This Day in History | 1990 Britain’s first full day in ERM

Britain’s first day as a full member of the Exchange Rate Mechanism (ERM) of the European Monetary System has been marked by hectic trading in the City.
More than 500 million shares were traded in the first two hours and by the end of the day the turnover was 1.08 billion shares – the highest daily volume since the 1987 stockmarket crash.
Sterling and share prices then settled down towards the end of the day as a reflection of profit taking, with the pound up 1.75pf against the DM at 3.0312.
While the pound today ended comfortably within its 6% bandwidth of value against the DM, the Bank of England has warned the limit will eventually need to be narrowed.
Robin Leigh-Pemberton, Governor of the Bank of England said a 2.5% band should be Britain’s objective, but only once interest and inflation rates reflected that of other EC members:
“I think until we’ve settled down, until our economic performance, our indicators have converged more closely with the other members, it was absolutely right to go in at 6%.”
The Chancellor, John Major, has said ERM entry is primarily a counter-inflationary measure, but business analysts were not convinced when he dropped interest rates last week 1% to 14%.
However, home buyers are likely to benefit alongside consumers after building society giant Halifax decided to cut its mortgage rate from 15.4% to 14.5%, underlying the strengthened pound.
Business leaders have warned membership could mean widespread job losses unless UK firms keep wage costs down.
Piers Morgan, from the Institute of Directors said: “To stay competitive our costs can’t go up any more than Germany’s, if they do our companies will become unprofitable.”
Some European ministers have expressed concerns Britain’s entry is a ruse to slow down EC progress towards full monetary union and a single currency.
Speaking in Luxembourg, Mr Major argued such a strategy would be illogical:
“It would seem to be rather a rum thing to get into the ERM which is a pretty substantive step…purely as a wrecking tactic,”
EC Commission President Jacques Delors said: “Frankly I am happy about the decision of the British Government but I remain vigilant.”

Courtesy BBC News

In context

The ERM was established in 1980 to bring stability to European currency markets and encourage trade and business.
Member states agreed to keep their currency value tied to the German mark requiring them to adopt German anti-inflation policies, with a view to eventual monetary union.
The UK crashed out of the Exchange Rate Mechanism in September 1992 when recession and massive currency speculation saw the pound take a heavy battering.
Britain did not rejoin the ERM after the day which became known as “Black Wednesday”.
The ERM is history, and the euro is now the official currency for some 300 million citizens in 12 European countries.