Non-euro area Member States link their currencies to the euro through the Exchange Rate Mechanism (ERM II). This linkage is part of the preparations for entry to the euro area. However, other countries can also link their currencies to the euro by supporting a fixed exchange rate against the euro. This is known as a ‘currency peg’.
In some cases, countries with weak economies make this linkage as a safety measure. Linking the value of their national currency to a ‘hard currency’, such as the euro, brings more certainty and stability to their national economies. In other cases, the linkages can be made to promote trade stability by avoiding strong exchange-rate fluctuations. While for some, this linkage is made through a ‘basket’ of currencies that includes the euro – in such cases the link is less direct.
Currencies linked to the euro by bilateral agreements are:
- The CFP franc used in French overseas territories in the Pacific region (French Polynesia, New Caledonia and Wallis and Futuna Islands). The CFP franc was previously linked to the French franc via a fixed parity and is now pegged to the euro. The euro area has no obligation to support the exchange rate with the CFP franc.
- The two CFA francs used by several countries in two monetary unions in West Africa and Central Africa. These countries have historical relations with France, and the CFA francs were previously pegged to the French franc. They are now pegged to the euro through bilateral agreements with France. The euro area has no obligation to support the exchange rate with the CFA francs.
- The Comorian franc (Comoros Islands) and the Cape Verde escudo (Cape Verde) were previously linked to the French franc and Portuguese escudo, respectively. They are now linked to the euro through bilateral agreements. The euro area has no obligation to support these currency pegs.
Examples of currencies linked unilaterally to the euro
- Several countries link their national currency directly to the euro. This is achieved through supporting an exchange rate against the euro that is only allowed to fluctuate within defined limits. The third countries’ monetary authorities support this exchange-rate peg on their own by intervening in currency markets. The euro area has no agreements or obligations to support these currencies. Such unilateral links with the euro exist, for example, in Croatia, the former Yugoslav Republic of Macedonia, Serbia and Tunisia.
- A number of EU countries which are not yet part of the euro area – Czech Republic, Romania – also manage their currencies in this way. And Hungary even shadows the Exchange Rate Mechanism (ERM II) by pegging the forint and applying a ±15% fluctuation band.
- Bulgaria and Bosnia and Herzegovina maintain euro-based currency boards in charge of supporting the fixed foreign exchange rate, to which the normal objectives of central banks are subordinated.
- Other countries link their currencies to the euro through a ‘currency basket’. In this case, the exchange rate of the national currency is linked to a fictitious exchange rate from a ‘basket’ of other currencies, such as the euro, the US dollar, and the Japanese yen. Countries that use such ‘currency baskets’ are Botswana, Jordan, Libya, Morocco, Russia, Seychelles, and Vanuatu.