ERM II (Exchange Rate Mechanism) is an exchange rate mechanism with the euro as anchor currency. The objective behind ERM II is to secure exchange rate stabil-ity between the euro area and the EU member states that have not yet joined the euro. ERM II was established along with the introduction of the euro on 1 January 1999.
For each member of ERM II, a central conversion rate and a fluctuation band is determined vis-à-vis. The normal fluctuation band is +/- 15 pct. If a member state shows an excellent degree of convergence to the euro area, a more narrow fluctuation band can be negotiated. Denmark has done this. The Danish fluctua-tion band is +/- 2.25 pct. around a central rate of 7.46038 DKK per euro.
If an ERM II member’s exchange rate hits one of the predetermined fluctuation bands, The European Central Bank (ECB) and the central bank of the country in question are required to intervene in the foreign exchange markets in order to keep the exchange rate inside the fluctuation bands. In case of an instant specula-tive pressure against a member’s currency, the ECB can provide a very short term lending facility. However, the intervention requirement can be suspended if the intervention is in contradiction with the primary objective of the ECB or the na-tional central bank.
ERM II membership is not compulsory, but in order for a country to join the euro it must have participated in ERM II for at least two years without severe tensions and without devaluations.
Denmark participates in ERM II together with four of the new EU member states (Estonia, Latvia, Lithuania and Slovakia). Hungary, Poland, Czech Republic, Bul-garia and Romania are expected to join ERM II at a later stage. Slovenia joined the euro on 1 January 2007 and Cyprus and Malta joined the euro on 1 January 2008. Slovakia is expected to join the euro on 1 January 2009.
United Kingdom and Sweden do not participate in ERM II.