Cyprus And Malta Join Exchange Rate Mechanism

by Lorys Charalambous, Tax-News.com, Cyprus

03 May 2005

In confirmation of last week's speculation in the press, the European Union announced at the weekend that Cyprus, Malta and Latvia have been accepted into the ERMII (Exchange Rate Mechanism), setting the countries on a path towards full adoption of the European Single Currency.

The ERM II mechanism is based on stable but adjustable central rates to the euro for the participating currencies, with standard fluctuation bands being +/-15% around the central rate. Exchange rate policy co-operation may be further strengthened, as is presently the case with Denmark, which has an agreed fluctuation band of +/- 2.25%.

For the Cypriot pound the pivot rate will be 0.585274 per euro, for the Maltese lira 0.429300 and for the Latvian lat 0.702804.

ERM II is based on the 16 June 1997 Amsterdam Resolution of the European Council on the establishment of an exchange-rate mechanism (ERM) in the third stage of Economic and Monetary Union. The new ERM replaced the European Monetary System as from 1 January 1999.

Decisions on ERM II are taken by mutual agreement between euro area members, ERM II participants and the ECB following a common procedure involving the European Commission and after consultation of the Economic and Financial Committee.

ERM II participation of Cyprus, Latvia and Malta has been announced in a communiqué, which reveals that the decision to participate in the mechanism was accompanied by a commitment by the countries concerned to pursue very sound policies – sound fiscal policies, effective financial supervision, appropriate wage policies and structural reforms. By implementing these policies, the countries will make further progress in their convergence process and also help to ensure stability in the mechanism.

ERM II plays a role in the formal euro adoption process as spelled out in the Treaty. Besides the formal requirement of a two-year participation in ERM II before the examination, the mechanism is intended to help Member States to achieve exchange rate stability.

The 1997 Council Resolution in particular recalls that the exchange-rate mechanism will help ensure that Member States participating in the mechanism orient their policies towards stability, foster convergence and thereby help them in their efforts to adopt the euro. At the same time, the mechanism also helps protect them and the other Member States from unwarranted pressures in the foreign-exchange markets. In such cases, the mechanism may assist participating Member States, when their currencies come under pressure, to combine appropriate policy responses, including interest-rate measures, with co-ordinated intervention.

The move comes after the Central Bank of Cyprus had denied a report in the local news publication, the Financial Mirror, which quoted senior bank sources as saying last week that the country's acceptance into ERMII was imminent.

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