The UK entered at what was the floating exchange rate at the time, although it had unofficially shadowed the DM for several years during the 80s. Ultimately th

The UK entered at what was the floating exchange rate at the time, although it had unofficially shadowed the DM for several years during the 80s. Ultimately the problem was that the correct price for the GBP/DM rate in 1989 wasn't the same as the correct price in 1992 - the divergence was largely because rates of inflation differed markedly between the UK and Germany and didn't converge. Also on your point re what the Germans could have done - they would have needed to cut rates to alleviate pressure. Instead they raised rates to head off inflation in Germany (this was in the context of German reunification which had led to a dramatic increase in government spending in Germany which has inflationary effects).