Well, well, well. It was 16th September, 1992, twenty years ago today. The UK had joined the Exchange Rate Mechanism, whereby the exchange rate against a basket of European currencies was fixed. The markets decided to test the rate, sold sterling until the Bank of England couldn't buy any more, and we crashed out.
Typically of Euro-loonies, John Major and his government had decided the principle was more important than the facts as they affected little people. The rate was too high - DM2.95 - due to high German interest rates following reunification. Britain with its inflation and its deficits and its trade with the US (the $ was also under pressure) couldn't keep up. It was the most humiliating defeat imaginable for what was the central plank of government policy.
I had stood in the elections in April 1992 on an anti-EU ticket. I had been roundly defeated, of course. I remember walking into a pub on the Thursday after the crash to hear someone say 'What's happened is exactly what Tim Hedges said would happen'.
Strangely enough some call it White Wednesday now. Sterling fell by about 20%, pricing our exports into the market, and with the Labour reforms carried out by Mrs Thatcher British industry surged. By 1996 the economy was healthy, but it was too late for the Conservative Party which lost the election in May 1997, tainted with the disgrace of Black Wednesday. The Chancellor, Norman (now Lord!) Lamont resigned but John Major, who had stated that membership of the ERM was the main plank of his government's policy, did not. I had little respect for him before, even less afterwards. Incidentally he has started to make speeches again and write articles for newspapers: he must be treated with contempt, for being not just a fool but a dishonourable fool.
The lessons?
Exchange rates should be determined by the market, not by governments; in any case they will be decided by the markets eventually.
Don't let dogma cloud your assessment of what is going on.
Devaluation is a successful tool as long as you have flexible labour markets.
The euro (the ERM was its predecessor) is a political construct, not an economic one.
Always listen to Tim Hedges.
1 comment:
JOHN MAJOR - "The Daily Telegraph" has been floating his name with a 'come back' monikre attached, in the same breath as an on- going spat involving the Cameron - Clegg coalition opposition to expanding Heathrow Airport. Is Boris Johnson behind the scenes here, pulling strings?
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