Friday, February 11, 2005


Well, after an intense squabble, a wedge of Treasury files on the 1992 sterling crisis, "Black Wednesday", have been released. The most interesting feature, though, would seem to be the incredible psychological rationalisations of the participants. Let us recap. At the time the pound sterling was under a fixed exchange rate with respect to the Deutsche Mark under the European Community (as it was at the time)'s Exchange Rate Mechanism. The ERM was intended to be the second step towards an eventual European single currency. Britain joined in 1990 in the last days of the Thatcher government, after the chancellor of the day (John Major) convinced Maggie that this move would help to kill inflation and also reconcile the Tory pro-European faction to her. Unfortunately, as was typical, she decided to join at once, with the result that an unusually high exchange rate was locked in.

A whole string of events then conspired to create a crisis. Germany's decision to apply a tough anti-inflationary policy at reunification helped to cause an economic slowdown right across Europe. It also meant high German interest rates and a strong mark, which created pressure on the pound's fixed rate. The British economy was tanking anyway, and the high interest rates and high exchange rate only made it worse. Mind you, John Major, now prime minister, thought this was fine as it was "fighting the battle against inflation". Things built up until another rise in the German interest rate brought about the raging crisis. A wave of selling tore through the currency market, and nothing would stop it. The Bank of England intervened massively, but that didn't cut it. In a succession of cabinet meetings whose circumstances are still hotly disputed (Kenneth Clarke and Michael Heseltine both claim that they took place in a room in Admiralty House with not even a phone, with the only source of information being a civil servant who dashed in and out with bits of paper. Major and Norman Lamont deny this.), the decision was taken to put up interest rates twice in the day.

Still the sell-off raged. Finally, after an unsuccessful cash-call to the Bundesbank, they bit the bullet and quit the ERM. The pound devalued drastically. Interest rates were cut. John Major was publicly humiliated, not for the last time. The tabloids had a field day: "Now we've all been screwed by the Cabinet" was the Sun's headline; "Out Of Control!" the Mirror's; "Torpedoed By the Germans" the Daily Mail's. It also gave rise to a classic conversation between Major and the Sun's editor, during which the editor declared that "Prime Minister, I have a vast bucket of shit on my desk, and I'm going to pour it all over your head."

Bizarrely, given the pain, it turned out to be one of the best things that had happened in years. Freed from the penally high interest rate and export-crushing exchange, the economy recovered rapidly. Chancellor Lamont was disposed of and replaced by Clarke, who espoused a policy of taking advantage of the devaluation as much as possible. Everyone quietly forgot about the ERM. The forex traders moved on to target the remaining ERM: by 1994 it was a dead letter, with the remaining member currencies in fluctuation bands so wide as to be meaningless.

Time heals all wounds. The words of the participants now reveal a lot about how you can convince yourself of anything you want to believe. John Major:
"In the end the public, he hopes, "will place the £3.3bn cost against an economy without inflation that has lasted for 13 years and is certainly worth far more than £3.3bn".
So - he still thinks it was justified in The War Against Inflation. But , if you accept the Tories' claim of a golden economic legacy, you surely have to accept that the post-crisis policy of keeping sterling and the interest rate down - an inflationary stance - was responsible for it. Does he believe that, had it all not happened and had he been able to continue his chosen policy, things would have turned out exactly the same? Or is he giving himself more credit for Machiavellianism than we might think? Heeeereeeee's Johnny!
"Norman has made it absolutely clear that we would not have got inflation down without the ERM and we would not have moved to the excellent economy we have now got if we hadn't got inflation down,"
So - we had to go into the ERM to get inflation down so we could then change policy? Does he really mean that he was planning this all along? In that case, why didn't he make an orderly shift instead of wasting all that money and making a fool of himself? To put it another way, if the Tories want credit for the economic recovery, they ought at least to admit that it happened under a policy regime diametrically opposite to the one they themselves chose. They didn't choose to devalue. They were forced to. This is like a drunken driver who claims credit for the fact he was arrested before crashing the car. But there's more, too:
""When Gordon Brown boasts that we have had the longest run of economic growth in economic record he is right. What he doesn't say is the Conservative party got rid of inflation to start with, the Conservative party carried that through, and half the period of this long run of economic growth was under the Conservative government."
But this only adds up to anything he can take credit if he really believes he deliberately set out to reverse his policy. It gets weirder, too. Lamont was at pains yesterday to stress that the Labour Party supported ERM membership. But he was his own man. He wasn't dependent on Labour votes to do it, so why should he have done it if he didn't think it was the right policy - and he claims still to think it was the right policy, squeezing out inflation and all that (remember?). It's a sad business all right.

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