On the eve of the First World War, Argentina enjoyed the third-highest standard of living in the world. Today, after a hundred years of woeful misgovernment, this wonderful and immensely rich country is in 45th position. The great Argentine writer Jorge Luis Borges once lamented to me that his country had not been colonised by the British. "If only your invasion of 1806 had succeeded," he said, "today we would be like Australia."

I spent four years there from 1973 to 1977, one of the most tumultuous periods of Argentina's tumultuous history and the one in which it was worst misgoverned. As a diplomat at the British embassy in Buenos Aires, I was successively consul general and minister, and for two years chargé d'affaires. I arrived a few days after the return of Juan Perón from his long exile in Madrid. On his death in 1974, he was succeeded as president by his widow, Isabelita, a former cabaret dancer. She ruled the country for a year with the help of her sinister lover, José López Rega. It was a period of creeping anarchy and soaring inflation. The military finally put an end to the Perónist regime in March 1976 by mounting a coup, which was greeted at first with general relief.

The army restored order and firm government and took action against left-wing terrorist groups such as the Montoneros and the ERP, which had proliferated during the increasingly lawless years of the Peróns. Neither I nor any of the other foreign diplomats in Buenos Aires was aware of the extent of the military's anti-terrorist operations at the time or the beginning of the long "dirty war", though perhaps we should have been alerted to it by the occasional sounds of shots in the night.

Since its emergence from the ruins of the Spanish empire in 1816, Argentina had claimed the Falkland Islands as part of the new republic even though Spain had ceded the uninhabited islands to Britain in 1771. Despite protests from Buenos Aires, Britain formally settled the islands in 1833 and has occupied them ever since, with the exception of 74 days in 1982. Argentina has never relinquished its claim and although it never pursued it with any vigour until the junta took over in 1976, it became part of Argentine mythology. The Islas Malvinas, as they are called in Spanish, are shown on Argentine maps as being part of Argentina and at all schools in the country, even the highly regarded Anglo-Argentine ones such as St George's and St Andrew's, the day begins with the raising of the national flag and recital of the mantra that "las Islas Malvinas son argentinas".
Generations of Argentines have been brainwashed in this way. When our youngest son went to St Andrew's at the age of nine, he was taught in Spanish in the mornings and in English in the afternoons, as is the case at all Anglo-Argentine schools. So, the pupils learned that the islands were the Malvinas in the morning and the Falklands in the afternoon. The boy was understandably confused.

Soon after I arrived in Buenos Aires I made a visit to the Falkland Islands to learn more about the main problem that I should be dealing with at the embassy. Thanks to the Communications Agreement of 1971, it was now possible to fly there from Buenos Aires by a weekly commercial flight operated, sinisterly, by the Argentine air force. I flew to Stanley in an almost empty plane - there was little traffic in either direction - and was met by the governor at the airstrip in his official car, a converted London taxi, with a roof high enough to accommodate his plumed hat on ceremonial occasions. Suddenly, an hour or two away from the seething, modern metropolis of Buenos Aires, I found myself in a 19th-century English village whose inhabitants knew nothing of their Spanish-speaking neighbours 300 miles across the sea and wanted to keep it that way. Apart from discussions with the governor and islanders, I had one small duty to perform - to pass on a gentle rebuke to the governor from London about his method of disposing of confidential papers. After reading them, he was in the habit of flushing them down the lavatory at Government House. Legend had it that they would wash up on the shores around Stanley Harbour.

Off the fence

For the past hundred years the Falkland Islands issue has served successive Argentine administrations as a useful distraction in times of internal crisis. It has also proved a hugely successful rallying cry for a single Argentine identity, creating a nation out of immigrants. Having exterminated the original Indian inhabitants in the 19th century, the local Spanish settlers relied on vast immigration from Europe to fill their empty spaces.

Spain and Italy provided the largest proportion (half the population of Buenos Aires is of Italian origin) and further significant numbers arrived from Germany, Ireland, the Middle East ("Turcos") and, not least, the British mainland, the Scots and Welsh populating large parts of bleak, windswept Patagonia. The English, unlike the rest of these groups, arrived not as poor immigrants but as merchants, businessmen, industrialists, engineers (who built the railways) and remittance men, some of whom made good spectacularly - including a great-uncle of mine who founded Duperial, the largest subsidiary of ICI in South America.

Unlike the other immigrants, the English eschewed politics, regarding it as a thoroughly ungentlemanly business. So far as they were concerned, the Falklands belonged to whomever they happened to be talking to, British or Argentine. The events of 1982 forced most of them to come down off the fence on which they had been sitting for two centuries in favour of their country of origin. The other ethnic groups had no such inhibitions. A Buenos Aires taxi driver once attacked me over the Falklands when he discovered that I was English. "When are you going to give us back our islands?" he asked aggressively. He then confided that he had been born in Milan but his parents had emigrated to Argentina. Nationalism works.

Following the return of the Peróns in 1973, Argentina began ratcheting up the fierce rhetoric over the Falklands once again. A shadowy nationalist group planted a bomb outside the British ambassador's residence that shattered most of the windows and blew to pieces the policeman on duty outside (his hat could still be seen several weeks later high up in the tree beside the front entrance). When Lord Shackleton led an official mission to the islands in 1975-76 to examine ways in which they could be developed, the Argentines' fury erupted. They withdrew their ambassador from London for "consultations", as the diplomatic phrasing goes. Britain did the same, and recalled its man in Buenos Aires. I was then propelled into the hot seat as chargé d'affaires for nearly two years while tensions between the two countries grew. The Foreign Office told me that it was sending out a team of "ex" SAS to be my personal bodyguard. When I protested that I had no need of such extreme measures and that it would only make me more conspicuous, I received a stinging rebuke. "The team will not be coming out to protect John Shakespeare," the telegram said tartly, "but to protect HMG from embarrassment in the event of his being kidnapped or killed."

For the whole of the past century, the Falklands issue has been at the bottom of every foreign secretary's in tray. It makes its way to the top only at times of exceptional turbulence in Anglo-Argentine relations, and the 1970s was one of those. As always, the British government hoped that the problem would just go away but this time it refused to do so because of the intransigence of the parties.

With the Argentine military now making the running, Britain agreed unhappily to negotiate. A variety of solutions was canvassed and tried out on the islanders and the Argentines, including leaseback (as with Hong Kong), condominium and joint development under a sovereignty umbrella, but with little success. We even found it hard to decide whether it was the wishes or "the best interests" of the islanders - two very different things - that should be paramount. The incoherence of our policies in the face of a brutal, fascist regime led inexorably to the invasion of the islands on 2 April 1982 and the near calamity that followed.

In 1976-77, two incidents occurred that in any other circumstances would have been casi belli, but were deliberately hushed up by a supine British government, desperate not to derail the negotiations. In February 1976 an Argentine destroyer fired on the British Antarctic Survey vessel Shackleton while it was in Falklands waters, with deliberate intent to sink it. The Shackleton was saved only by escaping into a bank of fog. I was instructed to deliver a limp slap on the wrist to the head of the Malvinas department at the foreign ministry, rather than to the foreign minister himself, as one would have expected. He was courteous but unapologetic.

Exactly a year later, another BAS vessel discovered that the Argentines had constructed a settlement on the small island of Southern Thule in the South Sandwich Islands, a British dependency 1,300 miles south-east of the Falklands. Once again, I was instructed to complain at the usual level; once again, I received the same response, with the added gloss that the Argentine navy was on the island "for research purposes" only.
But something even more bizarre happened while the Argentines were encroaching militarily on our position in the South Atlantic. We unwittingly encompassed our own destruction by trying to sell them the very weapons most capable of achieving it.

Tipping the balance

Argentina was in the market for new frigates and had already bought two Type 42 vessels from Vosper Thornycroft. Argentina was now interested in buying six of the new Type 21. In those days, trade was the name of the game where British foreign policy was concerned, and our embassy in Buenos Aires was instructed to give full support to Vosper Thornycroft. To that end, I hosted a lavish lunch at the residence in November 1976 - only a few months after the Shackleton incident and just one month before the discovery of the Argentine settlement on Southern Thule - to enable a sales team from Vosper Thornycroft to meet six senior Argentine admirals in the most agreeable circumstances.

I have never forgotten something that one of the admirals said to me at lunch and that I thought, wrongly, was a joke. "When we recover the Malvinas, the islanders will be able to go on with their traditional way of life undisturbed because no Argentine will ever want to live there," he said. (Ironically, the first and most detested action of the Buenos Aires-appointed military governor in 1982 was to impose driving on the right.)
The frigate negotiations got off to a good start but collapsed when Vosper Thornycroft declined to pay the requisite bribe into the naval officers' pension fund. It is chilling to think that, had it not been for this, the acquisition by their navy of six powerful, British-built warships could well have tipped the balance against our task force in 1982.

Now, once again, the Falkland Islands are in the news as the Argentine government steps up the pressure and our coalition government, unlike the Labour administration of the 1970s, digs in its heels. What has changed since then is the discovery of potentially huge reserves of oil in Falklands waters. Both sides realise that another attempt at imposing a military solution is out of the question - but both sides still have to show the necessary statesmanship that will lead, one hopes inevitably, to the joint exploitation of this new Eldorado.

John Shakespeare served as a diplomat in Argentina from 1973-77