Inside story of political fallout from Britain's Black Wednesday
Margaret Thatcher, at the urging of her chancellor John Major, took Britain into the ERM in October
1990. The move was an attempt to stave off recession and keep inflation under control by linking the pound to the deutschmark.
But many economists warned that Britain had gone in at too high a rate. Their fears were borne out on 16 September 1992, so-called "Black Wednesday", when speculators made a fortune as the Bank of England tried to prop up the pound.
Interest rates soared to 15 per cent in one day and Britain was forced to pull out of the ERM. Mr Major, by now Prime Minister, and his Chancellor Norman Lamont were humiliated.
Until now, the Treasury has kept secret nine documents drafted in the aftermath of the ERM debacle.
The cost of Black Wednesday
Labour has repeatedly claimed that the fiasco cost ?27billion, a figure repeated in last week's Times in a story leaked by Treasury officials. John Major has insisted the figure is much lower and today's documents back him up.
"The Cost Of Black Wednesday Reconsidered", a paper written on 6 August 1997 by Treasury official Harold Freeman, estimates the Government lost ?800 million in reserves trying to prop up the pound between August and September 1992, with an extra "opportunity cost of ?3.3billion".
Norman Lamont's reputation
Officials reveal that "the position that 'unemployment is a price worth paying', is one that ministers find it difficult to defend". It proves that Mr Lamont's comment, on the need to keep inflation down, had damaged the Government.
The Germans' warnings
One document reveals that the Governor of the German Bundesbank, Karl-Otto P?hl, had told the British ambassador in Bonn in 1989 that he wished Britain had joined the ERM "two or three years previously". Mr P?hl had repeated his view in
September 1990, just before Britain joined, arguing that "it was not possible for countries with three times Germany's inflation rate to join the ERM".
Margaret Thatcher put politics above economics
The Prime Minister had opposed Nigel Lawson's bid to join the ERM but her own declining fortunes over the poll tax made her weak. The papers make clear the decision to join the system was more political than economic.
"Mrs Thatcher's removal of her veto on ERM membership was determined by her own increasing political weakness," an official writes. "October 1990 was clearly not an optimal time for the UK to join the ERM."
The paper adds: "The open warfare between the Chancellor and Prime Minister made it especially difficult for the markets to decide what the objectives of the Government were."
