This week saw the tenth anniversary of Britain’s ignominious and ruinously expensive exit from Europe’s exchange-rate mechanism (ERM). On Black Wednesday (September 16 1992), then Prime Minister John Major spent much of the day in psychological denial, continuing to honour his diary appointments. Meanwhile his increasingly desperate Chancellor, Norman Lamont, ordered the Bank of England first to raise interest rates by two points to 12 per cent and then by a further three points to 15 per cent.
Lamont was fighting a losing battle against international currency speculators, who had ganged up on the pound and were selling hard, forcing the pound through the DM2.78 floor of the band in which it was meant to maintain a fixed valuation against other European currencies. After the markets closed that night, Lamont gave up and the UK left the ERM. Interest rates progressively returned to real life.
Many people can remember what they were doing on that fateful day. I bet international financier George Soros can. While the UK frittered away its cash reserves in a futile attempt to shore up the pound, Soros made several fortunes at the country’s expense by speculating in the currency markets. Meanwhile, it was my mother’s birthday and I opened a good bottle of claret in London’s Smithfield meat market. To each his own market, I suppose.
The ERM debacle is cited by campaigners against the euro as an example of the apparent folly of attempting to peg the pound to European currencies. These europhobes point out that during the two years the UK was in the ERM, 100,000 businesses went bankrupt, some 1.75 million households were plunged into negative equity and unemployment doubled.
By contrast, they point out that leaving the ERM triggered the longest continuous period of growth since the 19th century, while those countries that joined the euro have suffered sub-par growth and persistent mass unemployment.
So wrote Janet Bush, described as the “No” campaign director in The Times on Monday’s anniversary (celebrated as “White Wednesday” by the UK’s currency isolationists).
As a European federalist, I find this hard to take, not least because we were suffering from an intense economic recession during our membership of the ERM, with both inflation and interest rates periodically in the teens. That would seem to have had a greater bearing on the economic crisis and the recovery from it that Bush describes, than any effect of the ERM.
Indeed, unlike the euro, the ERM offered a system of target exchange rates, in which individual currencies continued to exist and the foreign exchange markets remained open (much to the advantage of Soros and his friends).
Furthermore, as the pro-euro economist Robin Marris points out, scrapping the pound would actually do away with exchange-rate crises like that of 1992. By contrast, if the UK remains outside the euro, the pound will be squeezed between what he calls the “tectonic plates” of the dollar and the euro, and will potentially become very volatile.
Staying out of the euro offers the true echoes of Black Wednesday, rather than any comparison between the euro and the ERM. But there are further reasons for celebrating the prospect of a single European currency, and they are to do with business trading rather than macroeconomics.
UK retailers, if they are to expand competitively in Europe, need to remain competitive with their European rivals. Take just one sector – electrical retailing – as a paradigm.
Bitter UK rivals Dixons and Kingfisher, which owns Comet, now face a European future in which they hold each other’s destinies in their hands. Kingfisher is in the process of transforming itself into solely a DIY retailer and needs to sell its French electrical retailer Darty, and close its loss-making German operations.
Were Dixons to step in, with a view to becoming a pre-eminent European electrical retailer, it would need to find a buyer for Comet in the UK for competition reasons. But the purchase of Kingfisher’s European interests would clearly provide the earnings growth that Dixons needs in flat markets.
Here we have a circumstance in which two competitive UK retailers need to talk about a European solution that suits them both. It is inconceivable that any deal struck between the two should be further complicated and made more expensive by considerations of conversion of asset-values into local currencies.
Clearly, both Dixons and Kingfisher are of sufficient international size to be able to strike a deal in a choice of currencies. But it remains a complicating factor that any valuation of Darty, either in terms of a flotation on the Paris Bourse or in relation to a trade sale to Dixons, needs to be converted to sterling for those British shareholders that are still stuck with the currency.
Such shareholders effectively have to deal in two discrete markets – the equities of Dixons and Kingfisher, and the currency markets of the UK and the euro-zone. There may be arbitrage positions from which to make a turn, but the bulk of investors would prefer transparency and simplicity.
There is something particularly pointless about having developed single retail trading markets across Europe – with a common currency – and then potentially paralysing it with a parallel UK market in which investors have to speculate in currencies too.
George Pitcher is a partner at communications management consultancy Luther Pendragon