The Erl-King is a thing (really unsure if human or animal) that lives in harmony with the forest and nature, and this allows him to thrive in the forest. The Erl-King is also dangerous, “Erl-King will do you grievous harm.” He lures young girls into the forest, has sex with them and then turns them into birds. The narrator is a girl who is lured by the Erl-King and she comes when he calls. They have sex and she loves him but relates him to a “tender butcher.” This connection shows that he loves, but will be harmful. So in order to keep herself safe and become powerful she plots to kill him with his own hair while he sleeps. The story ends with a weird transition to third person and the fiddle comes into the story again.
The significance of the fiddle is that it is what he used to lure the girls to the forest so that he could turn them into lovely birds that he could possess. This relates to the idea that males oppress females and that in the end the narrator opposes it and plans to strangle the Erl-King with his own hair and then use the hair to put on the fiddle. I think that this means that the oppresser and the “instrument” of oppression become one in the same.