Margaret Garritsen de Vries, The International Monetary Fund 1972–1978 (Narrative and Analysis, 2; Washington: International Monetary Fund, 1982), Chapter 37. John Goodman, Monetary Sovereignty: The Politics of Central Banking in Western Europe (Ithaca: Cornell University Press, 1992), 111; Loriaux, France after Hegemony, 9. Loriaux, France after Hegemony, 33. There were, of course, a number of differences in the economic situation of the two countries. In France, due to the tradition of fiscal conservatism, the size of fiscal deficits was much smaller than in other countries, including Britain. In controlling the growth of the monetary supply, therefore, the main problem before the French government was how to restrain the expansion of bank lending, not reducing the level of public spending as was the case for its British counterpart. Moreover, although both countries relied on foreign borrowing, in the British case a large proportion of foreign borrowing was made in sterling, not US dollars (and was thus recorded as an increase in the sterling balances). Yet these differences did not mask the overall similarities explained above. Goodman, Monetary Sovereignty, 119. Andrew Britton, Macroeconomic Policy in Britain 1974–87 (Cambridge: Cambridge University Press, 1991), 36–8. During the referendum campaign on Britain’s continuing membership of the EEC in 1975, there was talk of the possibility of forming a government of national unity which would include all political forces belonging to the yes camp. However, this never transpired, and nor did the result of the referendum change the parliamentary arithmetic, which was to constrain the government’s conduct of European diplomacy for the rest of the Parliament. David Butler and Uwe Kitzinger, The 1975 Referendum (London: Macmillan, 1976). Goodman, Monetary Sovereignty, 110; Loriaux, France after Hegemony, 183. Philip Cerny, ‘The New Rule of the Game in France’, in Philip G. Cerny and Martin A. Schain (eds), French Politics and Public Policy (London: Frances Pinter, 1980). Kevin Hickson, The IMF Crisis of 1976 and British Politics (London: Tauris Academic Studies, 2005). Morgan, Callaghan, 542. Burk and Cairncross, ‘Good-bye, Great Britain’, 67; Leo Pliatzky, Getting and Spending: Public Expenditure, Employment and Inflation (Oxford: Blackwell, 1982), 154. Pliatzky was the Second Permanent Secretary in the Treasury and the head of the public expenditure unit. Stephen Fay and Hugo Young, ‘The Day the £ Nearly Died’, The Sunday Times, 14, 21, 28 May 1978 made this allegation. Edmund Dell, A Hard Pounding: Politics and Economic Crisis 1974–76 (Oxford: Oxford University Press, 1991), 195–6. Dell had been the Paymaster General and was promoted to Secretary of Trade. Callaghan, Time and Chance, 414. Harold Wilson, Final Term: The Labour Government 1974–1976 (London: Weidenfeld and Nicholson and Michael Joseph, 1979), 227.

Notes 219 26 27 28

29

30 31 32

33

34 35

36 37 38 39 40 41 42 43 44

45 46

PREM16/796, ‘The Sterling Exchange Rate’, Healey to Wilson, 8 March 1976. Callaghan, Time and Chance, 419–20, 429, 431–3, 446. By contrast, Dell, Hard Pounding, 255 regards the sterling balances as of secondary importance. Jim Tomlinson, ‘Economic Policy’, in Anthony Seldon and Kevin Hickson (eds), New Labour, Old Labour: The Wilson and Callaghan Governments, 1974–79 (London: Routledge, 2004), 55. The Social Contract was an agreement concluded between the Labour government and the TUC; in exchange for accepting voluntary restraint on pay rises, the TUC was allowed to participate in the government’s policy-making over a wide range of social and economic issues. Pliatzky, Getting and Spending, 122, 132. Ibid., 138–40. Hellmann, European Currency Systems, 100–4; George Zis, ‘The International Status of Sterling’, in Michael Artis and David Cobham (eds), Labour’s Economic Policies 1974–1979 (Manchester: Manchester University Press, 1991), 111. The official papers recently released by the Treasury under the Freedom of Information Act (hereafter the TFIA) support this analysis. Of all the loss to the reserves of the Bank of England between March and the first week of May 1976, more than a quarter was on account of the reduction in the official balances. TFIA, ‘Speaking Note on Pressure in March, April and the First Week of May’. PDF file 05. Hellmann, European Currency Systems, 100–4. See also TFIA, ‘Source of Pressure’, Walker to Barratt, 8 June 1976, PDF file 05. CAB128/57/1, Cabinet Conclusions, Confidential Annex, CC(75) 31, 1 July 1975. Having failed to reach agreement over the sterling balances with the rest of the EEC, the Heath government decided to offer a unilateral guarantee to the official sterling holders in September 1973, which was extended until the end of 1974 by the Labour government. See PREM16/38 ‘Official Sterling Balances’, Healey to Wilson, 13 March 1974. PREM16/371, ‘New Sterling Guarantees’, 7 July 1975. PREM16/371, ‘External Borrowing Policy’, Lever to Wilson, 9 October 1975. Callaghan, Time and Chance, 399. The following account is based on Burk and Cairncross, ‘Good-bye, Great Britain’, 6–13 and Harmon, 1976 IMF Crisis, 62–78, 122–30. Harmon, 1976 IMF Crisis, 233. Ibid., 65–6. Ibid., 126. Bulletin of the European Communities, No. 12, 1974. For details of the Fourcade Plan, Dyson and Featherstone, The Road to Maastricht: Negotiating Economic and Monetary Union (Oxford: Oxford University Press, 1999) 112–14, 297. FV61/61, Copy of Mr Leo Tindemans’ letter to his European Council colleagues, 29 December 1975. European Union: Report by Mr Leo Tindemans, Prime Minister of Belgium, to the European Council, Supplement to Bulletin of European Communities,

220 Notes

47 48 49

50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75

76 77

No. 1, 1976. All quotations in this paragraph are made from Chapter 3 of the report. FV61/61, ‘Tindemans’ Report: Economic, Monetary and Industrial Aspects’, Note by HM Treasury, paragraph 7. Ibid., paragraph 17. This view was shared by a contemporary commentator who was more enthusiastic about EMU than the British Treasury. Loukas Tsoukalis, The Politics and Economics of European Monetary Integration (London: George Allen & Unwin, 1978), 159–61. FV61/61, ‘Monetary Aspects’, paragraph 15. FV61/61, FCO Telegram No. 27 of 10 January 1976; FCO Telegram No. 4 of 19 January 1976. FV61/61, FCO Telegram No. 3 of 8 January 1976. Ibid. FV61/61, FCO Telegram No. 11 of 10 February 1976. FV61/61, Boyes to Part, 14 January 1976. FV61/61, ‘Monetary Aspects’, paragraph 20. ©The Times, 7 February 1976, nisyndication.com. Ibid. PREM16/799, ‘Prime Minister’s Meeting with Chancellor Schmidt at Chequers’, 11 October 1976. Burk and Cairncross, ‘Good-bye, Great Britain’, 40. TFIA, Note of a Meeting held at 11 am, 3 June 1976, PDF file 06. TFIA, Note of a Meeting held at 7.00 pm, 3 June 1976, and Record of the Telephone Conversation between Simon and Healey, PDF file 03. TFIA, Note of a Meeting held at 11 o’clock, 5 June 1976, PDF file 06. TFIA, Record of the Telephone Conversation between Healey and Richardson, 5 June 1976, PDF file 06. Ibid. Burk and Cairncross, ‘Good-bye, Great Britain’, 40. TFIA, ‘Monetary Targets’, Wass to Principal Private Secretary [Stowe], 16 June 1976, PDF file 11. TFIA, Note of a Meeting, 20 July 1976, PDF file 19. Report on the Seventy-fifth Annual Conference of the Labour Party (London: Labour Party, 1976), 188. E. H. H. Green, Thatcher (London: Hodder Arnold, 2006), Chapter 2. Britton, Macroeconomic Policy, 34. Ibid., 37. Office for National Statistics, United Kingdom Balance of Payments: Pink Book, 2008 edn (London: Palgrave Macmillan, 2009). Morgan, Callaghan, 537. In this way, we can avoid the pitfalls of analysis centred on the concept of the post-war consensus. If we are preoccupied with the question of whether the policy of the Callaghan government can be best described as the remnants of the post-war consensus or as the precursor to Thatcherite reforms, we are likely to overlook those elements of the government’s policy that cannot be classified in either category. PREM16/800, ‘Note for the Record’, 10 November 1976. Pliatzky, Getting and Spending, 153.

Notes 221 78 79 80

81 82 83 84 85 86 87

88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108

The Times, 26 October 1976. Benjamin Cohen, The Future of Sterling as an International Currency (London: Macmillan, 1971), 206–7. Callaghan, Time and Chance, 419. This offer was made on the condition that the UK and countries in the sterling area accept the suspension of gold–dollar convertibility. Ibid., 420. Ibid., 429. PREM16/798, Transcript of a Telephone Conversation between the Prime Minister and President Ford, 29 September 1976. Burk and Cairncross, ‘Good-bye Great Britain’, 64. Callaghan, Time and Chance, 211. Ibid. Ibid. PREM16/796, ‘Swap Facilities with New York Federal Reserve’, 3 June 1976. This was exactly what happened after the devaluation of sterling in 1967. The US dollar was widely expected to be devalued against gold, and was therefore sold on a large scale. In 1968, the market price of gold was separated from the official price [1 troy ounce of gold = US$35], which henceforth was applied only to transactions between the central banks. Thus, the so-called ‘gold window’ was closed. Fay and Young, ‘The Day the £ nearly Died’, The Sunday Times, 21 May 1978, 34. The emphasis was added by the author. Callaghan, Time and Chance, 431. Kathleen Burk, ‘Symposium: 1976 IMF Crisis’, Contemporary Record, 3(2) (1989), 45. Callaghan, Time and Chance, 432. PREM16/800, ‘IMF Loan and Safety Net for Sterling Balances’, 5 November 1976. PREM16/800, ‘Prime Minister’s Conversation with Chancellor Schmidt’, 5 November 1976. Tony Benn, Against the Tide, 637. PREM16/799, ‘Economic Strategy’, Palliser to Stowe, 4 November 1976. PREM16/799, ‘IMF Loan and Safety Net for Sterling Balances’, 1 November 1976. ©The Times, 5 November 1976, nisyndication.com. Fay and Young, ‘The Day the £ nearly Died’, The Sunday Times, 21 May 1978, 34. Ibid. The emphasis was added by the author. PREM16/800, ‘Prime Minister’s Conversation with Chancellor Schmidt’, 5 November 1976. Burk and Cairncross, ‘Good-bye, Great Britain’, 78. Fay and Young, ‘The Day the £ nearly Died’, 21 May 1978, 34. PREM16/802, President Ford to Callaghan, 20 November 1976. Callaghan, Time and Chance, 433. Ibid. Benn, Against the Tide, 653–4. Callaghan, Time and Chance, 435. Ibid., 437.

222 Notes 109 110 111 112 113 114

115

116 117 118 119 120 121 122 123 124 125 126

127 128 129 130 131 132 133 134

135 136

Burk and Cairncross, ‘Good-bye Great Britain’, 91. The emphasis was added by the author. Ibid., 67. Callaghan, Time and Chance, 436. PREM16/804, ‘Note for the Record: IMF Negotiations’, 1 December 1976. Benn, Against the Tide, 661–9. For the details of the Alternative Economic Strategy, Mark Wickham-Jones, Economic Strategy and the Labour Party: Politics and Policy-Making, 1970–1983 (London: Macmillan, 1996). Susan Crosland, Tony Crosland (London: Jonathan Cape, 1982), 379. Susan Crosland wrote that David Hill, Roy Hattersley’s political adviser, approached Tony Benn’s adviser, Francis Morrell, to form a united front against the Treasury’s proposal. Morrell told Hill that ‘the Bennites were not willing to play that game with the Crosland group’. In fact, the leftist ministers other than Benn seem to have been more willing to cooperate with Crosland. Benn, Against the Tide, 656–7, 661. Fay and Young, ‘The Day the £ nearly Died’, The Sunday Times, 28 May 1978, 33. Crosland, Tony Crosland, 381. Fay and Young, ‘The Day the £ nearly Died’, The Sunday Times, 21 May 1978, 35. Callaghan, Time and Chance, 439. Ibid. Ibid. Lower interest rates as a result of the package were expected to reduce the PSBR by £300 million. Benn, Against the Tide, 673. Ibid. Ibid., 674. The IMF initially rejected the British proposal, and, in his memoirs, Healey offers a very detailed account of how he pressurised the IMF to agree with his figure, by threatening ‘a general election on the issue of the IMF versus the people’. Healey, My Life, 432. See also PREM16/805, Note of a meeting held at Number 11 Downing Street, 3 December 1976. TFIA, ‘A Package of Deflationary Measures’, Hopkin to Wass, 12 November 1976, PDF file 27. Denis Healey, The Letter of Intent, 15 December 1976, paragraph 2. TFIA, ‘A Package of Deflationary Measures’, PDF file 27. Benn, Against the Tide, 672. Ibid., 673. TFIA, ‘A Package of Deflationary Measures’, PDF file 27. TFIA, ‘Economic Effects of the Measures’, 13 December 1976, PDF file 37. PREM16/808, FCO Telegrams Nos 4189, 4208, and 4213 of 13 December 1976. The agreement on a safety net for sterling was eventually reached in the next year. Benn, Against the Tide, 687. Burk and Cairncross, ‘Good-bye Great Britain’, 109, quoting from the Manuscript Diary of Tony Benn.

Notes 223 137 138 139 140

141 142 143 144 145

Callaghan, Time and Chance, 449. Ibid., 451. Ibid. The no confidence motion was rejected by 322 to 298. Therefore, the government would have been defeated by two votes had it not made arrangements with the Liberals. Callaghan, Time and Chance, 456. Vernon Bogdanor, Multi-Party Politics and the Constitution (Cambridge: Cambridge University Press, 1983), 159. Michael Steed, ‘The Liberal Party’, in H. M. Drucker (ed.), Multi-Party Britain (London: Macmillan, 1979), 78. Callaghan, Time and Chance, 466. Cmnd. 7405, The European Monetary System (London: HMSO, 1978), paragraph 45.

Chapter 6 Comparing British and French Policy on European Monetary Integration (2): The Establishment of the EMS, 1978–79 1

2

3 4

5

6

7 8

This complicated institutional arrangement was designed as a last-minute compromise to accommodate Britain and have the EMS launched as a Community scheme. Note the fact that, until late November, while the British government considered the matter in terms of whether sterling should enter the EMS, the debate within the government centred on what was to become the ERM. The second factor will be excluded from the following analysis, because the sterling balances agreement concluded at the end of the IMF crisis was still valid. Although the agreement did not reduce the absolute amount of the official sterling balances, the relative importance of sterling as a reserve currency declined steadily in the second half of the 1970s. Edmund Dell, ‘Britain and the Origins of the European Monetary System’, Contemporary European History, 3(1) (1994), 20. Interview with Edmund Dell, 23 July 1998, 11–12, for example. This and other interviews referred to in this chapter were conducted in the context of the oral history project of the European Commission, and their transcripts are available at the website of the European University Institute. Leader’s Consultative Committee (LCC), ‘The European Monetary System (EMS)’, Minutes of a Meeting, 25 October 1978, Thatcher Archive. . Lawson was the architect of the party’s economic strategy and was promoted to Chancellor of the Exchequer after the general election of 1983. LCC, ‘European Monetary System’, Howe to Thatcher, 31 October 1978, Thatcher Archive. Howe became Chancellor of the Exchequer in 1979, and moved to the Foreign Office in 1983. Roy Jenkins, European Diary 1977–1981 (London: Collins, 1989), 23. Ibid., 168.

224 Notes 9

10

11 12 13 14

15 16

17 18 19 20

21 22 23 24 25 26 27 28 29 30 31 32

Roy Jenkins, ‘Europe’s Present Challenge and Future Opportunity’, Jean Monnet Lecture delivered in Florence, 27 October 1977. All following quotations are made from the text of the speech. Commission of the European Communities, Report of the Study Group on the Role of Public Finance in European Integration (Brussels, April 1977). It is fair to add that MacDougall himself reached the opposite conclusion from the same analysis; ‘I had been using this argument for arguing we’re not yet ready for a single currency, it was going to cause more trouble and was more likely to cause disharmony in Europe than advance European integration.’ Interview with Sir Donald MacDougall, 9 July 1998, 16. Peter Ludlow, The Making of the European Monetary System: A Case Study of the Politics of the European Community (London: Butterworth, 1982), 26. Jonathan Story, ‘The Launching of the EMS: An Analysis of Change in Foreign Economic Policy’, Political Studies 36 (1988), 404. Valéry Giscard d’Estaing, Le Pouvoir et la Vie (La recontre, 1; Paris: Compagnie 12, 1988), 131. Kenneth Dyson and Kevin Featherstone, The Road to Maastricht: Negotiations on Economic and Monetary Union (Oxford: Oxford University Press, 1999), 100. Giscard d’Estaing, Le Pouvoir et la Vie, i, 134. Ibid., 129. Giscard wrote that the floating of currencies from March 1973 was initially regarded only as ‘a transitional measure’, and that France played an active part in the subsequent attempt to ‘define a new system based on stable but adjustable parities’. Ibid., 134. Volkmar Lauber, The Political Economy of France: From Pompidou to Mitterrand (New York: Praeger, 1983), 85. Valéry Giscard d’Estaing, Le Pouvoir et la Vie (L’affrontment, 2; Paris: Compagnie 12, 1991), 132. Michael Loriaux, France After Hegemony: International Change and Financial Reform (Ithaca: Cornell University Press, 1991). Lauber, Political Economy of France, 101. Lauber, Political Economy of France, Chapter 8. Raymond Barre, Une politique pour l’avenir (Paris: Plon, 1981), 118–19. Ibid. Vincent Wright, ‘The French General Election of March 1978: “La Divine Surprise”’, West European Politics, 1(3) (1978), 27. Rainer Hellmann, Gold, the Dollar, and the European Currency Systems: The Seven-Year Monetary War (New York: Praeger, 1979), 59–60. Ludlow, European Monetary System, 33. Wright, ‘La Divine Surprise’, 25–6. (The emphasis is added by the author.) Jenkins, European Diary, 180. D. S. Bell and Byron Criddle, The French Socialist Party: Resurgence and Victory (Oxford: Clarendon Press, 1984), 95–101. Wright, ‘La Divine Surprise’, 33. Ibid., 47. Giscard’s interview in L’Express, 9–15 May 1977, 42; Valéry Giscard d’Estaing, Towards a New Democracy (London: Collins, 1977).

Notes 225 33 34

35 36 37 38 39 40 41 42 43

44 45 46

47 48 49 50 51 52 53 54 55 56 57 58 59 60

61

Wright, ‘La Divine Surprise’, 47. John Frears, ‘Legitimacy, Democracy and Consensus: A Presidential Analysis’, West European Politics, 1978, 1(3), 11–23; John Frears, ‘Parliament in the Fifth Republic’, in William G. Andrews and Stanley Hoffmann (eds), The Impact of the Fifth Republic on France (Albany: State University of New York Press, 1981), 47–68. Wright, ‘La Divine Surprise’, 47–8. Ibid., 50. Story, ‘Launching of the EMS’, 401. Valéry Giscard d’Estaing, Le Pouvoir et la Vie (Choisir, 3; Paris: Cie 12, 2006), 246. The Times, 7 July 1978; Dyson and Featherstone, Road to Maastricht, 99, 121; Ludlow, European Monetary System, 142. Kenneth Morgan, Callaghan: A Life (Oxford: Oxford University Press, 1997), Chapter 25. James Callaghan, Time and Chance (London: Collins, 1987), 486, 488. Ibid., 490. The Labour government could have kept the value of sterling low by abolishing exchange controls and allowing international outflow of capital, but in fact it avoided this course. The Conservatives, by contrast, removed all restrictions on capital movement once they returned to power in 1979. This is another example of major differences between the Callaghan and Thatcher governments. Callaghan, Time and Chance, 474. Morgan, Callaghan, 633. Jim Tomlinson, ‘Economic Policy’, in Anthony Seldon and Kevin Hickson (eds), New Labour, Old Labour: The Wilson and Callaghan Governments, 1974–79 (London: Routledge, 2004), 57. Dell, ‘Origin of the EMS’, 31. Jenkins, European Diary, 246. Giscard d’Estaing, Le Pouvoir et la Vie, i, 134–6. PREM16/1615, ‘Prime Minister’s Meeting with Chancellor Schmidt’, 12 March 1978. PREM16/1615, Stowe to Callaghan, 13 March 1978. Peter Ludlow represents this interpretation. Ludlow, European Monetary System, 81. See also Jenkins, European Diary, 240. PREM16/1615, ‘Prime Minister’s Discussion with Chancellor Schmidt and President Giscard’, 8 April 1978. PREM16/1615, ‘Proposal for European Currency Reserve’, 7 April 1978. Story, ‘Launching of the EMS’, 404. PREM16/1615, ‘Meeting with the President of the United States in the Cabinet Room at the White House’, 23 March 1978. International Herald Tribune, 15/16 July 1978. Callaghan, Time and Chance, 492. PREM16/1615, ‘Proposal for a European Currency Reserve’, 7 April 1978. PREM16/1634, FCO Telegram No. 512 of 20 June 1978; FCO Telegram No. 512 of 28 June; ‘European Monetary Reform’, Couzens to Stowe, 29 June 1978. See also PREM16/1617, FCO Telegram No. 536 of 25 June 1978. Ludlow, European Monetary System, 109.

226 Notes 62

63 64 65 66 67 68

69

70

71

72 73 74

75 76 77 78 79 80 81 82 83 84 85 86 87

88

Interview with Sir Michael Butler, 10 August 1998, 21. Butler, Undersecretary of the Foreign Office at the time, soon became the UK Permanent Representative to the EEC. Ibid. PREM16/1615, ‘Prime Minister’s Discussion with Chancellor Schmidt and President Giscard’, 8 April 1978. PREM16/1616, ‘Prime Minister’s Conversation with President Carter’, 17 April 1978. PREM16/1616, ‘Bonn Summit’, Hunt to Callaghan, 29 May 1978. Interview with Butler, 22. The paper is annexed to the Conclusions of the Bremen European Council and commonly known as the Bremen Annex. Bulletin of the European Communities, No. 6, 1978, 20–1. Despite the inefficiency of interventions in the dollar (e.g. sometimes one EEC country was selling the dollar whereas another was buying, thus cancelling each other out), the US dollar was used for most interventions within the Snake. Commission of the European Communities, Intervention in Community Currencies versus Intervention in Dollars, 26 April 1978. The Bremen Annex stated that ‘not later than two years after the start of the scheme, the existing arrangements and institutions will be consolidated in a European Monetary Fund’, but it actually never took place. Jenkins, European Diary, 283. See also PREM16/1634, Extract from the record of the meeting between the Prime Minister and Roy Jenkins, 3 July 1978. Dell, ‘Origin of the EMS’, 34. Ibid., 36. The more detailed account of the meeting is available in Ludlow, European Monetary System, 122–9. See also PREM16/1634, ‘European Council, Bremen, 6/7 July: Discussion by Heads of Government and the President of the Commission during the Evening of 6 July 1978’. Ludlow, European Monetary System, 126. Conclusions of the Bremen European Council. All of the following quotations are from the same text. See Ludlow, European Monetary System, 119–20. International Herald Tribune, 31 July 1978. PREM16/1634, ‘European Currency Arrangements: Handling, Timing and Tactics’, Healey to Callaghan, 22 June 1978. International Herald Tribune, 15–16 July and 28 September 1978. New York Times, 25 July 1978. Ibid. For the official record of the meeting, see PREM16/1618, ‘Bonn Economic Summit: Second Plenary Session’, 16 July 1978. Giscard d’Estaing, Le Pouvoir et la Vie, i, 134. Jenkins, European Diary, 249. Dell, ‘Origins of the EMS’, 31. Dorothee Heisenberg, The Mark of the Bundesbank: Germany’s Role in European Monetary Cooperation (Boulder: Lynne Rienner Publishers, 1999), 60. Ibid., 49. See also Dell, ‘Origins of the EMS’, 30.

Notes 227 89

90 91 92 93 94 95 96 97 98 99 100 101 102 103

104 105

106 107 108 109 110 111 112

113 114

115 116

Giscard d’Estaing wrote in his memoirs: after Bremen Callaghan ‘became an ardent partisan’ of British participation in the EMS. Le Pouvoir et la Vie, i, 142. House of Commons Debates, 10 July 1978, 1025–6. The Daily Telegraph, 10 July 1978. Dell, ‘Origins of the EMS’, 36. Ibid., 31. Ibid., 37. Denis Healey, The Time of My Life (London: Penguin Books, 1990), 439. Dell, ‘Origins of the EMS’, 35. Ludlow, European Monetary System, 145–6. Dell, ‘Origins of the EMS’, 20. Ibid. Ibid., 29. PREM16/1635, FCO Telegram No. 599 of 21 July 1978; ‘EMS’, Franklin to Hunt, 1 September 1978. This was at least what the French President expected. Giscard d’Estaing, Le Pouvoir et la Vie, i, 139. FV61/62, ‘EMS: Concurrent Studies’. The Times, 13 July 1978. It is noteworthy that Heath made the speech at Jenkins’s instigation. After Bremen, Jenkins also met the members of the Labour Committee for Europe and a couple of Conservative politicians such as Ian Gilmour and Willie Whitelaw in order to gain support for the EMS. Jenkins, European Diary, 291. The Monetary Committee of the European Communities, Interim Report on the European Monetary System (Brussels, 7 September 1978), 5. The Times, 16 September 1978 is one example. It is noteworthy that the British government got the same impression. See PREM16/1635, FCO Telegrams Nos 800 and 801 of 16 September 1978; FCO Telegram No. 754 of 18 September 1978. Le Monde, 17–18 September 1978. Ludlow, European Monetary System, 185. PREM16/1635, Wicks to Callaghan, 14 September 1978. PREM16/1635, ‘European Monetary System’, Healey to Callaghan, 14 September 1978. PREM16/1635, ‘Note of a Telephone Conversation between the Prime Minister and the Chancellor of the Exchequer’, 18 September 1978. Ibid. David Owen, Time to Declare (London: Michael Joseph, 1991), 376. Healey’s speech, as reported in a Canadian newspaper, was quite positive in tone and seems to support Owen’s version of the story. See ‘Healey Expects EEC Monetary System to be Operating Early in ’79’, The Globe and Mail, 21 September 1978. Owen, Time to Declare, 376. Interview with Butler, 20–1. Healey later wrote: ‘I was fairly agnostic until I realised how … it was likely to work in practice; then I turned against it’. My Life, 439. Le Monde, 17 October 1978. Le Monde, 3 December 1978.

228 Notes 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131

Tony Benn, Conflicts of Interest: Diaries 1977–80 (London: Hutchinson, 1990), 354. Ibid., 355. PREM16/1636, A Handwritten Note to Callaghan, 9 October 1978. CAB130/1047, GEN136(78) 5th Meeting, 10 October 1978; Dell, ‘Origins of the EMS’, 49–50. The Guardian, 10 November 1978. Copyright Guardian News & Media Ltd. 1978. LCC/78/188, ‘European Monetary System’, 14 November 1978, paragraph 12, Conservative Party Archive, Bodleian Library, University of Oxford. Ibid., paragraph 7. Ibid., paragraph 8. LCC, ‘European Monetary System’, Lawson to Thatcher, 30 October 1978, Thatcher Archive. LCC/78/223, Minutes of the 223rd meeting, 15 November 1978, Conservative Party Archive. LCC, ‘European Monetary System (EMS)’, Minutes of a meeting on 25 October. PREM16/1636, ‘European Monetary System and the Choice for the UK’, Richardson to Callaghan, 31 October 1978. Dell, ‘Origins of the EMS’, 52. PREM16/1638, ‘European Monetary System’, Hunt to Callaghan, 29 November 1978. Monetary Committee, Interim Report.

Chapter 7

Conclusion

1 Arend Lijphart, ‘Comparative Politics and the Comparative Method’, The American Political Science Review, 65(3) (1971). 2 Andrew Moravcsik, The Choice for Europe: Social Purposes and State Power from Messina to Maastricht (London: UCL Press, 1998), Chapter 4. 3 Jan Zielonka, Europe as Empire (Oxford: Oxford University Press, 2006). 4 After Blair became Prime Minister, there were long negotiations between him and German Chancellor Gerhard Schröder on the reform of the CAP, which was to be reviewed in 2002. In exchange for backing the British on the issue, Germany asked the UK to join the euro. Robin Cook, Foreign Secretary during the first Blair government, recorded in his diary: ‘Schröder had given Britain until the end of 2002 to prove it was serious about the euro, and if by then we had made no move to join, he would revert to Germany’s traditional partnership with France’. Robin Cook, The Point of Departure: Diaries from the Front Bench (London: Pocket Books, 2004), 171. 5 See, for example, David Howarth, ‘The Domestic Politics of British Policy on the Euro’, European Integration, 29(1) (2007), 47–68. 6 In fact, pro-European politicians seem to have understood the importance of bipartisan cooperation on the euro. Since Labour returned to power in 1997, a cross-party organisation, Britain in Europe, was founded to campaign for a ‘yes’ vote for the euro, with Clarke being a core member of the organisation. In addition, a member of the Liberal Democratic Party was invited to participate in the Cabinet Committee on European Policy.

Bibliography

OFFICIAL PAPERS British Government Command Papers Cmnd. 3269. Membership of the European Communities. London: HMSO, 1967. Cmnd. 4715. The United Kingdom and the European Communities. London: HMSO, 1971. Cmnd. 7405. The European Monetary System. London: HMSO, 1978.

House of Commons Debates National Archives, Kew CAB128/47, 49, 51, 57 CAB129/150, 154, 158 CAB130/572, 1047 CAB134/2598, 3387, 3495, 3624 FV61/61–2 PREM15/309–10, 326, 369, 371–4, 379–80, 812–13, 818–20, 841, 894, 1457–61, 1518 PREM16/38, 371, 796, 798–800, 802, 804–5, 808, 1615–18, 1634–6, 1638 T312/2729, 3251 T328/654

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230 Bibliography Report of the Study Group on the Role of Public Finance in European Integration. Brussels, April 1977. Intervention in Community Currencies versus Intervention in Dollars. Brussels, 26 April 1978. Monetary Committee of the European Communities. Interim Report of the European Monetary System. Brussels, 7 September 1978. Tindemans Report. ‘European Union: Report by Mr Tindemans, Prime Minister of Belgium, to the European Council’, Bulletins of the European Communities, Supplement 1/76. Werner Report. ‘Report to the Council and Commission on the Realization by Stages of Economic and Monetary Union in the Community’, Supplement to Bulletin of the European Communities, No. 11, 1970.

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Index Acheson, Dean, 4 Anglo-French summit, 9, 36, 45, 49–56, 61–2, 73, 95, 113, 154, 192 See also France, United Kingdom Atlantic relationship see US-Europe relationship balance of payments, 120, 128–9, 164, 193 as obstacle to UK participation in European monetary integration, 11, 43, 56, 76, 95, 108, 156 France, 11, 120 UK, 11, 37, 41, 43, 48, 51, 56, 66, 71, 76, 82, 84–5, 89–91, 95, 120, 125, 146, 148, 150, 156 US, 6–7, 80, 128, 164, 169–70, 172, 177, 216n80 Bank of England, 54, 81, 82, 90, 96, 100, 101, 105, 107, 124, 134, 135, 136, 140, 148, 155, 187 Barber, Anthony, 39, 82, 85, 87–8, 90–1, 100, 105–6, 207n9, 212n6 Barre, Raymond, 17, 40, 117, 120–1, 166, 178 Basle Agreement, 37, 41, 42, 48, 54, 55, 142, 143, 201n30, 207n6 See also sterling, sterling balances Benn, Tony, 62, 111, 126–7, 133, 148, 151, 180, 222n115 bipartisanship, 16–17, 191, 198, 228n6 failure of ~ on EEC membership in the UK, 16–17, 38–9, 56–60, 65, 68, 73–4, 78, 95, 99, 110–12, 193–4 possibility of a bipartisan approach to the EMS in the UK, 159, 186–7, 191, 195

successful cooperation of pro-European political forces in France, 16–17, 19, 29, 122, 168–9, 195–6 See also party system, government and opposition Brandt, Willy, 8, 47, 61, 100–2, 105–6, 116, 123, 132, 144, 154, 192 Britain see United Kingdom British Empire, 4, 9–11, 35–7, 40, 43, 50–1 54–5, 57, 66, 70, 73, 75, 91, 107, 113, 116, 142, 154, 155, 158, 184, 192, 193, 217n4 Imperial preference, 9 Sterling Area, 9, 10, 11, 37, 41, 43, 50, 51, 55, 81, 96, 107, 141, 142, 201n30, 221n80 See also sterling, sterling balances Bundesbank, 8, 30, 52, 82, 106, 117, 162, 165, 189 Callaghan, James, 3, 61–2, 111–12, 114, 116–17, 119, 122–7, 130, 133, 136–52, 154–6, 158–9, 163, 169–77, 179–80, 184–7, 190–1, 193–4, 217n4, 227n89 Blackpool Speech, 136–9 differences between the ~ and Thatcher governments, 137–9, 156, 220n75, 225n43 stance on the EMS, 158–9, 175–6, 179–80, 184, 185–6, 190 triggering Labour’s turnaround on EEC membership, 61–2, 144, 194 trying to obtain a Common Market loan in exchange for sterling’s return to the Snake, 116, 123, 133, 139–40, 143–4, 154, 192–3 Carter, Jimmy, 141, 158, 163, 169–70, 172–7, 190, 194

241

242 Index case study approach, 1, 20, 22–4, 196 Chirac, Jacques, 17, 19, 121, 169 City of London, 10, 81 Cold War, 5, 7 Commonwealth see British Empire Communists (France), 13, 16, 166–9 comparative method, 1, 20, 22–4 Connally, John, 80, 84 Conservative Party (UK), 12–13, 16–17, 20, 21, 29, 33, 40, 43–4, 57–8, 63–5, 67–73, 111, 116–17, 119, 121, 124, 133, 138, 144, 147, 159, 171, 186–7, 191, 193–5, 198, 211n106, 225n43, 227n103 stance on the EMS, 159, 186–7 Couzens, Ken, 163, 173–4 Crosland, Tony, 126–7, 143, 147–9, 222n115 de Gaulle, Charles, 7–8, 10, 18, 36, 52, 113, 121, 141, 165 antipathy to US influence in Europe, 7–8 attack on the international role of the US dollar, 7 Deutschmark, 8, 12, 40, 52, 76, 82–3, 87, 96–101, 106, 120, 143, 157, 164, 183 unilateral floating of, 8, 52 Douglas-Hume, Alec, 63, 82 ECSC (European Coal and Steel Community), 5, 7, 27 ECU (European Currency Unit), 3, 12, 117, 157, 171, 175, 178, 179, 181, 182, 183, 188, 189 EEC (European Economic Community), 1, 2, 5, 6, 7, 9, 10, 11, 12, 13, 20, 23, 27, 35, 36, 38–83, 85–90, 92–7, 99–112, 115–17, 121, 123, 129–34, 143–4, 154–5, 157, 160, 164, 173, 175, 180–1, 185–7, 189, 192–4, 200n22, 208n25, 210n85, 211n94, n102, n104, n106, 214n45, 215n73, 216n93, 218n16, 219n35, 226n62

EMCF (European Monetary Cooperation Fund), 3, 93, 117, 157, 189 EMS (European Monetary System), 2–3, 7–8, 11–12, 17–18, 22–3, 34, 86, 94, 112, 114–19, 121–2, 154–60, 162–5, 167, 169, 171–3, 175–91, 193–7, 203n64, 223n1, 227n89 quest for symmetry of intervention obligation, 12, 157, 175, 178, 182–3 See also ECU, EMCF, ERM EMU (Economic and Monetary Union), 1–3, 11–12, 35–41, 43–8, 52, 54–9, 69, 73–9, 85–7, 89, 91–4, 97, 102, 105, 108–9, 112–14, 129–33, 143–4, 157, 160–2, 165, 180, 192–3, 195, 199, 206n30, n1, n2, 220n49 Barre Plan, 40, 44 economist and monetarist schools on, 40, 46, 108, 131–2, 207n14 two-tier approach to, 131–3 Werner Report, 2, 38, 45–8, 56, 131 See also Snake ERM (Exchange Rate Mechanism), 2–3, 11, 15, 17, 21, 23, 29, 115, 117, 139, 157, 160, 185, 188–91, 194, 196–7, 203n64, 223n1 UK opting out of, 2, 3, 125, 127, 139, 157, 160, 185, 187–8, 189, 190, 194, 196–7, 203n64 European Commission, 27, 30, 40, 46, 54, 160 European Council, 30, 131, 148, 185 Bremen (July 1978), 3, 17, 157, 163–4, 169, 173, 175–6, 177–9, 196 Copenhagen (April 1978), 115, 157, 163, 171–3, 178 See also European summit European monetary cooperation see European monetary integration

Index 243 European monetary integration, 1–9, 11–22, 25, 29, 35, 38, 40, 43, 46–7, 76, 78–9, 81, 86–7, 92, 94–5, 99, 108–10, 112–13, 115–19, 121–3, 129–33, 144, 154, 156, 159–60, 162–3, 165–7, 174, 176–7, 186–7, 190–7 European summit, 130–1 The Hague summit (December 1969), 36, 40, 199n2 Paris summit (October 1972), 2, 85, 92–3, 212n12 See also European Council Europeanisation, 25, 32 exchange rate, 2, 3, 11–12, 15, 37, 40, 43–4, 45–7, 52, 75, 77–8, 79, 81–4, 85–90, 92–5, 97–100, 104, 107, 113, 117–20, 124, 130–1, 138–9, 156, 161–2, 164, 165, 170–2, 175, 179–80, 187, 189, 193, 195 British views on ~ stability, 88–92, 120, 138–9, 156, 158, 169–72, 174, 179–80, 190, 193–4 French support for an international monetary system based on stable ~, 3, 8, 52, 77, 84–5, 107, 113, 118, 195 See also international monetary system Federal Republic see West Germany Foot, Michael, 44, 126–7, 149–50, 185–6, 211n106 Ford, Gerald, 123, 140–1, 145, 147–8, 151 Fourcade, Jean-Pierre, 130, 132 franc, 1, 11–12, 17, 29, 40, 83, 98–9, 118–21, 130, 157, 159, 164, 165–6, 178–9, 183, 195 See also Snake France, 1–19, 21, 23, 25, 29, 33, 36–42, 45–55, 77–8, 82–5, 86, 96–9, 107, 111, 113–14, 115–22, 128, 130, 136, 157–8, 160–3, 165–9, 172–3, 175, 177–9, 181–3, 185, 189–90, 192, 195–7, 201n30, 207n6, 209n66, 218n13, 224n16, 228n4

differences with West Germany over international monetary issues, 8, 52, 77, 83–4 Franco-German partnership, 7–9, 102, 114, 116, 165, 175, 183–4, 195, 209n66, 228n4 hostility against a European currency bloc, 3, 8, 52, 77, 82–3, 96–8, 113, 195 successful cooperation of pro-European political forces, 16–17, 19, 29, 122, 168–9, 195–6 support for an international monetary system based on stable exchange rate, 3, 8, 52, 77, 84–5, 107, 113, 118, 195 Franco-German partnership see France French Empire, 4, 9–10 Gaullists (France), 13, 17, 121–2, 160, 166, 168–9, 178, 185, 190 Giscard d’Estaing, Valery, 3, 13, 16–17, 19, 33, 42, 48, 52–4, 96, 105, 114, 116, 118, 121–2, 157, 159, 163, 165–9, 171–8, 183–6, 188, 190, 195–6, 202n55, 209n61, 224n16, 227n89 Global Economic Summit, 118, 141 Bonn Summit (1978), 164–5, 168, 170, 174, 177, 179 government and opposition, 20–1, 34, 59–60, 65, 68–9, 110, 112, 154, 156 relationship between ~ as key to explain why UK parted from France on European monetary integration, 15–17, 19, 21, 25, 158–9, 196 See also bipartisanship, party system Heath, Edward, 3, 9, 36, 39, 42–3, 45, 49–55, 61, 63–7, 69, 73, 78, 82, 90, 100–2, 105–7, 113–14, 116, 123, 133, 144, 154, 159, 181, 182, 192–3, 209n66, 213n30, 214n42, 215n56, 216n96, 217n4, 227n103

244 Index Heath, Edward – continued making a secret deal on the sterling balances with Pompidou, 9, 11, 36, 45, 54–5, 107–8 negotiating with Brandt prior to the start of a joint Community float, 100–6, 116, 123, 144, 154, 192 Healey, Denis, 62, 112, 126–7, 129, 134–6, 141, 143, 145, 147–50, 158–9, 180, 183–4, 186–8, 210n80, 222n126, 227n112 stance on the EMS, 159, 183–4, 186 House of Commons, 16–17, 19–22, 33, 35, 39, 49, 53, 56–8, 61, 64–5, 68–73, 79, 88, 109–12, 121, 127, 135, 152, 158–9, 194 Howe, Geoffrey, 159, 186, 195, 223n6 IMF (International Monetary Fund), 46, 81, 117–18, 121–3, 127–9, 136, 140, 144, 146–51, 160, 166, 184, 212n6, 222n126 inflation, 2, 120, 128, 138 convergence of ~ rates as condition of monetary cooperation, 11–12, 40, 43, 78, 86–7, 95, 108, 119, 156, 161–2, 170, 196–7 France, 11, 98, 114, 117, 119–20, 130, 166, 178, 190 UK, 11, 76, 78, 85–6, 89, 91–2, 95, 97, 100, 108, 114, 119–20, 125–6, 133, 137, 139, 155–6, 170, 186, 190, 193 US, 128, 169–70 West Germany, 30, 52, 98, 105–6, 128, 164–5 institutionalism, 14, 25 intergovernmentalism, 5, 14, 25–6, 29–30 international monetary system, 3, 7–8, 37, 40, 43, 46, 51–2, 55, 75, 77–9, 81–5, 96–100, 106–7, 113–14, 117–19, 165, 172, 179, 187, 190, 194–5, 212n6, 214n54

collapse of the Bretton Woods regime, 2, 6, 11, 52, 75, 78, 94, 96–100, 113–14, 118–19, 154, 160, 162, 165, 172, 179, 192, 194–5, 214n54, 215n56 gold-dollar convertibility, 2, 8, 80, 84, 221n80 Nixon shock, 75, 77, 79 Smithsonian Agreement, 75, 77, 79, 85, 87, 89, 96 See also exchange rate, US dollar Jenkins, Roy, 44, 62, 110–12, 115, 126–7, 198, 210n90 as the President of the European Commission, 126, 157, 160–2, 167, 171 joint Community float, 2–3, 11, 52, 75–9, 81–4, 94–109, 113, 116, 123, 154, 162, 179, 192, 194, 214n48 UK’s stance on, 81–2, 83–4, 94–5, 96–7, 99–109 joint European float see joint Community float joint float of European currencies see joint Community float Kissinger, Henry, 6, 113, 144–5 Labour Party (UK), 3, 13, 16, 20, 22, 29, 33, 37–8, 40, 44–5, 56–65, 68–73, 77–9, 92, 95, 109–12, 115–17, 121, 123, 124, 126–7, 130, 133–8, 141, 144, 146, 149–54, 156, 158–60, 165, 170–1, 174, 180, 184, 185–8, 190, 193–4, 198, 211n104–6, 212n108–9, 216n93, 219n29, 227n103, 228n6 NEC (National Executive Committee), 20, 61–2, 111–12, 152, 185, 188 Parliamentary Committee, 20, 61 PLP (Parliamentary Labour Party), 60–1, 64, 111, 123, 126, 147, 149, 151–3, 186, 210n90, 216n85 turnaround on EEC membership, 59–65, 144, 194

Index 245 Lawson, Nigel, 159, 186–7, 195, 223n5 Lever, Harold, 111, 126–7, 134, 142, 144–5, 148, 174, 180 Liberal Party (UK), 16, 121–2, 152–4, 156, 211, 223n140, 228n6 Lib-Lab Pact, 121–2, 152–4 Marshall Plan, 5, 80 Mitterrand, François, 17, 61, 116, 167, 169 monetarism, 120, 123, 135 138–9, 203n64, 207n14 MRP (France), 13, 33 multi-level governance, 14, 25, 30–2 NATO (North Atlantic Treaty Organisation), 5, 7, 67, 140, 148 neo-functionalism, 5, 14, 25–9 Nixon, Richard, 2, 8, 42, 80, 82, 84, 106 OECD (Organisation for Economic Cooperation and Development), 44 oil shock, 3, 128, 130, 165 Ostpolitik, 8, 82 Owen, David, 64, 159, 174, 184 party system, 4, 19, 25–6, 31–2, 35, 38, 56, 58, 75, 156, 158, 168, 192–3, 202n50, 204n1, 205n25 definition of, 26 France, 19, 33, 168 importance of, 15, 121, 197 neglected by scholars, 14, 26, 34 UK, 18, 33, 58, 73, 110, 112 See also bipartisanship, government and opposition political parties See under individual names Pompidou, Georges, 3, 8–9, 11, 19, 36, 39, 42–3, 45, 47, 49–54, 61, 73, 83–5, 95, 107, 111, 113–14, 116, 118, 154, 165, 181, 192, 195, 208n25, 209n66, 213n25, 215n56, 216n96 Powell, Enoch, 12, 111 PS (France), 13, 33

referendum on UK’s EEC membership (1975), 109–12, 130 on UK’s participation in the euro, 198 Schiller, Karl, 52, 82, 209 Schmidt, Helmut, 3, 96, 101, 105, 116–17, 123, 129–30, 132–3, 140, 142–4, 147, 151, 154, 157, 160, 162–5, 169–79, 183, 185–6, 188, 190, 196, 217n7 Schuman Plan, 1, 130 Second World War, 4–5, 67, 70, 79–80, 85, 136–7 SFIO (France), 33 Shore, Peter, 56, 148, 185, 211n106 Snake, 1–3, 11–12, 18, 75–8, 85–94, 97, 100, 106, 114, 115, 118–19, 121, 123, 129–33, 140, 143, 159, 160, 162, 165–7, 171–2, 175, 178, 182–3, 188, 192–3, 195–7, 226n69 asymmetry of intervention obligation, 165 franc’s exit from, 1–3, 76, 114, 115, 118, 121, 130, 159, 160, 162, 165–7, 178, 195 ~ in the tunnel, 77 ~ left the tunnel, 93–4 sterling’s exit from, 1, 3, 75–6, 77, 85–6, 90–2, 160, 162 sterling’s possible return to ~ in exchange for a Common Market loan, 116, 123, 133, 139–40, 143–4, 154, 192–3 See also EMU, franc, sterling, sterling balances Soames, Christopher, 42, 49–50, 54, 209n66, 216n96 Social Contract, 124, 135, 146–7, 151, 156, 219n29 sovereignty, 2–4, 11–13, 23, 28, 35, 38, 44, 46–7, 56–9, 66–9, 71–4, 75–8, 95, 100, 102–4, 108–9, 112, 121, 156, 158, 178, 180, 190, 192, 194, 211n103 Soviet Union, 5–7

246 Index special relationship see United Kingdom sterling as an international currency, 7, 10, 37, 41–3 devaluation of, 6, 10, 37, 41–3, 128, 141, 221n87 See also British Empire, Snake, sterling balances sterling balances, 9, 11, 36–8, 41–5, 48, 50–1, 53–6, 73, 76, 78, 81, 95–7, 101–2, 105, 107–8, 113, 116, 119, 122–7, 133–6, 138–46, 154–5, 192–3, 201n30, 207n3, 218n13, 219n27, n33, n35, 223n2 as a cause of the IMF crisis, 124–6 dollar guarantee for, 9, 11, 37, 54–5 safety net for, 122–3, 127, 129, 133–5, 138–46, 149, 151, 155, 222n134 secret deal between Heath and Pompidou on, 9, 11, 36, 45, 54–5, 107–8 See also British Empire, Snake, sterling Suez crisis, 7, 10, 179 summit see Anglo-French summit, European summit, Global Economic Summit Thatcher, Margaret, 12, 27, 137, 139, 152, 156, 187, 196, 206n1 Tindemans Report, 129, 131–3 Treasury (UK), 41–3, 51, 54–5, 88–91, 96, 103–4, 107–8, 124–5, 132, 134–5, 140, 143–8, 150, 155, 163, 174, 198, 218n21, 219n33, 220n49, 222n115 TUC (Trade Union Congress), 91, 124, 127, 134, 146, 149–50, 156, 170, 190, 193, 214n42, 219n29 UDF (France), 13, 17, 19, 29, 159, 167–9, 190, 195–6 United Kingdom, 1–21, 23, 25, 29, 33, 35–45, 47–60, 62–74, 75–7, 79, 81–93, 94–7, 99–113, 115–22, 128, 130–1, 133, 139–43, 148,

152, 154–6, 157–165, 169–82, 184–191, 192–8, 201n30, 203n64, 206n1, 208n25, 216n96, 218n16, 223n1 failure of bipartisanship on EEC membership, 16–17, 38–9, 56–60, 65, 68, 73–4, 78, 95, 99, 110–12, 193–4 making a secret deal on the sterling balances in order to enter the EEC, 9, 11, 36, 45, 54–5, 107–8 opting out of a joint Community float, 81–2, 83–4, 94–5, 96–7, 99–109 possible return to the Snake in exchange for a Common Market loan, 116, 123, 133, 139–40, 143–4, 154, 192–3 possibility of a bipartisan approach to the EMS, 159, 186–7, 191, 195 refused to enter the ERM, 2, 3, 125, 127, 139, 157, 160, 185, 187–8, 189, 190, 194, 196–7, 203n64 relationship with France, 3, 8–9, 36, 49–55, 78, 113–14, 181–2, 191 relationship with the United States, 4–7, 8–9, 36–7, 42, 55, 70, 75, 79, 82, 85, 95, 106–8, 114, 116–17, 119, 154–5, 158, 164, 172–3, 176–7, 187–8, 189–90, 194 views on exchange rate stability, 88–92, 120, 138–9, 156, 158, 169–72, 174, 179–80, 190, 193–4 See also British Empire, sterling, sterling balances United States, 4–9, 35–8, 42, 47, 52, 55, 57, 67, 70, 73, 75, 79–85, 87, 89, 95–8, 106–7, 113–14, 116–19, 123, 126–9, 134–5, 139–42, 144–7, 154–5, 157–8, 160–1, 163–4, 169–70, 172–3, 176–7, 179, 187–90, 192–5, 201n30, 214n54, 217n4 benign neglect of the dollar, 172, 214n54

Index 247 refusing special treatment for the UK during the IMF crisis, 117, 155 See also US dollar US dollar, 2–3, 7–9, 11, 37, 42, 46, 48, 50–2, 54–5, 75, 77–84, 87, 90, 93–4, 96–101, 106–7, 113, 118, 120, 130, 132, 141–3, 157, 161–4, 169–77, 179–80, 187–90, 192, 194–5, 201n30, 213n21, n25, 215n56, 216n80, 218n13, 221n87, 226n69 devaluation of gold price, 8, 83–4 position as the international currency, 7–8, 42, 80–1, 87, 113, 177, 213n25 See also international monetary system, United States US-Europe relationship, 7, 8, 79–81, 106–7, 113, 163–4, 176, 177, 187–8

West Germany, 2–4, 7–9, 10, 11–12, 77, 82, 83, 87, 94, 96–9, 100–1, 105, 106, 108, 113, 116–19, 129, 130, 132, 139, 142–4, 146, 148, 169, 172–3, 177, 179, 180, 182, 195, 209n66 advocacy of a joint Community float, 2, 52, 77, 82, 100–1, 113, 162 initiative on the EMS, 2–3, 122, 157, 163–5 Wilson, Harold, 16, 20, 36, 37, 40, 61–6, 111–12, 116, 124, 126, 141, 152, 210n90, 216n93 Witteveen, Johannes, 128–9, 148 yen, 77, 80, 83, 97, 176, 214 negative impacts of the EMS on, 176