Abstract
With EU accession looming, a new chapter has been opened in the debate about the candidatecountries' exchange rate strategies. A heated discussion has arisen in relation to ERM2membership.
The experience of the present eurozone members with ERM/ERM2 membershipshows that none of them faced a significant challenge in the two-year "evaluation" period interms of the exchange rate stability convergence criterion. This could also be attributable to thestability policies prescribed by the Maastricht Treaty.
However, for catching-up countries in therun-up to joining the eurozone, given the existing functioning of the mechanism, the ERM2appears be of little help for ensuring exchange rate stability. The mechanism should be viewedrather as a tool for "persuading" the markets of the appropriateness of the euro-locking rate.Since the Maastricht rules do not allow downward adjustment of the central parity within theERM2 for two years before introduction of the euro, the authorities should be familiar with thepreferred real exchange rate path prior to entering the mechanism.
We conclude that countriescould face large costs if they fail to do so.