It's time to throw out Mr Major's advisers

JOHN MAJOR'S position as Prime Minister is under no immediate threat. His personality, though not his record, is still quite popular with the public. More importantly, his Conservative critics, though proved right by last week's events, have at present no alternative leader. From their point of view, Michael Heseltine is merely a louder trumpeter with more discordant tunes, and Kenneth Clarke is another of the bandsmen whose musicianship they have come to suspect. Kenneth Baker is emerging as the leader of the realist wing of the party in the House of Commons, a senior figure in the policy debate. If Mr Major had to go, I think I can guess who the next leader of the Conservative party would be - but I would not dream of saying who she is.

For the next 18 months Mr Major is safe enough, but he has two difficulties to overcome. The first is personal. He believed in his policies. His position is rather like that of Neville Chamberlain in September 1939. Chamberlain was utterly sincere in the policy of appeasement, and on the outbreak of war was heartbroken by its failure. Mr Major, as his speech to the Scottish CBI showed, was passionately committed to reducing inflation through membership of the exchange rate mechanism. Such failures hit at a man's inner self-confidence.

The second difficulty is objective. Mr Major built his strategy as a tripod table. The first leg was our membership of the ERM at the middle rate of DM2.95. As Chancellor of the Exchequer he was responsible for that decision, which his critics had already warned against. The second leg was friendship with Germany as the strongest power in the EC; Helmut Kohl became for him the international patron and friend that Ronald Reagan had been for Margaret Thatcher. The third was the negotiation and proposed ratification of the Maastricht treaty. Last week each of these three legs was sawn off at the top. The French referendum result is so narrow that it clearly will not strengthen Maastricht in Britain. It could leave Mr Major committed to ratification, without the ERM or a British referendum. That would be the most embarrassing possible result.

Prime ministers have been defeated on essential elements of policy before; one thinks of Anthony Eden and Suez, or Harold Wilson and devaluation. I cannot find another instance of an English head of government losing the whole of his economic and foreign policy in a single day, since Richard III lost the Battle of Bosworth.

John Smith has lost the basis of his economic and foreign policy as well. How lucky Mr Major is in Mr Smith, who lost Labour the last election with his shadow budget, and has lost any advantage in this crisis by being even more committed to the ERM-Maastricht package than the Government ever was.

If he is to stay, Mr Major will have to develop a credible alternative strategy. It must be based on what the British really want. The Government has been out of touch with the people and cannot continue in that way. Democratic politics depends on leaders having a real respect for the views of the public; that has been missing in the European debate, and not only in Britain.

The British want economic recovery and also want to preserve national independence. They do not want decisions about their future taken in Bonn, Frankfurt, Paris or Brussels, though they do want to trade freely in Europe and to co-operate on an equal basis with other independent European countries.

The Government should not even contemplate going back into the ERM. The last year saw penal British interest rates, during a deep recession, set by the Germans, who were themselves under inflationary pressure. The last few months have seen us dependent on the Bundesbank for the defence of our currency, a task repeatedly sabotaged by leaks. We have suffered too much from this process: the loss of businesses, jobs and homes. There are more than a million people who have paid for the ERM with personal economic disaster. The only possible answer to the ERM is: never again. Yet no ERM means no Maastricht.

Until this has been publicly stated by the Government, we will not enjoy honest relations with our European partners. The belief that Britain is a potential federal partner in Europe is a lie. Once our national position is clear, other nations can rely upon it. The worst thing would be to pretend we are Europeanists of a kind that is not compatible with our national interest or psychology. If other nations want to reconstruct the ERM that is a matter for them; we lived outside it for a decade and can do so again. Britain is no longer a great power, but a solid power in the upper middle rank. Our policies should be conducted with clarity and self-confidence, as they were under Mrs Thatcher or as French policy was under President de Gaulle.

Mr Major should also recognise that the unemployment crisis is central to social and economic policy. If we had stayed in the ERM, unemployment would probably have risen to 4 million in the next two years. Much lower interest rates - probably down to 6 per cent - and a lower exchange rate will slow the rise and may eventually reverse it. But higher employment will not be easy to achieve. Manufacturing companies are still raising productivity extremely quickly. The increase in manufacturing output during the next 10 years can probably be handled with a smaller workforce.

The recession, and the high interest rates, have bankrupted small businesses and individual businessmen. Beyond the bankruptcies there are perhaps hundreds of thousands of small businesses which have lost their credit relationship. The banks no longer want to lend to them, and they no longer want to borrow from the banks.

In the Eighties, the recovery of employment was largely the result of expansion of these small businesses. Mr Major has killed the enterprise culture. Can he resurrect it? The housing market has been particularly hard hit and until it recovers the whole economy will be held back. No doubt much lower mortgage rates would help, but there is still a large overhang of unsold houses. Employment in the construction industry will continue to fall in the coming months.

The Prime Minister has to bring Britain out of depression, despite the weakness of the world economy, without launching a new inflation in the second half of the Nineties. He has been forced to leave the ERM; he will presumably cut interest rates; the devaluation and lower rates should help to restore a normal level of economic growth. But we must not lurch from inflation to depression and back again.

In his speech to the House of Commons on Thursday, the Prime Minister should discard the ERM absolutely, but he should also explain his alternative. That should centre on a monetary policy to stimulate and control the economy. The decision to hand British monetary policy over to the Bundesbank proved a disastrous mistake, but that means a sound monetary policy for Britain is even more necessary.

The advisers who have been guiding the Government in the past two years have created an economic and political disaster. New advisers are needed. Tim Congdon warned against the Lawson inflation and the current depression. His essentially monetarist method of forecast has been consistently superior to the Treasury's non-monetarist methods. Alan Walters gave the right advice to Mrs Thatcher, though she did not always take it. Professor Congdon might give better advice to Mr Major than he has had either as Chancellor or Prime Minister.