CITY AND SUBURBAN
The stock the Prime Minister sold us on a false prospectus
CHRISTOPHER FILDES
Ido hope the police will not come along to Downing Street at six in the morning — 'Buzz off, Mrs Major cries, `we don't get up yet' — and arrest her husband on charges of issuing a false prospectus. He was the Chancellor who sold us the Euro- pean exchange rate mechanism, and if he had told us then what his successor is telling us now, I cannot think we would have bought it. A true prospectus would have read something like this: 'On joining the ERM we shall immediately go into recession. It will certainly last for two years, and after that things may get worse. Bor- rowers and lenders will crack under the burden of debt, unemployment will rise, investment will fall, and within the limits we have set ourselves, we can do nothing about it.' The present Chancellor has now tried hard to make a virtue of necessity. His lecture in praise of the ERM was a serious piece of work, unlike the perfunctory sketches of monetary policy which padded out his Mansion House and Budget speech- es. He came up with a variant on Denis Healey's law of holes: when you're in one, stop digging. Norman Lamont's law says: this is a splendid hole. It may be uncom- fortable, but it will be good for us. Besides, we have reconnoitred all the ways out and they look even nastier. Some of the shine came off Mr Lamont's presentation when the pound ignored it, carrying on down against the mark. His subsequent speech — please, nice Germans, don't put up your interest rates — was less polished.
Off to the races
How different it all sounded, two summers ago, when we were being warmed up to buy the ERM. Then, the story was that once we had joined, we could stop worrying about sterling — foreigners would have confi- dence in it, the ERM would somehow look after it. So down would come our interest rates and we should all be off to the races. Companies could stop worrying about exchange rates, except for such marginal currencies as the dollar and the yen. At the same time, the discipline of the ERM would curb and then cure our inflation. That promise has survived, to be the core of Mr Lamont's redrafted prospectus. I have to say that it, too, is misleading. Being in the ERM, as I warned when we joined it, will not bring down our inflation by any means which were not available to us out- side. If inflation is a disease of money, it will respond to monetary remedies, and in judging and applying them, we should be doing no more for ourselves than the Ger- mans are accustomed to doing for them- selves. Why should we expect them to do it for us? We find ourselves wearing an off- the-peg policy tailored by the German Bun- desbank for its home market, where the fig- ures are different, and decidedly rounder. Mr Lamont pretends that it is a perfect fit, or will be, when we grow into it.
No surrender
The Bundesbank knows better than that. Twice in the last month its most senior offi- cials have gone out of their way to remark that Europe's exchange rates were made by man and could be re-made. Germany's pol- icy is transmitted to us through the exchange rate, but if we (or the Italians or the French) don't like the effect, the reme- dy is in our hands. We are, the Bundes- bankers convey, free to pick a rate which gives a better result — or indeed to set interest rates at a level appropriate to an economy in recession, and see what that does to the exchange rate. The Germans would accept it and the rules would allow it. The ERM, like Bretton Woods before it, means that rates of exchange remain fixed until they are changed by agreement. That clause was written, plain and unambiguous, into the original prospectus, and the stock would not have sold without it. This was the guarantee that we could join the ERM without a surrender. Once that guarantee is given up, once exchange rates become per- manently and inflexibly fixed to each other, they become a common currency in all but name — in which case, as Jacques Delors' committee rightly said, we might as well get on and have one. Mr Lamont spent some time at Maastricht trying not to commit us to any such thing. Now, though, we find him rewriting the prospectus. He swears by all that the Treasury holds sacred (such as its forecasts?) that the pound and the mark are fixed at the rate that Mr Major chose — and what he joined together, let no man put asunder. The Chancellor has in fact staked his job on it. He should be worried to see the market take his bet and raise the stakes. So should the Prime Minister.
The unsmelt rat
No-one can claim to have coped with Robert Maxwell, and those who did not try came off best — like the M & G Group, which simply forbade its fund managers to buy Maxwell shares. Those who tried — like the directors drafted into Mirror Group — were apt to say that he was a rogue but that they could handle him. They came off worst. City regulators who had no choice but to try have paid for their fail- ures, which have predictably been blamed on self-regulation. I don't see what self has to do with it — the idea of a self-regulatory Maxwell is a contradiction in terms — but I do say that the City's style of regulation, which leans on the experience of people in markets, was designed to do better. Where was that experience, where were the old hands, where were the twitching whiskers and the sensitive noses for bad smells? Imro (the acronymic regulator) has its own board of directors, drawn from the markets. Were they all too busy voting each other onto committees of audit and remunera- tion? Did none of them think to ask whether Imro was double-checking Maxwell companies? In markets, a gram of intelligence is worth a pound of informa- tion. Imro lacked it. I recommend that its first reform should be to ask for a director from M & G.
Apostropheosis
A unique double awaits Sir David Walker, the regulator who has now turned High Street banker. Lloyd's of London must find someone to head its new board of regula- tion. I was saying last week that the job has Sir David's name written all over it, and a special position on Lloyd's ruling council will go with it. So Sir David looks all set to be, simultaneously, deputy chairman of Lloyds and of Lloyd's.
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