Emperor without clothes: Financial market sentiment and the limits of British currency machismo in the ERM crisis

This paper takes a constructivist approach to the power relations between state authority and international finance. It investigates the nature of 'symbolic power' (Pierre Bourdieu), a facet of power with the potential to direct authority-dependent international financial markets by imposing social meaning. I analyse British currency machismo during the 1992 ERM crisis to demonstrate the potential and limitations of symbolic power. British authorities exercised symbolic power to construct credibility for an unsustainable exchange rate commitment. Symbolic manipulation succeeded because intersubjective symbolic capital, the resource constituting symbolic power, is transposable. The reputation for robust, determined and inflexible leadership in the fight against inflation inherited by the Major administration from Thatcher's domestic monetarism was transposed to European exchange rate cooperation to beef up a commitment to defend sterling's ERM parity. However, the government found itself trapped in a 'symbolic dilemma': powerless to increase interest rates in defence of sterling, it had to escalate its macho rhetoric when markets started to lose faith. Currency machismo found its limits in a competing and symbolically more powerful vision of the situation: the suggestion by the German Bundesbank that sterling was overvalued.