Norman Lamont, Britain’s chancellor of the exchequer from 1990 to 1993, said Greece was likely to crash out – or be pushed out – of the world’s second-largest reserve currency, while Spain and Italy should jump too if they wanted growth to revive.
“There is no way Spain or Italy will recover their competitiveness vis-a-vis Germany if they remain within the euro but outside they may well do,” Lamont said in an interview.
“Spain I think is basically solvent at historic rates of interest – ie rates around 3% to 4% – which I don’t think are going to return in the next decade,” he said.
As finance minister during Britain’s humiliating “Black Wednesday” currency crisis in 1992, Lamont was forced to take sterling out of the European Exchange Rate Mechanism (ERM) after hemorrhaging reserves to currency traders such as George Soros, who famously made over $1-billion betting against the pound.
While Lamont had appreciated the inflation-lowering benefits of effectively pegging the pound to the Deutsche Mark through the ERM grid, he was an opponent of the European grand plan for monetary union.
When the markets pounced on September 16 1992 and sterling tumbled out of the ERM, it ushered in a decade of average growth for Britain a percentage point above the EU average of 2.4% – and far better than what Germany, France, Italy or Spain achieved in that time.
Taking the leap
Europe set up the ERM in 1979 but it was another decade before Britain took the leap. John Major, as finance minister to Margaret Thatcher, took Britain into the ERM in 1990, just a month before Thatcher was ousted as leader by her own party.
But Germany and Britain were economically diverging: just as Britain needed lower interest rates, Germany was raising rates to contain the inflation sparked by policy decisions resulting from unification after the fall of the Berlin Wall,
A weaker US dollar also meant a stronger Deutsch Mark and more pressure on the pound.
“I saw the logic of the argument that by linking our currency to the Deutsche Mark, the inflation rates of England and Germany would converge … But after about a year and a half, two years, it was obvious that the tool had really outlived its usefulness,” Lamont said.
“The markets had actually delivered one the opportunity for a more flexible policy.”
Flexible but chaotic, at least on the day.
Jacking up interest rates
As sterling plunged on Black Wednesday, the Bank of England spent billions of pounds to support the currency and jacked up interest rates but it was in vain; markets could even break the Bank of England.
While Major, by now prime minister, discussed what to do at an emergency meeting in Downing Street, Britain was, in Lamont’s words in his memoirs, “bleeding to death” as traders demanded payment at the official sterling rate, above the market price they were buying the currency.
“Events go so quickly you do not have time for feelings,” Lamont (70) said over a diet coke at the Mayfair offices of Anglo-Iranian commodity trader, Balli Group, where he is a non-executive director.
“I didn’t have any emotions that day. You just do what have to do, or try to do what you have to do,” he added.
Italy had devalued the lira by 7% several days before, but was forced to leave the ERM on September 17, the day Spain devalued the peseta. The peseta, Portuguese escudo and the Irish punt were all devalued within five months of Britain’s exit and the EU was forced to raise the fluctuation margin of the ERM to 15% in 1993. Italy rejoined in 1996.
Lamont’s ambivalence about the ERM in 1992 contrasts with the belief of his European counterparts today in a single currency, conceived as a part of a political project aimed at preventing Europe’s great powers – Germany in particular – from ripping the continent to bits in another war.
“These are honourable but misguided reasons for maintaining something I think will never work very well,” Lamont said. “They profoundly believe in it, even though there is a lot of evidence that this does not make a lot of economic sense.”
So what should be done for the euro?
“It would better if it were dissolved in a planned way, but I know that won’t happen. What I expect will happen will be a contraction of it gradually. I don’t see the point of a very narrow currency union if that is what we are left with.
“I thought the euro would last, my guess was always 20 to 25 years, so by my reckoning we are half way through its life,” he said. “This crisis has come earlier than I expected.”
Lamont said he did not expect Greece to get any more money out of Germany and that if it did crash out of the euro then the International Monetary Fund would have to step in to support Athens on its new odyssey with the drachma.
Eurozone leaders would then try to save the banking systems of Portugal, Spain and perhaps Italy with a huge transfusion of liquidity.
But Lamont rejected any notion of satisfaction at the prescience of his opposition to the euro.
“I don’t get any pleasure out of it,” he said. “I don’t think there is any laughter in it. It is a very frightening situation actually.” – Reuters