London - European leaders must throw off the burden of the
euro if they want their economies to thrive, said the former finance minister
who was forced to take Britain out of the European currency system that
proceeded the single currency.
Norman Lamont, Britain's chancellor of the exchequer from
1990 to 1993, said Greece was likely to crash out - or be pushed out - of the
world's second-largest reserve currency, while Spain and Italy should jump too
if they wanted growth to revive.
"There is no way Spain or Italy will recover their
competitiveness vis-a-vis Germany if they remain within the euro, but outside
they may well do," Lamont said in an interview.
"Spain I think is basically solvent at historic rates
of interest - ie rates around 3 to 4% - which I don't think are going to return
in the next decade," he said.
As finance minister during Britain's humiliating "Black
Wednesday" currency crisis in 1992, Lamont was forced to take sterling out
of the European Exchange Rate Mechanism (ERM) after haemorrhaging reserves to
currency traders such as George Soros, who famously made over $1bn betting
against the pound.
While Lamont had appreciated the inflation-lowering benefits
of effectively pegging the pound to the Deutsche Mark through the ERM grid, he
was an opponent of the European grand plan for monetary union.
When the markets pounced on September 16 1992 and sterling
tumbled out of the ERM, it ushered in a decade of average growth for Britain a
percentage point above the European Union average of 2.4% - and far better than
what Germany, France, Italy or Spain achieved in that time.
"Bleeding to death"
Europe set up the ERM in 1979 but it was another decade
before Britain took the leap. John Major, as finance minister to Margaret
Thatcher, took Britain into the ERM in 1990, just a month before Thatcher was
ousted as leader by her own party.
But Germany and Britain were economically diverging: just as
Britain needed lower interest rates, Germany was raising rates to contain the
inflation sparked by policy decisions resulting from unification after the fall
of the Berlin Wall.
A weaker US dollar also meant a stronger Deutsch Mark and
more pressure on the pound.
"I saw the logic of the argument that by linking our
currency to the Deutsche Mark, the inflation rates of England and Germany would
converge... But after about a year-and-a-half, two years, it was obvious that
the tool had really outlived its usefulness," Lamont said.
"The markets had actually delivered one the opportunity
for a more flexible policy."
Flexible but chaotic, at least on the day.
As sterling plunged on Black Wednesday, the Bank of England
spent billions of pounds to support the currency and jacked up interest rates,
but it was in vain; markets could even break the Bank of England.
While Major, by now prime minister, discussed what to do at
an emergency meeting in Downing Street, Britain was, in Lamont's words in his
memoirs, "bleeding to death" as traders demanded payment at the
official sterling rate, above the market price they were buying the currency.
"Events go so quickly you do not have time for
feelings," Lamont, 70, said over a Diet Coke at the Mayfair offices of
Anglo-Iranian commodity trader, Balli Group, where he is a non-executive
director.
"I didn't have any emotions that day. You just do what
have to do, or try to do what you have to do," he added.
Italy had devalued the lira by 7% several days before, but
was forced to leave the ERM on September 17, the day Spain devalued the peseta.
The peseta, Portuguese escudo and the Irish punt were all
devalued within five months of Britain's exit and the EU was forced to raise
the fluctuation margin of the ERM to 15% in 1993. Italy rejoined in 1996.
Frightening situation
Lamont's ambivalence about the ERM in 1992 contrasts with
the belief of his European counterparts today in a single currency, conceived
as a part of a political project aimed at preventing Europe's great powers -
Germany in particular - from ripping the continent to bits in another war.
"These are honourable but misguided reasons for
maintaining something I think will never work very well," Lamont said.
"They profoundly believe in it, even though there is a lot of evidence
that this does not make a lot of economic sense."
So what should be done for the euro?
"It would better if it were dissolved in a planned way,
but I know that won't happen.
"What I expect will happen will be a contraction of it
gradually. I don't see the point of a very narrow currency union if that is
what we are left with.
"I thought the euro would last, my guess was always 20
to 25 years, so by my reckoning we are half way through its life," he
said. "This crisis has come earlier than I expected."
Lamont said he did not expect Greece to get any more money
out of Germany, and that if it did crash out of the euro then the International
Monetary Fund would have to step in to support Athens on its new odyssey with
the drachma.
Eurozone leaders would then try to save the banking systems
of Portugal, Spain and perhaps Italy with a huge transfusion of liquidity.
But Lamont rejected any notion of satisfaction at the
prescience of his opposition to the euro.
"I don't get any pleasure out of it," he said. "I don't think there is any laughter in it. It is a very frightening situation actually.”