Sterling Euro Exchange Rate Graph
The mechanism that drives Euro exchange rates is called ERM (European Exchange Rate Mechanism). It is basically a system brought forward in Mar 1979, by European Community. It was introduced as a part of EMS (European Monetary System). Its principal aim was to lower the unpredictability of Euro exchange rates, and to get a stable currency system throughout Europe. This led to the formation of EMU (Economic and Monetary Union), and thus Euro was introduced on 1st Jan 1999.
When Euro was introduced, there was a major change in currency policies and the countries not falling in the Eurozone were linked to Euro using conversion. This made them have a common currency, acting at the apex. The major aim was to achieve currency stability, along with to have a mechanism for evaluation of possible members of Eurozone. This mechanism or technique is called ERM2.
ERM has its base in the system of fixed currencies, and fixed margins of exchange rates, though the exchange rate itself could be variable- as long as it stays in the margins. It is also called a semi pegged mechanism. Before Euro was introduced, exchange rates followed the ECU (European Currency Unit). The value of this unit was computed by including all the participating currencies and finding a weighted average. Sterling Euro Exchange Rate Graph
There is something called a parity grid (commonly known as grid). It consists of bilateral rates, and it is computed based upon central rates (as expressed by ECUs). Since the margins were fixed, currency fluctuations could not be more than 2.25 percent on either side. Italian Lira was an exception, which could fluctuate by 6 percent.
It is worthwhile to discuss Pound Sterling as well. UK entered ERM in 1990. However, it had to exit within 2 years, since Pound Sterling faced major pressure from currency explorers. On 16th Sept 1992, there was a major crash, which was called Black Wednesday. This crash brought major political changes in UK.
In 1993, the variability margins were relaxed to 15 percent with the introduction of French Franc in the currency system.
It was on 31st Dec 1998, when the ECU was frozen, and launching of Euro was decided. On the following day, i.e. 1st Jan 1999, Euro was introduced as the major currency of European markets.
Summarizing it all, Euro has faced a lot of changed in all these years. In a broader sense, EMU can be considered as an earlier version of Euro. But since it had fixed margins, it was very difficult to place it in the world market. To solve this problem, Euro was thus lunched on the first day of 1999. Sterling Euro Exchange Rate Graph
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