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Intent and operation of the ERMThe ERM is based on the concept of fixed currency exchange rate margins, but with exchange rates variable within those margins. Before the introduction of the euro, exchange rates were based on the ECU, the European unit of account, whose value was determined as a weighted average of the participating currencies.
The Irish pound loses parity with pound sterlingIreland's participation in ERM resulted in the Irish pound breaking parity with the pound sterling in 1979 as very shortly after the launch of the ERM the pound sterling, not at the time an ERM currency, appreciated against all ERM currencies and continued parity would have taken the Irish pound outside of its agreed band. Pound sterling's forced withdrawal from the ERMThe United Kingdom entered the ERM in 1990, but was forced to exit the programme in 1992 after the pound sterling came under major pressure from currency speculators, including George Soros. The ensuing crash of 16 September 1992, was subsequently dubbed "Black Wednesday". There has been some revision of attitude towards this event given the UK's strong economic performance since 1992, with some commentators dubbing it "White Wednesday". Some commentators took to referring to ERM as an "Eternal Recession Mechanism", after the UK fell into recession during the early 1990s. The UK spent over £6bn trying to keep the currency within the narrow limits, spending the Gold reserves. Increase of marginsIn 1993, the margin had to be expanded to 15% to accommodate speculation against the French franc and other currencies. Replacement with the euro and ERM II
In 1999, ERM II replaced the original ERM. The Greek and Danish currencies were part of the system, but as Greece joined the euro in 2001, the Danish krone was left as the only participant member. Currencies in ERM II are allowed to float within a range of ±15% with respect to a central rate against the euro. In the case of the krone, Danmarks Nationalbank keeps the exchange rate within the narrower range of ± 2.25% against the central rate of EUR 1 = DKK 7.460 38. Current status of the ERM IIAs of 1 May 2004, the ten National Central Banks (NCBs) of the new member countries became party to the ERM II Central Bank Agreement. The national currencies themselves will become part of the ERM II at different dates, as mutually agreed. The Estonian kroon, Lithuanian litas, and Slovenian tolar were included in the ERM II on 28 June 2004; the Cypriot pound, the Latvian lats and the Maltese lira on 2 May 2005; the Slovak koruna on 28 November 2005.[1] The currencies of the three largest countries which joined the European Union on 1 May 2004 (the Polish zloty, the Czech koruna, and the Hungarian forint) are expected to follow eventually. Plans for Bulgaria are to apply for ERM II membership in the beginning of 2007 and to commit to its rules regardless of the European Commission decision,[2] while Romania plans to join ERM in 2010-2012.[3] EU countries that have not adopted the euro are expected to participate for at least two years in the ERM II before joining the Eurozone. As Slovenia adopted the euro in 2007, the Slovenian tolar was removed from the ERM II and from circulation. Exchange rate bands
RemarksReferences
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