Shadow chancellor indicates that his opposition to British membership of ERM showed wisdom of challenging convention
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In a speech at the LSE Ed Balls on Thursday attempted to reframe the debate on the fiscal deficit. Photograph: Ray Tang/Rex Features
A seismic event early in your career usually resonates throughout the rest of your working life.
This is exactly what happened to Ed Balls when he had a ringside seat for the debate about British membership of the European Exchange Rate Mechanism in the early 1990s.
Balls had recently arrived at the Financial Times when John Major took Britain into the ERM in October 1990 – against the instincts of Margaret Thatcher – a month before he succeeded her as prime minister.
The then 23-year-old Oxford PPE graduate was one of a handful of people at the FT who were sceptical about British membership of the ERM. Major hoped that joining the ERM would help tame inflation.
In September 1992 Balls was still a leader writer at the FT when Britain was ejected from the ERM in dramatic circumstances. David Cameron was shaped by Black Wednesday as well. As a 25-year-old special adviser, he stood near Norman Lamont in the Treasury Circle on a balmy September evening as the then chancellor announced that Britain was leaving the ERM.
I remember the event well because I witnessed it as a cub reporter for the Times, standing just behind my future Guardian colleague Patrick Wintour. My job on that historic day was to tell the Times which politician entered which building at what time.
The ERM debacle had two major consequences for Balls, which are shaping his career to this day:
• It led indirectly to his appointment in 1994 as an economic adviser to Gordon Brown, setting Balls on a path to the same job held at that time by his mentor – Labour's shadow chancellor.
Peter Mandelson likes to say that he was instrumental in recruiting Balls, whose appointment was designed to strengthen Brown's operation after he was weakened by his support for British membership of the ERM. Brown was shadow trade and industry secretary when Britain joined. He had recently been appointed shadow chancellor when Britain crashed out.
• It helped foster Balls's belief that you should not fear taking a stand, as he did in FT leader writer meetings, against the consensus of the time.
In his landmark speech today at the London School of Economics Balls cited his and David Cameron's experience during the ERM episode to illustrate this point:
Take the fateful decision for Britain to join the ERM. That wasn't the result of great minds sitting around a table one day weighing up the pros and cons: it was the product of years of deliberation and delay, persuasion and preparation, through which a consensus was slowly built and those who disagreed – like [Margaret Thatcher's late economics adviser] Alan Walters – were gradually isolated.
Balls did not recall his experiences of the ERM because he is sentimental and likes to dwell on the past. He did it for raw political reasons – he wanted to show how he was vindicated by events in 1992. He also wanted to draw a parallel between George Osborne, who says there is no alternative to his plans to eliminate the structural deficit by 2015, and Lamont, who is seen as the weakest of the five Tory chancellors between 1979-97:
The consensus of that time was not right. Political support crumbled, credibility collapsed and the pound was withdrawn. I was working at the FT at the time and watched events unfolding. David Cameron had an even closer view, working as he did as Chancellor Norman Lamont's special adviser. And he will remember as I do the insistent and increasingly shrill 'jaw-boning' from a defiant chancellor who could not acknowledge that continued ERM membership was making the recession worse.
At the end of August 1992, three weeks before Black Wednesday, Norman Lamont summoned reporters to the Treasury at 8am and declared: 'There are going to be no devaluations, no leaving the ERM. We are absolutely committed to the ERM. It is at the centre of our policy. We are going to maintain sterling's parity and we will do whatever is necessary – and I hope there is no doubt about that at all.'
Balls then used the ERM episode to make another point. He said that Britain could not leave the ERM voluntarily because that would have led to market chaos. But he says that Osborne faces no such constraints and could easily vary his deficit reduction plans by reversing, for a temporary period, the 2.5% increase in the rate of VAT to 20% which was introduced in January.
The shadow chancellor tweaked Osborne's tail by reminding him that he has shown flexibility in the past. This is a reference to Osborne's decision to abandon the Tory pledge to match Labour's spending commitments:
It is because George Osborne has from the beginning had the flexibility and discretion to set a new and credible course that I find it so frustrating that he has boxed himself in, and now has to ignore the mounting evidence by sticking stubbornly to his guns – making the Major-Lamont ERM mistake all over again. Every time he says he can't change course, he makes it harder to do so – and increases the pain of lost jobs and lost growth.
Having argued that Osborne has room for manoeuvre, Balls then attempted in his speech to reframe the debate over the deficit. His call for a temporary cut in the rate of VAT represents, to his mind, a halfway house between Osborne's deficit reduction plan and Alistair Darling's proposal to halve the deficit over four years.
Balls signed up to the Darling plan when the former was appointed shadow chancellor in January. But is is clear he believes that it will be seen as increasingly irrelevant as time moves on and the world adapts to changing economic conditions.
There is also a lesson from the ERM. An opposition needs to be careful not to bind itself to a key economic policy long before a general election, as Labour did on the ERM in 1990 two years before the election.
The memories of the ERM gave Balls one final target. It allowed him to quote the words of the chief economist of Salomon Brothers, who told the New York Times in November 1991 that there was "no indication of currency misalignment" in Europe. For Britain to give in to realignment pressures: "would be neither beneficial for the stability of the ERM nor conducive to achieving [its] economic and currency goals," the economist added.
Balls picked up the story:
The man who said that? The IMF's John Lipsky.
And why would Balls want to target Lipsky? That would be because Lipsky, who became acting managing director of the IMF after the resignation of Dominique Strauss-Kahn, recently stood next to Osborne at the Treasury to endorse the chancellor's deficit reduction plan.
Balls showed once again that he has a long memory.