The Political Dimension of Currency: Britain, Europe, and the Struggle for Sovereignty

To mark the launch of her new book Geprägte Freiheit: Großbritannien und das Europäische Währungssystem 1979–1992, now available from De Gruyter Brill in the series ‘Publications of the German Historical Institute London’, Juliane Clegg shares an insight into her research with the GHIL Blog.

‘Now we’ve all been screwed by the Cabinet’. This was the headline used by The Sun in September 1992 to report on one of the most defining events in recent British history: Britain’s withdrawal from the European Monetary System’s Exchange Rate Mechanism (ERM).¹ A sterling crisis had forced the country out of the ERM, which was perceived as a humiliation and reinforced reservations about the planned European Monetary Union. In more recent interpretations, these events and experiences contributed significantly to Britain’s alienation from the EU and the subsequent Brexit vote in 2016.²

The political significance of the issue is best understood by looking at its historical background. The UK had initially stayed out of the ERM, the centrepiece of the European Monetary System established in 1978–9. The struggle over participation cost key ministers their posts in Margaret Thatcher’s Conservative government and even contributed to Thatcher’s own downfall in 1990.³ By then, the currency issue had long since become a symbol of Britain’s role as an ‘awkward partner’ in European integration.⁴

Currency and Political Agency

But why did a seemingly technical decision regarding the pound’s fixed exchange rate have such significant political repercussions? My book explores this question. Its starting point is the observation that money is more than just an economic instrument. It is also a means of political control, a cultural symbol, and a vehicle for notions of national identity and sovereignty. The debates surrounding the European Monetary System therefore centred not only on monetary and European policy decisions, but also on political agency, national sovereignty, and European cooperation.

Examining the economic, political, and cultural significance of money opens up a new perspective on British European and monetary policy in the 1980s. The British stance on European monetary cooperation was not simply an expression of a particular form of Euroscepticism or a pronounced sense of sovereignty, nor was it merely a precursor to later conflicts over European policy.

Drawing on newly accessible archival documents, my research shows that the debates of the time did not simply pit national sovereignty against European cooperation. Rather, they centred on how to safeguard political agency within an internationally interdependent economy. The sterling crisis of 1976 had brought this issue into sharp relief: in order to secure an IMF loan, the British Government was forced to accept strict austerity measures, which restricted its freedom of choice in budgetary policy.⁵

Faced with this challenge, some saw European monetary cooperation as a means of regaining agency in the face of the markets. Others feared further restriction of political freedom of choice, even though the policy they were advocating—national economic consolidation—would similarly have to adapt to the requirements of the financial and currency markets.

The European Monetary System was established in 1978–9 by the then member states of the European Community with the aim of deepening European cooperation and stabilizing exchange rates.⁶ However, both James Callaghan’s Labour government in 1978 and, subsequently, Margaret Thatcher’s Conservative government from May 1979 initially relied on national strategies in response to Britain’s economic problems. Pegging the pound to European currencies was not compatible with either of their reform agendas. For Callaghan, a currency peg to the Deutschmark seemed too restrictive for a policy aimed at promoting growth; Thatcher feared a conflict between her monetary targeting and an exchange rate target in the ERM. Consequently, whilst the UK did become a member of the European Monetary System, the country initially remained outside the ERM.

The Quest for Credibility

As problems with monetary targeting became more apparent in 1985, the ERM once again came into focus. The Chancellor of the Exchequer and the Foreign Secretary now saw it as a potential instrument for economic stabilization, whilst Thatcher continued to insist on an independent monetary policy without an exchange rate target. The focus was not yet on the question of sovereignty—which would later so strongly shape debates on monetary union—but rather on the question of credibility. Managing market expectations was seen as an essential prerequisite for a successful monetary policy. A coherent and reliable framework therefore seemed key to a sustained reduction in inflation.

Accordingly, the debate about joining the ERM was not primarily focused on whether sovereignty would be preserved or relinquished, but on which strategy would have greater credibility in the markets. Proponents of joining saw the exchange rate peg as the best option for presenting a comprehensible and coherent framework. Thatcher, on the other hand, argued that it was precisely a departure from the chosen monetarist approach that would undermine confidence.⁷ This demonstrates that monetary policy decisions were not merely technical measures or reactions to supposed constraints. They were also used by political actors to steer market expectations. Conversely, the reference to market pressures served to legitimize decisions and to define what was considered politically feasible.

What I found particularly surprising was just how important this focus on market expectations and economic credibility was, even within the opposition Labour Party. Here, the growing acceptance of the ERM marked a shift in policy direction. Long before Tony Blair’s New Labour project, the party under Neil Kinnock had moved away from positions that were increasingly perceived as radical, including withdrawal from the European Community and extensive economic regulation by the state.⁸ The openness to closer cooperation within the European Monetary System epitomized this shift: it underlined the acceptance of EC membership and signalled, through a willingness to peg the pound more closely to the stable Deutschmark within the ERM, a move away from expansionary, potentially inflationary policies. This reflected the quest for credibility in economic policy. At the same time, the stance on the ERM symbolized the aspiration to once again appear capable of governing.

What Did Sovereignty Mean?

The issue of sovereignty only came to the forefront of the debate in 1988, when the Delors Committee began to flesh out the plans for a European Economic and Monetary Union.⁹ Participation in the ERM was now increasingly discussed as part of this broader issue, though not as a simple choice between relinquishing sovereignty within European monetary policy and retaining it by pursuing an independent exchange rate policy. Instead, differing views emerged on what sovereignty meant and what role it played in safeguarding political agency.

Margaret Thatcher and Chancellor of the Exchequer Nigel Lawson both rejected a monetary union. They associated it with the relinquishment of parliamentary powers—for instance, in budgetary and tax policy—which they regarded as central to a democracy. However, they drew different conclusions from this. Lawson now viewed accession to the ERM not merely as an economic necessity, but also as an essential part of Britain’s European policy. Only in this way, he argued, could the UK secure a seat at the negotiating table to avert losses of sovereignty within a monetary union. Thatcher, on the other hand, regarded even the limited and theoretically reversible exchange rate peg within the European Monetary System as a dangerous step towards relinquishing fundamental state powers.

Others, however, pointed to the already limited scope for government action. They argued that it was precisely through international cooperation, or even a single currency, that political agency could be preserved. This was symbolized by the much-quoted remark that British sovereignty over interest rate setting consisted of the fifteen minutes it took to follow German interest rate moves and thus avoid sharp fluctuations in the exchange rate.¹⁰

The idea of a transfer of sovereignty was also called into question. In 1990, for instance, the former British Foreign Secretary Geoffrey Howe argued that closer European ties did not diminish sovereignty but rather strengthened it. To illustrate this, he used the image of silk threads which, when interwoven, become stronger without losing their individuality.¹¹ If we consider the views of contemporary actors who have received little attention to date—such as Conservative MEPs or business associations—we see that this was not merely an outlier position.

My research thus demonstrates that sovereignty was not a rigidly defined, universally applicable concept, but rather a contested one that was employed in various, sometimes contradictory ways, and at times strategically, within the currency debates. European cooperation was not merely understood as a counter-model to national agency, but was also seen by many actors as a possible means of safeguarding it. The examination of British monetary policy thus contributes to a historicization of the concept of sovereignty: sovereignty does not appear as a fixed analytical category, but as a historical question in its own right. This study therefore challenges teleological interpretations of British European policy, according to which a specific understanding of sovereignty or identity would have prevented participation in European monetary integration from the outset.

Post 1992: Disputes over Interpretation

Accession to the ERM in 1990 ultimately took place as a result of economic, European policy, and domestic political pressures. It was intended to lend stability and credibility to Britain’s monetary policy, which had come under pressure, and to preserve the UK’s agency in European affairs. However, the 1992 sterling crisis meant that this strategy failed just two years later.

This also unleashed disputes over the interpretation of 1992: to this day, there is debate over who bore responsibility for accession and whether the prolonged adherence to the ERM in 1992 was justified or led to pointless foreign exchange market interventions running into the billions.¹² Initially, the day of withdrawal from the ERM went down in history as ‘Black Wednesday’, a humiliating symbol of the pound’s weakness and the country’s distance from Europe. Later, particularly during the Brexit debates, it was reinterpreted by some as ‘White Wednesday’ or even ‘Golden Wednesday’.¹³ From this perspective, the subsequent economic upturn was cited as evidence that breaking with European ties promised prosperity and political self-determination. These competing interpretations also demonstrate that currencies are not merely economic or technical instruments. They are, at the same time, symbols of political responsibility, national agency, and European belonging.

Translated by Marielle Sutherland (GHIL).

Feature image: Bank of England, London. The credibility of British monetary policy and the stability of the pound played a key role in British debates on the European Monetary System. Photo by acediscovery, 2022 (cropped). Licensed under CC BY 4.0.

1. The Sun, 17 Sept. 1992. [↩]
2. William Keegan, David Marsh, and Richard Roberts, Six Days in September: Black Wednesday, Brexit and the Making of Europe (London, 2017). [↩]
3. Philip Stephens, Politics and the Pound: The Tories, the Economy and Europe (London, 1996). [↩]
4. Stephen George, An Awkward Partner: Britain in the European Community (Oxford, 1998), 126–31. [↩]
5. Kathleen Burk and Alec Cairncross, Goodbye, Great Britain: The 1976 IMF Crisis (‎New Haven, 1992). [↩]
6. Emmanuel Mourlon-Druol, A Europe Made of Money: The Emergence of the European Monetary System (Ithaca, NY, 2012). [↩]
7. See e.g. David Norgrove, record of a meeting held on 13 November 1985, dated 14 November 1985, The National Archives, PREM 19/2162. [↩]
8. Kevin Hickson (ed.), Neil Kinnock: Saving the Labour Party? (London, 2022). [↩]
9. Harold James, Making the European Monetary Union: The Role of the Committee of Central Bank Governors and the Origins of the European Central Bank (Cambridge, MA, 2012). [↩]
10. Nicholas Wood, ‘Sovereignty for 15 Minutes’, The Times, 6 July 1990. [↩]
11. Geoffrey Howe, ‘Sovereignty and Interdependence: Britain’s Place in the World’, International Affairs, 66/4 (1990), 675–95, at 685. [↩]
12. Ben Williams, ‘Black Wednesday: Thirty Years On’, Political Insight, 13/3 (2022), 22–5. [↩]
13. William Keegan, ‘Black Wednesday Gets a Whitewash’, The Guardian, 13 Feb. 2005; Martina Bet, ‘No Deal Brexit. How “Black Wednesday Showed Leaving EU Without Deal Would Be a Liberation”’, Daily Express, 21 May 2019. [↩]

Juliane Clegg

Dr Juliane Clegg is a postdoctoral researcher at the University of Stuttgart’s Institute of History. She completed her PhD at… Read more

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