The Sterling Crisis: Never glad confident morning again for Major

IS THIS the sort of crisis which brings down, if not governments, at least prime ministers? The short answer is no. But that does not mean that John Major will escape serious damage from the extraordinary events of the past 24 hours.

Mr Major faces no threat from the opposition parties, who immoderately supported the no-devaluation policy, and the Cabinet has been solidly united behind him. But his credibility will not easily be repaired. Politically, it will never be glad confident morning again for the man who triumphed so spectacularly against the odds only five months ago. Harold Wilson seemed a diminished figure after the forced devaluation of the pound 25 years ago. Mr Major's prestige has been similarly dented. Indeed, the Prime Minister may have lost more last night than his predecessor in 1967. Wilson, after all, merely inherited an exchange rate system and a parity, whereas Major not only fought to take the pound into the ERM, but also fixed its 2.95 central rate against the mark.

Since that fatal act, the Prime Minister's determination to maintain sterling's position within the ERM took on the fervour of a crusade. It was the means by which inflation was finally to be extirpated from the British economy. Anybody who suggested devaluation as the means to lower interest rates and economic recovery was not only wrong but morally defective. Naturally, Mr Major wanted to leave the foreign exchange markets in no doubt about his strength of purpose, but at times he said more than was either necessary or wise.

Despite the longest recession since the Second World War, Mr Major's mild-mannered fanaticism on the subject of devaluation made straightforward retreat politically unthinkable - until lunchtime yesterday. When first one interest rate rise and then another failed to make any impression on the markets, it was clear that the game was all but played. But what finally convinced the Prime Minister and the Chancellor to put up the white flag was the unprecedented and terrifying rate at which the foreign exchange reserves were being expended in a losing battle with the markets. What happens over the next few days is clouded in uncertainty. No time limit on sterling's suspension has been set. It will be allowed to find its floor with interest rates set, for the moment, at 12 per cent.

At least, Norman Lamont did not compound earlier tactical errors by seeking an inadequate devaluation within the mechanism last night which would only have given the markets something new to aim at.

The wider question is whether this marks the end of the ERM as well as a period of unprecedented European co-operation. Last night, the Government was not slow to point the finger of blame at the Germans and the French. For once, the charges appear justified. It is the French who have vetoed the revaluation of the mark which the ERM has desperately needed ever since the full costs of German unification became known. For its part, the Bundesbank, denied revaluation and increasingly unwilling to bear the responsibilities thrust upon it for managing Europe's anchor currency, set about making life unbearable for the ERM's weaker members. In doing so, it has probably gone a long way towards achieving its goal of destroying any near-term prospect of European monetary union.

The quality of political leadership from France and Germany in the months since the Maastricht treaty was signed has been lamentable. If the French vote 'no' on Sunday, the two great standard bearers of the European Community will have received an answer which they richly deserve.

For his part, Mr Major, overwhelmed by superior forces, deserves some sympathy. He now has to pick up the tattered remains of both his economic strategy and his European policy. Even released from the vice of the ERM, he will not give up his determination to secure permanently low inflation in Britain. Undeterred by the disgraceful behaviour of the Bundesbank, he should announce next week the establishment of an independent Bank of England.