The defeat was crushing not because devaluation is in itself a disaster. The new rate, if it broadly holds, will probably suit us better than the old one, and it is foolish to regard a particular exchange rate as a virility symbol rather than as an economic device.
The defeat lies in the fact that we have added another and peculiarly dismal chapter to the almost incredible story of the mismanagement of our relations with the continent of Europe over the past 40 years.
The European Monetary System and its central feature, the exchange rate mechanism, came into operation in the spring of 1979. Except for Britain all the countries of the Community (then nine) joined. For the first five years or so there were quite frequent changes of central rate (ie, small devaluations or revaluations) between the different currencies, and these continued, although less frequently, until 1987. They were carried through smoothly and undramatically, and eased the settling-in of the system without being sufficient to negate its stabilising effect.
That stabilising effect was substantial, and in sharp contrast with Britain's experience outside. The idea, sedulously propagated in the last few days (not least by Lady Thatcher) that floating gives a country a sublime command over its own destiny, tempered only by the need to march in harmonious step with the calm judgement of sagacious market forces, bears no relation to Britain's experience in the first half of the Eighties. In four years sterling's exchange rate against the dollar fluctuated between dollars 2.46 and dollars 1.05, neither figure bearing the slightest relation to our competitive position against the US or to comparative purchasing power. The wild lurches to the two extremes were due to speculative overcompensation. Meanwhile the European bloc enjoyed relative stability.
In October 1990 we at last decided to join. The choice of date has always defied rational explanation, except in relation to internal Conservative Party dispositions. Certainly it made no sense in relation to a favourable exchange rate/interest rate configuration. The EMS was then 139 months old, approximately 130 of which months would have provided a better date on which to have joined.
As a result the harness always fitted us uncomfortably, and when the storm came we fell out - although not without a struggle which, because irrationally prolonged, cost half of our reserves and produced the farcical writhings of last Wednesday. The last of these caused the Prime Minister and Chancellor to send an official to Brussels to suggest that, because Britain could not sustain its membership, the whole system, which had lived satisfactorily without us for 11 1/2 years, should be suspended.
The suggestion was rejected, but the fact that it was made will have greatly increased the desire of the core countries for a two- speed or 'variable geometry' Europe, with Britain firmly in the outer circle. The thought that things go more easily without us than with us cannot fail to have been implanted in the minds of others. This, combined with Britain's inglorious failure to sustain a membership which others have now lived with satisfactorily for 13 1/2 years, marks a terrible defeat for John Major's 'heart of Europe' policy.
The other main aim of Britain's Community Presidency, the vigorous pursuit of enlargement, has also taken a battering. The Community may look less attractive to aspirant members (although the Swedes have shown a remarkable determination to keep their ERM link), and it will certainly become more preoccupied with internal problems.
By no means only Britain's position has suffered. The ERM itself has shown that the rigidity of wholly fixed exchange rates without the full protecting shelter of a single currency is a position of unstable equilibrium, and that the Maastricht timetable is therefore either too short or too long. There are two ways out of this dilemma, either a tacit retreat or a more rapid advance, and it would be rash for Britain to assume that the core governments will necessarily opt for the former. A single currency would, of course, obviate the troubles of last week, although it might bring others in its train. But if it came quickly it would now comprise Germany, France, Benelux and, paradoxically, perhaps Denmark, with us on the outside.
To what extent do the French vote and other recent developments leave the whole European idea weakened? The answer cannot be given without some historical perspective. Throughout the post-war period the drive for European unity has been like a stream which runs quietly underground for long periods but occasionally surfaces with unexpected vigour. The seven years since 1985 have been such a period of vigour. On the basis of past experience it was probably due, even without Maastricht to splutter its way into a culvert about now.
Furthermore, most of the past checks (although also most of the impulses to advance) have stemmed from France. This was so with the rejection of the European Defence Community in 1954, the veto on enlargement from the original Six in 1963, and the 1965 crisis of the 'empty chair', when France refused to attend until the 1966 Luxembourg Compromise, which involved the suspension of majority voting in the Council of Ministers. From some checks, the bounce-back has been rapid: the Treaty of Rome was signed less than three years after the Assemblee Nationale threw out the defence community.
Sometimes, however, it has been slow. It was 10 years after de Gaulle's 1963 veto before Britain (and Ireland and Denmark) got in to the Community. And it can be argued that after the Luxembourg row it was 13 years before the Community registered a further significant achievement.
Now there should be much more urgency. The threads of disintegration in the post-Cold War world are formidable. If Western Europe, so far from being a beacon of hope and an example of co-operative stability to the East, imports from beyond the old Iron Curtain the new fissiparous tendencies, there may even develop a nostalgia for the stability of the Brezhnev years. The First World, and what was once thought of as the Second World, are becoming classic examples of how, if one team in a tug of war falls over, so does the other team, with confusion superimposing itself on victory.
The need to pull together unity in Western Europe will therefore be pressing. In particular, there will be a strong desire in Paris and in Bonn to reinforce the Franco-German partnership. This will probably be more to the fore than the idea of a super-state springing out of Brussels, which will have attractions for British Government thinking. But it will also have considerable disadvantages. We will have to work very hard if we are to prevent ourselves being even more on the periphery and far from the heart.
The European idea is certainly not dead. The threat of disintegration makes it more, not less, necessary. But it is in a new, different and probably more difficult phase.
Lord Jenkins of Hillhead was Chancellor of the Exchequer 1967-70 and President of the European Commission 1977-81.
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