EDITOR'S LETTERMerryn Somerset Webb
When did Brexit become inevitable? Most people would put the answer at some point in the early summer. Not so, says fixed income specialist Adrian Hull of Kames Capital. A better answer is 1990. That was the year in which Margaret Thatcher took us in to the European exchange-rate mechanism (ERM) at the wrong exchange rate. The result was two years of collapsing house prices, double-digit interest-rate rises and a £5bn cost to the Bank of England. So in 1992 we broke the currency peg. The then-chancellor, Norman Lamont, lost his job the following year. The pound fell 15% and, given that it was all a little unexpected, no one quite knew what to do next.
That last bit will sound rather familiar to those who have been watching UK politics over the summer. But it also “set in train the events that led directly to June this year”. The memory of the awful recession created by the fixed rate mistake gave us an environment in which any kind of further integration with the European Union was discussed only in terms of its cost to the UK. So it kept us firmly out of the eurozone (no one wanted to use up political capital arguing for an ERM re-run). It set politicians across the political divide on a path of talking about “opt out” and “two speed” Europe. And it made us suspicious of the German dedication to the greater good (it was a Bundesbank rate rise in 1992 that made the Bank of England’s job entirely impossible). We were firmly on the road to Brexit.
So what next on this road? Post-ERM, Lamont was said to be so thrilled to be out that he spent the evening “singing in the bath”. Hull reckons that neither George Osborne nor Mark Carney followed suit on 24 June. I wonder if he’s right. After all, look to this week’s eurozone. We know that the Italian banks are near crisis and we know that the German banks aren’t in great shape either: anyone in any doubt need only glance at Deutsche Bank’s share price over the last eight years. Down, down and down again. We also know there is no way these banks can raise the capital they need to keep the show on the road (who would be nuts enough to throw more good money after bad?).
The financial fall-out from their failure – whether governments have to bail them out even after promising not to or whether they eventually, as Lamont puts it, now “hit a fence” – won’t be pretty. If I was a central banker who knew that this wasn’t going to be my problem I might find I was able to hum a little something as I soaped. While you wait to see what happens here (and we are watching it closely), you might want to check your gold holdings. And if you haven’t got a good 5% of your portfolio in gold, you might want to think about buying a little more. Because all the central banks are doing so. If they think they need a little extra insurance today, I suspect the rest of us do too.