John Major

• The conservative govt was forced to withdraw the £ from the ERM after they were unable to keep it above its agreed lower limit


  September 16th, 1992
• Public opinions turned against the Tories
• Requirements of the ERM for Britain


  • Maintain a fixed rate of exchange (2.95 German Marks to the £)
• By 1992, the £ was coming under pressure from foreign exchange speculators
• The pound was trading at a low level, close to its minimum allowable rate of 2.77 marks, leading to the crisis of September 16th
• Major’s govt was determined to avoid any devaluation of the pound and remain with the ERM
• Chancellor Norman Lamont announced an increase in interest rates to 12%
• Dealers continued to sell pounds despite the interest rate increase
• The govt raised interest rates again to 15% hoping to persuade foreign investors to buy pounds again
• The inner circle accepted the decision to give up the struggle and withdraw from the ERM
• Hurd: 'Described the Admiralty House meeting as ‘dipping hands in the blood’'
• At 7pm, interest rates were back down to 12%
• German economy was more stable than the British economy at the time
• Britain was suffering more fluctuations in inflation and employment
• From the beginning of the 1990s, Britain had entered a period of economic recession
• It was hard for the govt to get involved to revive the economy
• The only way to encourage economic development was to lower interest rates to encourage investment as people were less incentivised to save
• Due to North Sea Oil, the pound was overvalued at the time it entered the group of ERM currencies
• The natural reaction from international markets to the overvalued pound was to influence the value of the currency, causing it to fall
• British govt had only 2 choices: increase interest rates to keep up the value of the £ which was damaging to the domestic economy during the recession, or ask the German govt and banks to lower their interest rates to effectively lower the value of the mark compared to the £
• Germans were not cooperative as they wanted to stabilise the value of their currency after the unification of Germany
• Stabilisation was a priority for the Germans
• The bank was not controlled by the govt, so recommendations could be made but changes could not be forced
• Both the German govt and bank were slow to respond to the crisis
• When they eventually lowered interest rates, it was by ¼ of a cent which made no difference
• The situation gradually worsened, and the press began to question John Major's intentions regarding the ERM
• From the 14th of September, the pound began to be sold on international markets and the value dropped
• Higher interest rates of 15% left a huge amount of people across Britain unable to pay their mortgages
• Negative outcome for the Tories
• On the 16th of September, Norman Lamont (chancellor) proclaimed Britain was going to leave the ERM
• There would have been a chance for some flexibility if the relationship with Germany was better at the time
• France had similar problems a year earlier but due to their good relationship, they offered a good arrangement
• Currencies within the ERM were given a small margin of difference and the German Mark was specifically strong at that point in time
• During the ERM crisis, Major claimed that the Pound would replace the German mark as the strongest European currency
• John Major's statements showed he was not fully in control of the economic policies
• The crisis justified concerns voiced by the Eurosceptics
• Concerns voiced by Eurosceptics were validated
• The situation discounted the monetarist policy as a sound economic policy
• The pound could not maintain its value without some form of govt regulation
• Upon entering ERM, Howe and Lawson were the strongest supporters of that decision