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What is the ERM II?

The European Exchange Rate Mechanism (ERM) II is the EU's system of exchange rates. Countries have to stay in the ERM II for at least two years before adopting the euro.

The European Exchange Rate Mechanism (ERM) II is the EU's system of exchange rates. Countries have to stay in the ERM II for at least two years before adopting the euro.

Within this system, national currencies are given a central parity - a fixed median exchange rate against the euro. Currencies can move 15 percent higher or lower than their parity rate.

The agreement on ERM II membership does not include a clause about countries that are expelled or choose to leave the system. Slovakia would leave the ERM II if the crown exceeds its limits, but before that happens it could negotiate another change of its central parity. This would not be considered a violation of ERM II conditions.

When a parity rate changes, it is usually due to revaluation or a currency's increasing value. Devaluation, or decreasing the value, is less likely.

If the crown gets close to its ERM II limits, the European Central Bank and the central banks of the eurozone can help the National Bank of Slovakia to keep the crown within its limits through interventions. They would do this on the condition that the government is following a responsible budgetary policy that does not increase the state deficit and complies with the ERM II programme.

Besides Slovakia, other states included in ERM II are Estonia, Latvia, Lithuania, Cyprus, Malta, and Denmark.

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