European Exchange Rate Mechanism
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The European exchange rate mechanism (or ERM) was a system introduced by the European Community in March 1979, as part of the European Monetary System (EMS), to reduce exchange-rate variability and achieve monetary stability in Europe in preparation for the introduction of a single currency, the Euro, which took place in January 2002.
The ERM is based on the concept of fixed currency exchange rate margins, but with exchange rates variable with those margins. Before the introduction of the Euro, exchange rates were based on the Ecu, the European unit of account, whose value was determined as a weighted average of the participating currencies.
A 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% either side of the bilateral rates (with the exception of the Italian lira, which was allowed a margin of 6%). Determined intervention and loan arrangements protected the participating currencies from greater exchange rates fluctations. However, in 1993, the margin had to be expanded to 15% to accommodate monetary problems with the Italian lira and the Pound Sterling.
On December 31, 1998, the Ecu exchanges rates of the Eurozone countries were frozen and the value of the Euro, which then superseded the Ecu on a 1:1 basis, was thus established.
In 1999, ERM II replaced the original ERM. The Greek and Danish currencies were part of it, but as Greece joined the euro in 2001, only the Danish krone now remains a part of it. Particiapting currencies in ERM II are allowed to float within a range of +/- 15% against the euro. In the case of the krone, this means an exchange rate of 7.46038 DKK = 1 €.
EU countries that have not adopted the euro must participate for at least two years in the ERM II before joining the eurozone.
See also