The European exchange rate mechanism (or ERM) was a system introduced by the European Community in March 1979, as part of the European Monetary System (EMS), to reduce exchange-rate variability and achieve monetary stability in Europe in preparation for the introduction of a single currency, the Euro, which took place in January 2002.
The ERM is based on the concept of fixed currency exchange rate margins, but with exchange rates variable with 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.
A grid of bilateral rates was calculated on the basis of these central rates expressed in ECUs, and currency fluctuations had to be contained within a margin of 2.25% either side of the bilateral rates (with the exception of the Italian lira, which was allowed a margin of 6%). Determined intervention and loan arrangements protected the participating currencies from greater exchange rates fluctations. However, in 1993, the margin had to be expanded to 15% to accommodate monetary problems with the Italian lira and the Pound Sterling.
On December 31, 1998, the Ecu exchanges rates of the Eurozone countries were frozen and the value of the Euro, which then superseded the Ecu on a 1:1 basis, was thus established.
The system is still in place for the EU countries outside the Eurozone (the UK, Sweden, and Denmark) as well as for aspirant member states, such as the ten new countries slated to join the EU in April 2004 and the Eurozone in 2007 or thereabouts.
