The Iron Lady

The Major – Hurd axis

Lawson’s departure opened a new phase in the Thatcher Government. Though routinely portrayed by the media as a dictator, the Prime Minister was in fact profoundly weakened from November 1989. In place of Howe and Lawson, the twin pillars of her middle period, Mrs Thatcher now had a new pair of senior colleagues who, if they combined as their predecessors had done before Madrid, had her in an armlock. Neither John Major nor Douglas Hurd was ‘one of us’; but she absolutely could not afford to lose another Chancellor or sack another Foreign Secretary. Though less senior and less assertive personalities than Lawson and Howe, Major and Hurd were thus, if they chose, in a position to dictate to the Prime Minister. And in the gentlest possible way they did.

Unlike their predecessors, Major and Hurd met regularly for breakfast to coordinate their approach.²⁴ ‘We both believed the Prime Minister needed to be coaxed, and not browbeaten,’ Major recalled;²⁵ and his Permanent Secretary observed how skilfully he did it. ‘Major went out of his way to be sensitive to what the PM wanted to do, and the fact that he was sensitive meant they got on pretty well. It also meant he got his way on most issues.’²⁶ For his part Hurd followed Howe’s tactic of not attempting to argue with Mrs Thatcher but simply waiting till she had finished before going on patiently with what he had been saying.²⁷

She still had doubts about Hurd’s capacity to stand up to the wily Europeans. ‘The trouble is Douglas is a gentleman and they’re not,’ she once expostulated.²⁸ But Major, she believed, was ‘perfect’.²⁹ Several times over the next few months she told Wyatt that Major was her chosen successor. ‘Yes, he is the one I have in mind.’³⁰ ‘That has always been my intention, as you know.’³¹ As a result she indulged him like a favourite son, averting her mind from the fact that he too lost no time in signalling his wish to join the ERM – the subject was never even mentioned when she appointed him – while he in turn suppressed his doubts about the poll tax.

Meanwhile, he had a difficult economic inheritance.The economy was slowing down. Unemployment, which had been falling steadily since 1986, turned up again over the winter; while inflation carried on rising, from 7.7 per cent in November to 9.4 per cent in April and 10.9 per cent in October 1990 – ‘a figure’, Lady Thatcher wrote, ‘I had never believed would be reached again while I was Prime Minister.’³² With interest rates at 15 per cent and the revolt against the poll tax in full swing, the Government’s poll rating fell to just 28 per cent and Mrs Thatcher’s personal approval rating to 23 per cent, two points lower than her previous nadir in 1981.

On these figures the Government faced complete wipe-out in the English local election results in May. In fact the Tories did less badly than expected; but with Labour winning 40 per cent to the Tories’ 32 per cent, the Liberal Democrats’ 18 per cent and the Greens’ 8 per cent, the Tories’ performance was still among their worst ever and they lost control of another twelve councils.

In the middle of July Mrs Thatcher suffered another blow when Nicholas Ridley was forced to resign following some unguarded comments about the Germans which were widely assumed to echo her views. Ridley was almost her last unqualified supporter in the Cabinet; losing him made her more than ever the prisoner of Major, Hurd and Howe.

Then, on 30 July, Ian Gow was murdered by the IRA. Though he had not been part of her private office since 1983, he and his wife Jane were still among her closest friends, one of the few couples with whom she and Denis would sometimes dine informally. ‘Margaret is quite shattered,’ Wyatt wrote. ‘She spoke with more emotion than I have heard for a long time and for considerable length… She missed him and misses him.’³³ She immediately went down to Sussex to comfort his widow and read the lesson at his funeral on 10 August, still very upset.³⁴ But she forced herself to keep on with her normal programme, telling her staff to cancel no engagements but to give her plenty of work to keep her busy.³⁵ Work was always her best therapy, and on this occasion she had no time to grieve. On 1 August she flew off to Colorado, and a few hours later Saddam Hussein invaded Kuwait.

All the time Major, with Hurd in the background, was working at trying to bring the Prime Minister round to joining the ERM. Since Madrid, she had been publicly committed to joining as soon as the conditions she had laid down there were fulfilled: free movement of capital between all the major countries in the system; completion (or near-completion) of the internal market; and British inflation coming down to somewhere near the European average. Since France and Italy were due to free capital movements on 1 July and the single market was already virtually complete, the critical condition was inflation – which was still rising.

Major started trying to talk her round at the end of March. ‘I felt from the outset that she could be persuaded to enter if the decision to do so did not humiliate her’, he wrote. The next stage of EMU was due to be discussed at the intergovernmental conference in Rome in December 1990. ‘Our exclusion from the EMU was making us bystanders in this debate. The Prime Minister did not like this argument, not least because it was true. Yet it did register with her’ – though Major still felt she shied away from the topic.³⁶

But in the end she did give way. On 14 June she conceded the principle but still insisted on delaying till the autumn. On 4 July she started to consider possible dates. By 4 September she was ready to agree on one condition: she wanted a simultaneous cut in interest rates. ‘No cut, no entry,’ she told Major. ‘We had no choice but to defer to her.’ At the last moment she had a fresh attack of doubt and had to be reconvinced.³⁷ But finally she gave the go-ahead on 4 October. ‘Do it,’ she now agreed. ‘Do it tomorrow.’³⁸

She made the announcement herself on the pavement outside Number Ten, with Major beside her but saying nothing: it was important that it should be seen as her decision. Accordingly she emphasised the interest- rate cut – back to 14 per cent – as much as ERM entry, asserting that ‘the fact that our policies are working and are seen to be working have [sic] made both these decisions possible’. She admitted that inflation was not yet coming down, but argued that since other countries’ inflation was rising faster, ‘we are coming nearer to the European average’, so the Madrid conditions ‘have now been fulfilled’. She affirmed that ERM entry ‘will underpin our anti-inflationary stance…We have done it because the policy is right.’³⁹

The immediate reaction was euphoric, and share prices soared. In his memoirs Major took understandable pleasure in recalling the enthusiasm of some of the papers which were most critical, with the benefit of hindsight, when Britain was forced out of the mechanism less than two years later. ‘Both politically and economically,’ the Financial Times wrote, ‘entry is shrewdly timed.’⁴⁰ But other commentators, even at the time, were not so sure.

The real argument that has raged ever since is whether sterling joined at the wrong rate: DM2.95, with a 6 per cent margin. But Major insists, ‘Any suggestion that we could have entered at a significantly lower rate is utterly unrealistic.’⁴¹ In fact, Mrs Thatcher decided that there should be no negotiation with Britain’s partners at all. Having bitten the bullet, she insisted on joining at the existing parity, partly because she always liked a strong pound and partly because she did not want entry to be accompanied by devaluation. Major was obliged to present his fellow Finance Ministers with a fait accompli. This failure of consultation was not responsible for fixing the parity too high, but it threw away much of the goodwill that sterling’s entry should otherwise have generated.⁴²

Afterwards Lady Thatcher made a virtue of the fact that she had never wanted to join at all. She had been pushed into it by the cumulative pressure of Lawson and Howe before Madrid, then of Major and Hurd, to the point where she could no longer resist. When sterling was forced out of the mechanism again in September 1992 she felt that she had been vindicated. Major denies that he pushed her into it unwillingly. She agreed ‘because she was a political realist and knew that… there was no alternative’.⁴³ But essentially it was true. The fact was that by October 1990 she was no longer in control of economic or European policy.

The irony of the ERM saga is that, after years of opposition, Mrs Thatcher finally agreed to join at an unsustainable rate at the worst possible moment. If she was thus proved right from one point of view, she was equally wrong from another. She was not only formally responsible, as Prime Minister, for the ultimate decision to go in; she was also, by imposing her personal veto from as far back as 1985, directly responsible for the fact that Britain did not join five years earlier, in more settled conditions, at a rate which sterling would have been able to sustain and at a time when membership would have helped contain inflation. Lawson’s attempt to shadow the