European Exchange Rate Mechanism

The Exchange Rate Mechanism II (abbreviated ERM II,. Eng European Exchange Rate Mechanism II and ERM II) or because his predecessor EWS and EWS II is an existing between different EU countries under the European Monetary System II since 1999 exchange rate agreements. It sets a maximum bandwidth of ± 15 percent around the central rate of the currency of ERM II Member to the euro. A minimum of two years smooth participation in ERM II is one of the four EU convergence criteria for adopting the euro dar. currently participating in ERM II with Lithuania and Denmark, two countries participate.

2.1 central rates and bandwidths
2.2 Interventions and intervention funding
2.3 Decision-making

3.1 Introduction
3.2 accessions of the Central and Eastern European countries 3.2.1 Estonia
3.2.2 Latvia
3.2.3 Lithuania
3.2.4 Slovenia
3.2.5 Malta
3.2.6 Cyprus
3.2.7 Slovakia

4.1 Reasons for Joining
4.2 Duration of Participation
4.3 Organisation

5.1 Former Members
5.2 Prospective Members

6.1 commonalities
6.2 differences

Basics

Classification

On 1 January 1999 the ERM II is in the third stage of Economic and Monetary Union ( EMU), taken the place of the original European Monetary System, EMS I briefly. The EMS was founded in 1979 as the successor of the European Exchange Rate Mechanism. It was a system of fixed but adjustable exchange rates between the currencies of EU Member States and should create an area that is largely exempt from profound exchange rate fluctuations. The three elements of the European Monetary System were one of the exchange rate and intervention mechanism, a comprehensive financial aid system and the European Currency Unit as a reference value and unit of account. In the European Monetary System a fluctuation in the exchange rates of the participating States of ± 2.25 percent agreed. In August 1993, the band widths were increased to 15 percent, up and down. With the final stage of EMU were irrevocable exchange rates of the currencies of the eleven Member States which were members from the beginning of the monetary union, set. In addition, the conduct of a single monetary policy under the responsibility of the European Central Bank ( ECB) began. Like the earlier EWS includes the ERM II fixed exchange rates. These may vary within certain ranges. Furthermore, ERM II allows the EU Member States that are not yet part of the euro zone, a connection to the common currency. The anchor currency in the euro area, the euro dar. ERM II thus adapts its principles and structural elements of the changed circumstances in the third stage of Economic and Monetary Union.

Legal bases

The ERM II is based on two right columns. The " Resolution of the European Council on the establishment of an exchange rate mechanism in the third stage of Economic and Monetary Union" of 16 June 1997 is the first column. The contents thereof are the principles and objectives as well as the basic structural elements of the system. The second column contains an agreement of 29 April 2004. This agreement between the ECB and the national central banks of the euro - area Member States specifies the operational elements of the system.

Basic principles

There are varied reasons for a system of exchange rates between the euro and the currencies of non -euro area belonging States. A basic principle is to prevent the deterioration of the internal market in the EU. This can be caused by excessive fluctuations in the nominal exchange rates of the participating currencies or by real exchange rates. The ERM II is for EU member countries that have not yet adopted the euro, representing a supportive exchange rate system. It is designed to help the euro area to connect their currencies to the euro in achieving the required convergence for future accession. Another principle of ERM II is the equal treatment in the introduction of the euro. Thus at least two years smooth participation in ERM is for Member States adopting the euro later, just as binding as in the Member States of the " first wave".

Functions

The ERM II performs two important functions. The first function involves aligning the exchange rates of the currencies of the participating Member States in the euro mechanism. The exchange rate between currencies participating in ERM II and the euro may vary by a maximum of ± 15 percent; but it can also narrower fluctuation bands are defined. On the other hand, the ERM II a convergence criterion for the introduction of the euro dar. Thus, countries wishing to adopt the euro as their currency have previously participated in ERM II without Leitkursabwertung two years. This two year participation in ERM II is one of four EU convergence criteria for euro adoption.

Currency board

The current member of ERM II, Lithuania has a currency board, with the appropriate exchange rate is fixed. This fixing of the respective country's currency to the euro is done unilaterally. That is, there is this to be one-sided obligations of the respective countries, which are not binding on the ECB. The ECB has a contractual obligation only when an imminent crossing of ± 15 percent deviation to intervene. You can also do this at any earlier point in time, however. Currency boards represent According to the ECB is no substitute for participation in ERM II dar. Thus, countries that have a currency board set up, have participated before the convergence examination, which is carried out before the introduction of the euro, at least two years in ERM II. An exception exists for countries with a viable classified currency board system on a euro basis. Here may be waived by a two-fold change their exchange rate regime with the consent of the ECB.

Structural features

Central rates and bandwidths

The ERM II is a multilateral agreement between the Member State, the Member States of the euro area, the ECB and other countries participating in the ERM Member States. When ERM II is a system of fixed but adjustable exchange rates and that can vary within a certain range. In a first step, official central rates of the currencies that are not yet members of the euro area, set against the euro. Unlike the EWS is omitted in this approach to the bilateral central rates of agreement between the participating non-euro currencies. The ERM II provides the possibility of applying different exchange rate strategies. However, floating exchange rates, floating exchange rate adjustments, links to non-euro currencies are not compatible with the ERM II. The exchange rate between currencies participating in ERM II and the euro, subject to a standard fluctuation band of ± 15 percent. This results in each currency upper and lower limit courses that are basically to defend. Through a convergent economic policies of the non-euro countries, the stabilization is to be achieved. The supportive use of the interest rate instrument is also provided. So-called intra- marginal interventions, thus smoothing the foreign exchange market interventions by central banks between the upper and lower limit courses are available on a voluntary basis. There continues to be agreed narrower bands than the intended standard bandwidth formally the possibility for countries with a correspondingly high degree of convergence. These are then defending also by automatic intervention. For the desire of closer ties, the initiative should come from the Member State concerned. In addition, informal arrangements may be made bilaterally between the ECB and the national central bank concerned, which are not published.

Interventions and intervention funding

The ECB and the central bank concerned from the non- euro area are obliged to intervene automatically and indefinitely when reaching the points of intervention in the currency markets. The intervention points for the participating central banks are the upper and lower limit courses. Here, each weak currency is bought against the strong currency. Interventions are in euros and the participating currencies which are not conducted in currencies such as the U.S. dollar. Any intervention means donating central bank money creation for its own currency. This can operate in automatic and unlimited, quickly lead to a conflict with the objective of price stability. The limits of interventions are words where they interfere with the geared to price stability monetary policy of a central bank. A recorded in the ERM II protection clause allows the participating central banks to suspend these interventions, as soon as such a conflict is imminent. However, the credibility of the whole system has to be considered in this decision. To give the intervention obligation to the bandwidth limits of credibility, it has been supplemented by financing facilities in the ERM II. It follows that the ECB and the participating central banks grant each other in case of need very short-term credit lines for the purpose of mandatory interventions. This funding can basically be taken automatically and indefinitely to complete. Previously, the debtor central bank, however, is required to make appropriate use of their foreign exchange reserves. In principle, these foreign exchange interventions are only supportive nature and should not replace a convergence- oriented monetary and fiscal policy.

Decision-making

Decisions on central rates and the standard bandwidth can be taken in the context of a common procedure. The main partners are the European Commission, the Economic and Financial Committee, the Ministers of the euro - area Member States, the ECB and the ministers and central bank governors of the non - euro area Member States. The decision fixing the central rates and the standard bandwidth requires unanimity. An adaptation, ie the revision of central rates is carried out by the same procedure. A timely adjustment of nominal central rates, for example, be required to anticipate developments that may lead to exchange rate tensions. Typically, in such a case, the national authorities a request for central rate. In advising the finance ministers of the euro countries, together with the President of the ECB and finance ministers and central bank governors of the ERM II countries. Furthermore, the European Commission also takes part in the talks. The method as adopted is presented in a final step, the Economic and Financial Committee for hearing. Then, where appropriate, the implementation is carried out by the national central bank and the ECB. A confidential procedure aimed at reconsidering central rates can be initiated by all participating parties to this mechanism, including the ECB. At the request of the relevant, not belonging to the euro area Member State to establish closer fluctuation band than the standard band width are determined. This possibility is an exception, because the default bandwidth for Member States in the convergence process is appropriate. If the convergence process as in the case of Denmark is very advanced multilaterally agreed narrow ranges can be considered.

Development

Introduction

The ERM II replaced with Resolution of the European Council on 16 June 1997 which was introduced in 1979, European monetary system. He was installed with the euro on 1 January 1999. In this context, the function of the euro receives as master or anchor currency, so that the parities, ie, the central rates for the currencies in question are linked to the euro. Since then, a total of nine Member States have participated in ERM II. Denmark and Greece were the first countries which joined the ERM II. Both countries had previously ERM I listened, who quit at the euro introduction in most of its Member States on 1 January 1999 to exist. Greece left the ERM II automatically when it introduced on 1 January 2001 the euro as its currency, after the EU convergence criteria were fulfilled. Denmark is still a member of ERM II and does not intend to replace the currency peg by an introduction of the euro.

Accessions of the Central and Eastern European countries

Estonia

Estonia became effective on June 27, 2004 ERM II. Since the June 20, 1992 Estonia had tied its currency, the kroon to the German mark or the euro, which has not changed even with the ERM II. The aim of introducing the euro after two years, but the country did not reach first. It was only on 12 May 2010, the European Commission recommended the introduction of the euro in Estonia. The accession was confirmed on 17 June 2010 by the finance ministers of euro countries and the Government. Thus, Estonia joined on 1 January 2011, the monetary union.

Latvia

As Malta and Latvia has tied the Lats with a currency board to the euro since 1 May 2005, but had variations of a percent. Latvia joined on 1 January 2014 in the euro area.

Lithuania

Lithuania also took effect on June 27, 2004 ERM II. Due to inflation by 0.1 percentage points above the limit the introduction of the euro could not take place there as well after two years. As Estonia had pegged its currency, the litas to the euro since 2 February 2002 Lithuania. Lithuania's accession to the monetary union is planned for 2015.

Slovenia

In contrast to the previous two countries, Slovenia has, which joined the ERM II at the same time, adopt the euro on 1 January 2007. Therefore, Slovenia has been increasing since that time no longer participating in ERM II.

Malta

Malta submitted May 1, 2005 its currency basket quite to the euro, so that corresponded to the arrangement through a currency board. On 16 May 2007, the EU Commission and the ECB issued the Recommendation, from 1 January 2008 to adopt the euro in Malta. The confirmation by the Council of Finance Ministers took place on 5 June 2007 in Luxembourg. The final decision was made by the EU Heads of State and Government at their summit on 21 June 2007. Consequently, the euro in Malta was introduced on 1 January 2008.

Cyprus

As with Malta and Latvia, the decision on the accession of the EU member Cyprus has not announced more 1 May 2005 the European Commission in order to avoid speculation on the financial markets. Cyprus joined, as recommended by the EU Commission and the ECB on 1 January 2008 the euro area.

Slovakia

On 28 November 2005, Slovakia joined in also without notice, the ERM II. On 19 March 2007, the central parity between Slovak koruna and euro in consultation between the EU and the Slovak National Bank has been adjusted. Was justified, the realignment of the crown with a number of fundamental factors that have put the Slovak currency appreciation pressure. The ECB considers that the revaluation of the currency to maintaining macroeconomic stability helps. However, the realignment had no impact on the prescribed two-year period, there was an appreciation. Since the upward pressure lasted, the central rate of the Slovak crown on May 28, 2008 was adjusted with effect from 29 May 2008, a second time. On 7 May 2008 the European Commission recommended due to the convergence report, the ECB, the euro introduction in Slovakia on 1 January 2009, because the country has fulfilled all the Maastricht criteria. This recommendation was confirmed at the Summit of Heads of State and Government of the EU Member States on 19 June 2008. On 1 January 2009, the euro was introduced in Slovakia. Slovakia thus left out of the ERM II.

Participation

Reasons for Joining

The decisive factor for the onset and duration of participation in ERM II, the prospects for achieving an increase of sustained convergence of economic fundamentals. The general objective of the participation process is to promote macroeconomic stability in the new Member States, so as to make the best possible contribution to sustainable growth and real convergence. This new Member States should take into account the limitations of exchange rate flexibility. While participating in ERM II does not guarantee a supportive and consistent structure and macroeconomic policy, but they can produce a disciplining effect in this regard. The new Member States will have to take into account to determine the optimal strategy in terms of ERM II and the later introduction of the euro, the specific circumstances of their country. These include the respective general strategy regarding the monetary integration as well as the monetary and exchange rate policy framework and the budget situation. The early rigidity of the exchange rate, for example, make abrupt realignments with potentially negative economic consequences necessary. Therefore, may be advisable for some Member States to achieve a higher degree of convergence before participating in ERM II, as well as the credibility of the exchange rate mechanism should remain generally been maintained. Joining the exchange-rate mechanism continues to depend on an agreement on the central rate and the fluctuation between the respective parties. In the crisis countries of the euro zone, the convergence of economic fundamentals has not been found. On the other hand, are already produced by adherence to the currency mechanism and the associated expansion of the money supply conditions, as the example of Denmark can be seen, for a real estate boom. The most important advantage is the rate stability for export and import in from the euro zone.

Duration of participation

The minimum period of participation in ERM II before the euro introduction sets the Treaty establishing the European Community, and short of the Treaty. From this it appears that before the convergence examination that precedes the introduction of the euro, a participation in ERM II is expected of at least two years. Thus, a Member State under ERM II has provided the normal fluctuation margins have complied with for at least the last two years before the convergence examination without severe tensions. He may also, within that period not have devalued its currency from the central rate against the euro. In addition to this two-year minimum period of participation in ERM II before the convergence examination are available for new members is no time limit for continued participation in ERM II There is no specific timetable for the entry of the new Member States and does not warrant a limitation of the duration of participation in ERM. The duration of participation in ERM II should therefore be oriented less to the required minimum period of two years, but rather on the favorability of the process of convergence. The original central rate does not necessarily also the final conversion rate for the euro adoption be because realignments may be necessary well.

Expiration

EU Member States outside the euro area, have the opportunity to join on a voluntary basis the exchange rate mechanism. However, the participation in ERM II is expected from new Member States, since it is a prerequisite for the eventual adoption of the euro. Joining this can be done at any time after joining the EU. For the procedure for ERM II entry by the Member State at any time can be initiated and is therefore not tied to specific dates. The parties involved in the mechanism have the main features, especially the central rates and fluctuation band agree. Participation in ERM II or the candidate is not dependent on preconditions and pre-established criteria. Political adjustments, for example, in terms of price liberalization and fiscal policy, however, should be performed prior to participation in the exchange rate mechanism in order to ensure a smooth participation in ERM II. Likewise, it is necessary to operate a credible policy to consolidate the public finances. Participation in ERM II is, as with any exchange rate regime, only one element of the overall policy framework. Therefore, it should not be viewed in isolation, but should be compatible with other elements of this general framework. This includes in particular the monetary, fiscal and structural policies. The selected central aims at the time of entry into the Exchange Rate Mechanism reflect the best possible assessment of the equilibrium exchange rate. This assessment should be based on a broad range of economic indicators and trends, as well as taking into account the market rate. The parties to the agreement can not determine the outcome of such an analysis in advance. You decide by mutual agreement on the central rates. Since the agreement, multilateral character, it is necessary that unilateral announcements to the intended central rates are avoided. Such realignments for example due to changes in the equilibrium exchange rate should be timely. In addition, have the opportunity to initiate a process for reconsidering central rates all parties.

Members

Currently, the ERM II has two members. Lithuania plans to adopt the Euro as soon as all the convergence criteria are met. Denmark negotiated in the Treaty of Maastricht of a derogation, which frees the land from the requirement of Euro introduction (so-called " opt-out "). The decision to adopt the euro, is made dependent on a referendum in Denmark.

(* ) On both sides guaranteed Moreover, currency fluctuation band of ± 15 %

Former members

The ERM II has so far proved to be a stable exchange rate arrangement. Since 1999, only the central rate of the Slovak crown had to be adapted twice, so be upgraded. The central rates of five other countries that have adopted the euro meanwhile, have remained unchanged during their ERM II membership. In all cases, the last ERM II central rate was also used as the final conversion rate to the euro.

Future members

Of the 28 EU countries have adopted the euro as their currency 18, two are currently accepting already participating in ERM II. Thus currently remain eight countries as future candidates for participation in ERM II

Coupled by the currency board to EUR ( Central: 1.95583 lev = 1 EUR )

With the exception of Denmark and the UK, all EU countries are obliged to adopt the euro and thus before joining the ERM II. Nevertheless, the inclusion of other countries in the ERM II is not expected in the near future. Reason is the economic situation in the countries concerned, Bulgaria, Poland, Romania, Czech Republic and Hungary, which makes it unlikely the fulfillment of all the convergence criteria in the foreseeable future.

A special case is the potential member of Sweden, which hurt until further intentionally one of the convergence criteria. Although the other convergence criteria would permit introduction of the euro, Sweden denied membership in ERM II, it was announced that it would adopt the euro after a positive referendum. This behavior violates strictly speaking, the Maastricht Treaty because Sweden, unlike the UK and Denmark, no official opt-out has. Nevertheless, it is tacitly tolerated by the EU Commission, since the euro was introduced in 1999, but in 1995 Sweden joined the EU. The Commission has, however, given to understand that for those countries which joined the EU after 1999, the EU, the introduction of the euro was " part of the overall package ", and are therefore an " unofficial opt-out " not accepted after the Swedish model would.

Comparison with the ERM I

Similarities

The ERM and the ERM II I have some similarities. To which the decision of realignments consulted in the context of a common procedure. Similarly, the definition of the bandwidth and central rates is done in such a framework. The Minister of Finance, the President of the ECB and the national central banks and the Commission are involved. In both, the default bandwidth is ± 15 percent ( in ERM I originally ± 2.25 per cent, since 1993, ± 15 percent ), with narrower bandwidths are possible. Both the ERM I and the ERM II shall be automatically interventions by the national central banks with adequate financing on reaching the intervention points.

Differences

There are several major differences between the ERM I and the ERM II. The multilateral exchange rate pegs ERM I are replaced by bilateral ties between the euro and the currencies of the participating countries not yet. Thus, the ERM I was characterized by multilateral intervention obligations. When ERM II on the other hand, bilateral intervention obligations between the ECB and the central banks of the participating Member States not yet. Another difference is the reserve currency. The euro in ERM II acts as a formal anchor. We focus on helping to promote the convergence of " pre-ins " in the direction of the macroeconomic stability standards of the euro area. In the previous model was as an anchor currency, the D- Mark, although not formally provided. ERM II is in contrast to the ERM I deliberately designed asymmetrically. That is, the alignment is not the average of the currencies, as in the ERM I in the currency basket ECU, but against the euro. This provides a centralized, the objective of price stability undertook currency dar. There were also in ERM I no so-called proviso. In the current mechanism, the ECB and all non -euro area national central banks belonging have the right to suspend its interventions in risk to the price stability objective. In ERM II is in addition to all the parties, including the ECB the opportunity to initiate proceedings for the revision of the central rate of a currency. In ERM I, however, the realignment of the Member State concerned had to go out.

Critical review

Critics fear that the ERM II exchange would cause speculators to test the defense willingness of central banks over your currencies. The starting point of such a scenario is the devaluation of suspicion against a currency. Then take a speculator a credit in this currency and to change them directly in euros. Follow other speculators this example, or is the loan to be large enough device that currency under depreciation pressure and the central banks would have to intervene. Set up by the speculators and the currency is devalued, they have to pay back less money than they originally recorded as a credit. To avoid the starting point of such speculation, the devaluation of suspicion, the ERM II should be carefully planned time. A quick accession for political reasons should be avoided. Rather, the real progress towards convergence and a consistent economic policy in the new EU countries should determine the right time of accession to the ERM.

With regard to intergovernmental economic relations to fixed exchange rates show a more advantageous than flexible exchange rate mechanisms. In order to maintain a fixed exchange rate, a control of international capital movements must be carried out. In addition, the countries involved need to have flexible economic structures and evolve similarly. Therefore, temporary exchange rate adjustments and the coordination of economic policies in these countries are necessary. Also in other parts of the world are possible currency combinations after the model of the European Monetary Union. Especially the political democratization and liberalization of capital movements suggest this assumption. Therefore, it is conceivable to incorporate experiences from the euro area in the reorganization of the international monetary system. If the major industrial countries be willing politically to act in the same direction, fixed exchange rates would be at best economic sense between their currency blocks.

Euro convergence criteria Currency intervention Deutsche Mark Treaty of Rome Budgetary policy Cypriot pound Croatian kuna

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