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    Spain joined the EMS and pegged the peseta to the DM

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    Historically, Spain has had high inflation and has seen its peseta continuously depreciate. In 1989, Spain joined the EMS and pegged the peseta to the DM. According to a Spanish banker, EMS membership means that "the government has less capability to manage the currency but, on the other hand, the people are more trusting of the currency for that reason."

    a. What underlies the peseta's historical weakness?

    b. Comment on the banker's statement.

    c. What are the likely consequences of EMS membership on the Spanish public's willingness to save and invest?

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    Solution Preview

    a. What underlies the peseta's historical weakness?

    Spain has historically pursued an easy monetary policy, with an associated high rate of inflation. High inflation, in turn, led to continual peseta devaluation.

    b. Comment on the banker's ...

    Solution Summary

    The solution provides an explanation to what underlies the pesata's historical weakness, commenting on the banker's statement, and listing the likely consequences of EMS membership on the Spanish public's willingness to save and invest.

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