The European Monetary System EMS and its Exchange Rate Mechanism (ERM) were replaced with ERM II with the commencement of Stage Three of the Economic and Monetary Union, on 1 January 1999.
ERM II offers those European Union countries that are still outside the euro area the opportunity to link their currency to the euro. Participation in ERM II is entirely voluntary, although the member countries are expected to join the Mechanism eventually.
On joining ERM II the country agrees on a conversion rate for its currency in relation to the euro. The conversion rate is fixed but can be adjusted, by common accord. A deviation rate of exchange rate fluc-tuation is set. The deviation margin is normally set at ±15%, but this can be narrower, where agreed on. The deviation margin forms a compulsory intervention rate whose limits are monitored automatically and unlimitedly through intervention, by the ECB and participating countries' central banks. Intervention can be interrupted, however, if it is in conflict with the core objective of the ECB – price stability.
Greece was part of ERM II before becoming part of the euro area on 1 January 2001. Following Greece's move to the euro area, Denmark was the only country left in ERM II. The Danish krone has a fixed conversion rate of 7.46038 krone to the euro with a deviation of ±2.25%.
From the beginning of May 2004, ten more countries became members of the European Union: Estonia, Cyprus, the Czech Republic, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. Bulgaria and Romania joined on 1 January 2007. The new member states are in a position to adopt the euro once they have fulfilled certain, mostly economic, criteria requiring convergence concerning price stability, sound public finances, exchange rate stability and long-term interest rate levels. The existing euro area countries were also required to meet these criteria.
Estonia, Lithuania and Slovenia joined ERM II on 27 June 2004, Cyprus, Latvia and Malta joined on 29 April 2005 and Slovakia on 25 November 2005. Since becoming part of the euro area, Slovenia (from 1 January 2007), Cyprus and Malta (from 1 January 2008) and Slovakia (from 1 January 2009) no longer belong to ERM II.
The Czech Republic, Hungary, Poland, Bulgaria, Romania, Sweden and the United Kingdom remain outside ERM II, for the moment.