After the anniversary of 9/11, the financial markets looked back on a happier event last week. It was the 11th anniversary of "Black Wednesday" - or "White Wednesday" as it soon became known - when sterling was forced out of the European Exchange Rate Mechanism (ERM).
In the equity markets, we saw a "rally of the rubbish" straight afterwards as stocks were repriced - not on the basis that they would do really well under a weaker pound, but on the basis that they were no longer going bust. In that sense, the post-war rally has been similar this year. Stocks have priced out the bust that never was, rather than priced in the boom that never will be.
That our departure from the ERM seemed a calamity - at a time when, as Norman Lamont said, nobody complained that the likes of Spain and Italy were similarly forced out - was not just about the loss of foreign currency reserves. Other countries lost theirs too. In my view it was almost certainly a function of the UK's economic Achilles heel: the housing market and its depen- dence on short-term interest rates. While the panic measure of raising rates to 15 per cent was clearly not sustainable, the shock to the British populace was considerable. For a time, many householders faced the prospect of bankruptcy.
The financing of our property market remains one of the key differences between the UK and the rest of Europe, and a switch to some form of fixed system is not only desirable in its own right but essential if the UK is ever to join the euro.
However, the latter looks more remote by the minute and we may yet find that last week's Swedish vote goes down in history as marking the high point of European integration, just as the end of the ERM marked the high point for managed exchange rates. The "yes" case up to now - that joining the euro is both essential and inevitable - is struggling and seems to reflect a growing popular resistance to the will of the political, business and bureaucratic elites. Swedish membership of the European Monetary Union (EMU) had the backing of a majority of the population in the sense it was supported by five of the eight parties in the parliament. But a free vote is a different matter. Meanwhile, the European Constitution, designed to make integration of the new members easier but subject to much criticism already, also faces the prospect of a series of referendums before it can be ratified.
As to the UK, the prospect of EMU membership has disappeared for the lifetime of this Parliament, and the Swedish technique of calling a referendum when the "time seems right" does not (now) seem likely to be emulated.
But a lower probability of joining the EMU does not reduce the importance of changing the mortgage system. Rates have to go up sooner or later, and it is very unlikely that UK households will have made much in the way of provision. So higher rates will, once again, lead to an exaggerated slowdown, while holding rates low will continue to encourage debt and fuel speculation in housing. A rock and a hard place.
Representations to the Chancellor's review of mortgage lending - by the lenders themselves - are, perhaps not surprisingly, in favour of the status quo except for the introduction of a US-style government-sponsored mortgage institution. I suspect that lobbies elsewhere may prevent this, and so would suggest an interim solution of making mortgage refinancing (at least) fixed rate. While not perfect, this has the advantage of reducing the interest-rate sensitivity of the UK household, while making the cost of moving to a fixed rate only applicable at the margin. A step in the right direction.
Mark Tinker is a director of Execution Stockbrokers. Mark.Tinker@letsxstock.comReuse content