Yanis Varoufakis claims European democracy was 'poisoned'
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Under Margaret Thatcher’s premiership, the UK joined the Exchange Rate Mechanism (ERM), after much insistence from her Chancellor – and future replacement – John Major. But the UK’s membership of the mechanism was later heavily questioned, with one expert claiming the ERM was an “economic trap” that risked severe harm to Britain’s economy.
The ERM started to become problematic for the UK in 1992, as Britain required Europe to lower its interest rates to help prevent the economy from free falling.
However, Germany’s Bundesbank refused, prompting the Chancellor, Norman Lamont, to urge Mrs Thatcher’s successor to pull out of the mechanism.
However Mr Major, a pro-European, was firmly against severing ties with the bloc, despite several pleas from the Treasury.
This exchange has been documented by the late Jeremy Heywood, who served as the Chancellor’s principal private secretary from 1991 to 1997.
Although he passed away in October 2018, his wife Suzanne Heywood has recently published a record of his career in the book: ‘What Does Jeremy Think? Jeremy Heywood and the Making of Modern Britain’.
At the start of the book, the issue of the ERM and the prime minister’s commitment to it was a pertinent issue.
The author writes: “Given that Britain’s membership of the ERM was central to John Major’s political vision of being at the heart of Europe, it wasn’t surprising that, when he succeeded Margaret Thatcher as Prime Minister a month later, he’s been determined to maintain it.”
But on September 5, 1992, the Chancellor met with European Finance Ministers in a desperate bid to get Germany to reduce their interest rates as the UK economy was starting to waiver.
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But Germany refused to change its interest rates as it wanted to keep inflation levels low.
Commenting on this, Ms Heywood said: “While the Bundesbank wanted to keep German interest rates high to try to dampen down inflation post-reunification, the UK had the opposite need – with unemployment soaring and its economy contracting, it needed to lower its interest retests but couldn’t do this because it would weaken sterling.”
Prior to this, the author said her husband sent several warning messages to his boss, Mr Lamont.
The book states: “Over the preceding weeks, Jeremy had written two notes to the Chancellor about this economic trap.”
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It continued: “The UK’s membership of the ERM was no longer sustainable, he told the Chancellor, unless German rates came down or the dollar strengthened.
“If neither happened, the UK should pull out, allow sterling to find its own level and rejoin when domestic economic conditions made it more appropriate.”
But despite both Mr Heywood’s and the Chancellor’s best efforts, the prime minister remained committed to the ERM.
As a result, the pound continued to weaken and culminated in Black Wednesday, on September 16, when the British Government was forced to withdraw from the ERM after the UK failed to keep the pound above the lower currency exchange limit mandated by the ERM.
The European Economic Community, which later became the European Union, introduced the ERM in 1979 as part of the European Monetary system.
The aim was to reduce exchange rate variability and achieve stability before member countries moved to a single currency.
The ERM mandated that a country’s currency exchange rate must be relative to other currencies within the group.
‘What Does Jeremy Think? Jeremy Heywood and the Making of Modern Britain’ (Harper Collins, £25) by Suzanne Heywood is out now.
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