Policy-Making in the Treasury

Explaining Britain's Chosen Path on European Economic and Monetary Union.

M. Smith

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137337030
• eBook ISBN: 9781137337047
• Topic: Politics & International Relations
• Subtopic: European Politics
• Index: Politics & International Relations

Going behind the doors of the Treasury and Number 10, this book explores why successive British Prime Ministers from Callaghan to Blair have been hesitant towards European Economic and Monetary Union. It uses official documents and interviews with former ministers to understand discussions that took place at the heart of government.

1

Introduction

Aims and purpose of this book

The question of whether to join the European single currency (the euro) and, before that, other forms of economic and monetary union (EMU) has been one of the biggest and most contentious issues facing British governments over the last 35 years. This period follows the earlier part of the post-war era where European integration posed a series of similar headaches for successive Prime Ministers and their ministers. Throughout these decades and up to the present day, Britain has shown repeated hesitation by either turning up late to the party, not showing up at all, or even trying to spoil the party for others as its Continental neighbours have embraced the ideal of ‘ever closer union’.

All these post-war decades of hesitation have earned the UK the status of ‘awkward partner’, and successive British governments’ awkwardness in the face of European economic integration has rarely taken place without ferocious debate in this country’s parliamentary and public arenas. Indeed, the difficult European question remains centre stage in British politics today, as the Coalition government contends with not only the impact of the euro zone’s current economic difficulties on its attempts to revitalise the UK economy but also internal debates within their parliamentary parties about Britain’s long-term position within the European Union (EU).

This book challenges the common understanding about why successive British governments have been the awkward partner in Europe on the issue of EMU. Conventional wisdom often orbits around the idea that Britain’s formal awkwardness towards EMU has been influenced heavily by the domestic political conditions that governments have had to operate within – specifically: pressure from the Euroscepticism within the governing party, the fear of upsetting a Eurosceptic electorate, or the efforts of anti-European civil servants (especially those in Her Majesty’s Treasury – ‘the Treasury’) aimed at making sure that their authority is not diluted by the ceding of power to Brussels. Commentators present a picture of decision-making being dominated by government ministers’ short-term and self-interested political survival instincts in the face of this pressure coming from people around them.

This reading of the drivers of policy points to a dramatic change from how it is generally believed that policy was shaped in the earlier era of European integration. When looking for the drivers of British governments’ awkwardness towards the nascent European Community in the 1950s and 1960s, commentators have often come to a very different conclusion and identified two main elements that underpinned the decisions taken by ministers. First, there was ideology – that is, a strong and unwavering belief (such as a natural preference to stand alone from Continental Europe). Second, there was what has been called ‘pragmatism’ – that is, policy direction has been the outcome of more open-minded cost-benefit analysis of the options. While explanations of Britain’s awkwardness in the immediate post-war period are not monolithic, there is a general acknowledgement that policy was the outcome of governments considering a mix of both elements and that, despite those governments having a natural stance on Europe, economics-focused cost-benefit analysis played a significant part in ministers’ final decisions to first reject the opportunity to join the European Economic Community (EEC) and then to seek membership a few years later. The economics ministries – the Treasury and the Board of Trade – are generally viewed as the departments that led the development of policy. And it has been identified that ministers relied heavily on civil servants – ‘officials’ – in these departments for advice that helped them to make up their minds on the best course that should be taken in order to pursue their government’s overarching economic and political goals in an effective way. This advice focused on the economic costs and benefits of participation in European economic integration, and a clear link can be seen between the advice provided by officials and the decisions taken by ministers.

But when commentators’ attention turns to the reasons for Britain’s awkwardness towards EMU from the late 1970s onwards, the consensus is that policy has been driven predominantly by just one of the above-mentioned factors. Specifically, conventional wisdom gathers around the idea that the British governments’ position has been determined by ideological views. Furthermore, the argument is that policy has been shaped by the ideological views of not the government but rather by others – essentially, by sceptics in the governing party’s back benches, the press or by the public at large. The influence of the Treasury is given less prominence. And the role of officials – within the Treasury or elsewhere – in formulating policy is diminished or not mentioned at all. Authors point to policy being based on subjective and untested reasoning by ministers as successive governments were swayed by the prevailing political winds more than anything else. This suggests a significant shift in how policy was decided, with British governments moving to a process that bypassed the traditional Whitehall machine.

Did successive governments really build such an important policy on such flimsy and opportunist foundations? And had the grip of the Chancellor and his Treasury over this policy area been loosened to such a degree, at a point in time when the European question was taking on even greater economic significance for Britain?

Literature review

Accusations that successive British Prime Ministers throughout this period had policy dictated to them by groups outside of government are the most prevalent explanations of why policy took the course that it did. Neither James Callaghan, Margaret Thatcher, John Major nor Tony Blair is spared this criticism. The dominance of domestic political conditions over governments’ policy direction, and the absence of an analytical basis, is cited as the pivotal force from when the real prospect of EMU appeared on the European agenda in 1978. For example, John Young (1993, p. 162) and Aspinwall (2003, pp. 803–11) suggest that Callaghan was unduly influenced by the need to manage the divisions in the Labour Party when deciding whether to join the Exchange Rate Mechanism in 1978. And Hugo Young (1999, pp. 301–2) is possibly suggesting a systemic Euroscepticism amongst officials when he states that Callaghan ‘regretted accepting what was in 1978 the conventional Treasury and Whitehall, as well as political, advice’.

Many commentators point to Thatcher herself as being the domestic political conditions that stood in the way of an analysis-based policy on EMU in the 1980s. Thompson (1996, p. 2) – amongst many others – points to the Prime Minister’s autonomous style of policy-making, whilst Geddes (2004, p. 85) and Denman (1997, pp. 265, 269) suggest that Thatcher overruled the analysis-based support of Chancellor Nigel Lawson for ERM membership because of her increased fear about EMU’s threat to national sovereignty. Stephens (1997, p. 31) once more raises questions about the objectivity of officials’ caution towards Europe, suggesting that personal scepticism may have been a significant shaper of their advice to ministers.

John Major is particularly identified as a Prime Minister who came under immense pressure from Eurosceptics within his own party, when it came to him negotiating the Maastricht Treaty. George (2001, p. 280) seems to reflect the views of others – including Denman (1997, p. 274), Gamble (2003, pp. 271–3) and Hugo Young (1999, p. 389) – when he states that ‘it would be absurd to deny the effect of considerations of internal party management on the Major government’. As a result of all this pressure, Stephens (1997, pp. 119–20) points to the ‘perplexing swerves’ that Major took in his policy on Europe during the Maastricht ratification process.

The strong influence of domestic political conditions over governments’ decisions is believed to have continued into the late 1990s and early 2000s. Rawnsley (2001, pp. 74–5), Wall (2008, p. 162) and Hugo Young (1999, pp. 493–4) are amongst a large number of commentators who argue that Tony Blair’s policy on EMU was driven more by politics than economics, and that he was worried foremost about keeping the anti-euro public on side – and, in particular, those in the print media who had carried him to electoral victory and were essential for retaining power but who included strongly Eurosceptic voices. Gowland et al. (2009, pp. 143, 155, 158–9, 170) echo this point, suggesting that this was a key consideration when constructing the New Labour government’s Five Tests policy framework on EMU. Peter Riddell, in The Times, provided a running real-time commentary between 1997 and 2003 on how policy was shaped by Blair’s and Brown’s concern about a deeply Eurosceptical electorate, too. It is also suggested by many that the euro issue was a ‘pawn in the power struggle between Prime Minister and Chancellor’ (Stephens, 2001, pp. 203–4). Indeed, while highlighting the analytical work that took place in the Treasury under Brown’s chancellorship, Peston (2006, pp. 214–15, 221, 223) states that the conclusions of that analysis were designed to please the political masters by whom they were commissioned.

In short, the current conventional wisdom appears to be that anti-Europeanism – be it amongst the governing party’s back-bench MPs, or the electorate, or the officials working for ministers – was a primary force that has caused successive British governments to say no to taking part in the European economic integration on offer at the time. Either that, or a dysfunctional relationship between the Prime Minister and the Chancellor of the Exchequer. As George (2001, pp. 277, 280) states, ‘the influence of domestic politics on the policies of British governments within the EC/EU has been a consistent explanatory theme’. Little sense is given by existing commentaries of British governments taking a structured evidence-based approach to policy-making similar to that which the Treasury and Board of Trade had brought to proceedings in the 1950s and 1960s; rather, policy-making is characterised as short-termist and centred around ministers’ efforts to ensure their personal political longevity.

The majority of books have tended to come to their conclusions by focusing on the colourful political debate that was often played out in public. Perhaps encouraged by the large number of memoirs by former ministers who have set out their recollections of how the Europe question dominated politics at the time, many existing commentaries have chosen to direct their focus towards analysing the minister–minister relationships that existed within the government of the time, and also the tensions between the government and the rest of the parliamentary party (Denman, 1997; Gamble, 2003; H. Young, 1999; J. Young, 1993). Sometimes this is extended to the minister–electorate relationship as a whole (Rawnsley, 2001; H. Young, 1999). Little consideration is given to what policy-making activity went on between ministers and officials inside departments – that is, the traditional engine of policy development in Whitehall. Despite being cited as a major element of policy-making on Europe in the 1950s and 1960s, there are few examples of studies doing this for the 1970s onwards (Gowland et al., 2009; James, 2010; Wall, 2008), and these are exceptions to the rule. Further, for those publications that do reference the minister–official relationship, the level of detail they go into rarely matches that which is used to explain the drivers of policy in the 1950s and 1960s. For instance, whilst several studies point to the significant role of the former civil servant Sir Frank Lee (e.g. Denman, 1997; H. Young, 1999; J. Young, 1993) in Britain’s post-war decisions first not to sign up to the EEC and then to seek membership a few years later, no such official from the 1970s onwards is given the same kind of attention.

The Treasury, in particular, has been an impenetrable fortress over recent decades in terms of understanding how it has influenced government policy on EMU. History suggests that the Treasury would have had a strong influence over this area of policy, but its preferred modus operandi has meant that its actual role has usually remained cloaked in secrecy. Peston’s Brown’s Britain (2006) is possibly the only book that brings some of the Treasury’s internal working out into the sunlight – making use of his contacts in the Westminster village to speculate about what went on behind the scenes.

Even those existing books that make some attempt to consider the activity that went on out of sight within Whitehall’s secretive corridors rarely include reference to primary sources such as the official government documents that would have supported and structured any such activity. Indeed, some acknowledge how the inability to consult official government documents (because of the 30-year rule) leaves a gap in their analysis and that they cannot be certain that their arguments are complete (Gifford, 2007, p. 462; Milward, 2000, p. 17; Thompson, 1996, p. xi; J. Young, 1993, pp. 133, 171). And those authors who do use some reference to primary sources seem to rely heavily on interviews with people who were involved in the policy-making process, and do not corroborate those interviews with official government documents (Thompson, 1996; Wall, 2008). Again, this is a big difference from the evidence base used to understand the drivers of policy in the 1950s and 1960s, where many publications refer to official government documents to identify the contribution made by Treasury and Board of Trade officials and the cost-benefit analysis underpinning the policy-making process (Denman, 1997; Gowland et al., 2009; Milward, 2000; J. Young, 1993; H. Young, 1999). It is therefore possible to be left questioning whether the existing conventional wisdom has really got to the bottom of the drivers behind Britain’s ‘awkward partner’ status.

Contribution and findings of this book

This book identifies the real drivers of governments’ decision-making on EMU by going beyond the reach of the existing literature and getting under the skin of economic policy-making by successive British governments. It has been able to do that by succeeding where others have failed: namely, by getting sight of what has actually happened behind the heavy and imposing doors of the most powerful and secretive departments in Whitehall – the Treasury and Number 10 Downing Street (‘Number 10’). While existing accounts have based their assessments of governments’ hesitation towards Europe on what they have been able to see from a bystander’s position, and have often acknowledged that the restricted view from their vantage point has placed constraints on the evidence base upon which they have founded their assertions, this book does not have to make such an apology. This is because this book draws on two areas of primary sources that are absent in other books and which give it a deeper and more vivid insight into the mechanics of policy-making in the British government and so provide a fuller explanation of the reasons behind Britain’s awkwardness in Europe.

More than 120 official government papers from the Treasury, Number 10 and other departments are the basis for the analysis in this book. These are complemented by a schedule of in-depth interviews with not only the former ministers but also the senior officials who commissioned or authored those aforementioned papers, in order to identify and understand the reasoning underpinning the internal discussions that took place within the government at the time on this issue. The list of people interviewed includes a Prime Minister; five Chancellors of the Exchequer; a Foreign Secretary; two Chief Economic Advisers to the Treasury; special advisers to Prime Ministers and other Cabinet Ministers; a Cabinet Secretary; four Permanent Secretaries to the Treasury; many senior officials, including several of those mentioned in the memoirs of former Chancellors; and several other officials who worked on these policies at the time.

Using this fresh evidence, this book sheds new light on both the dynamic between Chancellors and their Prime Ministers and between Chancellors and their officials. In presenting a fuller picture of the policy-making processes that underpinned the final decisions taken on EMU, this book provides a clearer explanation of how those decisions on this hugely important issue were arrived at. The findings of this book challenge the prevalent current perception that successive Prime Ministers and governments have shaped their policy on EMU first and foremost to accommodate the ideological views of others, and rather presents evidence that Britain’s continued awkwardness was the logical outcome of more analytical reasoning led by the Treasury.

This book finds that successive British governments’ ‘awkward’ stances on EMU were chosen because they were felt to be the best way to achieve their established economic goals, and were not positions forced upon them by others around them. In the eye of the storm that has swirled around the EMU issue in Britain for decades, governments’ decision-making remained focused on economic policy, relatively untroubled by contextual difficulties, and delivered what – in their view – was the policy that was best for Britain’s economy. Of course, there are exceptions to the rule but, by and large, governments have remained in pursuit of their pre-stated economic priorities and not allowed themselves to be forced by the pressures of government to deviate from their preferred path – despite this being an issue that has constantly stirred up sensitivities.

This book reveals that government policy on European economic integration from the 1970s onwards has been shaped by a balanced pursuit of stated economic and political objectives, and not by contextual political circumstances. Chancellors of the Exchequer have been the ministers who have driven policy development. Further, this book shows that Chancellors have been significantly aided in this endeavour by Treasury officials. They have turned proactively to officials, rather than to parliamentary back-benchers, for advice about how best to pursue their economic aims effectively and efficiently. And those officials have seen it as their role to put forward practical solutions that would help ministers to do that. Policy was rarely decided by ministers without the input of officials, and decisions were not shaped with the purpose of handling immediate political obstacles. This minister–official partnership – i.e. the combination of pre-stated aims and assessment as to how best to achieve them – was at the centre of the policy-making process; it has been the driving force.

The focus of Treasury officials’ advice on EMU to the Chancellor and Prime Minister was analysis of the economic consequences of the integration proposals. They used cost-benefit analysis to assess the ‘shifting plates’ in question – namely: the form of economic integration on the European agenda at the time; and the conditions in the UK economy at the time. When carrying out this analysis, officials used the government’s pre-stated economic and political objectives as terms of reference. They did not use the domestic political conditions that existed at the time as parameters for their analysis of the options. Domestic political conditions were not seen by officials as one of the ‘shifting plates’ relevant to policy development.

Where domestic political conditions were influential was over the presentation of policy. The way governments chose to present their policies, once they had decided them, was influenced by the ideological beliefs of back-bench MPs and the public. But the fundamental substance of policy was not, and a distinction needs to be made between the substance of policy and the presentation of policy: the former was shaped by cost-benefit analysis of the economic effects of participation, and the latter was designed by the government to secure sufficient parliamentary and public support to ensure that the pre-decided policy substance received sufficient support to be implemented. In other words, there was a bifurcation of policy.

This difference between substance and presentation of policy is not picked up explicitly in many existing commentaries – with Nugent (19...

Table of contents

• Cover
• Copyright
• Contents
• Title
• 1 Introduction
• 2 Whitehall, the Treasury and Policy-Making
• 3 The Callaghan Government and the ERM
• 4 Callaghan, the Treasury and the ERM: Behind Closed Doors
• 5 The Thatcher Government and the ERM
• 6 Thatcher, the Treasury and the ERM: Behind Closed Doors
• 7 The Major Government and EMU at Maastricht
• 8 Major, the Treasury and EMU: Behind Closed Doors
• 9 The Blair Government and the Single Currency
• 10 Blair, the Treasury and the Single Currency: Behind Closed Doors
• 11 Conclusions
• Bibliography and Sources
• Index