21st Anniversary of Black Wednesday

September 16, 2013

Sterling abandoned the Exchange Rate Mechanism (ERM) 21 years ago this day.  The ERM served as training wheels for currencies aspiring to join the European Currency Mechanism.  The British pound was a late comer to the ERM, joining in October 1990.  Former Prime Minister Margaret Thatcher had long opposed the action.  The ERM had been launched initially in March 1979. 

Although the Conservative government and Chancellor of the Exchequer Lamont suffered considerable political humiliation when a keystone of their economic policy crumbled under the weight of massive speculative sterling sales in September 1992, the economic consequences were favorable. 

  • Sterling’s external value:  As a member of the ERM, sterling was assigned a D-mark central parity of DEM 2.95 and allowed to trade within a range of +/- 6% against the German currency.  The weakest it could move in this arrangement was DEM 2.7780.  From 1987 through 1990, it traded on average at DEM 3.0052.  After leaving the ERM in mid-September 1992, the pound fell to as low as DEM 2.1640 in November 1995.  From 1993 through 2002, it got as high as DEM 3.4143 against the synthetic mark, and the average value during that decade was DEM 2.7814, that is just inside the old ERM boundaries.  Since 2003, sterling has recorded a mean value of DEM 2.5289 and ranged between DEM 1.9951 and DEM 3.0215.  It’s present level against the synthetic mark is DEM 2.3320, that is 7.8% stronger than its 1995 low but 16% weaker than its floor when trading in the ERM.
  • Real GDP:  British real GDP since 1948 has expanded at an average rate of 2.6% per annum.  In 1993-2002, the first post decade after leaving ERM, GDP climbed at a faster pace of 3.5% per annum, but the pace fell to 1.7% per annum in the subsequent decade.  And over the last four reported quarters, real GDP rose just 1.5%.
  • Inflation:  The U.K. developed a very serious inflation problem in the 1970s.  Retail price inflation hovered around 25% in 1975, for example.  In the first decade after leaving the ERM, RPI inflation averaged 2.4%, but such accelerated to 3.3% per year in the next decade and has risen 3.1% over the last dozen reported months.  Consumer prices climbed 2.6% per annum between 2002 and 2012 and 2.8% over the last reported year.  Inflation is now considerably more benign than it was but higher than in much of the rest of Europe.
  • Intangibles:  Given the debt problems now plaguing the euro area, the U.K. is very lucky that it did not abandon sterling in favor of the euro, and dire warnings that London would collapse as a financial center if the knot were not tied proved vastly overstated.  But it’s also worth noting that 10-year British gilt yields are now trading about 40 basis points above comparable French sovereign debt.  There’s been a cross-over of that relationship since early spring.

The term “Black Wednesday,” which was coined right after the pound’s exodus from the ERM 21 years ago has acquired an ironic image in the intervening years, but 21 years is a short span with which to judge history.  It’s possible that what happened to the pound on September 16, 1992 may yet undergo a further transformation in subsequent decades.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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