16 September this year marked the 30th anniversary of the Pound Sterling’s ejection from the European Monetary System (EMS). Described as a “disastrous day” by then Prime Minister John Major, he never recovered politically from that momentous day. The ex-Chancellor of the Exchequer was convinced that the indexation to the Deutsche Mark, which underlay the EMS, would at least indirectly benefit an unstable British economy conducive to inflationary outbreaks. But he did not manage to persuade Margaret Thatcher seven years before the unfaithful day. The Pound would gain credibility and the monetary policy of the Bundesbank would reinvigorate a chronically ill Great Britain.
The hopeful prospects were dashed when the very heavy burden of Germany’s reunification began to weigh in and the country was left with no choice but to raise its interest rates. This had a domino effect and quickly rubbed off on Great Britain and the country was left with no choice but also to raise its interest rates so that the flight of capital was kept to the minimum. Bad timing was all that could be said for Great Britain’s unfortunate economic plight as even before the raise, its real estate market had been underperforming and that only made matters worst for the country.
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Under the previous exchange rate system, the Pound Sterling was pegged to the Deutsche Mark and the latter’s appreciation made it even more difficult for the British economy because its currency had entered the EMS at an incomprehensibly high level and its high levels was literally putting a chokehold on the British economy.
An analysis carried out by George Soros and a few other hedge funds managers bet big on the fall of the Pound Sterling as a common understanding was reached that the Bank of England would not be able to defend its interest levels for long. This is now commonly known as “Black Wednesday” or the 1992 Sterling Crisis and it saw the central bank raising interest rates from 10 to 12 per cent, which amounted to hiking the variable mortgages by 20 per cent when the real estate market was already in liquidation.
Speculation against the Pound Sterling intensified and that fuelled greater capital flight. Amidst this uncertainty, the Bank of England surprised everyone by announcing a further increase in the interest rates to 15 per cent. For mortgage holders, this traumatic surge caused their debt to increase by no less than 50 per cent in less than 24 hours.
Led by Soros, everyone then began to sell the British currency to any takers — only the Bank of England was interested in buying it. After the markets closed on 16 September 1992, ex-Chancellor of the Exchequer Norman Lamont was forced to announce the cancellation of this second rate hike and simultaneously told the press that Great Britain would exit from the EMS. Interest rates were cut from 15 per cent to 9 per cent the next morning.
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This desperate defence of the Pound Sterling cost billions, but more importantly, its abandonment of the EMS was the infallible harbinger of Great Britain’s refusal to adopt the Euro. The country was indeed from then in an ambivalent posture vis-à-vis the European Union. That relationship continued until Brexit came in 2016 and postured a greater push for a single currency in the region.
Elsewhere in France, the events of Black Wednesday were also a game-change as it came just four days before the referendum on the Maastricht Treaty. According to almost all the opinion polls, the country’s population was not in favour but it managed to pull through against all odds and be adopted by France. This kept the European project alive and many said that it was because of the British’s plight that changed the French people’s minds. When asked a few years later about his decision to leave the EMS and how it has changed the situation in Great Britain and throughout Europe, Norman Lamont replied in French in a very sympathetic way, “Je ne Regrette rien” (I do not regret anything).
For more information about Michel Santi, visit his website: michelsanti.fr/en
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