In all, the Bank lost an estimated £3.5
billion as a result of the Chancellor of the Exchequer, Norman Lamont, deciding
to abruptly pull out of the European Monetary System (EMS) and its Exchange
Rate Mechanism (ERM I). The ensuing chaos drove the GBP to its lowest level of
exchange since 1985 and the resultant economic and financial imbalances plagued
the conservative government until it was
replaced in the landslide victory for
New Labour of 1997 . The consequent
more able direction by Gordon Brown of the UK´s
finances partly restored the country´s place in the hierarchy of EU but the joining in 1999 of ERM II and the Eurozone was declined.
The Portuguese escudo was also attacked on Black Wednesday but not to the same extent. Portugal had joined ERM I in April 1992 after the Bank of Portugal (BoP) had spent a decade desperately combating soaring inflation and a failing economy with a combination of high interest rates , taxation of foreign capital, licencing property transactions and selling forward large values of a pegged escudo. In September 1992 interest rates temporarily went as high as 25% but the overnight rate settled to around 15% due to the intervention of Germany and its neighbouring economies. From then until the birth of the Euro in 1999 there followed a gradual convergence of interest rates and a reduction of inflation until the entry of the escudo at the depressed value of 200.482 to the Euro.
Fast forward to an entirely different picture in 2022. Following Brexit the UK is on the verge of recession while Germany and France are not so far behind due to escalating closures of businesses and a forthcoming winter of forecast discontent. Portugal , however is growing in confidence as it is without severe energy and climate crises and is accepting a role as a gateway to a digital Europe. The present surge of foreign investment in Portuguese resources reflects the underlying increased value of the escudo which is concealed within the Euro “snake” created by ERM II . Conversely the Mark and Franc have fallen by as much as five percentage points in their net worth. In effect, the “vultures” of private equity are paying bargain values which are well below the comparable parities of 1999.
The temptation to restore the escudo to legal tender will be resisted by an impoverished EU but it could make sense if a parallel “invest-Euro” was created similar to the petro-dollars used for the trading of energy products. The alternative would be to reintroduce the taxation of foreign capital at the point of entry . In 1992 this was a rate of 1% but thirty years later would need to be higher if the nation is to be compensated socially for the continuing loss of its assets to the benefit of elite corporate entities and oligarchs.
Interestingly, the European Central Bank has agreed with Amazon and several other mega-retailers to launch a pilot study for the introduction of a digital Euro in 2025 to compete with Bitcoin and Ethereum in the burgeoning crypto currency markets . Hopefully this may reduce the huge leaks of untaxed profits which often result from criminal or dubious business activity and bring some much needed relief to the lower echelons of our great European society.
by email, Roberto