The ERM taught us no end of a lesson, so what a pity that some people never learn
CHRISTOPHER FILDES
It seemed a good idea at the time to so many people. The Treasury wanted it, the Foreign Office pined for it, the Governor of the Bank of England had been sold it, the CBI thought it would make for an easy life, the Financial Times and the Economist campaigned for it, and every bien-pensant commentator took the argument for granted. This was the button that had to be pressed, the if-only solution, as defined by Sir Kit McMahon in his concept of if-only economics: if only we joined the ERM, Europe's exchange rate mechanism, everything would be all right. At last the hardpressed Prime Minister, Margaret Thatcher, was brought round to it. We joined, and the stock market jumped by a hundred points. I found all this enthusiasm unnerving, because it left me in the sort of minority that statisticians believe they can safely ignore. I feared that if we joined the ERM, everything would be all wrong. By tying the pound to our neighbours' currencies — in effect, to Germany's — we were trying to make our economy fit the exchange rate. It might prove (it did prove) a tight fit, and, in any case, the ERM could do nothing for us that we could not, if we chose, do for ourselves. To rely on it as an external discipline meant relying on other people's policies to suit our needs. Their policy-makers suited themselves, and no wonder. The wonder was that after 18 months of this, all three major political parties could go into a general election with the ERM as the linchpin of their economic policies. The unlucky party won. Ten years ago, on one tumultuous day, its authority was shot to pieces in the market.
Out on our ears
THE summer was sultry. The green shoots of recovery, identified by a hopeful Chancellor, appeared to have dried up. Caught in a ferocious credit squeeze, companies were suffering and failing, house prices were tumbling, homes were being repossessed — but the obvious cure, cheaper money, could not be applied. Interest rates had to be kept high to prop up the pound. The CBI, though it still thought this policy splendid, wondered if its member firms could somehow be spared the consequences. The ERM had not, after all, made life easy. The markets came to perceive that it was cracking up. The Italian lira had folded under the strain, and the pound was next in line. In defence of the indefensible, the nation's reserves were poured out and interest rates, perversely, hoisted. This was seen as no more than a bluff, and was called. By the end of the day we were out of the ERM on our ears. In anticipation, the stock market rose by a hundred points.
Chancellor Ziegler
WAS surprised, the next day and in the days that followed, to find the Chancellor still there. Ever since then his name has eluded me, but he had been heard singing in his bath. His was the role performed by Ron Ziegler when Richard Nixon was President: he came on to say that previous statements were now inoperative. Policy, he said, would now be based on what was happening in our own economy — as if that had not always been his primary duty. He brushed aside the idea, first aired by Nigel Lawson, of an independent Bank of England. While we were in the ERM, he used to say, we did not need one, and now that we were out, we apparently still didn't. Without it, his policies' credibility had to depend on him, but that was no longer possible. His friends said, and in due course he said, that his heart was never in the ERM, but time after time, in speeches and statements, to grand audiences and to passersby outside the Treasury, he had bet his shirt on it, and ours too, and now the bet had been lost. 'Damned fellow,' grumbled Max Hastings. 'Leave him in a room with a loaded revolver and a whisky bottle, and what does he do? He drinks the whisky.' In the end, another hand had to pull the trigger.
The usual sages
TEN years ago, the policy that all the sages had urged upon us collapsed, and from then on the British economy changed for the better. Interest rates came down, the pound steadied and strengthened, growth resumed, and the governing party could even hope that a feel-good factor would win the election. No chance. The ERM debacle had swept away the party's claim to the high ground of financial competence. Besides, it could barely agree to disagree on the ERM's successor, the euro. The usual suspects were telling us that if only we joined Europe's single currency, everything would be all right. The CBI thought (yes) that it would make life easier. Only the Bank of England seemed to have gone off the idea. The most expensive day's trading in its long history had burned its fingers. and they still hurt.
Hitch your wagon
WE had hitched our wagon to Germany's, until the rope snapped. Ten years ago, this was Europe's leading economy, with Europe's most respected currency and a central bank to match. Since then it has traded in the mark and the Bundesbank for membership of the euro, and must wonder what sort of a bargain this was. Four million unemployed dominate the election, but whatever happens, the economy will be stuck with the European Central Bank's interest rates, which are too high for it. There is something familiar about the Germans' plight. Perhaps they should ditch the euro and hitch their wagon to sterling.
Robot not taken
THIS year must remind us of Robot, too: the missed chance of the post-war British economy, the road not taken. This was the secret plan to float the pound, which took its name from its proponents: Sir Leslie Rowan at the Treasury. Sir George Bolton at the Bank of England and Sir Richard 'Otto' Clarke, another Treasury mandarin. Fifty years ago Churchill's government deemed it too risky a gamble. Risky it was, but it might have saved us from a long chapter of sterling crises, false starts and fettering controls. Now Charles Clarke, Otto's son, is chairman of the Labour party, and during its conference plans to speak about sterling — and the lessons of Robot? Apparently not. He will urge us to tie ourselves into the euro. He might even tell us that this is inevitable. How sad it is that some people never learn.
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