Alan Walters and his critique

Today's obituary for Sir Alan Walters, formerly Mrs Thatcher's personal economic adviser, is interesting reading. (I'd forgotten that Walters was from my home town of Leicester. There was quite a lot of coverage in the local paper when he first took up his appointment.) But he gets too easy a ride with the obituarist's remark that: "Quotes from an article he had written before his return to Downing St [in 1989] also showed him to believe the ERM [European Exchange-Rate Mechanism] 'half-baked' and unsustainable."

The difficulties that Walters created for the Government were not the fault of media commentators mischievously digging up an old article. Let me give the background.

It was the ERM issue that provoked Nigel Lawson, then Chancellor, to demand Walters's dismissal. As Mrs Thatcher refused, Lawson resigned. Walters quickly followed him out of office, as - a year later - did Mrs Thatcher herself. Mrs Thatcher should indeed have sacked Walters, and not only because she might have avoided serious damage to her Government. The fact that Walters's anti-ERM remarks came from an article published before his return to government service was beside the point. Targeting the exchange rate was central to Lawson's strategy, and it was absurd to appoint Walters in the first place when it might have been predicted that he lacked the discretion to confine his advice to the PM. (What I hadn't realised, and find extraordinary, is that Walters had to be told that he ought to resign once Lawson had gone. This is stated in an affectionate article this morning by Lord Griffiths, who was the bearer of the bad news.)

Walters was vocal in espousing what was called the "Walters critique" of the ERM. He maintained that in a system of pegged exchange rates such as the ERM there would be a convergence of nominal interest rates, with the perverse outcome that countries with higher inflation would have lower real interest rates. His argument was quite influential but had the disadvantage of not being true. The interest-rate differential between France and Germany was consistently wider at this time than the difference between the two countries' inflation rates. Real interest rates were thus not lower in the higher-inflation country, viz. France. I point this out because it would be a pity - and more important, a misreading of history - if commentators were to read into the later failure of the ERM a vindication of Walters's views. Oh, look....

(Incidentally, Nigel Lawson makes the point about interest-rate differentials in the ERM in an appendix in his voluminous memoirs, The View from No. 11, 1992, pp. 505-8. He says this after an unconvincing argument that entry in 1985 might have prevented the later fiasco that the UK did in fact experience within the ERM, after it joined in October 1990. But his dismissal of the Walters critique is right.)

Comments

[David Duff]

Well, that's "all blood under the bridge", as Edward Albee put it with appropriately grim humour, but what about now?

Perhaps it is not considered 'clubable' in the hallowed halls of 'The Thunderer' for one commentator to put the boot into another, but is there any other treatment suitable for Mr. Kaletsky given this, even by his eccentric standards, extraordinary suggestion? His only mitigation is that he freely confesses to having been wrong on just about everything to do with this current crisis.

http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article5469589.ece

And your useless "remember personal information" remains exactly that, useless!