The Risks Associated With the ‘Danish Scenario’ for the Participation of the Czech Koruna in the Erm II

The strategy for the adoption of the euro in the Czech Republic involves the entry of the Czech koruna into the ERM II mechanism for only the essential amount of time (approximately 2½ years). No date has yet been set for the introduction of the euro. The situation may, however, arise where it will be desirable to introduce the euro as soon as possible. It would therefore be advisable to enter ERM II even without a set date for the introduction of the euro (a so-called “technical entry” to ERM II; “the Danish scenario” for entry). However, participation in the ERM II mechanism means fixing the exchange rate, which is associated with the risk of speculative attacks. The aim of this paper is to assess the experiences of those countries, whose currencies have been in ERM II for a longer period of time. The currency exchange rates of Denmark, Lithuania, Latvia and Estonia were stable at the time of their participation in ERM II, even in the crisis years of 2007-2009. The exchange rate stability criterion would be met in its hypothetical assessment. The key condition for this stability is the conviction of the participants in the foreign exchange markets with regard to the determination of the central bank to keep the exchange rate within ERM II and sufficiently high foreign exchange reserves of the central bank