But both politicians stopped short of calling for the chancellor's resignation.
Britain's decision to join the ERM in October 1990 represented a major shift in the direction of the government and has become a cornerstone of the country's European policy. But Conservative MP for Stone William Cash, said the policies of the government and the chancellor should now be reconsidered. "I think that the position of Norman Lamont at the moment is extremely precarious... We are in a state of political shambles," he said.
(Source: http://news.bbc.co.uk)
A. Provide synonyms used in the text for the following words and expression:
a) to support (the pound)
b) to buy all or as much as possible of something
c) mess
d) tumultuous, causing unrest or disturbance
e) to be unwilling to do something because it may involve a risk, but to nearly do it
f) insecure
g) the most important part of something that the rest depends on.
Text 4. Black Wednesday gets a whitewash
13 February 2005
The atmosphere is crackling with the sound of history being rewritten. Hardly a week goes by without some columnist or other telling us about the wonders of Thatcherism, and, not so long ago, my old friend Sir Alan Budd delivered a lecture in which he argued that our membership of the European Exchange Rate mechanism, including the timing of entry and exit, was a success after all.
Sir Alan was a Treasury official at the time; he did not appear so sanguine in 1992. And the release last week of Treasury papers relating to Black Wednesday has reminded us just how dark those days were, and how the Prime Minister John Major, his Chancellor Norman Lamont and the Treasury were seething at what they regarded as the Bundesbank's treachery in not doing enough to help the pound, and, indeed, allegedly sabotaging it.
The post hoc justification for the 1990−92 period of ERM membership is that it enabled the UK to get inflation out of the system and prepare the way for the longest period of 'low inflationary growth' since 1588, when, as older readers will recall, we saw off the Spanish armada.
Inflation was wrung out of the system by a prolonged application of very high interest rates (mortgage rates averaged 11.39% in 1991, the only full calendar year of ERM membership). As one of the released Treasury papers concedes: 'Looking at our period of ERM membership in retrospect, we are most conscious of the extent to which it required UK monetary policy to be tighter than warranted by domestic conditions.' The Treasury had failed to take into account the impact of handing decisions on British interest rates to the Bundesbank. Having envied low German inflation and having decided 'if you can't beat them, join them', the Treasury threw in its lot with the Bundesbank at just the time when German unification was producing an inflationary boom.
Years later the consensus was that we had joined at the wrong time, at the wrong (exchange) rate and for the wrong reasons. This was not the consensus at the time. Most commentators and institutions were in favour, indeed many had been pushing the government to do the deed for ages.
At the time of entry I wrote in this column: 'I cannot believe that the exchange rate will hold for more than two years and advise the Labour Party and Thatcher's potential successors to be wary of making commitments that they will be unlikely to be able to honour.' Some, including Mrs Thatcher, wanted a higher rate; and, as the Treasury papers remind us, the whole tone of the approach was to administer discipline on a British economy whose inflationary proclivities Thatcher and her colleagues had failed to assuage.
Or, rather, they had assuaged them once and then allowed everything to get out of hand again. Having inherited an inflation rate of 10% in 1979, which they had intended to halve, they managed to preside over a doubling of inflation. With the assistance of the biggest recession since the Second World War (in 1980−81) the Thatcher government managed to bring inflation down to 3.5% in 1983 (at the cost of misery to millions). It then proceeded to fall for its own rhetoric about 'economic miracles' and allowed inflation to rise above 10% by 1990. The policy response, intensified by the dictates of the ERM, brought us the second worst recession since the war and, again, misery to millions.
Here we come to another item of rewritten history. Last week the airwaves were replete with references to a rise in interest rates to 15% on Black Wednesday. It never happened. What happened was that rates were first raised from an already crippling 10% to 12% (in a vain effort to prop up the pound) and later it was announced that they would rise to 15% the next day. But that same evening, the game was up and the towel thrown in. It was too much and everybody knew it. It would have taken the already damaged economy straight back into recession, even depression.
The absurd thing was that some officials knew the game was up at 8.10 am that day. But at the insistence of the Prime Minister (and other officials) they honoured the rules of the ERM by intervening to support the pound when they should simply have said enough was enough. Incidentally, for all the loose talk surrounding the 'cost' of Black Wednesday, the Treasury papers broadly confirm what we already knew. But it was even worse than that.
I recall asking an official at the time whether it was true that we had spent most of the reserves. 'Most?' he replied, with the clear implication that we had lost the lot. In fact the Bank of England, on instructions from on high, sold $28 billion of reserves on Black Wednesday alone, making the loss in August and September nearly $40bn. We not only lost the lot, we borrowed a further $16bn. Although the loss of all the reserves (and net borrowing) qualifies as Wildean carelessness, there was also the little matter of selling the reserves cheap and buying them back more expensively after sterling's decline.
The real cost of the intervention (compared with what would probably have happened if the Bank had not intervened) is put by the Treasury at £3.3bn − which is not far from estimates that have been around for years. This was disaster on a grand scale.
So the official line now is that ERM membership was a great triumph, eliminated inflation from the system, and led to a British economic miracle.
Some people say it was not Black Wednesday but White Wednesday, because of what eventually followed. The truth is that it was Black Wednesday, but followed by a series of White ones.
But whether all is for the best in the best of all possible worlds, with inflation targets and an independent central bank, is open to question. The Bank was rather late to wake up to the asset price boom, and there is still a lot of nervousness around, for all the recent perceived economic successes.
An important consequence of Black Wednesday is that it transformed Gordon Brown's view of the ERM and the prospect of joining the single currency, on which he had been very keen. Britain has the best of both worlds in the opportunity to remain in the European Union by signing up to the constitutional treaty without any obligation to join the deflation-orientated eurozone.
Oh, and by the way: perhaps we have the Germans to thank after all. I understand that it was because Thatcher opposed unification that Chancellor Kohl was not prepared to help the pound on or before Black Wednesday.
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