In a new study published by the IEA, former Chief Economic Advisor to the Treasury, Sir Alan Budd, argues that Britain's ERM experience paved the way to a low inflation, low unemployment economy
Britain’s membership of the ERM had a highly positive long-term impact on the British economy, according to leading economist Sir Alan Budd, Chief Economic Adviser to the Treasury at the time of Britain’s unceremonious exit from the ERM on Black Wednesday.
In a new book published by the IEA, Black Wednesday: A Re-examination of Britain’s Experience in the Exchange Rate Mechanism,* Budd rejects the widely-held view that British membership of the ERM was an unmitigated disaster.
Budd argues that it would not have been possible to reduce inflation as effectively without the exchange-rate anchor that the ERM provided and that an independent central bank could not have reduced inflation from the high levels that existed before Britain joined the ERM: the political system could not have taken the strain of high levels of unemployment if they were believed to be caused by an unaccountable central bank.
Budd claims that the positive impact of the ERM can be illustrated by the performance of the UK economy in the eleven years prior to Black Wednesday and the eleven years since. The period from 1981 to 1992 was characterised by two recessions, high unemployment and inflation frequently in double figures. By contrast, from 1992 to 2003 unemployment has fallen dramatically and inflation has been between 2% and 3.5% for almost the whole period.
Nearly thirteen years on from sterling’s exit from the ERM, the economic and political consequences are still with us. Indeed, it is arguable that the shock waves that went through the Conservative government of the time will still heavily influence the result of the coming general election – the Conservative Party’s reputation for economic competence has still not recovered.
Read the full monograph here.