Bastards, Black Wednesday and what John Smith would make of Brexit

This humiliation of John Major’s government delivered fatal damage to the Tory Party’s reputation for economic competence and ignited a furious internal struggle over the Maastricht Treaty which ravaged their ability to govern at all. The Labour Party, then led by John Smith, brilliantly exploited these twin economic and political crises, paving the way for Labour’s 1997 General Election victory and more than a decade in the political wilderness for the Tory party.

A quarter of a century on Labour has a similar opportunity to wreak havoc on the faltering administration of Theresa May. But it requires Jeremy Corbyn to be as astute over Brexit and the single market as Smith was over the ERM crisis and Maastricht.

The seeds of the ERM fiasco were sown by the manner in which the Conservatives joined the currency system in October 1990. Prime Minister Margaret Thatcher had been firmly against but Major, then Chancellor, persuaded her to change her mind. But her U-turn came with a condition, an immediate interest rate cut from 15 to 14%.

In the haste to garner positive headlines, the Tory Government failed to consult our European partners in advance about the entry level. They were curtly informed of the unilateral decision to join at a central rate of DM 2.95, which was widely believed to be too high. The bungled ERM entry also signalled to the markets that this critical decision was not a carefully considered policy but driven by opportunistic Tory politics. A familiar story, 25 years on.

In November 1990 Thatcher was ousted by her own party and Major became PM. With the huge advantage of not being Thatcher, Major unexpectedly won the General Election on April 2, 1992. But chaos soon followed.

To ease inflationary pressures from German unification the Bundesbank had raised interest rates. This was the opposite of what was needed in the UK where the economy was in recession with rising job losses. To avoid higher rates the Bundesbank wanted a general realignment with an upward revaluation of the Deutsche Mark. But Major dismissed all talk of a realignment and even boasted that he wanted the Pound to replace the Mark as the strongest currency in Europe. Such hubris would cost him dearly.

By early September markets sensed blood and speculators took positions first against the Italian Lira. The Bundesbank tried to promote an ERM realignment at a finance ministers’ meeting in Bath but Major’s Chancellor Norman Lamont ruled out any official discussion of the option and instead hectored the Bundesbank President, Helmut Schlesinger, about cutting German interest rates. On September 13 the Lira was unilaterally devalued as the Bundesbank agreed to make a very small cut in its borrowing rates.

The next day, after a news report in which Schlesinger again argued for a realignment, the currency traders turned on the Pound. On Black Wednesday markets opened with the Pound facing a torrent of speculative pressure. In desperation, the Bank of England raised interest rates first by 2% and then 3%. But all to no avail. Despite spending billions in reserves, the Pound continued to haemorrhage support and by the evening the UK was out of the ERM. The political impact was instant, devastating, and enduring. In July 1992 Gallup’s poll gave the Tories a small four-point lead. By October Labour enjoyed a huge 22% lead and remained well ahead all the way to the 1997 election and beyond.

Smith launched a blistering onslaught in the Commons, mocking Major’s ‘Walter Mitty’ fantasy to have the Pound replace the DM, labelling him the ‘devalued Prime Minister of a devalued Government’. Smith’s uninhibited attack was strengthened by an important change to Labour’s ERM policy he made after the 1992 general election. He knew perfectly well that the Tories had entered at the wrong rate and as the new Labour leader he backed the calls for an ERM realignment. To have said this before the election would have been economically irresponsible and politically suicidal for Labour. It would have encouraged speculation against the Pound and allowed the Tories to label Labour as the ‘party of devaluation’.

If Black Wednesday wrecked the Tories’ reputation for economic competence it was the Maastricht Treaty crisis that followed which destroyed their political credibility. Labour’s strategy for the European Communities Amendment Bill was to fight to end the UK opt-out from the Social Chapter and drag out the legislative process as far as possible, creating opportunities for rebellions by Tory eurosceptics.

George Robertson, then Labour’s Europe spokesman, set a ‘ticking time bomb’ amendment on the Social Chapter which was finally put to the vote on July 22, 1993. Labour lost by one vote but in a second division on the Government’s motion to reject the Social Chapter, Major was defeated by 324 votes to 316. The embattled Tory leader, labelling some of his own MPs ‘bastards’, had no alternative but to use ‘the nuclear option’ of a confidence vote. Threatened with annihilation, the Tory rebels fell into line. At the end of the Maastricht negotiations the Tories had declared ‘game, set and match’ for Major, but Smith, switching to the Tory leader’s beloved cricket, declared that ‘he was clean bowled yesterday and he has been forced to follow on today’.

This was all unfolding a month after a sacked Lamont said the Tories ‘give the impression of being in office, but not in power’. The Maastricht fiasco fully demonstrated the validity of Lamont’s scathing remarks. Labour had also kept its own divisions under control despite having as many potential anti-EU rebels. Smith took the highly unusual step of allowing a series of debates in the Parliamentary Labour Party before the whip was agreed. All the votes went Smith’s way but his inclusive style earned respect even among the most persistent Maastricht rebels – such as a certain Jeremy Corbyn.

So, what are the lessons for Labour today? First, don’t hesitate to change policy if growth, jobs, and investment in the British economy depend on it, exactly as Smith did by pushing for ERM realignment. Second, relentlessly exploit Tory ideological divisions over Europe as they care more about these than the best interests of the UK. And third, build the widest possible unity of purpose among Labour MPs and members. The softening of Labour’s Brexit policy announced by Keir Starmer is a good start and the EU (Withdrawal) Bill is the perfect opportunity for ‘ticking time bomb’ amendments to destroy what little remains of Theresa May’s credibility.

John Smith would have been horrified by Brexit, campaigned passionately against it and made sure Labour fought all out to stay in the EU. In 1971 he was one of 69 Labour MPs who rebelled against the whip to vote in favour of joining Europe. He argued that he was ‘willing to give up some national sovereignty to gain sovereignty which will be able to do something about controlling the international companies of the future… If we do not enter Europe we shall not be in a position to control them and achieve those economic, social and political ends which we on this side hold among our main political objectives’.

Today, Smith the politician would acknowledge the result of the referendum, but Smith the lawyer would forensically expose Brexit’s ambiguities and delusions, and Smith the patriot would always fight for what he believed was right for Britain. He would insist that a narrow vote to leave the EU does not necessitate exiting from the single market or the customs union, and would relentlessly expose Tory incompetence in negotiation. I also believe that he would argue that freedom of movement rules should be more flexibly applied, and that a strong framework of employment law, exemplified by the minimum wage that he so strongly campaigned for, is the best way to defend working people in the UK wherever they are from.

In 1993 Smith fought hard for the Social Chapter to be included in the Maastricht Treaty and today he would argue that the single market, though far from perfect, delivers to us not just our biggest trading partnership but also the most comprehensively regulated economic area for employment, environment, and consumer rights anywhere in the world. That explains Tory support for a Hard Brexit, and why Labour must mobilise to defeat it. Not to do so would be to betray the future of young people who overwhelmingly reject the Tory agenda of austerity and isolation. John Smith would be their champion and never miss any opportunity to attack the folly of Mrs May’s Brexit chaos. That is the task facing Labour now.

David Ward served as head of policy to John Smith from 1988 to 1994