Why the United Kingdom must say 'No'
By Rt Hon. David Heathcoat-Amory, MP E-mail: david@wells.tory.org.uk

THE UNEXPECTED HAPPENS AGAIN

After the Maastricht Treaty was signed in 1992, but before it was ratified, the Exchange Rate Mechanism (ERM) was thrown into turmoil. The cause lay at the very heart of the system. German unification was financed with increased public expenditure and higher borrowing, which the authorities countered with higher interest rates in order to fight inflation. These were exactly what was not needed by other Member States where low inflation and weak economic activity called for lower interest rates.

This certainly applied to the UK which had finally joined the ERM in 1990 when it was widely thought to be the key to lower interest rates. By 1992 however the ERM itself had become the reason why interest rates could not be lowered. There was therefore an increasing divergence between the domestic policy needs of Germany and those of the rest of Europe. German unification was an event which tested the existing ERM to destruction.

Growing instability and loss of confidence in the existing exchange rates culminated in Sterling's exit from the ERM in September 1992 together with the Italian lira. Other devaluations, suspensions and withdrawals followed but the crisis was not resolved until the following year when the French and Danish currency rates became unsustainable and the ERM was in effect suspended by greatly widening the permitted fluctuation bands.

The consequences of the ERM debacle were very serious in terms of lost economic growth and political damage. However, some attributed it to different causes and drew different conclusions. The European Commission drew the lesson that the reason for the ERM's disintegration was not too much monetary union but too little. The difficulties were attributed to speculators and illogical market reaction. (Note 5) The Commission's solution was to press ahead faster and further with full monetary union. According to this view, the problem of exchange rate instability could be avoided by removing the exchange rates. Turmoil in the currency markets could be ended by abolishing the currencies.

It remains a Treaty requirement that stage three of monetary union, the irreversible locking together of exchange rates and the introduction of a single currency, shall start on January 1, 1999. Under the terms of the British 'opt-out' the decision on whether to join must be made in 1997.