Jeremy Warner's Outlook: Nothing to regret about Britain's ERM debacle

So Lord Lamont, are you still singing in the bath? The song the former Chancellor of the Exchequer is meant to have bellowed out from the soap suds shortly after standing po-faced on the steps of the Treasury to swear that he would never devalue the pound, was Edith Piaf's "Non, je ne regrette rien". He was singing it again yesterday in response to the release under the so called Freedom of Information Act of a number of Treasury documents pertaining to Britain's ignominious exit from the European exchange rate mechanism (ERM) more than 10 years ago.

Predictably, these turned out to be a complete damp squib, telling us almost nothing we didn't already know about this defining moment in British economic history. There is infinitely more enlightenment and colour to be had on these events in the various memoirs and accounts that have since been written about them by involved parties since. Indeed, the most revealing document was one that was not meant to be released at all, in which the Treasury expresses concern that if it published documents on Black Wednesday it might be forced into disclosure of documents relating to current economic planning.

As Lord Lamont pointed out yesterday in a pre-prepared press release, even the estimate of the costs of the ERM débâcle to Britain's reserves - which turns out to be a good deal less than the made-up numbers that have been appearing in the press in recent days - is largely a red herring. Foreign exchange intervention is not a cost, but a swapping of one currency for another.

Nor are foreign exchange reserves money that could have been spent on anything else, such as schools on hospitals. As their name implies, they are a sum of money specifically held to underpin the value in the currency. Given that the pound has since recovered to above its ERM level, there would have been no notional loss at all but for the fact that some plonker later decided to sell some of the sterling so expensively acquired during the crisis while the exchange rate was still comparatively low.

Still, for students of political and economic history, the documents are not entirely without interest. A memo from Sir Nigel Wicks, then a senior Treasury mandarin, reveals that Margaret Thatcher was only persuaded to accept entry as a quid pro quo for a 1 per cent cut in interest rates, a cut that many in the Treasury "were intensely unhappy to see implemented before entry". How wrong can you be? Before long, the demands of German reunification had driven interest rates within the ERM to punishing levels, thereby inducing a recession in the UK.

There is also a reminder in the same memo of just how naive and insular the Government and the Treasury had been in deciding to enter in the first place. Membership of the ERM, the memo opines, required total subordination of economic management to the maintenance of Britain's position in the bands, particularly through vigorous and early use of interest rates. That was something ministers never really accepted, in the same way as other members, most notably France, more obviously did.

The Treasury meanwhile reveals itself to be a dab hand at forecasting. Right through the ERM experience, it continued to hold the view that economic recovery was just round the corner. And pigs might have flown.

Returning to poor old Lamont, of course he wasn't particularly keen on joining the ERM in the first place. Rather he inherited the policy from his predecessor John Major, but it was luckless Norman who took the bullet when it all went wrong. One effect of the débâcle was to destroy the Tory Party's reputation for economic competence, a consequence it still suffers from to this day.

We shall forget the fact that the present Chancellor, Gordon Brown, was fully behind the policy at the time, interestingly because he thought the ERM applied socialist planning to the economy rather than relying on market forces. Indeed, yesterday's papers strongly suggest that but for Mr Brown's opposition to devaluation, Britain might have left at an earlier date.

The political kerfuffle that has surrounded the release of these documents is a good sight more interesting than the documents themselves. That the events of more than 10 years ago could be seen as potentially more explosive than the fact that the present Government led us into an illegal Middle Eastern war and that its two most senior figures are barely on speaking terms shows just how far our politics have been subjugated to the manipulation of spin. Anyone would think there's an election coming.

The underlying reality, which to this day is not understood by many, is that British membership of the ERM was part of a wholly necessary and ultimately beneficial evolution of British macro-economic policy that helped exorcise inflation from the UK economy once and for all. The experience was painful, as indeed was our eventual, humiliating exit, but it was also cathartic.

It taught Britain how to control inflation, and the economic benefits that can stem from it. It became much more feasible to introduce an inflation target once the ERM had done the donkey work of bringing inflation down. It is a curiosity of today's Tory party that it still looks back on these events as a shaming political and economic catastrophe. It was actually nothing of the sort, though it did help to build the successful economy that today enables Labour to be so far ahead in the polls. Lord Lamont was away on business in Bermuda yesterday. Sounds like the place to be.

Firing Carly Fiorina

Is it 'cos I's female? Well, yes, the board of Hewlett-Packard might have said to Carly Fiorina. We would have sacked you ages ago but for the fact that you are a woman, the first one, moreover, to lead a Dow Jones Industrial Average company. Just as Marjorie Scardino, chief executive of Pearson, is sometimes referred to as the first lady of the FTSE 100, Mr Fiorina was the first lady of the Dow and that was part of her celebrity and fascination.

Yet beneath the voyeuristic profiles lies a story of failure and bad management. Hewlett-Packard has been a disaster zone for ages now. In personal computers, it has been out-competed by Dell, its share of the server market is plummeting and its core business in printers is going nowhere. On top of all this came the disastrous merger with Compaq, which with the benefit of hindsight looks like more of an attempt to distract from wider problems than forge a new computing powerhouse.

The board cited concerns about execution in firing Ms Fiorina yesterday and I can't say I'm surprised. The merger with Compaq, opposed by many shareholders at the time, has been appallingly handled. Strategically, Hewlett Packard seems equally at sea. Yet all is not lost for those who saw Ms Fiorina's elevation to the senior echelons of corporate America as a symbolic breakthrough for women in the boardroom. Her main executioner, Patricia Dunn, is a woman too. The world has indeed changed.

Euronext ahead

We've got the now almost certain Competition Commission investigation still to come, but after yesterday's patch of proposals from Euronext, the Paris-based exchange looks to be ahead on points of its rival, Deutsche Börse in the battle for the London Stock Exchange. Bar domiciling in the UK, Euronext has come as far as it is possible to in answering the Financial Services Authority's concerns over regulation and corporate governance by offering to set up a unified board. By having a dual primary listing in London, Euronext also makes itself subject to UK listing rules, including the combined code. Deutsche Börse cannot do this because German law requires it to have a supervisory board. There's a long way to go yet, and Euronext has yet to name a price, but on the regulatory front its chairman, Jean-François Theodore, has already established a clear lead.

jeremy.warner@independent.co.uk

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