The Conservatives’ ‘economic competition’ led Britain to Black Wednesday. Let us never forget it | William Keegan

METRONext Wednesday will mark the 32nd anniversary of Black Wednesday. For younger readers and older ones with short memories, Black Wednesday, 16 September 1992, was the day the Conservatives lost their reputation for economic competence.

It is true that they had already lost it once before, when the Heath government of 1970-74 fell victim to the inflationary impact of the 1973-74 oil crisis, its out-of-control economic boom and what became known as the three-day workweek disaster.

But it was not long before the Wilson-Callaghan Labour governments of 1974-79 fell into the same trap. Public debt began to spiral out of control and the Labour Party had to come to the rescue with a loan from the International Monetary Fund.

In 1979-90 came the Thatcher government, followed by the Major government from 1990 to 1997. I have written extensively about what I see as the mistakes of the Thatcher period, but it was the pound’s forced exit from the European Exchange Rate Mechanism (ERM) on Black Wednesday that was widely seen as ending the Conservatives’ reputation for economic competence.

These were pre-euro times, and Lawson and Major’s main motive was to link the fortunes of the pound to those of the Deutsche Mark, as Germany, after the war, had a well-deserved reputation for controlling inflation.

Unfortunately, our entry could not have been more ill-timed. German inflation soared as a result of the enormous cost of absorbing the East German economy into the reunification process, a historic and welcome development in itself.

The fact was that the pound had been pegged to the German mark at the wrong time, at the wrong exchange rate and for the wrong reasons. The Lawson boom of 1988-89 had led to the second worst recession since the Second World War, but high interest rates imposed by the Bundesbank, the German central bank, to combat German inflation were holding back other ERM members.

At a meeting of European finance ministers and central bank governors in Bath, Norman Lamont, who had succeeded Major as chancellor, tried to put pressure on the Germans to reduce interest rates and thus the pressure on the pound. Dr. Helmut Schlesinger, president of the Bundesbank, strongly opposed this. The Germans felt that the pound was overvalued and that the British should deal with this problem.

To sum up, and the markets were The conviction that the UK could not sustain an overvalued currency became overwhelming and speculation forced the pound out of the ERM. This improved the competitive position of our economy and the economic recovery became sustainable. The following Sunday I suggested in my column that Schlesinger should be knighted for having helped the British economy escape recession.

Well, I can report that, although he was never given that honor, my friend Helmut Schlesinger is in very good shape and recently celebrated his 100th birthday.

Within months, Lamont said he had been “singing in the bathroom” as a result of the easing of economic conditions. (He certainly hadn’t been singing.) in But Major was not happy with Lamont’s handling of the Bath meeting, and replaced him with Kenneth Clarke, who handed over a reasonably fit economy to Gordon Brown in 1997.

Economic policy has its ups and downs, and in 2010 it was Labour’s turn to lose its reputation, when the Conservatives launched a brilliant and deeply cynical campaign to accuse Labour and its alleged overspending of having caused the financial crisis of 2007–09, when it was – as the then-top Treasury official, Sir Nicholas (now Lord) Macpherson, put it – “a banking crisis, pure and simple”.

The result of that successful propaganda is that the current chancellor, my (almost) new friend Rachel Reeves, is obsessed with the apparent need to regain a reputation for economic competence. Unfortunately, she has so far gone about it in the wrong way: by penalising the poor and threatening tax increases on the wealthy investors she is supposedly courting to invest in the UK.

We look forward to his first budget on 30 October. What he should do is take a long-term view of lending for investment that should benefit future generations, and a long-, medium- and short-term view that we should apply to re-entering the European customs union and the single market as soon as possible, thereby fulfilling the promise of the Labour manifesto (do older readers remember it?) to reduce barriers to trade, of which the most obvious is Brexit.