Home Top

ALEX BRUMMER: We've heard this doom mongering nonsense before...and last time, when we were told leaving the ERM would spark disaster, our exit began a golden economic age

Published: 22:50 GMT, 23 May 2016 | Updated: 23:34 GMT, 23 May 2016

View
comments

George Osborne’s apocalyptic predictions for the pound and the economy if the British people vote to leave the European Union have a very familiar ring.

Anyone who lived through the trauma of the UK’s exit from the European Exchange Rate Mechanism in 1992 can be forgiven for thinking: We’ve been here before.

For the Europhiles predicted similar disaster if Britain left the ERM – the precursor of the single currency.

Instead, the precise opposite happened. Rather than catastrophe, what followed our forced departure was a golden age for the British economy.

David Cameron, left, and George Osborne, right, are predicting disaster for the UK if Britain leaves the EU

The Conservative government of John Major and his Chancellor Norman Lamont had done all in its power to try to keep Britain inside the ERM.

In their determination to keep the pound as strong as the German Mark, policymakers had strangled the economy until it was almost dead – forcing up interest rates to dizzying heights.

House prices tumbled, ordinary people in Britain found it impossible to keep up their home loan payments and the keys piled up on the doormats of estate agents up and down the country.

Bankruptcies soared, big property companies collapsed and over-extended high street banks made enormous losses.

But still the Europhiles insisted: if you leave, it’ll be even worse. They predicted meltdown, with Britain consigned to the economic dark ages for years to come.

When the struggle was finally lost on ‘Black Wednesday’ – September 16, 1992 – and the pound was ejected because it could no longer keep up with the surging Mark, it duly went into freefall, eventually losing up to 17 per cent of its value against a basket of currencies of the main countries with which the UK traded.

That plunge was larger than the 15 per cent fall predicted by the Treasury in its worst-case ‘severe shock’ scenario for the effects of Brexit.

But far from being the disaster predicted by European zealots, the humbling exit from the ERM, which saw the bank rate temporarily raised to 15 per cent in a chaotic day of trading, turned out to be a huge blessing for the UK economy.

Former Chancellor Norman Lamont, pictured, oversaw a golden age for the British economy despite the pound being ejected from the European Exchange Rate Mechanism in 1992

Indeed, Chancellor Norman Lamont admitted to reporters, among them this writer, who had accompanied him to the International Monetary Fund in Washington, that his wife had been surprised to hear him ‘singing in the bath’.

Interest rates immediately tumbled from 15 per cent back to 10 per cent and the London stock market pulled itself out of the doldrums and jumped 8 per cent in the first two days’ trading. Better was to follow.

The fall in the pound as Britain disengaged itself from Europe made exports of goods and services competitive once again – and sparked the longest period of growth for the UK economy in living memory.

Output grew well above trend, the jobs market rapidly revived, Britain’s trade deficit shrank and the black hole in its budget at home closed.

The upturn that started in 1992-93 became a boom, with the economy expanding at an average of 3 per cent from 1998 to 2007 – the onset of the credit crunch and the ‘great recession.’

John Major and his economic team paid the price for the chaos before the nation’s exit by losing the 1997 election.

But it opened the door to 15 years of growth when the nation barely paused for breath.

George Osborne's (pictured) doom-laden forecasts should be doubted, says Alex Brummer

It’s a story everyone should remember as they read George Osborne’s doom-laden forecasts.

Much of the analysis in HM Treasury’s document is based on the assumption that a fall in the pound after Brexit would be terrible for us all – leading to higher interest rates, inflation and falling house prices.

The truth is that if corporate Britain and the army of small enterprises which is the bedrock of the economy take up the challenge, and see a sharp devaluation as an opportunity not just to sell to Europe but the rest of the world, Brexit – like the exit from the ERM – could fuel a boom.

Exports would rise, prosperity increase and lead to an era of higher living standards and less government borrowing.

Freedom from the European Union could prove as big an antidote to economic sclerosis as the departure from the ERM.

But should we trust Mr Osborne’s predictions at all? In fact, there’s every reason to doubt almost all of them.

CLAIMS AND REALITY: THE TRUTH BEHIND THE TREASURY'S 'DOSSIER'

CLAIM: The Treasury says a ‘leave’ vote would cause a loss of 3.6 per cent of output by 2017-18, or 6 per cent in a ‘severe shock’.

REALITY: The worst-case scenario presented by the Bank of England, which unlike the Treasury is highly regarded for its economic analysis, is for a ‘technical recession.’

That would mean two quarters of negative growth, not the dramatic downturn predicted by the Treasury.

Latest forecasts from private sector economists show the UK economy is on the up, despite the impending vote.

Goldman Sachs (which is financially supporting the ‘Remain’ campaign) puts quarterly growth at 0.5 per cent.

What is certain is that two-year forecasts are often wildly wrong. The continued slump in the Eurozone economies is likely to be just as much of a drag on growth as any uncertainty caused by Brexit.

CLAIM: Consumer prices will rise by between 2.3 and 2.7 per cent.

REALITY: This forecast is based on the assumption that the pound will fall heavily (not necessarily the case) and this will lead to a sharp increase in import prices.

What this ignores is that the world is going through a period of disinflation (falling prices). Oil and commodity prices are spectacularly low, and any effect on import prices of weaker sterling would be minor.

Even if the Treasury is right, inflation of 2.3 per cent – just 0.3 per cent above the Bank of England’s target rate – can hardly be regarded as incendiary.

CLAIM: Unemployment will increase by 1.6 per cent or 520,000 jobs and in a worst-case scenario could rise by 2.4 per cent to 820,000.

REALITY: Even if this forecast could be relied on, a jobless rate that is 1.6 per cent higher than the current 5.1 per cent rate would still be relatively modest compared to the 10 per cent-plus rate across the eurozone.

The latest unemployment figures showed that, despite the uncertainty over Brexit, the UK created 44,000 new jobs in the first three months of 2016 and the number of people on dole fell in April.

CLAIM: Average real wages will drop by 2.8 per cent.

REALITY: Higher inflation obviously means a hit for real (inflation-adjusted) wages. But if the Treasury’s assumptions on inflation aren’t fulfilled, this forecast falls apart.

What has proved a long-term dampener on real wages, irrespective of Brexit, is the influx of new people into Britain’s workforce.

CLAIM: House prices will fall by at least 10 per cent and perhaps as much as 18 per cent.

REALITY: This is based on the assumption that interest rates – and therefore mortgage rates – will have to rise to counter higher inflation.

But the Bank of England has been warning that if the economy keeps on growing, interest rates would have to rise anyway.

In parts of the country, such as the over-heated South-East, a fall in house prices might be welcome and enable more people to climb the ladder.

Irrespective of the referendum, the Chancellor has already taken some of the steam out of house prices by higher stamp duties on expensive properties, removing interest rate relief on second homes and a clampdown on mortgage lending for buy-to-let.

CLAIM: The pound will fall by 12 per cent and possibly 15 per cent.

REALITY: The pound has actually been rising against the euro and hit a three-and-a-half-month high last week. A devaluation of the pound could be just the present that our exporters need.

It would make Britain’s exports of goods and services substantially cheaper on all global markets. Historical experience suggests that devaluation is almost always a huge plus for Britain.

CLAIM: The budget deficit could soar by £24 billion or, in the worst case, £39 billion.

REALITY: Budget deficits are highly sensitive to economic forecasts. If the Treasury has its growth and unemployment numbers wrong, then almost certainly this forecast will be wrong too.

An alternative scenario is that the repatriation of our payments to the EU could lower the budget deficit. Higher exports could generate more tax income which would lower the deficit.

Remember that the budget deficit is the difference between two very big numbers – what the government spends and what it collects in taxes and charges. Forecasting for both is never on the mark.