Exchange Rate Mechanism (ERM)
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| 1. History
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| 2. Major events |
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| 3. Latest Developments |
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The Exchange Rate Mechanism (ERM) is a device in which interest rates were only allowed to fluctuate within defined bands. Its overall objective was to stabalise the national currencies in that way that trade within Europe was encouraged and inflation controled. (Evans, 87)
In 1992 the ERM was wrenched apart when a number of currencies could no longer keep within these limits.
On what became known as Black Wednesday (16 September 1992), the British pound was forced to leave the system. The Italian lira also left and the Spanish peseta was devaluated.
As EMU progressed, a currency's ability to stay within its margins became one of the convergence criteria deciding its suitability to join the single currency and complete monetary union.
Since 1 January 1999 ERM II is in place. ERM II 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.
Links:
- BBC News Euro-glossary: ERM (Exchange Rate Mechanism)
- ERM II as explained by the European Commission
Latest Developments:
