My case against the ERM hinges on the logical argument that such pegged exchange rate systems are fundamentally destabilising and give rise to perverse monetary policies, a rollercoaster ride and, ultimately, a financial crisis with collapsing exchange rates. So far as I can see, there is no political content in this reasoning whatsoever; it is simply an application of the theory of price and market behaviour. Perhaps the absence of political content explains why many centrists and left-wingers (eg Peter Shore, Bryan Gould) have adopted the same view.
But a much more important reason for believing that the ERM is fatally flawed is that events have vindicated what has come to be called the 'Walters critique'. From 1987, when we de facto joined the ERM, Britain has been on a rollercoaster with monetary policies (interest rates) dictated by the need to preserve the mark parity. And, of course, last September was the predicted crisis for sterling and the lire, followed by last week's crisis for the French franc, Danish krona, and so on.
The degree of liberality in the ERM, compared with floating rates or indeed 15 per cent bands, is a moot point. From 1979-90, both covert and overt capital controls were reintroduced in the last months of 1992 and again in 1993. Surely an EMS that requires exchange rate controls does not qualify as a 'liberal' system.
The 'single market', as far as it has gone, has been a liberal solution, but only in so far as the Community's external trade barriers have been brought down rather than raised. The increased protection that we have seen in the current recession - particularly directed against the former Communist countries and the poor Third World - gives me pause before bestowing the
accolade of 'liberal'.
Finally, if you wish to characterise me, I object to the label 'right wing'. If anything I am an 'unreconstructed Manchester liberal' with a notably small 'l', believing in light government and unilateral free trade. But that is completely irrelevant in determining whether my critique of the ERM is justified or not.
Sir Alan Walters
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