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| Brexit isn’t a new Black Wednesday. It’s far darker than that | Brexit isn’t a new Black Wednesday. It’s far darker than that |
| (10 days later) | |
| This is quite an anniversary year for great British economic disasters. Last weekend saw the 25th anniversary of the ignominious exit of the pound from the European exchange rate mechanism – “the first Brexit”, and, I still hope, the only one. | This is quite an anniversary year for great British economic disasters. Last weekend saw the 25th anniversary of the ignominious exit of the pound from the European exchange rate mechanism – “the first Brexit”, and, I still hope, the only one. |
| Then this November will see the 50th anniversary of the dramatic 14% devaluation of the pound – an episode from which the Labour government of Harold Wilson never quite recovered, not least because Wilson made the mistake of proclaiming that “the pound in your pocket has not been devalued” – based on a brief by Treasury officials which was aimed at explaining that, from the point of view of the pocket or purse, it was only the price of imports that were going up, and spending on imports was only a small fraction of total household spending. | Then this November will see the 50th anniversary of the dramatic 14% devaluation of the pound – an episode from which the Labour government of Harold Wilson never quite recovered, not least because Wilson made the mistake of proclaiming that “the pound in your pocket has not been devalued” – based on a brief by Treasury officials which was aimed at explaining that, from the point of view of the pocket or purse, it was only the price of imports that were going up, and spending on imports was only a small fraction of total household spending. |
| At least, it was in those days. As even people who voted Leave are beginning to realise, the recent referendum-induced devaluation is having a very noticeable impact on the prices of the vast number of imported goods and food items that we now take for granted. | At least, it was in those days. As even people who voted Leave are beginning to realise, the recent referendum-induced devaluation is having a very noticeable impact on the prices of the vast number of imported goods and food items that we now take for granted. |
| Yet – unlike, it seems, the recent devaluation – the 1967 one, thought disastrous for the reputation of the government, was a success from the point of view of (eventually) correcting the trade deficit. Unfortunately for Labour, however, some freak trade figures published on the eve of the 1970 general election enabled the tabloid press to proclaim “Britain Back in the Red”. This was a brief phenomenon, but it contributed to the electoral damage Wilson suffered. | Yet – unlike, it seems, the recent devaluation – the 1967 one, thought disastrous for the reputation of the government, was a success from the point of view of (eventually) correcting the trade deficit. Unfortunately for Labour, however, some freak trade figures published on the eve of the 1970 general election enabled the tabloid press to proclaim “Britain Back in the Red”. This was a brief phenomenon, but it contributed to the electoral damage Wilson suffered. |
| Today, the Organisation for Economic Cooperation and Development and the Bank of England still point to a dismal UK trading performance, and the OECD’s post-referendum forecasts show the economy being outpaced by our continental friends, with growth a miserable 1.1% (fourth quarter, 2016 to 2017) and a forecast of 0.9% next year. How’s that for a Brexit boost to the economy? | Today, the Organisation for Economic Cooperation and Development and the Bank of England still point to a dismal UK trading performance, and the OECD’s post-referendum forecasts show the economy being outpaced by our continental friends, with growth a miserable 1.1% (fourth quarter, 2016 to 2017) and a forecast of 0.9% next year. How’s that for a Brexit boost to the economy? |
| Now, the recovery in the export/import relationship in the late 1960s took time. We talk about the “J curve” to illustrate how things got worse before they got better: first higher import prices, then the impact of price changes on the volume of exports (a boost) and imports (a discouragement). | Now, the recovery in the export/import relationship in the late 1960s took time. We talk about the “J curve” to illustrate how things got worse before they got better: first higher import prices, then the impact of price changes on the volume of exports (a boost) and imports (a discouragement). |
| However, one of the problems 50 years later is that industrial decline has left British industry smaller, as a proportion of gross domestic product, and it is an open question whether there will be such marked J-curve effects as before. Ah, I hear the Brexiters who brought us this devaluation cry, what about our strength in financial services? | However, one of the problems 50 years later is that industrial decline has left British industry smaller, as a proportion of gross domestic product, and it is an open question whether there will be such marked J-curve effects as before. Ah, I hear the Brexiters who brought us this devaluation cry, what about our strength in financial services? |
| Here we come to the nub of the crisis, induced by our so-called leaders’ lame acceptance of a referendum result so close that Nigel Farage would have demanded another vote if it had gone the other way. | Here we come to the nub of the crisis, induced by our so-called leaders’ lame acceptance of a referendum result so close that Nigel Farage would have demanded another vote if it had gone the other way. |
| While so much of the publicity seems to be devoted to the cost of the “exit bill”, the real cost lies with all the uncertainty that the prospect of Brexit has provoked: vital economic actors are leaving town and country; investment and trade are suffering; and a divided, second-rate government, which is making a false show of unity, continues to live in a fantasy world where we can enjoy all the benefits of the largest trading group in the world and none of the responsibilities. | While so much of the publicity seems to be devoted to the cost of the “exit bill”, the real cost lies with all the uncertainty that the prospect of Brexit has provoked: vital economic actors are leaving town and country; investment and trade are suffering; and a divided, second-rate government, which is making a false show of unity, continues to live in a fantasy world where we can enjoy all the benefits of the largest trading group in the world and none of the responsibilities. |
| Which brings me back to Black Wednesday. In a new book, my co-authors and I argue that this “first Brexit”, in 1992, led, via a long fuse, to the referendum and its explosive result. Leaving the exchange rate mechanisim emboldened the Eurosceptics in the Conservative party to perfect a guerrilla campaign against our membership of the European Union, which eventually brought us to this juncture. All the while, by the way, Britain was having almost the best of both European worlds, enjoying the benefits while negotiating numerous opt-outs from what did not appeal. | Which brings me back to Black Wednesday. In a new book, my co-authors and I argue that this “first Brexit”, in 1992, led, via a long fuse, to the referendum and its explosive result. Leaving the exchange rate mechanisim emboldened the Eurosceptics in the Conservative party to perfect a guerrilla campaign against our membership of the European Union, which eventually brought us to this juncture. All the while, by the way, Britain was having almost the best of both European worlds, enjoying the benefits while negotiating numerous opt-outs from what did not appeal. |
| The more messianic of the Brexiters are drawing a false analogy between the outcome of Black Wednesday and the outcome of Brexit (if the country does not come to its senses). After Black Wednesday, we were freed from the mechanism that forced excessively high interest rates in order to preserve the value of the pound’s relationship to the Deutschmark. Interest rates came down dramatically, and the economy grew so rapidly that – guess what – the fiscal position also improved. | The more messianic of the Brexiters are drawing a false analogy between the outcome of Black Wednesday and the outcome of Brexit (if the country does not come to its senses). After Black Wednesday, we were freed from the mechanism that forced excessively high interest rates in order to preserve the value of the pound’s relationship to the Deutschmark. Interest rates came down dramatically, and the economy grew so rapidly that – guess what – the fiscal position also improved. |
| This time, interest rates are so low that the only question – repeated ad nauseam in the financial press – is when they are going to go up. And, God help us, far from benefiting from J-curve effects, many firms that operate here because of the advantages of the single market for their supply chains are “considering their position”. | This time, interest rates are so low that the only question – repeated ad nauseam in the financial press – is when they are going to go up. And, God help us, far from benefiting from J-curve effects, many firms that operate here because of the advantages of the single market for their supply chains are “considering their position”. |
| This is a national disaster waiting to happen. One way or another, it has to be averted. We face enough economic problems as it is. Perhaps the ultimate irony is that more and more people are claiming that the referendum was a protest vote against austerity. Unless there is a change of heart soon, there will be even more, Brexit-induced, austerity. | This is a national disaster waiting to happen. One way or another, it has to be averted. We face enough economic problems as it is. Perhaps the ultimate irony is that more and more people are claiming that the referendum was a protest vote against austerity. Unless there is a change of heart soon, there will be even more, Brexit-induced, austerity. |
| I sincerely hope that Brexit will not happen, so that there will be no need for a 25th or 50th anniversary. | I sincerely hope that Brexit will not happen, so that there will be no need for a 25th or 50th anniversary. |
| • Six Days in September – Black Wednesday, Brexit and the Making of Europe, by William Keegan, David Marsh and Richard Roberts is out now, published by OMFIF | • Six Days in September – Black Wednesday, Brexit and the Making of Europe, by William Keegan, David Marsh and Richard Roberts is out now, published by OMFIF |