Short-term devaluation may lead to long-term benefits
When Kwasi Kwarteng unveiled his mini-budget last Friday, sceptical commentators focused on the medium-term. Would the Chancellor’s offering — a double album of Thatcheresque golden oldies — get the British economy growing again? (I had my doubts.)
But then came the short-term verdict of the financial markets: an instant vote of no-confidence. It was the sort of thumbs-down normally given to the economic policies of a banana republic, not a G7 democracy. Welcome to Britazuela.
There was an especially nasty moment on Wednesday when the Bank of England was forced into an emergency purchase of UK government bonds. Given the day of the week, this triggered memories of 16 September 1992 — a.k.a. Black Wednesday — another occasion when the markets lost confidence in the economic policies of a Tory government.
It was a national humiliation. The Chancellor at the time, Norman Lamont, was sacked a few months later, but the reputation of John Major’s government never recovered. The Conservatives went down to a landslide defeat at the next election in 1997. A similar fate threatens the Tories today.
However, looking back on the first Black Wednesday we can see that the long-term consequences weren’t all bad. The forced devaluation of the pound was followed by an export-led recovery, a new economic policy helped curb inflation, and Britain’s traumatic removal from the ERM meant that we weren’t sucked into the European single currency. There was also a transformative effect on the Tories: they became a profoundly Eurosceptic party, which eventually paved the way for Brexit.
For Brexiteers, at least, the first Black Wednesday can be seen as a ‘White Wednesday’. So might the same apply to the second Black Wednesday? Years hence, will we able to look back on current events with something other than horror?
Perhaps. For instance, a lasting impact on the value of the pound, if it happens, might boost British exports. Rising interest rates might tame house prices (though at a cost to mortgage payers). And future governments might have more respect for the limits on what they can safely borrow.
A further benefit could be a Conservative Party cleansed of its militant tendency. The idea that the solution to every problem is a tax cut has been tested to destruction. In place of the libertarian snake oil peddled by Liz Truss and her fellow ideologues, an authentically conservative agenda could have a chance to establish itself.
Of course, in the meantime we have to deal with the economic consequences of Mr. Kwarteng. The possibility that the second Black Wednesday will one day be seen as a second White Wednesday is of scant comfort right now. However, that’s all the more reason why anti-Truss Tories must work to take back their party and salvage what they can from the wreckage.