European Exchange Rate Mechanism

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This article is about the second European Exchange Rate Mechanism (ERM II). For
ERM I, see European Monetary System.

Andorra
Bulgaria
Croatia
Czech Rep.
Denmark
E U R O Z O N E
Hungary
Kosovo
Monaco
Montenegro
Poland
Romania
San Marino
Sweden
Vatican

Eurozone

ERM II

ERM II with an opt-out

Other EU members

Monetary agreement

Unilaterally adopted

The European Exchange Rate Mechanism (ERM) II, formerly ERM, is a system
introduced by the European Economic Community on 1 January 1999 alongside the
introduction of a single currency, the euro (replacing ERM 1 and the euro's
 predecessor, the ECU) as part of the European Monetary System (EMS), to
reduce exchange rate variability and achieve monetary stability in Europe.
After the adoption of the euro, policy changed to linking currencies of EU countries
outside the eurozone to the euro (having the common currency as a central point).
The goal was to improve the stability of those currencies, as well as to gain an
evaluation mechanism for potential eurozone members. As of 2020, three currencies
participate in ERM II: the Danish krone, the Croatian kuna and the Bulgarian lev.

Contents

• 1Intent and operation of the ERM II

• 2Historical exchange-rate regimes for EU members
o 2.1Irish pound breaks parity with pound sterling
o 2.2Pound sterling's forced withdrawal from the ERM
o 2.3Increase of margins
• 3History of the ERM II
o 3.1New EU members
o 3.2Current status
o 3.3Exchange rate bands
▪ 3.3.1Historical reference
• 4See also
• 5Citations
• 6External links

Intent and operation of the ERM II[edit]

The ERM is based on the concept of fixed currency exchange rate margins, but with
exchange rates variable within those margins. This is also known as a semi-pegged
system. Before the introduction of the euro, exchange rates were based on
the European Currency Unit (ECU), the European unit of account, whose value was
determined as a weighted average of the participating currencies. [1]
A grid (known as the Parity Grid) of bilateral rates was calculated on the basis of
these central rates expressed in ECUs, and currency fluctuations had to be contained
within a margin of 2.25% on either side of the bilateral rates (with the exception of the
Italian lira, the Spanish peseta, the Portuguese escudo and the pound sterling, which
were allowed to fluctuate by ±6%).[2] Determined intervention and loan arrangements
protected the participating currencies from greater exchange rate fluctuations.
United Kingdom Chancellor of the Exchequer Denis Healey reportedly chose not to
join the ERM in 1979 owing to concerns that it would benefit the German economy by
preventing the Deutsche mark from appreciating, at the expense of the economies of
other countries.[3] The UK did join the ERM in October 1990 under Chancellor John
Major, in a move which at the time was largely supported by business and the
press,[4] but was forced to leave again two years later on Black Wednesday.