Conservatives face another Black Wednesday if they can’t fix the economy

If you want an example of how bad things can get for a Conservative government over the course of a few turbulent days, undermining its reputation for economic stewardship, then here’s a lesson from history. Next month will see the 30th anniversary of Black Wednesday, September 16, 1992, a date that should be etched in the collective psyche of the party.

It still haunts them. The genesis of the exchange rate mechanism fiasco can be traced back to pressure on the British government to adopt Germanic discipline aimed at reducing inflation through interest rate policy.

The late 1980s saw a mini-boom fueled by Nigel Lawson’s tax cuts that quickly turned into a bust with a recession at the start of the following decade. There was a war in Europe when Bosnia and Croatia demanded independence from the former Yugoslavia and an oil price shock when Iraq invaded Kuwait. Some things never change.

The big economic differences at the time were high unemployment and a fixed, overvalued exchange rate pegged to the Deutschmark through the ERM. Yet despite, or perhaps because of, economic hardship, the Conservatives won the 1992 general election.

There had been six quarters of negative growth by the time the country went to the polls and unemployment was on the rise. But John Major still won the biggest popular mandate in history, with more than 14 million votes, as Middle England turned out in droves to keep Labor out even though the economy was down. in the quagmire. It was Neil Kinnock’s election to lose: the Conservatives had already been in power for 13 years and no party since the Great Reform Act had won four consecutive terms.

As today, as the latest wage figures show, living standards were down sharply and this recession has hit homeowners in the South and London just as hard as those in the North. Even with a relatively new Prime Minister, the odds were stacked against the Conservatives and yet they won. Why? Because the country feared Labor would be even worse at handling the recession. A vote for the left is considered less risky in good times like 1966 or 1997.

That’s why Black Wednesday was so harmful to conservatives. Once again entrusted to power despite the mess they had created, they accentuated the impression of losing control with the debacle of the ERM. On the fateful day, interest rates – already artificially high to support the pound – rose to 15%, a breathtaking moment for someone who had recently borrowed to the limit to buy a house (that is – i.e. me).

The government tried to hold the line against the markets but was overwhelmed. The pound left the ERM, was devalued and the economy rebounded, ushering in a 15-year boom that only ended with the financial crash. It turned out to be a White Wednesday after all, but support for the Tories plummeted from that day and never recovered until Tony Blair’s landslide victory in 1997.

The lesson for Tory leadership candidates is that Labor can still be beaten in recession provided the country feels the Tories have a grip on the economy, even if they presided over its collapse. So the question is, which of the two has both the politics and the character to handle the crisis in a way that won’t bankrupt conservatives for a generation?

Liz Truss, the likely next occupant of Downing Street, may have been just 17 in 1992 and in her Lib Dem phase, but she sees the ERM experience as calamitous for the party. That’s why it’s making overhauling the economy its number one priority, even before tackling soaring energy costs or the NHS crisis.

She has a big advantage here over Rishi Sunak in that he has been Chancellor for the past two and a half years and can be described as being in the grip of Treasury orthodoxy accused of thwarting the strategy of growth the country needs. Ms Truss managed to position herself as the insurgent even though she was in Cabinet for eight years under three Prime Ministers, including a stint in the Treasury as Chief Secretary.

Yet you wonder if either of them has truly grasped the magnitude of the economic calamity that is looming. Mr Sunak says yes, which is why he calls his opponent’s policy a “fairytale economy”. Ms Truss, mindful of the only constituency that matters in this contest – the party’s roughly 160,000 members – seeks to highlight the electoral benefits that would accrue to the party by engineering a takeover through tax cuts. Mr Sunak is less optimistic about the country’s ability to weather the coming storm and wants to put in place the defenses to weather it both economically and politically.

These differences are important but the argument is somewhat redundant since the outcome is almost certainly decided now. Thousands of votes have been cast, there are still three weeks to go, and expectations remain high that it will be the Foreign Secretary who will move to No 10 on September 5.

She is proposing an emergency budget within weeks to reverse the National Insurance hike and cut taxes on green fuels, allowing people to keep more of their own money rather than have it taken out more late. But that won’t be enough to protect millions of people from the impact of soaring energy prices. So she needs a plan, especially when Labor leader Sir Keir Starmer is proposing a freeze until spring.

The best answer to date came from Scottish Power boss Keith Anderson. It suggests setting the cap at the current level of £1,971 for two years, with suppliers able to cover losses by borrowing from a “tariff deficit fund” run by commercial banks and guaranteed by the Treasury.

The loans would be repaid over 10 to 15 years and gradually passed on to consumers, avoiding huge cost increases. Had Sir Keir had any sense he would have taken this approach rather than going back to type by proposing another tax raid on oil and gas companies. Mr Sunak rejected that idea in April in favor of targeted aid, which was a mistake, and the government is actively considering how such a program could be implemented. Mrs. Truss, who opposes ‘almsgiving’, would do well to seize it. It might even make the curators look competent once again – and put the ERM ghost to rest.

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