The Exchange Rate Mechanism of the European Monetary System.

It was intended to be the preliminary stage for the European Currency, the euro. All members had to keep their currencies at fixed rates, within a range of permissible variations. In practice they had to keep a fixed relation to the Deutschmark, which was thus the effective reserve currency.

In October 1992 the members were: Belgium, Denmark, France, Germany, Luxembourg, Netherlands, Spain and Portugal. Italy and Britain had formerly been members but left in September 1992. Greece had never been a member. Italy eventually rejoined.

The question at the time was whether the ERM could be a workable interim between a single currency and floating national currencies. The British government apparently decided there was no interim between the two and chose to float and therefore not to join the euro when it was set up in 2000.

An earlier solution proposed by the British was a separate ECU (the Hard ECU) to operate alongside the national currencies and be adopted gradually and voluntarily. This was how the US dollar began. This was rejected. In 1994 several of the major currencies linked to the DM unofficially.

The ERM was to some extent a restoration of the pre-1914 system when most European currencies were linked via gold.

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