Background to the Danish fixed-exchange-rate policy
Denmark has participated in European exchange-rate systems since the early 1970s, first in the form of the currency snake, and later via ERM and ERM 2. The krone was devalued against the D-mark on a number of occasions in the first years. In 1982, following massive imbalances in the Danish economy, the incoming government announced that it would refrain from adjusting the exchange rate for economic policy purposes. The credibility of the fixed-exchange-rate policy gradually increased, and despite fluctuations in the exchange rate, the krone was steered successfully through the exchange-rate crises in the 1990s.
Denmark in ERM 2
With the introduction of the euro in 1999, Denmark – as a non-euro area member state – joined the European Exchange Rate Mechanism, ERM 2. ERM 2 is still the formal framework for Denmark's fixed-exchange-rate policy. The fixed-exchange-rate policy has provided a solid anchor for low and stable inflation expectations. Denmark participates in ERM 2 at a central rate of 746.038 kroner per 100 euro. The central rate is a conversion of the previous exchange rate against the D-mark and it was last changed in January 1987. The standard ERM 2 fluctuation band is +/- 15 per cent. Because of the high degree of convergence, Denmark has concluded an agreement with the European Central Bank (ECB) and the euro area member states on a narrower ERM 2 fluctuation band of +/- 2.25 per cent. This means that the krone can only fluctuate between 762.824 per 100 euro and 729.252 per 100 euro. Since the late 1990s, Danmarks Nationalbank has stabilised the krone at a level closer to the central rate.
Facts about ERM 2
The euro is at the core of ERM 2, and the currencies of participating EU member states have central rates against the euro, but not against each other. The obligation to intervene – that is, to buy or sell currency to support the exchange rate – if a participating currency reaches a fluctuation limit rests solely on the central bank of the relevant member state and the ECB. The other participating member states have no obligation to intervene. ERM 2 includes a provision on unlimited intervention credit between the ECB and the participating central banks in connection with intervention at the fluctuation limits.
One of the convergence criteria for joining the euro area is to observe the normal fluctuation band within ERM 2 without severe tensions for at least two years. In the same period, the member state in question may not devalue its currency against the euro.
For further information about how the krone is stabilised against the euro in practice, see the section on monetary policy.