Exchange Rate Mechanism

The ERM is a program through which member countries of the European
Economic Community agree to maintain parity in exchange rates among their
currencies. Limits are set on the amounts by which exchange rates may vary
between any two currencies. If an exchange rate reaches the limit, the
central banks of the two countries intervene in the market to ensure that
the limit is not exceeded. The ERM was established in 1979 with agreement
by Belgium, France, West Germany, Luxembourg, the Netherlands, and Denmark
to limit fluctuation in the bilateral exchange rates between their
currencies to ?2.25%. Italy, which was also a member, did not limit
fluctuation to ?25% until 1990. Spain joined in 1989, the UK in 1990, and
Portugal in 1992, each agreeing to a wider band of 6% fluctuation in the
bilateral exchange rates in the value of their currencies against other ERM
members. Disruptions in
September 1992 led to the withdrawal of Italy and the UK and to some parity
realignments. The ERM has since resumed, with provisions allowing currency
fluctuations of 15 percent.