David Cameron witnessed first-hand Britain’s own European currency debacle with 1992's 'Black Wednesday'. Two decades on, he is back in the thick of it with the eurozone crisis
Twenty years ago this summer, I was standing outside the Treasury building with dozens of other journalists to hear the chancellor, Norman Lamont, read the last rites over Britain’s ill-fated attempt to fix its exchange rate to the Deutsche Mark. The crisis had been developing for weeks because the markets knew the pound was over-valued inside the Exchange Rate Mechanism.
On September 16, 1992, as interest rates climbed to 15%, Lamont withdrew the pound from the ERM. There was another witness to the chancellor’s statement that fateful evening – a fresh-faced Tory party researcher who was acting as Lamont’s bag carrier while learning his way around Whitehall and into politics: David Cameron.
He experienced first-hand the dramatic days leading up to Black Wednesday. He saw the desperate efforts to stave off the inevitable – how Lamont pleaded with the German central bank governor to cut interest rates to relieve the pressure on sterling. But the Bundesbank would not yield and the government’s economic policy was blown apart. Yet the opportunity it afforded to devalue the pound helped pull the country out of recession.
It heralded a period of growth that lasted until the credit crunch in 2008.
So, what lessons did Cameron draw from that experience? After all, the ERM debacle was a dress rehearsal for the much bigger crisis in the eurozone. The rational solution to the pain being inflicted on the citizens of Greece, Ireland, Italy, Spain and Portugal is for these countries to get out of the euro.
True, the political and emotional ties that bind them into it are stronger than those that attached the UK to the ERM; and withdrawing from a currency union is much more disruptive than leaving a pegged exchange rate system. But the issues are the same.
If the indebted eurozone countries ever want to grow again they need to devalue and they cannot do that while they use the single currency. Just like Britain in 1992, they are at the mercy of German decision-making: the Bundesbank has simply been replaced by the European Central Bank.
Despite these parallels, Cameron appears anxious to keep the eurozone intact. The government’s official policy is that it is not in the UK’s national interest for the euro to collapse. Chancellor George Osborne has even suggested that the rest of the EU should form a single political and fiscal area if they want to have a single currency. You can’t have one without the other, a point made long ago by both Margaret Thatcher and Ted Heath.
It is hard to see how a united states of Europe on our doorstep would be good for the UK. But Osborne sees this from an economic perspective. The alternative – a collapse of the euro – would have a massive impact on EU trade and bank balances.
Many Tories have drawn the opposite conclusion – that the central flaw at the heart of the European project has been exposed. It has tried to force disparate political and economic entities into a relationship they cannot sustain. Here in Britain, the turmoil is fuelling record levels of euro-scepticism and boosting support for the UK Independence Party at the expense of the Tories. There is now a widespread expectation that Cameron will try to spike Ukip’s guns by promising a referendum on EU membership in the Conservative manifesto for the next election.
In the meantime, all the calculations for paying down the deficit and restoring the public finances to some semblance of good order have been knocked for six. Ironically, if there was one issue that Cameron had vowed to avoid when he took over the party leadership in 2005 it was Europe. The experience of 1992 and the internal Tory battles over Maastricht had left deep wounds that he was anxious not to reopen. Now he has no choice.
Philip Johnston is assistant editor of The Daily Telegraph
