eBusiness Weekly
Alfred Mthimkhulu
It is said that on September 16, 1992 after the United Kingdom withdrew from the European Exchange Rate Mechanism (ERM), the Chancellor of the Exchequer, Norman Lamont, sang in the shower supposedly in celebration. How could he celebrate such a colossal embarrassment to Her Majesty’s government? Preposterous!
Maybe he was not celebrating because in 1998, Her Majesty honoured him with a life peerage, a lifelong seat in the House of Lords. Anyway, it is the tense events of the early 1990s which are more intriguing than whatever Sir Lamont was truly up to that evening. Such events can inform debates on possible anchors, if any, for the yet-to-be-properly-named Zimbabwean currency.
Sir Lamont took over as Chancellor from John Major in 1990 when Prime Minister Margaret Thatcher was forced to resign. Sir John Major became Prime Minister.
The Iron Lady’s forced exit was thanks to her position on European monetary union. She was cautious about UK’s participation. It would usurp democracy along with the Kingdom’s long-established institutions and the lady was not for turning.
The ERM was formed in 1979 promoted by French President Francois Mitterrand and German Chancellor Helmut Kohl. The UK was a founding member. An underlying goal of the ERM was a single currency in Europe. To that end, members were to keep their currencies within a set range of the anchor currency.
The anchor currency was the German Deutsche Mark. The plan, as restated in the Maastricht Treaty of February 1992, was for the ERM to evolve into a single currency managed by a continental central bank, all by 1997. It was rocky in the ERM especially after the fall of communist regimes in the east. The collapse of the Soviet Union triggered momentous changes among which was German unification at a time when several western countries were in recession.
In June 1992, Denmark withdrew from the ERM. Why? The Danes had endured a long recession. As said, the ERM, among other requirements, compelled sovereign currencies to fluctuate within a range.
This resulted in perennial hardships for countries with inherently weak currencies. Such countries would then formally reduce the value of their currencies to remain within the ERM. In a weak currency country, imported goods become expensive. Typically, a currency is weak because the economy imports more than it exports. One way to strengthen a weak currency is by raising interest rates.
Higher interest rates attract investors from other countries. As investors pour in, the demand for the weak currency increases so strengthening it against others. But higher interest rates also mean higher borrowing costs for local firms and households such that making ends meet can become even more difficult for residents. Monetary authorities are therefore wary of raising interest rates. Politicians too, higher rates cost votes.
To stay within the ERM became very difficult as Germany, with its stronger Deutsche Mark, raised interest rates to fend-off inflationary pressures arising from the unification. As the Danes walked out in June, the French, Italians and others blamed the ERM and the German Bundesbank for inflicting the misery. (A quick aside while we’re on this: has anyone of late asked our neighbours — the Namibians, amaSwati and the southerners of the mountain kingdom — about their views on the Common Monetary Area anchored in the South African Rand?)
In his book aptly titled “And the Weak Suffer What They Must?”, Greece’s former Finance Minister, Professor Yanis Varoufakis, suggests that weak countries are (mis)led to believe that joining a monetary union delivers stability through the de facto coup of the weak country’s governance institutions.
This suggests that a harmonious monetary union must be preceded by a political union and herein was the objection of Baroness Thatcher to the single currency experiment. But Sir John Major and others wanted in. What did economists think of this stalemate? Well, what’s interesting to note is that as at today, Sir Norman Lamont is pro-Brexit. Maybe he was celebrating in the bath.
George Soros surely celebrated that evening. He had bet that the Bank of England would fail in propping up the value of the British Pound. Its failure would mean UK’s ERM exit. Soros walked away with a billion dollars from his ten billion-dollar bet. Definitely worth singing about in the shower.
As for gold being anchor, we need not say much. Our civilisation has flirted with gold for centuries. In his memoir, former chairman of the Federal Reserve, Alan Greenspan, concedes that inasmuch as the gold standard is formidable in keeping a currency stable, he has “long since acquiesced in the fact that the gold standard does not readily accommodate the widely accepted current view of the appropriate functions of government — in particular the need for Government to provide a social safety net”.
Indeed, money must be elastic to absorb shocks in the economy. Gold takes away that elasticity, that flexibility which enables authorities to be pragmatic in their fiscal and monetary policies.
On anchoring a currency on another, George Soros reminds us of the ever-lingering ineptitudes in authorities’ decision-making one of which made him pocket a billion dollars in a few hours. He observes that authorities “don’t like to admit failure; they would rather call for speculators to be hung from the lampposts than engage in a little bit of soul-searching to see what they did wrong”.
This is exactly why some advocate a coup of a local monetary system by a regional one. But can politics be completely absent in monetary policy decisions that so directly impact society?
Professor Varoufakis addresses the matter succinctly thanks also to his hands-on experience on it: “the notion that money can be administered apolitically, by technical means alone, is dangerous folly of grandest magnitude”.
This makes the argument for anchoring Zimbabwean currency to a regional system very difficult to sustain. With the gold standard as anchor out of the picture too, the poor Zimbabwean currency must fend for itself as most currencies do.
As with all currencies, the underwriter can never be some third party elsewhere.
The underwriter will always be the collective citizenry’s output from their daily undertakings wherein they turn less valuable stuff into very valuable stuff not just for own consumption but mainly for shipment to the rest of the world.
In such undertakings is the enduring anchor for a currency.
It takes a long time for that anchor to emerge.
Even when all actors sing in perfect harmony, five years will be far too short a time for the anchor to hold.
◆ Alfred Mthimkhulu, Senior lecturer, Graduate School of Business, NUST, Email: [email protected], Twitter: @mthimz
