What is the role of the euro in the European Exchange Rate Mechanism (ERM)?

The euro plays a significant role in the European Exchange Rate Mechanism (ERM) as it serves as the anchor currency for the participating countries. The ERM is a system designed to promote stability and coordination among the exchange rates of European Union (EU) member states.

In the ERM, each participating country has a central parity rate, which is the fixed exchange rate of its currency against the euro. The euro acts as a reference point for these exchange rates, providing stability and reducing the volatility of currencies within the system.

The European Central Bank (ECB) plays a crucial role in maintaining the stability of the euro within the ERM. It intervenes in the foreign exchange market to ensure that the exchange rates of participating currencies remain within the agreed limits, known as the fluctuation bands. If a currency's exchange rate deviates too much from its central parity rate, the ECB may intervene by buying or selling that currency to bring it back within the agreed limits.

By using the euro as the anchor currency, the ERM aims to promote economic stability, facilitate trade, and encourage closer economic integration among EU member states. It provides a framework for countries to coordinate their monetary policies and exchange rate management, which can help to reduce currency fluctuations and enhance economic cooperation.

Overall, the euro's role in the ERM is to provide stability, serve as a reference point for exchange rates, and promote economic integration among EU member states.