For the Record. David Cameron
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early for the briefing sessions and sit at the bottom of the narrow flight of stairs that led to his No. 10 flat, just outside the door to the study where we held the briefing meeting. John had a habit of bounding down the stairs and, with a cheery hello, ruffling my hair.
My main job as leader of the political section of the CRD was taking apart the Labour opposition and preparing for the 1992 general election.
The tale of that election is extraordinary. The Conservative Party had ditched its most successful ever leader, caused inflation to rise, put up interest rates, seen the property market crash and the country tip headlong into recession. Meanwhile, the Labour Party under Neil Kinnock had scrapped some of its most unpopular policies, such as unilateral nuclear disarmament, and seemed hungry for, and perhaps even ready for, power.
Yet we won. And the scale of the victory should not be measured by the small parliamentary majority – twenty-one seats – that John Major achieved. The true scale of his victory was the fact that we were almost eight percentage points ahead of Labour, and he had attracted more votes than any other prime minister in British political history.
To be sure, we didn’t expect it. I had a strong sense then that the only person who really thought we would win was John Major himself. He seemed to have an innate confidence that when given the choice, the British people would stick with him.
No one should underestimate the personal triumph for John Major. In the head-to-head with Neil Kinnock, people knew who they wanted as prime minister. But allied to this was the most systematic destruction of opposition policy that I have ever seen in a campaign. The mantra that ‘Oppositions don’t win elections, governments lose them’ was turned on its head. The hubris of Labour’s pre-polling day Sheffield rally, and the self-inflicted wound of its shadow Budget, in which Labour promised to raise taxes on people who saw themselves as middle-earners, are well documented. But those of us who were in the campaign team would argue that the costing of Labour’s spending pledges, together with the blunderbuss of our advertising campaign, were what made the biggest difference. By polling day everyone knew that a Labour government meant higher taxes.
Norman Lamont’s pre-election Budget was a political masterstroke: by stealing Labour’s plan for a 20p starting rate of income tax he pushed them into making new tax proposals. So just at the moment they should have been talking about anything other than tax, they walked into our trap.
Election night, when predictions of Labour victory turned to the reality of a Conservative majority, was a moment of pure political joy. While I would experience the excitement of getting elected to Parliament in 2001, and the topsy-turvy night in 2010, the exhilaration of 1992 wouldn’t really be matched until May 2015, twenty-three years later.
Victory in the general election, and my relationship with Norman Lamont, provided me with the chance to take the next step in my political career – becoming a special adviser, or ‘spad’, at the Treasury.
The Treasury today retains much of the power and aura it had back then, but the place I worked in nevertheless seems a world away. Women in white coats would wheel tea trolleys around the so-called ‘magic circle’ on the principal floor of the Treasury building in Whitehall where the key officials and spads sat. The office I had then – all to myself – was substantially bigger than the one I would have as prime minister.
And many of the rooms – particularly the chancellor’s – were genuinely ‘smoke-filled’. Norman smoked an endless succession of small cigars. His principal private secretary, later to become my cabinet secretary, Jeremy Heywood was rarely without a cigarette between his fingers. Chief economist Alan Budd and specialist economic adviser Bill Robinson were constantly puffing away. When the deputy governor of the Bank of England, Eddie George, came to see the chancellor he would light up too. Back then I was smoking twenty Marlboro Lights a day, and would happily join in. There were times when you couldn’t see the other side of the room.
Going to the Treasury also introduced me properly to William Hague. Elected at a by-election in 1989, he was Lamont’s parliamentary private secretary, the first rung on the ladder for a new MP.
William immediately struck me as one of the brightest and most talented Members of Parliament I’d ever come across. He had a huge understanding of the economic and other policy challenges we faced, while knowing his parliamentary colleagues and the complexity of Conservative politics back to front. We formed a friendship that has lasted ever since.
Seismic events were ahead for all of us. The decision to join the ERM – a fixed exchange rate between European currencies – was made by John Major and Margaret Thatcher in October 1990, before Norman Lamont arrived at the Treasury. Our task was to try to make the policy work. We failed.
The story of the end of Britain’s membership of the ERM is simply told. Following reunification, the German economy required high interest rates. Following the Lawson boom, the United Kingdom economy was in recession and required low interest rates. It was Germany that drove the European economy, and the mighty Bundesbank had a critical say in the ERM. Naturally, they prioritised German domestic policy. In the end the ERM could not contain this fundamental structural imbalance. That, above all, is what lay behind Britain’s exit.
But the ERM wasn’t just a story about Britain’s economic circumstances. It became an essential proxy in the Conservative war over the burgeoning European Union. Pro-Europeans made the argument then – and some still do now – that Britain joined at the wrong time and at the wrong rate, and if only different decisions had been made,the ERM might have worked. They also argue that leaving it so dramatically was unnecessary, that there was some middle way by which Britain could have been part of a realignment of Europe’s currencies, thus avoiding the humiliation of either a very public devaluation of the pound, or the exit that eventually took place. Some anti-Europeans claimed then – and still claim now – that the ERM actually caused the British recession, and was therefore responsible for all the pain it would cause in terms of job losses and house repossessions.
Both these views are, in my view, wrong.
The pro-Europeans miss the real point. Of course it might have been better if Britain had joined the ERM at a different time or at a lower rate, but in the end what did so much damage to the British economy was not the precise exchange rate, but the high interest rates, and therefore high mortgage rates, required by the ERM because of what was happening in Germany. No country ever managed for any sustained period to have interest rates below those prevailing in Germany. So even if we had joined at a lower exchange rate, those high interest rates would still have been necessary.
The argument that a ‘middle way’, with a more general currency realignment, was possible simply doesn’t stand up to scrutiny. All that was effectively on offer was a substantial British devaluation. Economists will continue to argue about whether that could have prevented our forced exit from the ERM. I would simply point out that several other countries had devalued more than once. The problem was interest rates.
The anti-European argument was equally bogus. The ERM did not cause the recession in Britain. It was caused by a rise in inflation at the end of Lawson’s period as chancellor, and the need to raise interest rates to bring it under control. It is true that the ERM resulted in high interest rates for longer than was necessary, but most economists agree that that was for a matter of months, not years. The ERM made the recession longer and deeper; it didn’t cause it in the first place.
The clear conclusion from all this was that fixed exchange rate systems can put huge pressures on the economies of different countries when their economies have different needs. The real lesson was that what was true for the ERM would be doubly true for a European single currency. It would be the ERM without an emergency exit route. My mantra became ‘We cannot join the single currency, because it requires a single interest rate, and sometimes that will not suit us.’
The truth turned out to be even worse. During the Eurozone crisis, effective interest rates in the struggling economies like Spain, Greece and Portugal were far higher than in Germany because, in spite of the lack of a formal exit route from the euro, markets still thought departure was possible, and demanded a premium