The Thatcher Government and the ERM

Abstract

This second case study reviews the Conservative government’s policy on membership of the Exchange Rate Mechanism (ERM) between 1979 and 1990. Within a few months of the ERM being established and the Labour government being criticised by the Conservative Opposition for not taking Britain in, the Thatcher-led Conservative Party had come to power and was in a position to make amends. Indeed, using an external monetary policy instrument like the ERM system could have fitted with the monetarist preference running through the new government’s macroeconomic policy. But having declared it a ‘sad day’ when Labour chose not to take up the ERM option (see Chapter 3), Mrs Thatcher made the same decision upon becoming Prime Minister. What is more, it would be a further 11 years before she finally decided to take the pound into the ERM.