Thatcher stands firm against full EMS role

Mrs Margaret Thatcher remains firmly opposed to full British membership of the European Monetary System. Being linked to the D-Mark would be too deflationary and would constrain the UK economy, she believes.

During a wide-ranging interview with the Financial Times, she also denied that there was any exchange rate target for sterling, or that the pound was tied unofficially to a rate of just under or about DM3.

Her remarks on exchange rate policy show a markedly different emphasis from the views of the Treasury and the Foreign Office. Both departments believe sterling should be in the exchange rate mechanism of the EMS.

In the course of a 75-minute interview in the White Drawing Room in Downing Street, Mrs Thatcher also said:

• Britain would insist at the EC heads of government summit in Copenhagen next week on an unbreakable guarantee that agricultural surpluses be reduced. As an alternative to a gradual reduction through stabilisers—a means of cutting production ceilings—she is proposing a new “clean slate” approach, whereby member states would write existing surpluses off their national budgets.

• Further UK tax reform is planned. “You can take it that Nigel (Lawson) is by nature a tax-reforming chancellor and that he will have another go in the coming term. There is still quite a bit of tax reform to be done.” She hinted at action to reduce the higher rates of personal tax which could not be allowed to get “too much out of kilter with those of rival countries.”

• Any change in mortgage tax relief was “pretty well out,” she said. “You may take it that the present structure goes on.”

• Reducing the inflation rate from the present 3–5 per cent annual range remained the Government's positive intention.”

• Britain remained a “global power,” for example, helping the US in Central America by keeping troops in Belize.

• The UK opposed any fundamental change in Western defence policy; no further nuclear weaponry should be taken out of Europe after an intermediate nuclear deal.

• She would like to remain Prime Minister at least until the next election in 1992–93. “The moment we have got passed one milestone, you see them stretching out before you, and each one gets more exciting.”

Mrs Thatcher indicated during the interview that she remained as strongly opposed as ever to full EMS membership. She said everyone in Europe was geared to the D-Mark except the UK.

“The D-Mark at the moment is slightly deflationary. That means the whole of Europe is geared to a slightly deflationary policy. Now we have not been so geared and we have had a greater degree of freedom in relation to both the dollar and the D-Mark, and I am grateful for that.”

She stressed the advantages of this freedom and her natural caution, in view of the difference between the UK economy and the rest of the EC, against going back within strict limits. She said Britain had profited from this approach by having a higher growth rate than if sterling had been in the EMS.

Mrs Thatcher also denied that the pound was tied to any specific range with the D-Mark. She said Britain was free to choose whether or not it supported the rate.

She drew a distinction between being in a system geared to lines which were publicly known and could be tested, and being outside and choosing voluntarily to run the exchange rate for a period near to one particular level, though not being constrained and having complete freedom to change.

On the EC, Mrs Thatcher was firm that there had to be enforceable stabilisers. Unless there was binding action to [end p1] reduce farm surpluses there would be no progress and no increase in the community's financial resources Spending would then be decided on a monthly basis as negotiations continued until the next EC summit.

As an alternative, Mrs Thatcher unveiled the idea of the “clean slate” approach whereby member states would decide now to write off their existing surpluses. This would be via national budgets rather than through the Common Agricultural Policy She described this as a “possiblity” which would have the attractions of dealing with surpluses and stopping them piling up again.

Mrs Thatcher laid considerable emphasis on 1992 as the year for Europe, the target date for completion of the internal market, for the removal of farm surpluses, and, coincidentally, as the date for the completion of the Channel Tunnel project. Front page box:

The spirit of 2000

Mrs Thatcher is considering how the year 2000 should be marked, possibly via “some special attainment” for those “who would have the privilege of living through that psychological time,” writes Peter Riddell She said the year was “a natural target. You have got to use it somehow to raise peoples' efforts and spirits—not that their spirits need raising—but raise their sights to what is attainable.”

She said it should be something that “involves everyone, every kind of small town and village. Some will take it as building, some as institutions, some as just raising the environment together, not only cleanliness and everything like that but a kind of beautification.” She drew a comparison with replanting trees after last month's hurricane.

Mrs Thatcher said people had to start to prepare for it, “because Heaven knows one might be twanging a harp by that time.” End of front page box. [end p2] Main interview (p 19)

Thinking about the year 2000

Mrs Margaret Thatcher has more or less mapped out her plans for the course of British politics until the years 1992–93, so far as events are under her control. She has begun to think about what to do after that and is already looking for suitable ways for Britain to mark the second millennium.

The Prime Minister appears more strongly opposed than ever to attaching sterling to the exchange rate mechanism of the European Monetary System and in economic policy is seeking the maximum freedom of action.

She is opposed to any fundamental changes in western defence policy after the likely superpower agreements on the reduction of nuclear weapons and believes that Britain is still a global power.

At the meeting of the European Council in Copenhagen next week she will seek an unbreakable guarantee that farm surpluses will be reduced and that spending on the common agricultural policy will be cut back. She is also canvassing a new proposal which, if adopted, would enable existing farm surpluses to be written off over-night by national governments and the common agricultural policy to start afresh with a clean slate.

Those were some of the main points to emerge from an interview with the Financial Times, on Friday.

Mrs Thatcher denied categorically and repeatedly that there was any exchange rate target for the pound, whether against the D-Mark or any other currency or basket of currencies.

“At the moment,” she said, “everyone is geared to the D-Mark, save us. The DM at the moment is slightly deflationary. That means that the whole of Europe is geared to a slightly deflationary policy Now, we have not been so geared and we have had a greater degree of freedom in relation to both the dollar and the D-Mark and I just think that I am grateful for that.”

She rejected completely the notion that the pound was tied, at least unofficially, to a rate of just under or around DM3. “There is no specific range,” she said. “We are always free”

Present British exchange rate policy, she argued, was quite different from “actually getting yourself onto graph paper and saying ‘I live within these few boxes’, and then letting people test you as you come up to a top … We are not confined to any particular limits and I do not like us to be, because to do that is to tempt people to have a go and you cannot beat a speculator except over a short period.”

The Prime Minister was reminded that in an interview published in the Financial Times on November 19 last year she had said that a principal reason why Britain could not become a full member of the EMS was that the domestic economy was still too weak and might have to come out again under speculative pressure.

She replied that the economy today was certainly strong, but added that, from her experience of recent times, she thought: “We have been freer and perhaps been able to be more helpful than we could have been, had we been on the exchange rate mechanism.”

It was one thing to run your exchange rate “near to something, near to one particular band, for a period if it suits you—everyone knows that you are not constrained by that band and you can come off it today or tomorrow if you wish.”

Mrs Thatcher was also sceptical about the possibility of a more managed international exchange rate system working because, she said, no such system “can be a substitute for sound running of economies.” It would work “only when you are all running your economies in a similar sound way” “Sound” was a word she used repeatedly throughout the economic section of the interview.

As in her speech to the Lord Mayor's banquet in London last Monday, she again called for stimulative action from West Germany and Japan. “No-one is entitled to have a balance of payments surplus entrenched in the way in which they run both their economy and also their society or if you like to put it—their culture, because if that were to be so, then when the US deficit goes down, it means that the rest of us would have to carry a bigger proportion of the can than we should.”

On defence policy the Prime Minister reaffirmed her view that, after a superpower agreement on the elimination of intermediate nuclear forces and a possible agreement on the reduction of intercontinental ballistic [end p3] missiles, “There must be no further nuclear weaponry taken out of Europe before we get the Soviet Union much further nearer to us on conventional weapons and before we see whether we can in fact get a verification system and the Soviets agreeing to eradicate their chemical weapons because we have eradicated ours.”

Mrs Thatcher dismissed completely any suggestion of an American military withdrawal from Europe. “The frontier across Germany,” she said, “is the frontier of freedom for the US as well as for Europe.”

She also argued that British defence policy was fully supportive of the US around the world, and not just in the Nato area. “We had the best minesweepers and they are busy sweeping mines in the Iranian Gulf … We have troops on Belize, Cyprus, Sinai over to Hong Kong, in Africa, in the Gulf, indeed we have troops in one form or another—some as military advisers and trainers—in 30 countries in the world and of course in the Falklands, and that means that we are still a global power and we do our bit.”

The presence of the troops in Belize, she went on, demonstrated to the US how Britain understands what Americans feel “about some of the threats from Central America … It keeps a stable democracy there right on the Central American front.”

Asked whether there was still a special relationship between Britain and the US, the Prime Minister replied: “Very much so.”

She gave some credit to France for also taking part in defence activities outside the Nato area. Then she added: “The best possible thing of course—which I cannot see happening—would be for France to rejoin Nato, militarily integrated.”

In a reference to recent moves towards closer defence co-operation between France and West Germany, she said: “What I think that we have to watch is that there do not grow up sub-structures in Europe which could have unwittingly, unintentionally, the effect of undermining the links across the Atlantic Alliance … I think it is important that those (Franco-German) arrangements do not take on wholly a bigger life of their own.”

Mrs Thatcher's comments on what she clearly regards as an undisciplined approach to expenditure by the British Ministry of Defence were expressed largely in mime: a sharp indrawing of the cheeks and an extended outdrawing of breath. She said quietly: “There was something called Awacs and Nimrod.”

There was a warning for the future. “As I am constantly saying to our defence people, just make certain that you do not waste anything, and you will just about get the same amount out as you have been getting in the past.”

On the European Community and the key meeting of the heads of government in Copenhagen next week, the Prime Minister argued that from her point of view agriculture, coupled with Community financing, were “just about the long and the short and the tall of it.”

The basic point is that the Community is now up against the limit of its permitted expenditure and that Mrs Thatcher will not agree to an increase until existing policies are radically reformed, especially on agriculture. The British Government is seeking firm and binding regulations that are automatically applied to reduce surpluses. “Unless we get that,” Mrs Thatcher insisted, “there will be no progress.”

If there were no progress, she went on, there would be no increase in the Community's financial resources. Spending would have to be determined on a monthly basis while the negotiations were continued until the next European Council.

There are two possible approaches that the Prime Minister says that she can support. One, being canvassed by the European Commission, is to apply a system of “stabilisers” to all agricultural products Stabilisers mean setting production ceilings and progressively reducing the subsidy if the ceilings are exceeded. If adopted in an enforceable way, they could result in the surpluses being reduced to an agreed strategic level by 1992, a year that Mrs. Thatcher regards as “exciting” for a number of reasons.

However, she has an alternative and more radical proposal that she is understood to have put to Mr Jacques Chirac, the French Prime Minister, yester [end p4] day. It is what she calls the “clean slate” approach on surpluses. It amounts to the member states agreeing now to write off their existing surpluses now, and to do so through their national budgets rather than through the common agricultural policy.

She said: “Each of you agrees on your national budget to take and accept the responsibility of a clean slate Each of you writes down what we have got and takes responsibility for disposing of it without the writing down or costs of the disposal coming on to the CAP.”

Such an approach, she argued, would be “much fairer to countries like Spain and Portugal because, after all, the surpluses are not their fault.” She herself would be prepared to write down the “quite considerable” British surpluses But she wondered how many other countries would be ready to accept such a speedy solution that bypasses the traditional workings of the common agricultural policy.

On domestic policy the Prime Minister showed some anxiety about inflation She found it “worrying” that over the last four years “it seems to have fluctuated between about 3 and 5 per cent” The aim was still to get it down further and the Government had used higher interest rates in August as a sign of its intent.

She also claimed that inflation was unlikely to go on being fuelled indefinitely by such factors as higher house prices in the south east. The process, she said, should be “self-correcting” “There is a great incentive to companies now to move further north because salary-for-salary their people will have a much higher standard of living … It may take three, four, five or six years … the Birmingham area is not very far away; they might go further still.”

Mrs Thatcher was adamant that there would be no abolition of mortgage tax relief. “I think you may take it,” she said, “that it is pretty well out.”

The reasons why she regards the years 1992–93 as potentially so exciting are manifold. The internal market of the European Community is due for completion by 1992, as well as the overhaul of the CAP even by the slower route. “It is just very fortunate that the next year you should get the Channel Tunnel open and, really, as far as we are concerned, (Europe) should become a much greater reality.”

There may also have been developments at home. In previous interviews with the Financial Times, Mrs Thatcher has given her views on the state of domestic politics and the opposition parties. This time there was a lengthy pause before she said: “Do you know, I have not really given that very much attention because I am so much more concerned to carry on with our own policies, to get those well ahead … and then to start on the next Parliament.”

She thought that British opinion might have turned subconsciously against coalitions because of what it saw on the continent.

Being coalition-free, she claimed, “gives us a freedom of decision, decisiveness, leadership, that others are not free to exercise.”

She went on: “We have got really enough to do within four years now and quite a lot that comes on next, and then, almost every western country is going to think of trying to get some special attainment going by the year 2,000 … you have got to make it some kind of target. It is a natural target.”

Asked what the attainment would be, she said: “I do not know. That is what all of us are trying to think of now. It will be something that involves everyone, every kind of small town and village.”

To the question whether she would still be Prime Minister in 1993, she replied: “Well, one would like to be, but it does not wholly depend on me. At the moment we have got past one milestone you know, you see them stretching out before you, and each one gets more exciting.”

Mrs Thatcher ended in full flood with a long statement of her belief in restoring the values of the Victorian age. The prosperity of the south was moving north to Manchester, Nottingham, Bradford.

There had been a civic pride in the past that had led the city fathers to say that prosperity and beautiful town halls were not enough. They had gone on to set up libraries, orchestras and art galleries. They were “almost city states a complete ideal.” That was what she wanted to happen again.