Thursday, December 11, 2008

One Grey Wednesday Coming Right Up

Don't mention the currency war
There's some previous here. The outburst from the German Finance Minister has strong echoes of several previous contretemps, and not just over Poland. In particular we should recall the events leading up to Black Wednesday - our ejection from the ERM in 1992.
One of the reasons we blew out was that Germany was pursuing a policy of strict monetary control (ie high interest rates) to contain the inflation fallout from German reunification. Our economy was in the pit of recession and simply couldn't handle it.
We begged Germany to cut their rates, especially at a rancorous meeting of EU finance ministers (Ecofin) the previous weekend in Bath. Norman Lamont was chairing that meeting and here's the New York Times' account:
"Lamont grilled Schlesinger [head of the Bundesbank] as if he had hauled him before a select committee of the House of Commons. The German civil servant was deeply offended.
"Every finance minister here wants you to cut your rates," Lamont shouted at Schlesinger, unimpressed by the latter's explanation that cuts were not possible without unleashing inflation in Germany and the rest of Europe. Lamont would not take no for an answer and pressed for a commitment. Schlesinger flushed, stood up and made as if to head for the door. Finance Minister Waigel had to put out a hand to stop him and take the floor in his defense.
"My dear Norman," Waigel warned Lamont, "you have asked us that question four times, and four times we have given you the same answer. We do not see the need for wasting any more time."
Three days later the market delivered its devastating verdict.
But, you say, we're not in the ERM any more, so we don't need to worry. Let the Germans go hang.
While it's quite true that sterling can float freely (thank God), let's not imagine it's a free lunch. As we've blogged before, every time sterling falls, all of us get poorer. Our imports get more expensive, but our incomes don't rise. As our currency crumbles, international investors take fright and demand a higher price for all that cash we need to borrow. And if sterling goes for a real walk - as it is right now - they might stop lending altogether. Which would be a tad awkward.
What the German Finance Minister is really telling us is that we need to brace up and take some pain. We've overspent and overborrowed, and the day of reckoning is at hand. Trying to spend our way out of trouble will only make our situation worse - we simply don't have the financial standing to sustain it.
He's also telling us something else: vainglorious claims by Herr Brown to be speaking for the entire civilised world are total sauerkraut.

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