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Old Money: first Brexit


At 7:30pm on September 16, 1992, or Black Wednesday, at the end of a frenzied day in the markets the UK chancellor of the exchequer Norman Lamont announced that Britain was leaving the Exchange Rate Mechanism of the European Monetary System. It was a critical change in policy direction from the path of monetary convergence with the Europe and the first Brexit.

In the 1950s and 1960s Britain stood aside from the creation of European Economic Community’s institutions and European economic integration. Membership of the European Community in 1973 marked an historic shift towards the European project. 

But British participation in the ‘snake’ — the first regional fixed exchange rate system — lasted just six weeks until sterling floated. Through the rest of the 1970s and the 1980s, sterling and the British economy developed in parallel to European arrangements.

The troubled ‘snake’ was succeeded by the European Monetary System (EMS) in 1979. All nine EC countries became members of the EMS based around the low-inflation deutschmark, but sterling did not join the system’s pegged exchange rate framework, the ERM, and continued to float. 

However in 1987, in search of a ‘nominal anchor’ to bring down inflation and interest rates, Britain began to shadow the deutschmark and on October 8, 1990 sterling joined the ERM. After two decades of semi-detachment Britain had become a full participant in European monetary matters.

Meanwhile, German reunification was underway following the fall of the Berlin Wall in November 1989; it was completed just five days ahead of Britain’s ERM accession. The integration of East Germany led to a big increase in German government spending and a boom. 

With inflation approaching 5% the Bundesbank, Germany’s fiercely vigilant central bank, had hiked interest rates to record highs by summer 1992. This meant that other European countries, which were suffering unemployment, were unable to stimulate their economies by lowering their rates for fear of jeopardising the stability of their ERM parity.

A separate destabilising factor was Danish voters’ rejection of ratification of the Maastricht Treaty to move to Economic and Monetary Union and a single currency in June 1992. This called into question some countries’ political will to bear economic pain for something that might never even happen, which undermined the credibility of their ERM parities.


The Bundesbank refused to cut German rates but suggested a general realignment of ERM parities with a German revaluation and the devaluation of other parities. But devaluation was unacceptable to governments fearful of inflation and electoral punishment. Nevertheless Italy went ahead with a 7% devaluation of the lira on Monday, September 14, reminding the markets that ERM parities were not immutable.

Speculative pressure immediately mounted on sterling. On September 16, the pound encountered relentless selling by hedge funds — making their debut in a financial crisis — and currency traders. 

Despite hiking interest rates from 10% to 15% and support intervention of $28bn — the whole of Britain’s foreign exchange reserves and more — Britain was forced to float the pound; the estimated cost to taxpayers was around $6bn with the George Soros’s funds alone trousering $1bn.

The ERM crisis rumbled on for a further 11 months with the devaluation of the Irish punt and two apiece of the Spanish peseta and Portuguese escudo, as well as the floating of the EMS-pegged Swedish krona and Norwegian krone. 

In August 1993, to relieve pressure on the French franc the system’s ERM fluctuation bands were widened to plus or minus 15%. That ended the crisis by effectively suspending the system. The trauma redoubled the resolve of the core EMS members for EMU culminating in the launch of the euro in 1999.


After Black Wednesday, Britain was, once again, a part of the EU but apart from its core. Bereft of a fixed exchange rate policy anchor, Britain (and Sweden) moved swiftly to develop a new monetary regime of inflation targeting and central bank independence. 

Though Britain’s brief ERM membership delivered a transformative fall in inflation from 11% to 4%, sterling’s spectacular defenestration contributed to the discredit and electoral defeat of prime minister John Major’s administration and the disinclination of subsequent British governments to join the euro, thus distancing Britain from the evolving European project. 

Arguably the Black Wednesday Brexit set Britain on the trajectory of EU divergence and disillusion that culminated ultimately in big Brexit 24 years later.

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