The European Exchange Rate Mechanism (ERM II) is a system introduced by the
European Economic Community
The European Economic Community (EEC) was a regional organisation created by the Treaty of Rome of 1957,Today the largely rewritten treaty continues in force as the ''Treaty on the functioning of the European Union'', as renamed by the Lisbo ...
on 1 January 1999 alongside the introduction of a
single currency, the
euro
The euro (currency symbol, symbol: euro sign, €; ISO 4217, currency code: EUR) is the official currency of 20 of the Member state of the European Union, member states of the European Union. This group of states is officially known as the ...
(replacing ERM 1 and the euro's predecessor, the
ECU) as part of the
European Monetary System
The European Monetary System (EMS) was a multilateral adjustable exchange rate agreement in which most of the nations of the European Economic Community (EEC) linked their currencies to prevent large fluctuations in relative value. It was initi ...
(EMS), to reduce
exchange rate
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...
variability and achieve monetary stability in Europe.
After the adoption of the euro, policy changed to linking currencies of EU countries outside the
eurozone
The euro area, commonly called the eurozone (EZ), is a Monetary union, currency union of 20 Member state of the European Union, member states of the European Union (EU) that have adopted the euro (Euro sign, €) as their primary currency ...
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 January 2025, two currencies participate in ERM II: the
Danish krone
The krone (; plural: ''kroner''; sign: kr.; code: DKK) is the official currency of Denmark, Greenland, and the Faroe Islands, introduced on 1 January 1875. Both the ISO code "DKK" and currency sign "kr." are in common use; the former precedes ...
and the
Bulgarian lev
The ''lev'' (, plural: / , ; ISO 4217 code: BGN; numeric code: 975) is the currency of Bulgaria. In old Bulgarian, the word ''lev'' meant "lion"; the word "lion" in the modern language is ''lаv'' (; in Bulgarian: ). The lev is divided in 100 '' ...
.
Intent and operation
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
The European Currency Unit (, , ; ⟨⟩, ECU, or XEU) was a unit of account used by the European Economic Community and composed of a basket of member country currencies. The ECU came in to operation on 13 March 1979 and was assigned the ISO& ...
(ECU), the European unit of account, whose value was determined as a weighted average of the participating currencies.
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 lira ( , ; : lire, , ) was the currency of Italy between 1861 and 2002. It was introduced by the Kingdom of Italy (Napoleonic), Napoleonic Kingdom of Italy in 1807 at par with the French franc, and was subsequently adopted by the different s ...
, the
Spanish peseta
The peseta (, ) was the currency of Spain between 1868 and 2002. Along with the French franc, it was also a de facto currency, ''de facto'' currency used in Andorra (which had no national currency with legal tender).
Etymology
The name of the ...
, the
Portuguese escudo
The Portuguese escudo (, ) was the currency of Portugal replacing the ''real'' on 22 May 1911 and was in use until the introduction of the euro on 1 January 2002. The escudo was subdivided into 100 . The word literally means shield; like other ...
and
Pound sterling
Sterling (symbol: £; currency code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound is the main unit of sterling, and the word '' pound'' is also used to refer to the British currency general ...
, which were allowed to fluctuate by ±6%). Determined intervention and loan arrangements protected the participating currencies from greater exchange rate fluctuations.
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Northwestern Europe, off the coast of European mainland, the continental mainland. It comprises England, Scotlan ...
Chancellor of the Exchequer
The chancellor of the exchequer, often abbreviated to chancellor, is a senior minister of the Crown within the Government of the United Kingdom, and the head of HM Treasury, His Majesty's Treasury. As one of the four Great Offices of State, t ...
Denis Healey
Denis Winston Healey, Baron Healey (30 August 1917 – 3 October 2015) was a British Labour Party politician who served as Chancellor of the Exchequer from 1974 to 1979 and as Secretary of State for Defence from 1964 to 1970; he remains the lo ...
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.
[William Keegan: David Cameron's EU referendum raises spectre of Thatcher-era euroscepticism]
W. Keegan, International Business Times, 19 October 2015 The UK did join the ERM in October 1990 under Chancellor
John Major
Sir John Major (born 29 March 1943) is a British retired politician who served as Prime Minister of the United Kingdom and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1990 to 1997. Following his defeat to Ton ...
, in a move which at the time was largely supported by business and the press, but was forced to leave again two years later on
Black Wednesday
Black Wednesday, or the 1992 sterling crisis, was a financial crisis that occurred on 16 September 1992 when the UK Government was forced to withdraw sterling from the (first) European Exchange Rate Mechanism (ERMI), following a failed at ...
.
Historical exchange-rate regimes for EU members
The chart below provides a full summary of all applying
exchange-rate regime
An exchange rate regime is a way a monetary authority of a country or currency union manages the currency about other currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many ...
s for
EU members, since the
European Monetary System
The European Monetary System (EMS) was a multilateral adjustable exchange rate agreement in which most of the nations of the European Economic Community (EEC) linked their currencies to prevent large fluctuations in relative value. It was initi ...
with its Exchange Rate Mechanism and the related new common currency
ECU came into being on 13 March 1979. The euro replaced the ECU 1:1 at the exchange rate markets, on 1 January 1999. Between 1979 and 1999 the
D-Mark functioned as a ''de facto'' anchor for the ECU, meaning there was only a minor difference between pegging a currency against the ECU and pegging it against the D-Mark.
The
eurozone
The euro area, commonly called the eurozone (EZ), is a Monetary union, currency union of 20 Member state of the European Union, member states of the European Union (EU) that have adopted the euro (Euro sign, €) as their primary currency ...
was established with its first 11 member states on 1 January 1999. The first
enlargement of the eurozone
The enlargement of the eurozone is an ongoing process within the European Union (EU). All member states of the European Union, except Denmark which negotiated an opt-out from the provisions, are obliged to adopt the euro as their sole currency on ...
, to Greece, took place on 1 January 2001, one year before the euro had physically entered into circulation. The zone's next enlargements were with states that
joined the EU in 2004, and then joined the eurozone on 1 January in the mentioned year: Slovenia (2007), Cyprus (2008), Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014), Lithuania (2015). Croatia, which joined in the EU 2013, adopted the euro in 2023.
All new EU members having joined the bloc after the signing of the
Maastricht Treaty
The Treaty on European Union, commonly known as the Maastricht Treaty, is the foundation treaty of the European Union (EU). Concluded in 1992 between the then-twelve Member state of the European Union, member states of the European Communities, ...
in 1992 are obliged to adopt the euro under the terms of their accession treaties.
However, the last of the five economic
convergence criteria
The euro convergence criteria (also known as the Maastricht criteria) are the criteria European Union member states are required to meet to enter the third stage of the Economic and Monetary Union of the European Union, Economic and Monetary Un ...
, which need to be complied with in order to qualify for euro adoption, is the exchange rate stability criterion. This requires having been a member of the ERM for a minimum of two years without the presence of "severe tensions" for the currency exchange rate.
Parity break of the Irish pound and sterling
To participate in the European Monetary System, Ireland chose to break the
Irish pound
The pound ( Irish: ) was the currency of Ireland until 2002. Its ISO 4217 code was IEP, and the symbol was £ (or £Ir for distinction.) The Irish pound was replaced by the euro on 1 January 1999. Euro currency did not begin circulation unti ...
's parity with
sterling in 1979, because the UK had decided not to participate.
(The Irish Central Bank had maintained parity with sterling since the foundation of the state in 1922. "It was only in the 1970s, when high inflation in the UK threatened price stability in Ireland, that alternatives were seriously considered".
[)
]
Forced withdrawal of the sterling
The United Kingdom entered the ERM in October 1990, but was forced to exit the programme within two years after sterling came under major pressure from currency speculators. The ensuing crash of 16 September 1992 was subsequently dubbed "Black Wednesday
Black Wednesday, or the 1992 sterling crisis, was a financial crisis that occurred on 16 September 1992 when the UK Government was forced to withdraw sterling from the (first) European Exchange Rate Mechanism (ERMI), following a failed at ...
". There was some revision of attitude towards this event given the UK's strong economic performance after 1992, with some commentators dubbing it "White Wednesday".
Some commentators, following Norman Tebbit
Norman Beresford Tebbit, Baron Tebbit, (born 29 March 1931) is a British retired politician. A member of the Conservative Party (UK), Conservative Party, he served in the Cabinet from 1981 to 1987 as Secretary of State for Employment (1981–1 ...
, took to referring to ERM as an "Eternal Recession Mechanism", after the UK fell into recession in 1990. The UK spent over £6 billion trying to keep the currency within the narrow limits with reports at the time widely noting that the controversial Hungarian-American investor George Soros
George Soros (born György Schwartz; August 12, 1930) is an American investor and philanthropist. , he has a net worth of US$7.2 billion, Note that this site is updated daily. having donated more than $32 billion to the Open Society Foundat ...
's individual profit of £1 billion equated to over £12 for each man, woman and child in Britain and dubbing Soros "the man who broke the Bank of England".
Britain's membership of the ERM was also blamed for prolonging the recession at the time, and Britain's exit from the ERM was seen as an economic failure which contributed significantly to the defeat of the Conservative
Conservatism is a cultural, social, and political philosophy and ideology that seeks to promote and preserve traditional institutions, customs, and values. The central tenets of conservatism may vary in relation to the culture and civiliza ...
government of John Major
Sir John Major (born 29 March 1943) is a British retired politician who served as Prime Minister of the United Kingdom and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1990 to 1997. Following his defeat to Ton ...
at the general election
A general election is an electoral process to choose most or all members of a governing body at the same time. They are distinct from By-election, by-elections, which fill individual seats that have become vacant between general elections. Gener ...
in May 1997, despite the strong economic recovery and significant fall in unemployment which that government had overseen after Black Wednesday.
Increase of margins
In August 1993, the margin was expanded to 15% to accommodate speculation against the French franc
The franc (; , ; currency sign, sign: F or Fr), also commonly distinguished as the (FF), was a currency of France. Between 1360 and 1641, it was the name of coins worth 1 livre tournois and it remained in common parlance as a term for this amoun ...
and other currencies.
History
On 31 December 1998, the European Currency Unit (ECU) exchange rates of the eurozone
The euro area, commonly called the eurozone (EZ), is a Monetary union, currency union of 20 Member state of the European Union, member states of the European Union (EU) that have adopted the euro (Euro sign, €) as their primary currency ...
countries were frozen and the value of the euro, which then superseded the ECU at par, was thus established.
In 1999, ERM II replaced the original ERM. The Greek
Greek may refer to:
Anything of, from, or related to Greece, a country in Southern Europe:
*Greeks, an ethnic group
*Greek language, a branch of the Indo-European language family
**Proto-Greek language, the assumed last common ancestor of all kno ...
and Danish currencies were part of the new mechanism, but when Greece joined the euro in 2001, the Danish krone
The krone (; plural: ''kroner''; sign: kr.; code: DKK) is the official currency of Denmark, Greenland, and the Faroe Islands, introduced on 1 January 1875. Both the ISO code "DKK" and currency sign "kr." are in common use; the former precedes ...
was left at that time as the only participant member. A currency in ERM II is allowed to float within a range of ±15% with respect to a central rate against the euro. In the case of the krone, Danmarks Nationalbank
Danmarks Nationalbank (in Danish often simply ''Nationalbanken'') is the central bank of the Danish Realm, Kingdom of Denmark. It is a non-eurozone member of the European System of Central Banks (ESCB). Since its establishment in 1818, the objecti ...
keeps the exchange rate within the narrower range of ± 2.25% against the central rate of EUR 1 = DKK 7.46038.
EU countries that have not adopted the euro are expected to participate for at least two years in ERM II before joining the eurozone
The euro area, commonly called the eurozone (EZ), is a Monetary union, currency union of 20 Member state of the European Union, member states of the European Union (EU) that have adopted the euro (Euro sign, €) as their primary currency ...
.
New EU members
On 1 May 2004, the ten national central banks (NCBs) of the new member countries became party to the ERM II Central Bank Agreement. The national currencies themselves were to become part of the ERM II at dates to be agreed.
The Estonian kroon
The kroon (sign: KR; code: EEK) was the official currency of Estonia for two periods in history: 1928–1940 and 1992–2011. Between 1 January and 14 January 2011, the kroon circulated together with the euro, after which the euro became the sole ...
, Lithuanian litas
The Lithuanian litas (ISO 4217, ISO currency code LTL, symbolized as Lt; plural ''litai'' (nominative) or ''litų'' (genitive) was the currency of Lithuania, until 1 January 2015, when it was replaced by the euro. It was divided into 100 Cent ...
, and Slovenian tolar were included in the ERM II on 28 June 2004; the Cypriot pound
The pound, or lira (, plural , and , , from the Latin language, Latin via the Italian language, Italian ; Currency symbol, sign: £, sometimes £C for distinction), was the currency of Cyprus, including the Sovereign Base Areas in Akrotiri and D ...
, the Latvian lats and the Maltese lira
The lira (, plural: ''liri'', ISO 4217 code: ''MTL'') or pound (until ca. 1986 in English, code ) was the currency of Malta from 1972 until 31 December 2007. One lira was divided into 100 cents, each of 10 mils. After 1986 the lira was abbrev ...
on 2 May 2005; the Slovak koruna
The Slovak koruna or Slovak crown (, literally meaning ''Slovak crown'') was the currency of Slovakia between 8 February 1993 and 31 December 2008, and could be used for cash payment until 16 January 2009. The ISO 4217 code was ''SKK'' and the lo ...
on 28 November 2005.
On 10 July 2020 it was announced that the Bulgarian lev
The ''lev'' (, plural: / , ; ISO 4217 code: BGN; numeric code: 975) is the currency of Bulgaria. In old Bulgarian, the word ''lev'' meant "lion"; the word "lion" in the modern language is ''lаv'' (; in Bulgarian: ). The lev is divided in 100 '' ...
(which had joined the EU on 1 January 2007) and Croatian kuna (which had joined the EU on 1 July 2013) would be included in the ERM II.
These states (with the exception of Bulgaria) have all since joined the eurozone
The euro area, commonly called the eurozone (EZ), is a Monetary union, currency union of 20 Member state of the European Union, member states of the European Union (EU) that have adopted the euro (Euro sign, €) as their primary currency ...
, and hence left ERM II: Slovenia
Slovenia, officially the Republic of Slovenia, is a country in Central Europe. It borders Italy to the west, Austria to the north, Hungary to the northeast, Croatia to the south and southeast, and a short (46.6 km) coastline within the Adriati ...
(1 January 2007), Cyprus
Cyprus (), officially the Republic of Cyprus, is an island country in the eastern Mediterranean Sea. Situated in West Asia, its cultural identity and geopolitical orientation are overwhelmingly Southeast European. Cyprus is the List of isl ...
(1 January 2008), Malta
Malta, officially the Republic of Malta, is an island country in Southern Europe located in the Mediterranean Sea, between Sicily and North Africa. It consists of an archipelago south of Italy, east of Tunisia, and north of Libya. The two ...
(1 January 2008), Slovakia
Slovakia, officially the Slovak Republic, is a landlocked country in Central Europe. It is bordered by Poland to the north, Ukraine to the east, Hungary to the south, Austria to the west, and the Czech Republic to the northwest. Slovakia's m ...
(1 January 2009), Estonia
Estonia, officially the Republic of Estonia, is a country in Northern Europe. It is bordered to the north by the Gulf of Finland across from Finland, to the west by the Baltic Sea across from Sweden, to the south by Latvia, and to the east by Ru ...
(1 January 2011), Latvia
Latvia, officially the Republic of Latvia, is a country in the Baltic region of Northern Europe. It is one of the three Baltic states, along with Estonia to the north and Lithuania to the south. It borders Russia to the east and Belarus to t ...
(1 January 2014), Lithuania
Lithuania, officially the Republic of Lithuania, is a country in the Baltic region of Europe. It is one of three Baltic states and lies on the eastern shore of the Baltic Sea, bordered by Latvia to the north, Belarus to the east and south, P ...
(1 January 2015), and Croatia
Croatia, officially the Republic of Croatia, is a country in Central Europe, Central and Southeast Europe, on the coast of the Adriatic Sea. It borders Slovenia to the northwest, Hungary to the northeast, Serbia to the east, Bosnia and Herze ...
(1 January 2023).
Current status
As of January 2025, two currencies participate in ERM II: the Danish krone
The krone (; plural: ''kroner''; sign: kr.; code: DKK) is the official currency of Denmark, Greenland, and the Faroe Islands, introduced on 1 January 1875. Both the ISO code "DKK" and currency sign "kr." are in common use; the former precedes ...
and the Bulgarian lev
The ''lev'' (, plural: / , ; ISO 4217 code: BGN; numeric code: 975) is the currency of Bulgaria. In old Bulgarian, the word ''lev'' meant "lion"; the word "lion" in the modern language is ''lаv'' (; in Bulgarian: ). The lev is divided in 100 '' ...
. The currencies of Sweden (the Swedish krona
The krona (; plural: ''kronor''; sign: kr; code: SEK) is the currency of Sweden. Both the ISO code "SEK" and currency sign "kr" are in common use for the krona; the former precedes or follows the value, the latter usually follows it but, espec ...
), the three largest countries which joined the European Union
The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are Geography of the European Union, located primarily in Europe. The u ...
on 1 May 2004 (the Polish złoty
The złoty (alternative spelling: ''zloty''; Polish: ''polski złoty'', ;The nominative plural, used for numbers ending in 2, 3 and 4 (except those in 12, 13 and 14), is ; the genitive plural, used for all other numbers, is abbreviation: z� ...
, the Czech koruna
The koruna, or crown (sign: Kč; code: CZK, ), has been the currency of the Czech Republic since 1993. The koruna is one of the European Union's eight currencies, and the Czech Republic is legally bound to adopt the euro in the future.
The ...
, and the Hungarian forint
The forint (, sign Ft; code HUF) is the currency of Hungary. It was formerly divided into 100 fillér, but fillér coins are no longer in circulation. The introduction of the forint on 1 August 1946 was a crucial step in the post-World War II s ...
), and Romania which joined on 1 January 2007 (the Romanian leu
The Romanian leu (, plural lei ; ISO code: RON; numeric code: 946) is the currency of Romania. It is subdivided into 100 (, singular: ), a word that also means "money" in the Romanian language.
Etymology
The name of the currency means "lio ...
), are required to join in accordance with the terms of the applicable treaties of accession.
Sweden has voted in a referendum to stay out of the mechanism, despite being expected to join by the ECB, since Sweden has no opt-out like Denmark. EU members are required to join the ERM by the Maastricht convergence criteria.
Exchange rate bands
In theory, most of the currencies are allowed to fluctuate as much as 15% from their assigned value. In practice, however, the currency of Denmark deviates very little.
Historical reference
The former members of ERM II are the Greek drachma
Drachma may refer to:
* Ancient drachma, an ancient Greek currency
* Modern drachma, a modern Greek currency (1833...2002)
* Cretan drachma, currency of the former Cretan State
* Drachma proctocomys, moth species, the only species in the Genus ...
, Slovenian tolar, Cypriot pound
The pound, or lira (, plural , and , , from the Latin language, Latin via the Italian language, Italian ; Currency symbol, sign: £, sometimes £C for distinction), was the currency of Cyprus, including the Sovereign Base Areas in Akrotiri and D ...
, Estonian kroon
The kroon (sign: KR; code: EEK) was the official currency of Estonia for two periods in history: 1928–1940 and 1992–2011. Between 1 January and 14 January 2011, the kroon circulated together with the euro, after which the euro became the sole ...
, Maltese lira
The lira (, plural: ''liri'', ISO 4217 code: ''MTL'') or pound (until ca. 1986 in English, code ) was the currency of Malta from 1972 until 31 December 2007. One lira was divided into 100 cents, each of 10 mils. After 1986 the lira was abbrev ...
, Slovak koruna
The Slovak koruna or Slovak crown (, literally meaning ''Slovak crown'') was the currency of Slovakia between 8 February 1993 and 31 December 2008, and could be used for cash payment until 16 January 2009. The ISO 4217 code was ''SKK'' and the lo ...
, Latvian lats, Lithuanian litas
The Lithuanian litas (ISO 4217, ISO currency code LTL, symbolized as Lt; plural ''litai'' (nominative) or ''litų'' (genitive) was the currency of Lithuania, until 1 January 2015, when it was replaced by the euro. It was divided into 100 Cent ...
, and Croatian kuna.
See also
* Euro convergence criteria
The euro convergence criteria (also known as the Maastricht criteria) are the criteria European Union member states are required to meet to enter the third stage of the Economic and Monetary Union (EMU) and adopt the euro as their currency. Th ...
* List of acronyms associated with the eurozone crisis
Citations
External links
The ERM on the UK Parliament website
{{Euro topics
Eurozone