Joining the ERM: Analysing a Core Executive Policy Disaster

Abstract

Throughout the whole of the 1980s, British governments confronted a major economic decision: should they join most of the UK’s EEC partners in the European Exchange Rate Mechanism (ERM), or should they stay out? The issue was considered no less than eight times between 1979 and October 1990, when the UK did eventually join. In the event Britain stayed in the ERM for less than two years, before being forced out of the system by foreign exchange market pressures in September 1992, partly because the rate at which the UK entered was always unsustainable. Joining early in the decade could have prevented the overvaluation of sterling in the period 1980–82, thereby saving much of Britain’s manufacturing capacity and thousands of jobs (NIESR, 1989). But joining very late in 1990 and at the wrong rate brought no benefits to the UK at all. The story of policy making on ERM is thus one of missed opportunities, chronic misperception by British policy makers and huge welfare losses for the British economy.