The sterling crisis
The idea that it was possible to create a single currency by consent among competing capitalist powers in Europe was always a long shot. Now the bitter realities of the "free market" have been sheeted home to its own proponents.
When the dust settles, the Exchange Rate Mechanism (the agreed matrix of European currency rates) will be redrawn and the game will begin anew, though under somewhat changed conditions — the difference being a destructive new round of austerity in the weaker economies. The economic laws have presided over politics.
If, as presently seems most likely, the deutschmark emerges over time as the virtual European currency — rather than an ECU or any other fictitious money — the implications for the rest of Europe are dire. Permanent unemployment on the order of 20-30% could be the result in Portugal, Spain, Italy and Britain (not to mention the fate of expectant Eastern European nations).
Comments by Bundesbank chief Helmut Schlesinger that the pound ought to have been devalued are enough to reveal that the Germans knowingly precipitated this crisis. Additionally, there are both immediate and long-term causes of the financial chaos.
The recent insignificant 0.25% drop was an unambiguous signal German interest rates would remain high regardless of the penalty to other EC economies.
Massive budget deficits and big foreign borrowing to finance the integration of eastern Germany are the cause of high German rates, indicating the strains of converting the former socialist world to capitalism are insupportable on both sides of the old iron curtain.
Sterling has been artificially overvalued for years and entered the ERM in October 1990 well above its real worth, fundamentally to prop up the London financial sector, the mainstay of the British economy. The value of the pound had to fall at some point.
Meanwhile, acutely aware that continued high interest rates will force Britain further into recession, speculators dumped the pound.
Jumping interest rates to 15% just did not work, but anyway would have crushed the domestic economy. Nor did the spending of more than £20 billion by Europe's central banks to buy sterling. The weight of speculative capital moving out of sterling was too great even for the combined EC reserve to counter.
Like Britain, the rest of Europe is staring at a new economic downturn. The much vaunted plans for European unity in 1992 might have had a (temporarily) smoother ride had it not been for the further onset of recession across the continent (and across the world economy).
The 1987 stock market crash was the harbinger of these events. Money was pumped into the system with abandon then to stave off a 1930s-like depression. That could not last indefinitely. The collapse of credit in the '90s is only the postponed consequence of the "greed is good" syndrome of the '80s, but it leaves few ways out of the crisis.
One conclusion is obvious. All talk of recovery in the currently recessed major world economies is fatuous. The dramatic events of the last week are a further notice that the world economy continues its slide toward a new deep depression.