Monday will be the 32nd anniversary of Black Wednesday. For younger readers, and older ones with ailing memories, Black Wednesday, on 16 September 1992, was the day the Tories lost their reputation for economic competence.
True, they had lost it once before, when the Heath government of 1970-74 fell victim to the inflationary impact of the 1973-74 oil crisis, their economic boom that got out of control, and what became known as the disaster of the three-day week.
But it did not take long for the Wilson/Callaghan Labour governments of 1974-79 to fall foul in turn of the same accusation. Public borrowing started to spiral and Labour had to go “cap in hand” to be rescued by a loan from the International Monetary Fund.
In came the Thatcher government of 1979-90, followed by the Major government of 1990-97. I have written extensively about what I regard as the mistakes of the Thatcher period, but it was the enforced exit of the pound from the European Exchange Rate Mechanism (ERM) on Black Wednesday that was universally agreed to have put an end to the Conservatives’ reputation for economic competence.
Those were pre-euro days, and the principal motive of Lawson and Major was to tie the pound’s fortunes to the Deutschmark, postwar Germany having had a well-deserved reputation for controlling inflation.
Unfortunately, our entry could hardly have been worse timed. German inflation took off as a result of the enormous cost of absorbing the east German economy under the process of reunification – itself a welcome and historic event.
The fact of the matter was that the pound had been attached to the D-mark at the wrong time, at the wrong exchange rate, and for the wrong reasons. The Lawson boom of 1988-89 had led to the second worst recession since the second world war, but the high interest rates imposed by the Bundesbank, the German central bank, to combat German inflation were holding back other members of the ERM.
At a meeting of European finance ministers and central bank governors in Bath, Norman Lamont, who had succeeded Major as chancellor, tried to bully the Germans into reducing interest rates and therefore the pressure on the pound. Dr Helmut Schlesinger, the president of the Bundesbank, took strong exception to this. The German view was that the pound was overvalued, and that it was up to the British to deal with that problem.
To cut a long story short – and the markets were going short of the pound – the belief that the UK could not maintain an overvalued currency became overwhelming, and speculation forced the pound out of the ERM. This eased our economy’s competitive position, and economic recovery became sustainable. The following Sunday I suggested in my column that Schlesinger should be given a knighthood for having helped the British economy to escape from recession.
Well, I can report that, although he was never awarded that honour, my friend Helmut Schlesinger is in fine fettle, and recently celebrated his 100th birthday.
Within months, Lamont said he had been “singing in the bath” as a result of the easing of economic conditions. (He had certainly not being singing in Bath after his humiliating experience.) But Major had not been amused by the way Lamont had handled the Bath meeting, and replaced him with Kenneth Clarke, who handed over an economy in reasonable shape to Gordon Brown in 1997.
There are swings and roundabouts in economic policy, and it was Labour’s turn again to lose its reputation in 2010, when the Conservatives launched a brilliant, and deeply cynical, campaign to accuse Labour and its supposed overspending for having caused the 2007-09 financial crisis, when it was – as the then top Treasury official at the time, Sir Nicholas (now Lord) Macpherson, pointed out – “a banking crisis, pure and simple”.
The result of that successful propaganda is that the current chancellor, my (almost) new friend Rachel Reeves, is obsessed by the perceived need to win back a reputation for economic competence. Unfortunately, so far she has been going about it the wrong way: penalising the poor while threatening tax increases for rich investors whom she is supposed to be wooing for investment in the UK.
We await her first budget on 30 October. What she should be doing is taking a long-term view of borrowing for investment that should benefit future generations, and a long-, medium- and short-term view that we should apply to re-enter the European customs union and single market as soon as possible, thereby fulfilling the promise in the Labour manifesto (do older readers remember that?) to reduce barriers to trade – of which the most glaringly obvious is Brexit.
