Exchange Rate Mechanism
The Exchange Rate Mechanism II (ERM II) replaced the Exchange Rate Mechanism of the European Monetary System and came into force at the beginning of Stage Three of Economic and Monetary Union (EMU) in January 1999. Based on the European Council Resolution of 16 June 1997, ERM II is currently regulated by the Agreement of 16 March 2006 between the European Central Bank (ECB) and the national central banks (NCBs) of Member States not participating in the euro area.
Participation in ERM II is voluntary for the non-euro area Member States, and functions without prejudice to the objective of the ECB and the NCBs of maintaining price stability.
Within the context of the agreement, fixed but adjustable central parities are established between the currencies of participating countries and the euro, as well as fluctuation margins of up to ±15%. If reached, the latter will, in principle, prompt automatic and unlimited intervention. Very short-term financing is available to that effect.
Within ERM II, intervention is carried out by the ECB, with the involvement of the Eurosystem NCBs, and in cooperation with the central banks responsible for the currencies intervened. Together with other policy measures, including monetary and fiscal policy, foreign exchange interventions should be used as an instrument to support the pursuit of economic convergence and exchange rate stability. Four countries currently participate in ERM II: Denmark, Estonia, Latvia and Lithuania.