Short-term devaluation can lead to long-term benefits
by peter franklin
Kwasi Kwarteng, UK Chancellor of the Exchequer, leaves 11 Downing Street. Credit: Getty
When Kwasi Kwarteng unveiled its mini-budget last Friday, skeptical commentators focused on the medium term. Would the Chancellor’s offer – a double album of Thatcheresque gold oldies – revive the growth of the UK economy? (I had doubts.)
But then came the short-term verdict of the financial markets: an instant vote of no confidence. It was the kind of denial normally given to the economic policies of a banana republic, not a G7 democracy. Welcome to Britazuela.
There was a particularly nasty moment on Wednesday when the Bank of England was forced into emergency buying of UK government bonds. Given the day of the week, it triggered memories of September 16, 1992 – aka Black Wednesday — another occasion when the markets lost confidence in the economic policies of a Conservative government.
It was a national humiliation. Then-Chancellor Norman Lamont was sacked a few months later, but the reputation of John Major’s government never recovered. The Conservatives suffered a crushing defeat in the next election in 1997. A similar fate threatens the Conservatives today.
However, looking back to 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, new economic policy helped curb inflation and Britain’s traumatic withdrawal from the ERM meant we weren’t sucked in in the single European currency. There was also a transformative effect on the Conservatives: they became a deeply Eurosceptic party, which ultimately paved the way for Brexit.
For Brexiteers, at least, the first Black Wednesday can be considered “White Wednesday”. Could the same apply to the second Black Wednesday? Years from now, will we be able to watch the news with something other than horror?
Maybe. For example, a lasting impact on the value of the pound, if it occurs, could boost UK exports. Rising interest rates could tame house prices (but to the detriment of mortgage payers). And future governments might have more respect for the limits of what they can safely borrow.
An additional advantage could be a conservative party stripped of its militant streak. The idea that the solution to all problems is a tax cut has been put to the test. Instead of the libertarian snake oil peddled by Liz Truss and her fellow ideologues, a genuinely conservative agenda might 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 ever be considered a Second White Wednesday is little comforting at this time. However, this is all the more reason why anti-Truss conservatives must work to reclaim their party and salvage what they can from the wreckage.