Divergence Threshold

Summary of Divergence Threshold

Within the euro Pean Monetary System (read this and related legal terms for further details), each participating currency is assigned a value in terms of the European currency unit (ECU). The participating currency is permitted to fluctuate as much as 2.25 percent, in either direction, against the assigned value; if the currency should fluctuate beyond this band, the member governments are obligated to intervene in the exchange markets to restore the prescribed value of the affected currency. The divergence threshold itself is reached when a currency deviates 75 percent from its assigned value within the 2.25 percent limit; it serves as an indicator of instability for that currency, thereby permitting the issuing country to take its own corrective measures prior to invoking the official intervention of other EMS member countries.

(Main Author: William J. Miller)