The European Monetary System (EMS) and its Exchange Rate Mechanism (ERM) were replaced with ERM II with the commencement of Stage 3 of Economic and Monetary Union, on 1 January 1999.

ERM II offers EU Member States outside the euro area the opportunity to peg their currency to the euro. Participation in ERM II is voluntary, although Member States are expected to join the mechanism eventually.

On joining ERM II a country agrees on a central exchange rate between its currency and the euro. The central rate is fixed but can be adjusted, by common accord. The currency is allowed to fluctuate above or below the central rate within a set fluctuation band. The standard fluctuation band is ±15%, but it can be narrower, where agreed on. At the margins of the fluctuation band the Eurosystem and the national central bank of the participating country support the exchange rate automatically and unlimitedly by intervention. Intervention can be suspended, however, if it is in conflict with the ECB’s primary objective of price stability.

The countries participating in ERM II are Denmark, Bulgaria and Croatia. The Danish krone has a fixed conversion rate of 7.46038 krone to the euro and a deviation band of ±2.25%, while the Bulgarian lev has a fixed conversion rate of 1.95583 levs to the euro and a deviation band of ±15%, and the Croatian kuna has a fixed conversion rate of 7.53450 kuna to the euro and a deviation band of ±15%.