central bank – opted rapidly and unambiguously for a restrictive
monetary policy to combat inflation, even though the federal govern-
ment still pursued full employment.^29 Many European countries fol-
lowed suit, because the European Exchange Rate Agreement (the
“Snake”) tied their currencies to the German mark and compelled
them to a form of “imported monetarism.”^30 This evolution went
largely unnoticed, however, until 1979, when monetarist ideas began
to be implemented with a “much more single-minded determination.”^31
Margaret Thatcher was the first political leader to be elected, in
May 1979, with an avowedly monetarist program. Her government
was committed to maintain rigid targets for the monetary supply,
assuming this approach would stop inflation without increasing
unemployment. The Conservative Party also promised to reduce the
size of the state and enhance market mechanisms, to counter the power
of trade unions, and to restore the authority of the government.^32
Between 1979 and 1981, the British government adopted strict
monetary policies, letting the short-term interest rate go as high as
16.6 percent in 1980. This course of action, combined with a steep
increase in value-added taxes and national insurance contributions,
contributed to the creation of a severe recession. By 1982, the
unemployment rate had climbed above 12 percent, without lowering
inflation, still around 8 percent.^33 On all sides, including among
business leaders and within the cabinet, pressures mounted in favor
of a more accommodative policy. Publicly, Thatcher resisted. She
(^29) Fritz W. Scharpf,Crisis and Choice in European Social Democracy, Ithaca,
Cornell University Press, 1991, pp. 132–33 and 202–207; Philip Manow and
Eric Seils, “Adjusting Badly: The German Welfare State, Structural Change,
and the Open Economy,” in Fritz W. Scharpf and Vivien A. Schmidt (eds.),
Welfare and Work in the Open Economy. Volume II. Diverse Responses to
Common Challenges, Oxford University Press, 2000 p. 268; Kathleen
R. McNamara, “Consensus and Constraint: Ideas and Capital Mobility in
European Monetary Integration,”Journal of Common Market Studies, vol. 37,
30 no. 3, September 1999, 455–76, p. 466.
Scharpf, “Economic Changes, Vulnerabilities, and Institutional Capabilities,”
31 pp. 32–33.
John Smithin,Macroeconomics after Thatcher and Reagan: The Conservative
32 Policy Revolution in Retrospect, Aldershot, Edward Elgar, 1990, p. 36.
Kavanagh,Thatcherism and British Politics, pp. 12–13.
(^33) Ibid., pp. 225–33; Smithin,Macroeconomics after Thatcher and Reagan,
p. 42–47 and 59; Peter A. Hall,Governing the Economy: The Politics of State
Intervention in Britain and France, Cambridge, Polity Press, 1986, p. 120.
The triumph of market democracy (1980–2007) 145