What does ERM II stand for?
ERM II stands for Exchange Rate Mechanism
II. One of the four nominal (Maastricht) convergence criteria
that must be met before a country can adopt the euro consists
of a test of the stability of the domestic currency. This takes
the form of the establishment of a central parity rate for
the domestic currency against the euro and its participation
in the exchange rate arrangement known as ERM II for a minimum
period of two years without devaluing against the euro.
Which EU Member States are participating
in ERM II?
Five Member States currently participate
in ERM II: Denmark, Estonia, Latvia, Lithuania and Slovakia.
Denmark joined the Mechanism on 1 January 1999. Estonia and
Lithuania joined on 28 June 2004, whereas Latvia joined on
2 May 2005. Slovakia joined on 28 November 2005.
Which EU Member States do not participate
in ERM II and why?
The Czech Republic, Hungary, Poland, Sweden,
Romania, Bulgaria and the United Kingdom do not participate
in ERM II. The United Kingdom has a permanent derogation from
adopting the euro and may, therefore, opt not to join the Mechanism.
The other six Member States do not have such a derogation and
are expected to join ERM II in the future.
Although participation in ERM II is obligatory,
the Treaty does not specify a date by which a Member State
should join the Mechanism. Entry in ERM II starts after the
conclusion of a process which consists of a review of the applicant
country’s economy and its suitability to enter the Mechanism.
Since ERM II is a multilateral arrangement, reflecting the
fact that matters concerning the exchange rate of an EU Member
State are a subject of common concern, the decision is taken
jointly by the ministers of the Member States of the euro area,
the European Central Bank and the ministers and central bank
governors of ERM II participants, following consultation with
the European Commission and the Economic and Financial Committee.
The latter is a committee which advises the EU Council of Economic
and Finance Ministers (ECOFIN).
What happens during ERM II?
In ERM II an exchange rate is established
between the euro and the national currency of each EU Member
State that participates in the Mechanism. This rate is officially
known as the central parity rate.
The market exchange rate of the national
currency against the euro may, if the country so chooses, be
allowed to vary within a maximum range of + or – 15%
around this central rate. In Malta’s case, as in Estonia
and Lithuania, the Monetary Authorities committed themselves
to maintain the exchange rate of the Maltese lira against the
euro unchanged at the central parity rate during the ERM II
phase in order to retain the stability and other benefits of
a fixed exchange rate regime.
How is the central parity rate determined?
The central parity rate is also set jointly
by the ministers of the Member States of the euro area, the
European Central Bank and the ministers and central bank governors
of ERM II participants, following consultation with the European
Commission and the Economic and Financial Committee.
What is the central parity rate of
the Maltese lira in ERM II?
The central parity rate for Malta is MTL0.429300
per euro.
How did ERM II affect the determination
of the Maltese lira exchange rate against other currencies?
Whereas the value of the Maltese lira was
previously fixed in terms of a basket in which the euro, the
pound Sterling and the US dollar carried weights of 70%, 20%
and 10% respectively, the value of the Maltese lira during
ERM II was fixed in terms of the euro at MTL0.429300 per euro.
During ERM II, since the Maltese lira was pegged to the euro,
its value against other currencies varied according to how
the euro itself moved against these currencies on international
foreign exchange markets.
From 2 May 2005 till the end of December 2007, the Central
Bank of Malta quoted rates of exchange against the major currencies
at the opening of business daily on the basis of cross rates
between the euro and these currencies, in accordance with the
central parity rate.
Did Malta’s entry in ERM II
mean that the euro has became its national or legal tender
currency?
No. During ERM II the Maltese lira remained
Malta’s sole national and legal tender currency and the
euro continued to be a foreign currency. Only when Malta adopted
the euro on 1 January 2008 did the euro become legal tender.
Can the central parity rate be changed?
All parties to the decision leading to entry
in ERM II can request a reconsideration of the central parity
rate. However, none of these parties may change the central
parity rate unilaterally. The common procedure which applies
to the setting of the rate also applies to any possible revisions.
What is the irrevocably fixed conversion
rate and what was the irrevocably fixed conversion rate
between the Maltese lira and the euro?
The irrevocably fixed conversion rate is
the fixed rate at which Maltese lira was converted into euro.
This rate is unalterable and irrevocable. The setting of this
rate required a unanimous decision of euro area Member States
and the Maltese authorities, on a proposal from the European
Commission and after consulting the European Central Bank.
The rate was formally established by the EU Council of Economic
and Finance Ministers (ECOFIN) following the announcement of
the abrogation of the derogation from euro adoption on 10 July
2007. Malta joined the euro area with an irrevocably fixed
conversion rate of EUR1=MTL0.429300.
Who sets the irrevocably fixed conversion
rate?
The setting of the rate requires a unanimous
decision of euro area Member States and the Maltese Authorities,
on a proposal from the European Commission and after consulting
the European Central Bank. The rate is formally established
by the EU Council of Economic and Finance Ministers (ECOFIN).
Did entry in ERM II mean that the
Central Bank of Malta ceased to set monetary policy in
Malta?
No. Entry in ERM II did not affect the right
of the Central Bank of Malta to set monetary policy in Malta.
Throughout ERM II the Central Bank of Malta continued to determine
official interest rates in Malta.
The right to conduct monetary policy autonomously was only
relinquished when Malta adopted the euro as its national currency
on 1 January 2008. The Central Bank of Malta became fully integrated
in the Eurosystem. The latter is composed of the European Central
Bank and the central banks of the Member States that have adopted
the euro as their national currency. The Central Bank of Malta
participates in the formulation and implementation of the European
Central Bank’s monetary policy through the Governor’s
participation in the Governing Council.
Did entry in ERM II require the
transfer of reserves from the Central Bank of Malta to the
European Central Bank?
No. The national central banks of EU Member
States only transfer part of their foreign reserve assets to
the European Central Bank upon joining the euro area. This
follows from Article 43 of the European System of Central Banks
Statute which excludes ERM II participants and other non-euro
members from the requirement to transfer foreign reserve assets
to the European Central Bank.
Non-euro area central banks are, however,
members of the European System of Central Banks and must therefore
contribute to the capital of the European Central Bank. Thus
on joining the European Union on 1 May 2004, the Central Bank
of Malta subscribed to the capital of the European Central
Bank, making a payment of EUR252,023.87 (approximately MTL108,194),
equivalent to 7% of the Bank’s share in the capital of
the European Central Bank.
What conditions were fulfilled so
that Malta was able to join the euro area?
To be eligible for adopting the euro:
1. Malta had to fulfil the Maastricht criteria,
including participation in ERM II.
2. The Maltese economy had to achieve
a high degree of similarity with the economies of the euro
area, as reflected in statistical indicators of real convergence.
3. The public sector and the private sector
(including the financial sector) had to complete the necessary
legal and practical preparations to enable the introduction
of euro notes and coins and the conversion of money values
from Maltese liri to euro.
Further details about these conditions are
available in the document Malta's Strategy for participating
in Economic and Monetary Union and adopting the Euro, which
is accessible on this site.
What are the Maastricht criteria?
The Maastricht criteria are a set of criteria
listed in Article 121 of the Treaty of Maastricht and specified
in more detail in a separate Protocol attached to that Treaty.
This states that:
1. the inflation rate, observed over a period
of one year before the examination, cannot exceed by more than
1½ percentage points that of, at most, the three best
performing EU Member States in terms of price stability;
2. the government, at the time of the examination,
should not be in an excessive deficit position. In principle
this means that the ratio of government deficit to GDP should
not exceed 3%, or it should be close to 3%, but approaching
3% steadily and continuously. Higher deficits will only be
considered if the EU considers them exceptional. Additionally,
the ratio of government debt to GDP should not exceed 60%,
or it should be close to 60%, but approaching 60% steadily
and continuously;
3. the Member State should have respected
the normal fluctuation margins provided for by the exchange
rate mechanism of the EU without severe tensions, especially
without devaluing against the euro, for at least two years
before the examination; and
4. the average nominal long-term interest
rate must not exceed that of the three best-performing Member
States in terms of price stability by more than two percentage
points.
Who determines whether these conditions
have been fulfilled?
Every two years, or at the request of the
national authorities of a Member State aiming to join the euro
area, the European Central Bank and the European Commission
each prepare a Convergence Report. This Report examines whether
Member States outside the euro area meet the Maastricht criteria,
and whether their legislation is in line with EU legislation
related to Economic and Monetary Union.
On the basis of these
Convergence Reports, the ECOFIN Council of Ministers then
decides which of the Member
States subject
to this examination fulfil the relevant criteria. The decision
is taken after consultation with the European Parliament
and the Council of Ministers, meeting in the composition of
the Heads of State
or Government.
When did Malta join the euro area?
At the end of the two-year ERM II period,
Malta has requested a Convergence Assessment. Following the
publication of a positive Convergence Report on 16 May 2007
Malta's entry into the euro area has acquired the approval
of the EU Council (euro area finance ministers and heads of
state or government). Malta will joined the euro area on 1
January 2008.
Did
any adjustments need to be made to existing fixed interest
rate commitments during the period
Malta spent in ERM II?
No. All existing fixed interest rate commitments,
such as interest rates on bonds and fixed interest loans, remained
unchanged during the period Malta spent in ERM II. When Malta
adopted the euro, Maltese lira amounts were converted into
euro on the basis of the irrevocably fixed conversion rate.
If the answer to your query
has not been covered by the above questions, kindly submit
your query here, or contact
us by mail at the following address:
The Manager
External Relations
Office
Central Bank of Malta
Castille Place
Valletta VLT 1060
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