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Summaries of EU Legislation

Exchange rate mechanism between the euro and other participating national currencies

Date of last review:
21/03/2023
Initial creation date:
19/09/2011
Author:
Publications Office of the European Union
Responsible entity(ies):
European Central Bank

Exchange rate mechanism between the euro and other participating national currencies

SUMMARY OF:

Resolution of the European Council on establishing an exchange rate mechanism

Agreement between the European Central Bank and the central banks of Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of economic and monetary union (2006)

Agreement between the ECB and the national central banks of the Member States outside the euro area amending the Agreement of 2006 (2020)

Agreement between the ECB and the national central banks of the Member States outside the euro area amending the Agreement of 2006 (2022)

WHAT IS THE AIM OF THE RESOLUTION AND THE AGREEMENTS?

  • The resolution aimed to create a system between euro-area and non-euro-area European Union (EU) Member States that guaranteed exchange rate stability between their different currencies when the third stage of economic and monetary union began on .
  • The 2006 agreement (ERM II Central Bank Agreement) built on the resolution and repealed and replaced a similar agreement reached in 1998. It established a stable exchange rate mechanism (ERM II), replacing the original European Monetary System, between the euro and the national currencies of non-euro-area Member States (Member States that have not adopted the euro but are participating in the agreement). Currently, ERM II includes the currencies of Bulgaria and Denmark, since Croatia joined the euro area on , having fulfilled the exchange rate criterion over the 2-year period ending on .
  • The aim of the resolution and the 2006 agreement is to avoid excessive exchange rate fluctuations disrupting the EU’s single market.
  • The 2020 amending agreement took account of the United Kingdom’s withdrawal from the EU. The Bank of England has no longer been a party to the ERM II Central Bank Agreement since . Annex II to the agreement, ‘Ceilings on access to the very short-term financing facility referred to in Articles 8, 10 and 11 of the Central Bank Agreement’, was replaced to reflect this departure.
  • The 2022 amending agreement takes account of the adoption by Croatia of the euro on . From the same date, the Croatian National Bank (Hrvatska narodna banka) has no longer been a party to the ERM II Central Bank Agreement. Annex II to the agreement has been replaced to reflect the adoption by Croatia of the euro.

KEY POINTS

  • The 2006 agreement:
    • confirms that participation in ERM II is voluntary for non-euro-area Member States with an opt out from the single currency, but adds that they are expected to participate;
    • provides for a central rate – agreed by the European Central Bank (ECB) and the relevant national central bank – between the euro and each participating national currency, which may fluctuate by 15% in either direction;
    • allows for automatic and unlimited intervention by the ECB and the national central bank if the 15% limit is crossed;
    • establishes detailed procedures for:
      • the involvement of a euro-area national central bank in any intervention,
      • very short-term credit facilities between the ECB and a non-euro-area national central bank,
      • repayment of outstanding very short-term financing balances,
      • extension of any financing operation,
      • closer exchange rate cooperation between the ECB and non-euro-area national central banks,
      • monitoring of the overall ERM II system,
      • possible amendments of the central rates and the 15% fluctuation limits.
  • The 2006 agreement must be amended whenever a new national central bank participates or a national central bank departs.

FROM WHEN DO THE RESOLUTION AND AGREEMENTS APPLY?

  • The resolution has applied since .
  • The 2006 agreement has applied since .
  • The 2020 agreement amends the ERM II Central Bank Agreement with effect from .
  • The 2022 agreement amends the ERM II Central Bank Agreement with effect from .

BACKGROUND

  • Convergence of basic economic performance is essential for maintaining a stable exchange rate. A stable economic environment is necessary for the single market to operate properly and to promote higher investment, growth and employment.
  • The exchange rate mechanism gives non-euro-area Member States a reference for sound economic policies, enabling them to prepare to adopt the euro.

MAIN DOCUMENTS

Resolution of the European Council on the establishment of an exchange rate mechanism in the third stage of economic and monetary union, Amsterdam, (OJ C 236, , pp. 5–6).

Agreement of between the European Central Bank and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union (OJ C 73, , pp. 21–27).

The 2020 amendment to the 2006 agreement has been incorporated into the original text. This consolidated version is of documentary value only.

Agreement of between the European Central Bank and the national central banks of the Member States outside the euro area amending the Agreement of between the European Central Bank and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union (OJ C 12, , pp. 3–6).

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