What is ERM II?

The Exchange Rate Mechanism (ERM II) was set up on 1 January 1999 as a successor to ERM to ensure that exchange rate fluctuations between the euro and other EU currencies do not disrupt economic stability within the single market, and to help non euro-area countries prepare themselves for participation in the euro area. The convergence criterion on exchange rate stability requires participation in ERM II. Within the euro area, there is only one currency the euro but there are EU countries outside the euro area with their own currencies, and avoiding excessive fluctuations in their exchange rates with the euro or misalignments helps the smooth operation of the single market. It is ERM II that provides the framework to manage the exchange rates between EU currencies, and ensures stability. Participation in ERM II is voluntary although, as one of the convergence criteria for entry to the euro area, a country must participate in the mechanism without severe tensions for at least two years before it can qualify to adopt the euro.

How does ERM II work?

In ERM II, the exchange rate of a non-euro area Member State is fixed against the euro and is only allowed to fluctuate within set limits. ERM II entry is based on an agreement between the ministers and central bank governors of the non-euro area Member State and the euro-area Member States, and the European Central Bank (ECB). It covers the following:

A central exchange rate between the euro and the country's currency is agreed. The currency is then allowed to fluctuate by up to 15% above or below this central rate. When necessary, the currency is supported by intervention (buying or selling) to keep the exchange rate against the euro within the 15% fluctuation band. Interventions are coordinated by the ECB and the central bank of the non-euro area Member State. Non-euro area Member States within ERM II can decide to maintain a narrower fluctuation band, but this decision has no impact on the official 15% fluctuation margin, unless there is agreement on this by ERM II stakeholders. The General Council of the ECB monitors the operation of ERM II and ensures co-ordination of monetary- and exchange-rate policies. The General Council also administers the intervention mechanisms together with the Member States central bank.

A measure of sustainable economic convergence

When a Member State enters the euro area, its central bank becomes part of the Eurosystem made up of the national central banks of the euro area and the ECB, which conducts monetary policy in the euro area independently from national governments. The consequence of this is that euro-area Member States can no longer have recourse to currency appreciation or depreciation to manage their economies and respond to economic shocks. For example, they can no longer devalue their currency to slow imports and encourage exports. Instead, they must use budgetary and structural policies to manage their economies prudently.

ERM II mimics these conditions thereby helping non-euro area Member States to prepare for them. Successful participation in ERM II for at least two years is considered as confirmation of the sustainability of economic convergence and that the Member State can play a full role in the euroarea economy. It also provides an indication of the appropriate conversion rate that should be applied when the Member State qualifies and its currency is irrevocably fixed.

EU currencies included in the Exchange Rate Mechanism (ERM II)

Denmark: the Danish kroner joined ERM II on 1 January 1999, and observes a central rate of 7.46038 to the euro with a narrow fluctuation band of 2.25%. Greece: the Greek drachma joined ERM II on 1 January 1999, and observed a central rate of 353.109 to the euro with a standard fluctuation band of 15%. On 17 January 2000, the central rate was revalued to 340.750. The Greek drachma left ERM II when Greece adopted the euro on 1 January 2001. Estonia: the Estonian kroon joined ERM II on 28 June 2004, and observes a central rate of 15.6466 to the euro with a standard fluctuation band of 15%.The Estonian kroon left ERM II when Estonia adopted the euro on 1 January 2011. Lithuania: the Lithuanian litas joined ERM II on 28 June 2004, and observes a central rate of 3.45280 to the euro with a standard fluctuation band of 15%.Slovenia: the Slovenian tolar joined ERM II on 28 June 2004, and observed a central rate of 239.640 to the euro with a fluctuation band of 15%. The tolar left ERM II when Slovenia adopted the euro on 1 January 2007. Cyprus: the Cyprus pound joined ERM II on 2 May 2005, and observed a central rate of 0.585274 to the euro with a fluctuation band of 15%. The Cyprus pound left ERM II when the country adopted the euro on 1 January 2008. Latvia: the Latvian lats joined ERM II on 2 May 2005, and observes a central rate of 0.702804 to the euro with a fluctuation band of 15%, but Latvia unilaterally maintains a 1% fluctuation band around the central rate. Malta: the Maltese lira joined ERM II on 2 May 2005, and observed a central rate of 0.429300 to the euro with a fluctuation band of 15%, but Malta unilaterally maintained the exchange rate of the lira at the central rate without fluctuation . The Maltese lira left ERM II when the country adopted the euro on 1 January 2008. Slovakia: the Slovak koruna joined ERM II on 28 November 2005, and observed a central rate of 38.4550 to the euro until 19 March 2007 when it was revalued to 35.4424.On 29 May 2008, it was again revalued to 30.1260 , while maintaining the standard fluctuation band of 15%. The Slovak koruna left ERM II when the country adopted the euro on 1 January 2009
http://ec.europa.eu/economy_finance/euro/adoption/erm2/index_en.htm