In the course of the day, however, sterling's fate became a sideshow next to the unfolding drama of the French franc. The pressure on the franc was as ferocious as last Wednesday's selling of sterling, and the markets were buzzing with rumours that the Banque de France had run through a third of its reserves to hold it up. If the franc goes the way of sterling, the humiliation for the French will be 10 times that of Britain. The franc fort has been the central plank of policy since the Mitterrand U-turn in 1983, and the rate against the mark has been unchanged for five years.
A devaluation would be justice nevertheless. Since German reunification, a revaluation of the mark against all other currencies in the system has made eminent good sense. With German demand stoked by public spending, monetary policy bore the sole burden of the fight against inflation. But without a rise in the mark (which would make import prices fall, and hence directly reduce inflation in Germany), interest rates had to be even higher than they would otherwise be. The insistence of Germany's largest trading partner on a fixed exchange rate with the mark has been largely responsible for high German (and European) interest rates.
A revaluation of the mark against the franc is thus the surest way of bringing down German interest rates, which should in turn make it easier to reduce rates throughout Europe. This arithmetic applies in Britain as well, even though sterling is no longer formally linked with the mark. Lower German interest rates will allow lower UK rates for a given level of the pound. A formal mark revaluation and lower German interest rates could have important long-term consequences: it would save the British government's face over the events of last week, and make the ERM easier to rejoin. France's distress may be Britain's opportunity.Reuse content