The Prime Minister's office said Mr Major's outright endorsement of the Chancellor's performance at an hour-long Cabinet meeting yesterday morning was greeted with calls of 'hear, hear'. Mr Major told the Cabinet that 'no one should have any doubts about our commitment to the ERM (exchange rate mechanism) and existing parities'.
He drove that message home yesterday evening in a speech to the Scottish CBI in Glasgow, where he attacked 'quack doctors' peddling alternative economic remedies and said that to go for 'the soft option, the devaluer's option, the inflationary option would be a betrayal of our future.'
Growing Tory backbench unease over the continuing recession was not helped by yesterday's retail sales figures showing August down on last year. Although the CBI expects a slight pick-up this month, it was difficult to see sales returning to the more buoyant levels seen earlier this year. Retailers had also become more pessimistic about the general business prospects and the outlook for employment and investment.
Mr Major said it was wrong to regard Britain's problems as unique, or to blame them on the ERM. When half Britain's exports went to countries with lower inflation 'we must bite the anti-inflation bullet or accept that we will be forever second-rate in Europe,' he said. To remain competitive Britain would need the Government's present policies whether or not it was a member of the ERM, he said - 'And as we have seen in Scandinavia this week, it is a cold world outside the ERM.'
There was, he said, 'going to be no devaluation, no realignment,' his press office again interpreting that to mean the pound would remain at the central 2.95 rate against the mark, even if others sought a German realignment.
Mr Major's comments came after a day of increasing tensions within the ERM, as pressure mounted for a realignment of the system. The Bundesbank and the Italian central bank were again forced to buy billions of lire in an attempt to prop up the Italian currency, which was pinned to its floor in the system. The mark climbed to the top of the grid of European currencies.
Investors and speculators believe that the lira would be the first candidate to be devalued if a 'no' vote in the French referendum on the Maastricht treaty prompted the first realignment of ERM currencies in five years.
But most economists think the pound would also be under strong pressure to devalue. It slipped a little closer to its ERM floor of DM2.7780 yesterday, closing at DM2.7857. The City believes the Government is likely to have to raise interest rates from their current 10 per cent to defend sterling.
The pound rose and fell with the dollar yesterday. The US currency was helped by a comment late on Wednesday by Wayne Angell, a governor of the Federal Reserve, that the dollar was 'extremely undervalued'. This followed President George Bush saying a weak dollar was good for US exporters. But the dollar slipped back in the afternoon.
Gordon Brown, Labour's shadow Chancellor, attacked the Cabinet for 'rubber stamping the Chancellor's mistakes of the summer'. An emergency expansion programme was essential, he said.
Unlike Mr Major, Mr Brown was prepared to contemplate a German realignment if that would help to cut interest rates. But the Labour leadership's determination not to be painted as the party of devaluation made him add on BBC radio that 'there is no guarantee that (lower interest rates) would happen and it is not our policy; but we recognise that these things have to be discussed in order to get interest rates down.'
Sixty-five per cent of British voters want a referendum on Maastricht, according to a Gallup poll in today's Daily Telegraph; 37 per cent say they would endorse the treaty, 30 per cent would reject it.
Retail gloom, page 22
Commentary, page 23
Hamish McRae, page 21