Britain and the Politics of EMU

The most divisive issue in British politics in the 1990s was whether or not to participate in Economic and Monetary Union (EMU). British debates over European policy brought down one prime minister (Margaret Thatcher), contributed to the political humiliation of a second (John Major), and posed a potential threat to the future electoral prospects of a third (Tony Blair). These debates have involved extensive public discussions and controversies among all the major political parties and interest groups. Substantial institutional changes and innovations in the conduct of monetary policy have accompanied these conflicts. Between 1990 and 1999, Britain had four distinct arrangements for deciding and implementing monetary policies. These policies varied in their level of internationalisation, institutionalisation and success. Despite persistent rhetoric about removing interest rate policy from the vagaries of direct political control, all four policies resulted from a highly politicised process. In this chapter, I first examine the institutional environments in which British monetary policy was formed. Then I explore the party politics that underpinned the four distinct monetary policies that the British Government pursued during the 1990s: (1) the Exchange Rate Mechanism (ERM), (2) informal inflation targeting, (3) formal inflation targeting, and (4) an independent central bank.