British Conservative Government and the European Exchange Rate Mechanism: 1979-94

The British Conservative government's policy towards the European Exchange Rate Mechanism from 1979 to 1994 is explored in this book, revealing its development and downfall, including the deterioration in the relationship between Margaret Thatcher and Nigel Lawson and the undermining of the Major government's credibility.

Format: Paperback / softback
Length: 272 pages
Publication date: 18 December 2020
Publisher: Taylor & Francis Ltd

The British Conservative government's policy towards the European Exchange Rate Mechanism (ERM) from 1979 to 1994 is explored in this text, offering valuable insights and information. The book delves into the development of ERM policy, which ultimately resulted in the downfall and discredit of the Conservative leadership. It highlights significant events and episodes that contributed to the policy's demise, including the deterioration in the relationship between Margaret Thatcher and Nigel Lawson. The author vividly portrays how the Thatcher government was torn apart and the credibility of the Major government was undermined.

The text begins by providing a brief overview of the ERM and its objectives. The ERM was established in 1979 as a mechanism to stabilize exchange rates among European countries. Its primary goal was to prevent large fluctuations in exchange rates, which could have negative impacts on trade and economic growth. The ERM was initially successful, with most member countries maintaining their exchange rates within the agreed-upon bands. However, over time, the ERM began to experience difficulties, particularly as a result of the economic crisis of the early 1990s.

One of the key challenges facing the ERM was the divergence of economic policies among member countries. While some countries, such as Germany, pursued a strict monetary policy aimed at maintaining low inflation, others, such as the United Kingdom, pursued a more relaxed monetary policy. This divergence led to tensions within the ERM, as countries with different economic policies were forced to adjust their exchange rates to maintain their positions within the bands.

The text highlights the role of Margaret Thatcher and Nigel Lawson in the development of ERM policy. Thatcher, as Prime Minister, was a strong advocate of the ERM, believing that it would help to stabilize the British economy and promote trade. Lawson, as Chancellor of the Exchequer, was responsible for implementing ERM policy. However, the relationship between Thatcher and Lawson deteriorated over time, as Lawson became increasingly concerned about the negative impacts of the ERM on the British economy.

The text describes the events that led to the collapse of the ERM in 1992. One of the key factors was the decision by the German government to abandon the ERM. The German government had been pursuing a strict monetary policy, which had led to high interest rates and a strong currency. However, the German economy was experiencing a recession, and the government was concerned that the ERM would prevent it from recovering. As a result, the German government announced that it would leave the ERM and allow its currency to float freely.

This decision had a significant impact on the ERM. Other member countries, including the United Kingdom, were forced to adjust their exchange rates to maintain their positions within the bands. However, the British economy was already in a recession, and the adjustment of the exchange rate led to a further decline in the value of the pound. This, in turn, led to a crisis of confidence in the British economy, and the government was forced to intervene to support the pound.

The text also describes the aftermath of the collapse of the ERM. The British government was criticized for its handling of the crisis, and the Conservative leadership was undermined. Thatcher resigned as Prime Minister in 1990, and Lawson was forced to resign as Chancellor of the Exchequer in 1992. The Conservative Party was also defeated in the 1992 general election, and the Labour Party came to power.

The text highlights the lessons that can be learned from the collapse of the ERM. One of the key lessons is the importance of coordination and cooperation among member countries. The ERM was designed to be a cooperative mechanism, but the divergence of economic policies among member countries led to tensions and instability. In order to prevent future crises, it is essential for member countries to work together to develop and implement policies that are consistent with the objectives of the ERM.

Another lesson is the importance of flexibility in monetary policy. The ERM was designed to be a rigid system, with fixed exchange rates. However, the economic crisis of the early 1990s showed that this approach was not sustainable. In order to prevent future crises, it is essential for monetary policy to be flexible, so that it can respond to changing economic conditions.

The text also highlights the role of the media in the collapse of the ERM. The media played a significant role in shaping public opinion about the ERM, and in promoting the Conservative leadership's policies. However, the media also played a role in exaggerating the negative impacts of the ERM, and in undermining the credibility of the Conservative leadership.

In conclusion, this text provides a comprehensive overview of the development of the British Conservative government's policy towards the European Exchange Rate Mechanism from 1979 to 1994. The book offers valuable insights and information into the development of ERM policy, which led to the downfall and discredit of the Conservative leadership. It highlights significant events and episodes that contributed to the policy's demise, including the deterioration in the relationship between Margaret Thatcher and Nigel Lawson, and the media's role in shaping public opinion. By learning from the lessons of the collapse of the ERM, it is possible to develop and implement policies that are consistent with the objectives of the ERM and that are more sustainable in the long term.

ISBN-13: 9781138964990