Prime Minister Margaret Thatcher's government, in a sharp reversal of both economic policy and longstanding political ideology, agreed Friday to tie the British pound to the European Community's exchange rate mechanism.
The move, which was coupled with a decision to cut interest rates by 1 percent, was expected to give at least a short-term boost to Britain's flagging economy, which has been pushed toward recession by double-digit annual interest and inflation rates.It is also likely to boost the political standing of Thatcher's Conservative Party, which holds its annual conference next week trailing the opposition Labor Party in the polls largely because of its purported economic mismanagement.
By effectively pegging the pound to the German mark, Thatcher has ceded some of Britain's sovereignty in making economic decisions in return for the prospect of higher growth and lower inflation similar to what West Germany has achieved during the past decade. It is a move she had fiercely resisted for months despite strong pressure from the hard-hit British business community and from pro-European forces within her own party.
Two senior Cabinet ministers - Chancellor of the Exchequer Nigel Lawson and Foreign Secretary Geoffrey Howe - either resigned or were removed from office after pressing Thatcher to join the exchange-rate mechanism. But party insiders say Thatcher's opposition was gradually eroded by steady persuasion by the two men's successors, John Major and Douglas Hurd, and by economic realities.
Thatcher had insisted Britain would not join until its inflation rate, currently 10.6 percent, dropped toward the level of other European states, which is in the 5 percent range. For months the government instead has relied upon a politically unpopular policy of enforcing punitively high interest rates of 15 percent to throttle consumer spending and force down inflation.
So far the policy has not seemed to work - the inflation rate has risen all during the year.