Within the euro area, there is only one currency – the euro – but there are EU countries outside the euro area with their own currencies, and avoiding excessive fluctuations in their exchange rates with the euro or misalignments helps the smooth operation of the single market. It is ERM II that 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.

How does ERM II work?

In ERM II, the exchange rate of a non-euro area Member State is fixed against the euro and is only allowed to fluctuate within set limits. ERM II entry is based on an agreement between the ministers and central bank governors of the non-euro area Member State and the euro-area Member States, and the European Central Bank (ECB). It covers the following:

• A central exchange rate between the euro and the country's currency is agreed. The currency is then allowed to fluctuate by up to 15% above or below this central rate.
• When necessary, the currency is supported by intervention (buying or selling) to keep the exchange rate against the euro within the ±15% fluctuation band. Interventions are coordinated by the ECB and the central bank of the non-euro area Member State.
• Non-euro area Member States within ERM II can decide to maintain a narrower fluctuation band, but this decision has no impact on the official ±15% fluctuation margin, unless there is agreement on this by ERM II stakeholders.
• The General Council of the ECB monitors the operation of ERM II and ensures co-ordination of monetary- and exchange-rate policies. The General Council also administers the intervention mechanisms together with the Member State’s central bank.

A measure of sustainable economic convergence

When a Member State enters the euro area, its central bank becomes part of the Eurosystem made up of the national central banks of the euro area and the ECB, which conducts monetary policy in the euro area independently from national governments.

The consequence of this is that euro-area Member States can no longer have recourse to currency appreciation or depreciation to manage their economies and respond to economic shocks. For example, they can no longer devalue their currency to slow imports and encourage exports. Instead, they must use budgetary and structural policies to manage their economies prudently.

ERM II mimics these conditions thereby helping non-euro area Member States to prepare for them. Successful participation in ERM II for at least two years is considered as confirmation of the sustainability of economic convergence and that the Member State can play a full role in the euro-area economy. It also provides an indication of the appropriate conversion rate that should be applied when the Member State qualifies and its currency is irrevocably fixed.