The European Exchange Rate Mechanism (ERM II) is an agreement between states aimed at supporting the stability and coordination of exchange rate policy in Europe.
The legal basis for ERM II is the Treaty on the European Union, particularly its articles 138 and 140, and the Decision of the European Council of June 16, 1997.
With this decision, the European Council laid down political guidelines for the formation of ERM II in the third stage of the Economic and Monetary Union.
Estonia joined ERM II on 28 June 2004. This was a stage in Estonia’s path towards adopting the euro. The European Exchange Rate Mechanism forms a framework based on which, as a result of multilateral negotiations (Member States, the European Central Bank, European Commission, applicant country), the currency exchange rate of the country wishing to adopt the euro is pegged to the euro. During ERM II participation, every country that wants to join the euro area has to maintain its national currency stable vis-à-vis the euro (the standard fluctuation range of the determined central exchange rate in ERM II is ±15%)and meet the Maastricht criteria. Every country wishing to adopt the euro must participate in ERM II for at least two years, whereas the length of that period depends on the country’s success in meeting the Maastricht criteria.
When Estonia joined ERM II, the country made a unilateral commitment to keep the exchange rate unchanged and, thus, does not use the allowed fluctuation range. Estonia will continue to use the currency board system until the adoption of the euro and will apply the exchange rate of 1 EUR = 15.6466 EEK.