11/16/2023 0 Comments British pound sterlingSoros believed the rate at which the United Kingdom was brought into the Exchange Rate Mechanism was too high, inflation was too high (triple the German rate), and British interest rates were hurting their asset prices. In the months leading up to Black Wednesday, among many other currency traders, George Soros had been building a huge short position in sterling that would become immensely profitable if the currency fell below the lower band of the ERM. In the wake of the rejection of the Maastricht Treaty by the Danish electorate in a referendum in the spring of 1992, and an announcement that there would be a referendum in France as well, those ERM currencies that were trading close to the bottom of their ERM bands came under pressure from foreign exchange traders. ![]() Issues of national prestige and the commitment to a doctrine that the fixing of exchange rates within the ERM was a pathway to a single European currency inhibited the adjustment of exchange rates. The UK and Italy had additional difficulties with their double deficits, while the UK was also hurt by the rapid depreciation of the United States dollar – a currency in which many British exports were priced – that summer. įrom the beginning of the 1990s, high German interest rates, set by the Bundesbank to counteract inflationary effects related to excess expenditure on German reunification, caused significant stress across the whole of the ERM. In 1989, the UK had inflation three times the rate of Germany, higher interest rates at 15%, and much lower labour productivity than France and Germany, which indicated the UK's different economic state in comparison to other ERM countries. ![]() Hence, if the exchange rate ever neared the bottom of its permitted range, DM 2.773 (€1.4178 at the DM/Euro conversion rate), the government would be obliged to intervene. On 8 October 1990, Thatcher entered the pound into the ERM at DM 2.95 to £1. This led to Lawson's resignation as Chancellor he was replaced by former Treasury Chief Secretary John Major who, with Douglas Hurd, the then Foreign Secretary, convinced the Cabinet to sign Britain up to the ERM in October 1990, effectively guaranteeing that the UK Government would follow an economic and monetary policy preventing the exchange rate between the pound and other member currencies from fluctuating by more than 6%. Matters came to a head in a clash between Lawson and Thatcher's economic adviser Alan Walters, when Walters claimed that the Exchange Rate Mechanism was "half baked". Thus, although the UK had not joined the ERM, at Lawson's direction (and with Prime Minister Margaret Thatcher's reluctant acquiescence), from early-1987 to March 1988 the Treasury followed a semi-official policy of "shadowing" the Deutsche Mark. He justified this by pointing to the dependable strength of the Deutsche Mark and the reliably anti-inflationary management of the Mark by the Bundesbank, both of which he explained by citing the lasting impact in Germany of the disastrous hyperinflation of the inter-war Weimar Republic. His successor, Nigel Lawson, whilst not at all advocating a fixed exchange rate system, nevertheless so admired the low inflationary record of West Germany as to become, by the mid-eighties, a self-styled "exchange-rate monetarist," one viewing the Sterling-Deutschmark exchange rate as at least as reliable a guide to domestic inflation – and hence to the setting of interest rates – as any of the various M0-M3 measures beloved of those he labelled as " Simon Pure" monetarists. ![]() This was a controversial decision, as the Chancellor of the Exchequer, Geoffrey Howe, was staunchly pro-European. When the ERM was set up in 1979, the United Kingdom declined to join. Post-Brexit United Kingdom relations with the European Union. ![]()
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