Brexit – How did we get here? Part 3

This evening, Conservative MPs will vote on whether to oust Prime Minister Theresa May after months of dissatisfaction on the backbenches over her Brexit strategy. This, of course, is not the first time that a Conservative leader and Prime Minister has faced such a prospect – in my last blog, we looked at how Thatcher was pushed out of office after disagreements on her European outlook. In this latest blog as part of an ongoing series, I take a look at how euroscepticism evolved under John Major’s time in office and the most of Tony Blair’s premiership, with the slow rise of UKIP, plans to join the Euro and continued expansion of the EU to the former Eastern Bloc.

Major and Black Wednesday (1990-1997)

John Major took over from Thatcher and with him was a more pro-European style of leadership. Major pledged to keep the country at the heart of Europe. He also claimed a significant victory in 1992, after obtaining opt-outs from the European single currency and the Social Chapter (European labour regulations) in the Maastricht Treaty. The treaty, which founded the European Union, came into effect in November 1993. However, it was not plain sailing for the Prime Minister – with 22 Conservative MPs rebelling against the Major and threatening to bring down his government down.

One of the last acts of Thatcher as Prime Minister was to take Britain into the European Exchange Rate Mechanism (ERM) at the insistance of Major, having initially declining to join in 1979. This required the government to follow a monetary policy preventing the exchange rate with other currencies from fluctating too greatly and, if it did so, the government would have to intervene. To maintain the pound’s value in relation to other currencies, British interest rates had to match German ones. In theory, this would provide stability, as well as low inflation and German-style prosperity.

However, rather than bringing prosperity, Britain sunk further into a recession, with one million people becoming unemployed. High interest rates, due to being in the ERM, meant businesses struggled to sell goods abroad and homeowners found it hard to meet their mortgage payments. Germany then increased their interest rates further to combat increasing inflation in their country. Then Chancellor Norman Lamont reached out to the President of the Bundesbank (Bank of Germany) to ask them to cut rates to help out Britain but they refused.

After Italy was forced to take urgent measures to prevent its economy from collapsing, including devaluing its currency, fears that Britain may do the same caused uncertainty on financial markets. Remarks from the Bundesbank President suggesting that Britain could also devalue in the near future were published by a German journalist and on the following day, Wednesday 16th September 1992, sparked panic on British markets. Speculators and investment funds sold the pound in large amounts.

The Bank of England attempted to allay any crisis by buying pounds on the market; at one point it was spending £2 billion of public money an hour to hold back the tide. However, this was soon lost and the Bank sort to increase interest rates from 10% to 12%. Instead of showing strength, markets saw this as an act of desperation and continued selling. Cabinet officials soon began talking of the prospect of suspending Britain’s participation in the ERM, but instead the Prime Minister chose to raise interest rates for a second time that day – to 15%. This had a disasterous effect on financial markets, being seen as a sign of weakness., and an avalanche of selling took place against the pound.

By mid-afternoon, the Bank of England had spent £15 billion propping up the pound, but was fast running out of money. Rumours swirled that Germany would drop its interest rates, but the Bundesbank was not prepared to put the interests of the British above those in Germany. Major asked German Prime Minister Helmut Kohl for help, but none was forthcoming. With no other alternative, the Prime Minister made the choice to withdraw from the ERM, which was announced later that evening by British Chancellor Lamont.

Today has been an extremely difficult and turbluent day. Massive speculative flows continued to disrupt the functioning of the Exchange Rate Mechanism (ERM).

…the government has concluded that Britain’s best interests are served by suspending our membership of the Exchange Rate Mechanism. As a result, the second of the two interest rate increases I sanctioned today will not take place tomorrow.

Norman Lamont, outside the Treasury at 7:30pm on Black Wednesday

The cornerstone of the Major government’s credibility and the centre of its economic policy was now in ruins, and the Bank of England had lost up to £4 billion of public money trying to keep the pound in the ERM. John Major and Norman Lamont both considered resigning but decided against it. The issue of Europe dogged the rest of Major’s premiership, with his government crippled with division even in his own Cabinet.

Following Black Wednesday and the signing of the Maastricht Treaty, LSE professor and eurosceptic Alan Sked formed the United Kingdom Independence Party. Seen largely as a single-issue party, they won 1% of the vote in the 1994 European election, its first national contest. However, the party soon lost ground to another eurosceptic party formed the same year.

The Referendum Party was formed in 1994 by prominent tycoon and financier Sir James Goldsmith, with the aim of holding a referendum on Britain’s membership of the European Union. Like UKIP, they claimed that the UK was drifting towards becoming a federal European state, particularly with Labour Party leader Tony Blair’s support for Britain joining the proposed single European currency. However, unlike them, Goldsmith was able to fuel the party with large amounts of funding. They embarked on a large-scale advertising campaign, spending more money in the run up to the 1997 election than the Conservatives or Labour, including sending a VHS to five million households in the UK.

The party also gained its first and only MP in 1997, George Gardiner, who defected from the Conservatives shortly before the election.

In the 1997 election, Labour swept to a landslide with Tony Blair becoming Prime Minister. UKIP was beaten back by the Referendum Party in almost all the seats they both contested, achieving only 0.3% of the vote. UKIP managed to save only one deposit, in Salisbury with candidate Nigel Farage.

Goldsmith’s Referendum Party achieved 2.6% (over 800,000 votes) in the election, with support strongest in the south and east of England. However the party gained no seats, with George Gardiner coming fourth and only saving deposits in 42 of the 547 constituencies it contested. In a study in 2000, Ian McAllister and Donley T. Studlar claimed that the party had cost the Conservatives almost 20 seats and 3.4% of the vote in the election. The future of the party was short-lived – Goldsmith passed away just two months later from pancreatic cancer and the Referendum Party died with him. Many of those who had been candidates were soon recruited by UKIP.

With the pro-EU Labour government firmly in power, and the lack of significant gains, the prospect of a referendum on EU membership was extremely distant.

Greater integration and the rise of Euroscepticism (1997-2004)

Blair was a staunch pro-European and, soon after taking office, Britain joined the EU’s Social Chapter and passed the Human Rights Act, bringing the rights contained in the European Convention into UK law. He also supported further enlargement of the European Union, particularly to former Soviet countries, and a referendum on Britain joining the euro. However, on this latter issue, Blair would face disagreement from his Chancellor, Gordon Brown. At Brown’s insistance, Blair agreed to five economic tests to assess the UK’s readiness to join the euro:

• Are business cycles and economic structures compatible 
   so that we and others could live comfortably with euro interest rates on a permanent basis?
• If problems emerge is there sufficient flexibility to deal with them?
• Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?
• What impact would entry into EMU have on the competitive position of the UK’s financial services industry, particularly the City’s wholesale markets?
• In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?

The Treasury began to assess the UK economy against these from October 1997, with the government considering the outcomes soon after the 2001 general election. In that vote, Labour returned to power again with a large majority, with the Conservatives’ defeat under William Hague blamed on an obsession with the European Union and ensuring Britain keeps outside of the eurozone. Despite this, the Tories elected Iain Duncan Smith as the new leader, who was more eurosceptic than Hague.

Under Blair’s leadership, the UK supported the expansion of the European Union, with ten new member countries, mostly former Eastern Bloc nations, joining in 2004. This was, and remains, the largest single expansion of the European Union to date. Due to the large number of countries joining and fears of mass immigration due to the EU’s freedom of movement for workers, certain countries introduced transitional controls to stem the flow of people moving to their country to work. The UK’s approach, however, was not as restrictive; introducing only restrictions on welfare. Estimates of 13,000 people moving to the UK from these countries ended up being a dramatic underestimate, with 129,000 migrants from the new Eastern European member states entering Britain.

Over the following years, this stirred up anti-immigrant rhetoric which significantly changed the debate on immigration in Britain, particularly by UKIP, who used this as one of their flagship campaigning issues for the case for Brexit. In the years following, those responsible for the decision expressed regret and admitted they had assumed that other EU countries would also not bar freedom of movement to the new member states, but only Ireland and Sweden followed suit.

Just six months later, in the European elections, UKIP placed third with 12 seats and almost 16 percent of the vote. Along with dissatisfaction with the two major parties and anger at the large numbers of migrants moving to Britain from the new EU countries, UKIP also benefited from funding from major donors and an endorsement from broadcaster Robert Kilroy-Silk. However, Kilroy-Silk quit the party the following year, after failing to win the leadership, forming a new party – Veritas (Latin for ‘truth’). The party made no ground and merged with the English Democrats in 2015.

This would mark the start of a series of breakthroughs for UKIP over the coming years, culminating in a promise by David Cameron to hold an in-out referendum on EU membership.