Black Wednesday 2008

Gordon Brown returns again and again to Black Wednesday. He is always keen to remind people of Cameron’s role in that credibility-shredding day.

As of yesterday, he might want to stop banging on about it.

As of yesterday the pound has fallen by more since the Prime Minister took office than it did on black Wednesday.

The day before Brown took over the pound bought you 1.49 euros. It is now worth 1.269 euros – a fall of about 14%.

Have a look at the graph. Norman Lamont's era is in tory blue, and Brown's is in fetching pink.

The day before black Wednesday (16 September 1992) the pound got you DM 2.78. After black Wednesday it was about 12% down, before falling to 14% down on 5 October - the low point of Black Wednesday which we have now surpassed.

Brown could argue that the real low point was long after black wednesday in March 1993. But looking at what happened after black wednesday makes the comparison worse. At the equivalent point nine months after black Wednesday the pound was back up to 2.49, or just over 10% down. It was the same after a year.

On the other hand, If the current trend continues the pound will be down about 18-20% by Brown’s first anniversary. Brown's Black Wednesday may be happening more slowly compared to Lamont's - but it could be bigger.

Is this a bad thing? Yes and no.

It certainly isn’t a huge vote of confidence in the UK economy. In fact the pound was the only currency to fall against the dollar yesterday.

But on the positive side, the fact that outside the euro the UK can have appropriate interest rates and can gain competitiveness from a falling pound is extremely good news as the world economy heads downwards.

Euro member states like Spain and Ireland are going to have, er… “interesting times” if they suffer from property crashes.

They can’t cut rates, and the ECB has set its face against taking action. Fair enough: inflation in the eurozone is above target and German exports are doing fine. So the struggling member states of the periphery are on their own.

In the Telegraph Ambrose Evans Pritchard points out that the Fed taking manic action to stave off recession while the Bundesbank ECB sits on its hands is reminiscent of the conditions just before the 1987 crash.

If things do get worse it will be the first real test of the euro system. How will it fare? In the good times member states have done little to prepare for problems and run deficits at the top of the cycle. France and Germany trashed their own fiscal rules at the first sign of trouble in 2002. They have failed to resolve structural questions like the eurozone’s lack of a lender of last resort.

So while the pound might be falling like a stone, this is not like 1992. Remember, Britain’s exit from the ERM was a good thing – it was being in it that was the problem. With interest rates subordinated to an artificial exchange rate target, the ERM became rightly known as the Eternal Recession Mechanism.

At least in 2008 the authorities have the ability to respond if things do get worse: with a free hand on fiscal policy; a flexible exchange rate; and ultimately even control over the monetary target . And if you don’t think they are doing a good job… at least you can get rid of them.