Some three weeks before 'Black Wednesday', the Bundesbank hinted at a general realignment in which the mark would be revalued against the Italian lira, sterling and, possibly, the Spanish peseta. The British, French and Spanish firmly rejected such ideas.
But when US officials, in discussions between senior officials of the Group of Seven leading industrial states, learned of the potential willingness of the Bundesbank to revalue the mark, they gave tacit support. They believed it would lay the foundations of a co-ordinated reduction in German, Japanese and US interest rates, to counter the world recession and help the waning political fortunes of President Bush.
Soon afterwards, on the weekend of 4 and 5 September, EC finance ministers and central bankers met in Bath for a long- planned informal gathering. Though realignment was never discussed, it was, as one senior official put it 'always in the air'.
Several EC countries pressed Helmut Schlesinger, the Bundesbank president, on when he was going to cut rates and relieve the downward pressure on their currencies. Mr Schlesinger firmly resisted their entreaties, though he issued an anodyne statement ruling out further increases, and relations between him and Norman Lamont sank to a new low point.
The scene shifts to Frankfurt. On 14 September, the Bundesbank announced a slight, quarter-point reduction in its key interest rate in response to the announcement by Italy that it would devalue the lira by 7 per cent. What was not known then, but became embarrassingly public the next day, was that the German central bank sought a realignment that would effectively devalue the pound too.
Mr Schlesinger then gave an interview to the German newspaper Handelsblatt, a summary of which was printed on the morning of 16 September, trailing the full interview to be published the following day. In it, Mr Schlesinger said the ERM problems had not been solved and 'could have been further eased had there been a more comprehensive realignment'.
Those words, which the Bundesbank subsequently insisted were not said and were 'unauthorised', triggered the biggest post-war speculative assault on the pound.
After the humiliation, senior officials blamed the disaster on a Bundesbank whispering campaign and briefed newspaper editors about the absence of Bundesbank support on 'Black Wednesday'. Those off-the-record comments proved to be a fateful mistake.
In Washington for a meeting of the G7 the following weekend, Mr Lamont and Mr Schlesinger managed to avoid a damaging public dispute in an atmosphere compared by one official as like 'walking on eggshells'. But the Chancellor did set new conditions for Britain's re-entry into the ERM. He said German rates, held high because of the inflationary pressures of unification, would first have to come down and that the system would have to reformed, so that countries with strong currencies were as obliged to intervene to support weak ones as the countries defending their currencies.
During subsequent meetings held as part of the annual gathering of the International Monetary Fund in Washington, Theo Waigel, the German Finance Minister, angrily disputed that unification was to blame for tensions in the ERM. He indicated that economic problems in the weaker countries - such as Britain - were a more direct cause.
Mr Schlesinger then held a press conference, at which he brushed aside Mr Lamont's re-entry conditions and asserted brusquely that, next time, the UK would have to enter subject to unanimous approval by Community nations. By this time, Mr Lamont's attempts at gaining approval for ERM reforms were looking bereft of support.
He failed to make a formal request for reforms at an emergency meeting of EC finance ministers, called to consider the results of the French referendum on Maastricht. But what did emerge from that meeting was the first indication that the countries belonging to the hard inner core of the ERM - Germany, France, and the Benelux nations - had begun to consider the idea of a two-speed Europe in which they would take the fast lane to monetary union.
Though that was an alarming potential development for Britain, implying that the UK would be definitely consigned to the second-rank nations, the spotlight shifted briefly from the embattled British government to France.
After the narrow approval of the Maastricht treaty, the French franc was next to suffer massive speculative attack. In contrast to the British crisis, however, German officials made strongly supportive statements and the Bundesbank entered the currency markets with strong support for the franc. What appeared to be carefully planted rumours - that Germany and France were examining the idea of a mini currency union - then began to circulate. The tactics worked. Pressure to devalue the franc was beaten back successfully and Britain by comparison appeared even more humble.
Last Monday, after two weeks of extraordinary shifts in position, the Chancellor attended a meeting of EC finance ministers in Brussels. Not only did his request for a fundamental reform of the ERM go nowhere, but he effectively apologised to the Germans for the strident criticism of the Bundesbank in the UK press.
But it was too late. Mr Schlesinger had been deeply hurt by the attacks and sent a dipolmatic note to London with a detailed defence of the Bundesbank's actions, including the startling revelation that the German central bank had spent the bulk of DM44bn defending the pound. Leading article, page 22
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