This time, though, the circumstances are quite different. The system is splitting into a hard core and a soft penumbra. As the two Iberian currencies were devaluing, the French authorities felt so happy with the franc's position that they calmly cut interest rates again. Bolstered by the new right-wing government and the announcement of the independence of the Banque de France, the franc has been hoisted within the mark's inner circle.
For others with a less impressive anti-inflationary and fiscal track record, second-class citizenship must be their lot. The peseta's plight tells us less about the exchange rate mechanism than about Spain's economy.
A few years ago Spain was a magnet for foreign investors who viewed it as the new sunbelt of Europe. A boom ensued. The high interest rates needed to check inflation then led to an overvalued exchange rate when Spain entered the ERM in June 1989.
When the country slid into recession with 16 per cent of the labour force out of work, interest rates had to stay inappropriately high to maintain the peseta's parities. The first two devaluations were not seen as big enough to convince the markets that there would not be another, hence interest rates stayed high.
Yesterday's adjustment is thus largely a Spanish affair. For the penumbra, the ERM will increasingly look like the more adjustable system of 1979 to 1987 rather than the hard ERM it then became. But this is still useful. It will stop the severe exchange rate misalignments that would otherwise undermine Europe's new single market.Reuse content