Exchange Rate Mechanism

The Exchange Rate Mechanism, shortly refer to as ERM, is a method or technique based on the philosopy of fixed currency exchange rate margin. This system was instituted in 1979 for the purpose of ascertaining the exchange rates within European monetary system of European Union(EU). All the exchange rates were based on the ECU (European Currency Unit), before the euro was introduced in the market. The main objective of exchange rate mechanism is to devise a single currency mechanism.

Exahange rate mechanism consist of several member currencies, which are fixed against each other. Although minor variations may exist between them in accordance with European Currency Unit (ECU) rate.

Exchange rate mechanism made it’s revision in 1 January 1999 and eventually introduced the idea of single European currency, termed as euro.

A grid of bilateral rates ( bilateral rate is an exchange rate between two currencies. Bilateral exchange rate is a ratio of the amount one has to pay in one currency to purchase one unit of another currency) were computed on the basis of central rates in terms of ECU.

ERM operation

The ERM is devised on the concept of fixed currency exchange rate margins(A fixed exchange rate is a type of exchange rate mechnism, where one currency value is equated to the value of another single currency, or to another measurement of value).

Exchange rates

Theoretically, the currencies can vary as much as 15% from their designated value but practically the currencies are pegged closely to the central rate.

Some of the currencies and their respective codes are summarized as below:

Cypriot pound, coded as CYP
Danish krone, coded as DKK
Danish krone, coded as DKK
Estonian kroon, coded as EEK
Lithuanian litas, coded as LTL
Latvian lats, coded as LVL

Exchange Rate Mechanism


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