Black Wednesday, the Maastricht treaty and what John Smith would think about Brexit
Twenty-five years ago, ‘Black Wednesday’ saw the pound forced out of the European Exchange Rate Mechanism (ERM). This dramatic humiliation of John Major’s government on 16 September 1992, wrecked the Tory party’s reputation for economic competence and ignited a furious internal struggle over the ratification of the Maastricht treaty which ravaged their ability to govern at all. The Labour party, then led by John Smith, brilliantly exploited these twin economic and political crises, paving the way for Labour’s 1997 general election victory and more than a decade in the political wilderness for the Tory party. Twenty-five years on Labour has a similar opportunity to wreak havoc on the faltering administration of Theresa May, if Jeremy Corbyn can be as canny and astute over Brexit and the single Market as Smith was over the ERM crisis and the votes on Maastricht.
The seeds of the ERM fiasco were sown by the way the Conservatives joined the currency system in October 1990. Prime minister Margaret Thatcher had been firmly against it but, weakened by bitter arguments on the issue with her former chancellor Nigel Lawson, the new chancellor John Major persuaded the ‘Iron Lady’ to join. But Thatcher’s U-turn came with a condition; an immediate interest rate cut from 15 to 14 per cent was announced on 5 October. This was deliberately timed for the last day of a successful Labour party conference when the party was riding high in the opinion polls, and just before what turned out to be Mrs Thatcher’s final Conservative conference as leader.
In the haste to grab headlines from Labour, the Tory Government failed to consult in advance with the ERM’s member governments about the UK entry level. They were curtly informed of the unilateral decision to join at a central rate of DM 2.95. Particularly unhappy was the then president of the Bundesbank, Karl Otto Pohl, who believed the entry rate should be no higher than DM 2.60. The Conservative’s bungled ERM entry signaled both to the markets and to Britain’s European partners that this critical decision was driven, not by a considered commitment to multilateral currency coordination, but by opportunistic Tory politics.
Thatcher was ousted by her own party just over a month later in November 1990. John Major took over as prime minister and began to erode Labour’s previous strong lead in the opinion polls. In 1991 he ended the hated poll tax, and was seen to have skilfully negotiated the Maastricht treaty on the EU securing opt outs from the single currency and the social chapter. With the huge advantage of not being Mrs Thatcher, Major unexpectedly won the general election on 2 April 1992.
However, in a few months Major’s administration was floundering in a crisis from which the Tories never recovered. To ease inflationary pressures from German unification the Bundesbank had raised interest rates. With the pound now obliged to remain within the ERM’s currency bands upward pressure also mounted on the UK borrowing rate. This was the opposite of what was needed as the economy was in recession with rising job losses. To ease reliance on higher interest rates the Bundesbank wanted a general realignment with an upward revaluation of the deutsche mark. But Major and his chancellor Norman Lamont dismissed all talk of a realignment. Major even boasted that he wanted the pound to replace the DM as the strongest currency in Europe. Such hubris would not last long.
The pound was vulnerable to a growing view that it could not hold its place in the ERM. By early September markets sensed blood and speculators took positions first against the Italian lira. The Bundesbank again tried to promote an ERM realignment at a finance ministers meeting in Bath on 5 September. However Lamont ruled out any official discussion of the option and resorted to bullying the new Bundesbank president, Helmut Shlesinger, to cut German interest rates. Shlesinger was so angry at the UK chancellor’s hectoring that he had to be persuaded not to walk out of the meeting.
By September 13 the pressure on the lira grew too strong and it was unilaterally devalued as the Bundesbank agreed to make a very modest reduction in its borrowing rates. The next day, after a news report in which Shlesinger again spoke in favour of a realignment, the currency traders turned on the pound which fell to its permitted floor of DM 2.78. The markets opened on Black Wednesday with the pound facing a torrent of speculative pressure. By mid-morning the Bank of England raised interest rates by 2 per cent and then again in the afternoon by a further 3 per cent. But all to no avail. Despite spending billions in reserves, the pound continued to haemorrhage support. Early that evening the UK withdrew from the ERM.
Views on the economic consequences of the ERM debacle remain sharply divided. But whether September 16 1992 is described as ‘black’ or ‘white’ Wednesday one thing is clear: it had a devastating political impact on the Conservatives. In July 1992, just before John Smith’s election as Labour leader, Gallup’s opinion poll gave the Tories a small four-point lead. By October Labour enjoyed a huge 22 point poll advantage over the Conservatives and remained well ahead of them all the way to the 1997 election. Only after David Cameron became Tory leader in 2006 did the Tories regain consistent opinion poll leads over Labour. With hindsight, it is obvious now that the ERM crisis was an unmitigated disaster for the Tories and Labour’s turning point on the road back to Number 10.
In the aftermath of Black Wednesday Smith launched a devastating onslaught on John Major’s government. In parliament Smith mocked Major’s ambition to have the pound replace the DM “as having a certain detachment from reality of which Walter Mitty himself would have been proud” and labelled him the “devalued prime minister of a devalued government.” Smith’s performance was widely acclaimed and even John Major conceded that Smith gave a “brilliant debating performance” admiring his “brass neck” given Labour’s pro-ERM policy.
What Major overlooked, however, is that soon after the 1992 general election Smith made a significant change to Labour policy on the ERM. In June Smith suggested that an ERM realignment “was likely” and “could permit a reduction in German interest rates leading to similar reductions throughout the Community”. In July, in one of his last acts as Labour leader, Neil Kinnock wrote a letter to the Financial Times also arguing for a realignment. And, just days before Black Wednesday, on 9September Smith repeated his call for a realignment in a BBC interview during the TUC Congress.
Smith was a pragmatist about exchange rate policy. He knew perfectly well that the Tory’s had bungled entry into the ERM by choosing the wrong rate and, after the general election in 1992, he had no hesitation in calling for a realignment. The problem was that saying this before the general election would have been economically irresponsible and politically suicidal for Labour. To do so would have encouraged speculation against the pound and have allowed the Tories to label Labour as the ‘party of devaluation’. As much as Smith was strongly in favour of transparency and open government, such candour on the value of the pound ahead of the 1992 election was out of the question.
If Black Wednesday wrecked the Tory’s reputation for economic competence it was the Maastricht treaty ratification crisis that destroyed their ability to govern. The struggles over the European communities (amendment) bill intensified in November 1992 as Major’s government attempted to recover from the collapse of its ERM policy. Labour’s strategy, crafted by Smith together with the then Labour’s European spokesperson, George Robertson, was not to block ratification but rather to drag out the legislative process as far as possible, tabling amendment after amendment, creating opportunities for repeated rebellion by Tory Eurosceptics.
Robertson set a ‘ticking time bomb’ amendment on the social chapter which was finally put to the vote on July 22. With Tory whips desperately trying to keep their rebels on side, the vote was lost by one vote. Then, in a second division on the government’s motion to reject the social chapter, Major was defeated by 324 votes to 316. The embattled Tory leader, labelling some of his own MPs ‘bastards’, had no alternative but to use ‘the nuclear option’ of a confidence vote on the government’s social chapter opt-out. Threatened with annihilation in a general election, the Tory rebels fell into line. But Smith’s command of the House of Commons was clear for all to see. At the end of the Maastricht negotiations the Tories had declared ‘game set and match’ for Major, but Smith, switching to the Tory leader’s preferred sport of cricket, declared that “he was clean bowled yesterday and he has been forced to follow on today”.
A month earlier a sacked Norman Lamont told the Tories that they “give the impression of being in office, but not in power”. Labour’s parliamentary tactics over Maastricht fully demonstrated the validity of Lamont’s scathing remarks. Labour had also kept its own divisions under control despite having as many potential anti-EU rebels. Smith, who was cautious about the prospect of a single currency, had reassured Labour MPs that the party wouldn’t endorse it unconditionally. He also took the highly unusual step of allowing a series of debates in the parliamentary Labour party before the shadow cabinet agreed the whip. The PLP votes all went in favour of the front bench, but Smith’s inclusive style earned respect from among even the most persistent Maastricht rebels such as a certain Jeremy Corbyn.
What are the lessons for today’s Labour party from Smith’s handling of the ERM crisis and the Maastricht votes?
Firstly, be flexible on policy and don’t hesitate to change line if growth, jobs and investment in the British economy depend on it, exactly as Smith did by pushing for ERM realignment. Secondly, ruthlessly exploit Tory ideological divisions over Europe as party now seem to care more about these than the best interests of the UK. Thirdly, work hard to build the widest possible unity of purpose among Labour MPs and members. The recent softening of Labour’s Brexit policy announced by Kier Starmer certainly starts to feel like an approach that Smith would recognise and the EU withdrawal bill is the perfect opportunity for another ‘ticking time bomb’ amendment to detonate under the shambolic administration of Theresa May.
John Smith would surely have been horrified by Brexit and would have campaigned passionately against it. In 1971 Smith was one of 69 Labour MPs that rebelled against the whip to vote in favour of joining Europe. He argued then that he was “willing to give up some national sovereignty to gain sovereignty which will be able to do something about controlling the international companies of the future… If we do not enter Europe we shall not be in a position to control them and achieve those economic, social and political ends which we on this side hold among our main political objectives”.
Today, Smith the politician would acknowledge the result of the referendum, but Smith the lawyer would forensically expose Brexit’s ambiguities and delusions. Smith would insist that a narrow vote to leave the EU does not necessitate exiting from the single market or the customs union, and would relentlessly expose the incompetence of May’s hopelessly divided administration. I also believe that he would argue that there is far more flexibility in the application of freedom of movement rules than is commonly understood, and that a strong framework of employment law, exemplified by the minimum wage that he so strongly campaigned for, is the best way to defend working people in the UK wherever they are from.
In 1993 Smith fought hard for the social chapter to be included in the Maastricht treaty and today I’m sure he would argue that the single market, though far from perfect, is not just our biggest trading partner but also the most comprehensively regulated economic area for social, employment, environment and consumer rights anywhere in the world. This explains the motivations behind Tory support for a hard Brexit, and why Labour must mobilise to defeat it.