A special report prepared by BBV.
A EUROMONEY SURVEY - MARCH 1996
The tenacity with which Spain has held onto its place in the exchange rate mechanism of the European monetary system since it joined the mechanism in June 1989 is testament to the commitment of the authorities to convergence and integration with other economies in the ERM. All through the currency turmoil of the period between 1992 and 1993, Spain resisted leaving the ERM and has maintained its wide 6% bands around a central Ecu parity, although that parity has been devalued on four occasions since Spain joined the ERM.
Historically, the exchange rate has been dominated by periods of overvaluation. These happened after restrictive monetary policy designed to weigh down on inflation has sucked flows of short-term capital into the country. That was certainly evident in the early 1990s when the peseta sat at the top of the ERM and market players, convinced there would be no adjustment in central parities prior to monetary union, poured short-term flows into what they saw as a one-way bet. In the past, periods of overvaluation and uncompetitiveness have been followed by devaluation.