Those who lived through the events culminating in the UK’s departure from the exchange rate mechanism of the European Monetary System, on 16 September 1992, will never forget the experience.
The outstanding achievement of this account is that it is both exciting as the drama unfolds, and rich in the analysis of the political and economic movements in Europe which had always threatened the UK’s survival as an ERM member. There is a great deal of new material from interviews and unpublished documents.
It would make a great movie; one can hear the relentless hammer blows of the percussion as the fatal hour approaches, and those clicking inserts telling us the time, date and where we are. We have the script to hand: Six Days in September – Black Wednesday, Brexit and the making of Europe, by William Keegan, David Marsh and Richard Roberts.
The authors lay out several fundamental factors for why the UK left the ERM. Most important, perhaps, is Britain’s ambivalence towards Europe. Churchill’s words from 1930 are quoted, ‘We are with Europe, but not of it, linked, but not compromised… interested and associated, but not absorbed.’ Likewise, there was the deep hostility of Prime Minister Margaret Thatcher towards German reunification.
When the UK joined the ERM, the biggest challenge was how to cope with the economic and political problems of reunification. Within Germany, there was the conflict on the speed of movement towards a single currency between the Chancellor, Helmut Kohl, and the Bundesbank. Continental Europe, too, had potential conflicts of attitudes, most notably between France and Germany. This made it a bad time to join the ERM.
Some ministers, most notably Nigel Lawson, the chancellor of the exchequer, had pressed for membership since 1985. In his case, this was not because of any enthusiasm for deeper European monetary integration, but because of the failure of other counterinflationary policies. Eventually, Thatcher’s opposition was worn down and the UK joined the ERM.
Unfortunately, this coincided with the biggest challenge to the mechanism. The book includes a new account of the debate on whether the interest rate should have been cut when Britain joined. This seems to have been a far more serious debate than any consideration of the appropriate exchange rate. The rate was cut, against strong opposition from the Bank of England.
The book is excellent on the build-up of difficulties in early 1992, and then of the critical period from the summer onwards. The conflict between the German Bundesbank’s desire to hold its interest rate steady to counter the potential inflationary effects of reunification, and the wish by others, including the UK, to cut interest rates for domestic reasons, became acute. For many, the solution was a general realignment of the currencies, including an appreciation of the D-mark. However, given the intentions of German policy-makers, that was not a possibility.
The book moves on to the final days preceding Black Wednesday, with the currency crisis triggered not, as many had expected, by the French referendum on the Maastricht treaty, but by a depreciation of the Italian lira. My memory of the events differs in some minor respects from those described in the book though, undoubtedly, the most important event was the interview by Bundesbank President Helmut Schlesinger, in which he was interpreted as saying the German central bank would not support sterling.
As a Treasury official at the time, modesty does not prevent me from saying that I have a walk-on part in the drama. The book describes the trip which Mervyn King, then chief economist at the Bank of England, and I took to Frankfurt and Bonn on the Monday before Black Wednesday to try to persuade German officials that sterling’s parity within the ERM was sustainable. We failed, though the UK can claim a long-term victory.
Sir Alan Budd was Chief Economic Adviser to the UK Treasury between 1991-97. Purchase Six Days in September here.