If the pound, as the Bank of England believed at the time, was only slightly overvalued prior to its ejection from the ERM, it is now clearly somewhat undervalued. Given the grim prospects for growth in the main Continental markets this year, this is strategically the right place for our currency to be.
Conventional wisdom on the foreign exchanges would hold that the main event this year will be a further revaluation of the dollar and a devaluation of the German mark. Sterling is seen to be on the sidelines - not really an issue.
But, without quarrelling with the main proposition that the dollar will climb against the mark, it is worth exploring the possibility that any dollar revaluation might pull the pound up, too. It is quite possible that by the end of this year sterling will be beginning to look uncomfortably strong.
The argument goes like this. The UK will experience strong growth this year. The more bullish projections put this at around 3 per cent - for example, Tim Congdon's Lombard Street Research argues that it will be possible to achieve this rate of overall growth even if consumption grows by only 2 per cent, as business investment, construction and housebuilding are all picking up.
In contrast, there is every possibility that Germany will experience a double-dip recession and that this will drag down the whole of Continental Europe. As it happens, just such a pessimistic outlook was sketched yesterday by the Berlin-based DIW think-tank, which predicted that the German economy would contract by a further half per cent this year. This contrasts with an OECD forecast of 0.4 per cent growth and a government forecast of 1.5 per cent.
The prospect of continued solid growth in the UK will mean that the trough in British interest rates will be reached around the third quarter, with base rates at perhaps 4.5 per cent. After that, while rates will not immediately soar, the direction will be clearly upwards.
In Germany, however, on all previous form the Bundesbank will steadily and slowly push rates down. Because the decline will be slow, come the end of this year there will still be the prospect of another year or 18 months of falling rates. In other words, the trough in German rates will not come until 1996. The mark will remain weak at least through 1994, probably until well into 1995.
Meanwhile, there will be another two years of 3 per cent growth in the US. At some stage this year the pressure for higher money market rates will lead the Federal Reserve to tighten - maybe starting quite soon - which will underpin the rise of the dollar. Currencies never move in straight lines. Suppose there is a sudden spurt of the dollar about the middle of this year, will the pound move with it?
The mainstream view of the markets is that it will not, that we could easily see a dollar-pound rate of dollars 1.35, but without much change in the sterling-DM rate.
The minority view would be that the markets would look at British economic growth, falling unemployment, an insignificant current account deficit and policies clearly in place to correct the fiscal position, and they would decide to pull the pound up alongside the dollar. On this scenario the dollar rate would stay around its present dollars 1.50, but we might find the pound climbing towards DM2.80. Sterling's weighted index would be around 85-86.
All this is possible without assuming any significant oil price rise. Were that to recover, even to the high teens, a stronger pound would become almost inevitable.
How would the British authorities react to this? My assessment is that a pound in the mid-80s on the index would be acceptable. It would preserve just enough of a competitive edge and would naturally exert a most helpful downward pressure on inflation.
But the mid-80s would be seen as the top of the acceptable range, and before the pound got there the authorities would have started to worry about a too-strong pound and adjust their interest-rate policy accordingly.
The dilemma would not become evident until the autumn. But one could see a situation around the next budget in November when, for purely domestic reasons, the Bank and the Treasury might be wanting to hold or even increase short-term rates, yet for international reasons - such as the strengthening pound - they would be looking to cut them.
We will see. This all seems a long way in the future. But it is worth thinking about the dilemma that a too-strong pound might present, for this is a real possibility during the expansion phase of the UK economy.
It is part of the wider picture of British medium-term economic prospects - that for the next two years we will appear a very successful economy by European standards. We will not, however, necessarily be as strong as we look unless we use the time to make further structural changes to the economy and have appropriate fiscal and monetary policies.
The reaction of the authorities to a stronger sterling will therefore be one of the clues to the quality of future economic management. Allowing some rise would certainly be wiser than cutting interest rates by too much and therefore risking another boom-bust cycle.
It ought to be almost unthinkable that the authorities could make the same mistake again. But maybe it isn't.