The uncertainties generated by Bundesbank leaks over sterling's viability and the French referendum were in the Prime Minister's sights as his determined defence of a fixed exchange rate collapsed in his hands.
He said only last week that devaluation would be a 'betrayal of our future', and has long argued that it would directly cause inflation. Gordon Brown, Labour's Shadow Chancellor, said last night: 'There has been a complete failure of policy.' Paddy Ashdown, leader of the Liberal Democrats, said: 'Their economic policies are in tatters.'
That point was underlined by Number 10 recriminations, and officials' inability to say how or when the crisis would end.
One well-placed source said Mr Major would not be surprised if the Italian lira and Spanish peseta followed sterling out of the ERM, and in spite of emergency talks between senior officials in Brussels last night - with the British urging a free-float for all ERM currencies until after Sunday's French referendum - the possibility was mooted that sterling might not rejoin the mechanism for the foreseeable future.
Mr Major delivered a 'firm' protest to Helmut Kohl, the German Chancellor, over repeated suggestions by Bundesbank council members and officials that a British devaluation was likely.
The Prime Minister's office insisted that neither Mr Major nor Norman Lamont, Chancellor of the Exchequer, would resign. But with Parliament to be recalled for emergency session on the currency crisis next Thursday, few of Mr Lamont's colleagues were last night putting money - or words - on his survival.
John Smith, the Labour leader, in Germany for a meeting of the Socialist International, said after the devaluation: 'I think it represents an almost total defeat for the strategy that's been followed for a number of years, not just by the Chancellor but by the present Prime Minister.'
Mr Lamont's resignation would flow directly from a devaluation that was in direct contradiction of his repeated pledges to defend a fixed exchange rate parity, at whatever cost. Having nailed all his, and the Prime Minister's, credibility on the rate at which Mr Major took sterling into the ERM, as Chancellor, in October 1990, Mr Lamont could now be tying up the loose ends of his political future.
If Mr Lamont has gone by the time Parliament reassembles next week - which is possible if not probable - contenders for his post would include Kenneth Clarke, Home Secretary; Michael Portillo, Chief Secretary to the Treasury; Gillian Shephard, Secretary of State for Employment; and Michael Howard, Secretary of State for the Environment.
It is unlikely that Mr Major would risk the wrath of his right wing by putting Michael Heseltine, President of the Board of Trade, into the economic hot- seat. Backbench frustration was so great yesterday that it extended to the normally-loyal ranks of the 1922 Committee executive. There was even talk of the possibility of a challenge to Mr Major's leadership if the threatened 15 per cent interest rate had been maintained.
It was a measure of the political loss of control by the Prime Minister that his own officials had insisted earlier in the day - after the increase of interest rates to 12 per cent - that the existing ERM parity of DM2.95 was 'competitive' and would be defended at all costs.
Defending the 12 per cent rate yesterday morning, one Downing Street source said: 'We do not use words like crisis. We make sure we do what we promised to do, which is to stick within our ERM bands.'Reuse content