20 September 2022

NIESR's Marsh: Six Lessons from Black Wednesday for Today’s Central Bankers

Britain’s forced departure from the exchange rate mechanism of the European Monetary System 30 years ago was a landmark in UK and European economic history. The saga of monetary misfortune that culminated on 16 September 1992 contains significant lessons for contemporary policy-makers.

The upset reinforced Euroscepticism towards the European Community (later Union) within the UK Conservatives, Britain’s dominant post-war party of government. This triggered a train of events, including the 2016 referendum that ultimately brought departure from the EU in January 2020.

Yet ‘Black Wednesday’ also ushered in a successful Bank of England-Treasury inflation-quelling regime and a period of economic stability not punctured until the 2007-08 financial crisis. The OMFIF Press published a book on the upheavals and the aftermath – Six Days in September: Black Wednesday, Brexit and the Making of Europe – to mark the 25^th anniversary of the crisis in September 2017, available for £9.99 on the OMFIF website.

The reverberations extend to today’s fluctuating politics. Queen Elizabeth’s death and King Charles’ accession after his mother’s 70-year reign come at a time when Britain has had four (Conservative) prime ministers and six chancellors in six years since 2016 – the most volatile period since the 1920s. There are echoes with current oscillating financial markets. The ERM laid the groundwork for economic and monetary union in Europe, implemented in 1999. But the strains 30 years ago illustrated the perils of EMU ‘fragmentation’ which – despite near-continuous crisis-fighting since 2010 – have still not been banished.

A month after the 1992 upset, Helmut Schlesinger, president of the German Bundesbank, whose injudicious (though partly justified) remarks in a newspaper interview on 15 September provoked sterling’s collapse, met Elizabeth on an official visit to Germany. She asked him ‘whether speculators could really be so strong?’ Schlesinger replied, ‘Yes madam, in a system of fixed exchange rates with high differentials in the rate of inflation, they can.’ Schlesinger, who turned 98 on 4 September, is no longer active in public life. Behind the scenes he has been playing a discreet subsidiary role stiffening the sinews of today’s Bundesbank against negative interest rates (now abandoned) at the European Central Bank.

Prime Minister Liz Truss, in office for just 10 days, faces extensive challenges with loyal, largely untried ministers. Given the size of the UK’s budget and current account deficits and uncertainties over Truss’s economic and energy policies, there is a risk of major pressure on sterling that could disrupt her government. Here are six lessons from 30 years ago that she and other policy-makers should be heeding:....

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