Black Wednesday 1992: European Exchange Rate Mechanism Crisis

The European Exchange Rate Mechanism (ERM) crisis occurred on Wednesday 16th September 1992 costing the government £3 billion approximately. Commonly referred to as Black Wednesday, however, it is also referred to as White Wednesday by those who were hostile towards the Community. It was on this date that under John Major Britain was forced to withdraw Sterling from the ERM, as the Pound could no longer stay in the lower band of the ERM. There had been three previous economic crisis post-war but all had occurred under a Labour government. The Pound had been devalued in 1949 (Clement Atlee’s government) and in 1967 under (Harold Wilson’s government). Moreover, it was under James Callaghan government in which they took a $3.9 billion loan from the IMF to stabilise its failing economy. ERM marked the first economic crisis which had occurred under a Conservative government.

The ERM was a semi pegged system. It was based on a grid of bilateral rates that were calculated on the central rates of the European Currency Unit (ECU). This provided a central rate for currency within two narrow bands, allowing currencies to fluctuate by 2.25%. The Sterling, and other some other currencies were however, allowed to fluctuate up to 6%. It was up the Central Banks to ensure that their respective currencies remained in this band. Unlike today, there was no Euro thus an ECU had to be established. The ECU was determined by creating a basket of member states currencies (which included Sterling) to determine an average currency unit.

Britain had joined the ERM on 8th October 1990, joining at a particularly unstable time due to Britain’s economic decline.  Moreover, it was unsustainable for Britain to stay in the ERM due to the time they joined. The Deutschemark was 2.95 to the Pound, this was exacerbated by the fact that Britain in the period of 1989-91 was the only nation to record negative growth. Thus the UK economy was weak during this period, moreover they – like other member states – had shadowed the interest rates set by the Bundesbank, and as German reunification occurred in 1990 there was an immense inflationary pressure on Germany’s economy. To combat this the Bundesbank retained high interest rates. This had the adverse effect of lowering the value of member states currencies, driving these currencies including Sterling to the lower band of the ERM. A way to address this could have been to devalue currencies against the Deutschmark but France rejected this idea and other member states, including Britain followed. Norman Lamont the Chancellor at the time called the Bundesbank on four separate occasions to convince them to lower interest rates but to no avail.[1] The Pound by September 1992 could no longer remain in the lower limits of the ERM and the Conservative government was forced to withdraw Sterling from the ERM. This led to many currency speculators putting further pressure on Sterling, as the currency was ‘floated’ this eventually led to the devaluation of the Pound in 1992.

The economic effects of Black Wednesday, however, it also had immense impact on the Conservative Party. It contributed to the party’s move into a general Eurosceptical line as seen by the proceeding leaders of the party with William Hague and Iain Duncan Smith. It is was a tipping point for the Conservative Party as the party management over Europe began to become increasingly difficult, this was also worsened by the successive Labour Party general election victories which resulted in the Conservatives not being in power for 18 years. The subsequent referendum in 2016 also showed that party management continued to be an issue over Europe.

[1] D, Gowland, A, Turner, A, Wright, Britain and European Integration since 1945, (Routledge 2010)p.122