European Currency Unit (ECU) A Brief History of the ECU, the Predecessor of the Euro

What was the european currency unit?   The european currency unit, ECU for short, was an artificial "basket" currency that was used by the member states of the European Union (EU) as their internal accounting unit. The ECU was conceived on 13th March 1979 by the European Economic Community (EEC), the predecessor of the European Union, as a unit of account for the currency area called the European Monetary System (EMS). The ECU was also the precursor of the new single European currency, the euro, which was introduced on January 1, 1999. The acronym ECU is considered a word and in French is the name of ancient French coin. The ISO-4217 symbol for the ECU was "XEU".   How was the ECU linked to the European Monetary System?   The EMS was a limited-flexible exchange rate system that defined bands in which the bilateral exchange rates of the member countries could fluctuate. The bands of fluctuation were characterized by a set of adjustable bilateral central parities and margins that defined the bandwidth of permissible fluctuations. This set of parities was called a parity grid as it defined parities for all combinations of the ECU constituent currencies. The borders of the fluctuation bands were described by the upper intervention point and lower intervention point. Typically, the bandwidths were 2.25% to each side, with a wider margin for the Italian Lira. After a currency crisis in 1993, the bands were widened to 15% on each side, but in practice the fluctuations were kept within a narrow band. When a market exchange rate reached either of these intervention points, the central banks were compelled to support these rates indefinitely through open market operations (buying of weakened currency or selling of a strengthened currency). Some countries (notably Britain) initially did not participate in the exchange rate mechanism of the EMS. Britain participated actively in the EMS only for a short period.   What is the value of an ECU?   When the euro was introduced in January 1999, it replaced the ECU at par (that is, at a 1:1 ratio). The tables on the right shows the composition of the ECU basket as it evolved over time through the expansion of the European Union. Note that the compostion values in the table below are fixed, while the weights fluctuate due to changes in the bilateral exchange rates.   How can one calculate the value of an ECU?   To calculate the value of the ECU (XEU) with respect to another currency (say, USD), divide each of the twelve amounts of national currency in the ECU basket (see table above) by the corresponding exchange rates of that country vis-à-vis the target currency (DEM/USD, FRF/USD, GBP/USD, etc.). Then add these twelve numbers together to obtain the USD/XEU exchange rate.   Where can I get more information?   The Euro - Europe's New Currency   The European Central Bank   Giancarlo Gandolfo: International Economics II: International Monetary Theory and Open-Economy Macroeconomics, Springer Verlag, Berlin: 1987, pp. 380-393, 404-411.

The tables below show the composition of the ECU basket at different times during the existence of the ECU.   13-Mar-1979 through 16-Sep-1984 ISO Currency Value Weight (%)  BEF   Belgian Francs   3.80   9.64   DEM   German Marks   0.828   32.98   DKK   Danish Krones   0.217   3.06   FRF   French Francs   1.15   19.83   GBP   British Pounds   0.0885   13.34   IEP   Irish Punts   0.00759   1.15   ITL   Italian Lira   109   9.49   LUF   Luxembourg Francs   (*)   (*)   NLG   Dutch Guilders   0.286   10.51  Technical Notes: The Belgian and Luxembourg francs were in a currency union. Thus, the ecu basket values are combined and shown only for Belgium. Weights are evaluated at central parities on March 13, 1979.   17-Sep-1984 through 21-Sep-1989 ISO Currency Value Weight (%)  BEF   Belgian Francs   3.85   8.57   DEM   German Marks   0.719   32.08   DKK   Danish Krones   0.219   2.69   FRF   French Francs   1.31   19.06   GBP   British Pounds   0.0878   14.98   GRD   Greek Drachmas   1.15   1.31   IEP   Irish Punts   0.00871   1.20   ITL   Italian Lira   140   9.98   LUF   Luxembourg Francs   (*)   (*)   NLG   Dutch Guilders   0.256   10.13  Technical Notes: The Belgian and Luxembourg francs were in a currency union. Thus, the ecu basket values are combined and shown only for Belgium. Weights are evaluated at central parities on September 17, 1984.   21-Sep-1989 through 31-Dec-1999 ISO Currency Value Weight (%)  BEF   Belgian Francs   3.301   8.183   DEM   German Marks   0.6242   31.915   DKK   Danish Krones   0.1976   2.653   ESP   Spanish Peseta   6.885   4.138   FRF   French Francs   1.332   20.306   GBP   British Pounds   0.08784   12.452   GRD   Greek Drachmas   1.44   0.437   IEP   Irish Punts   0.008552   1.086   ITL   Italian Lira   151.8   7.840   LUF   Luxembourg Francs   0.13   0.322   NLG   Dutch Guilders   0.2198   9.87   PTE   Portugese Escudos   1.393   0.695  Technical Notes: During the period May 3, 1998 through December 31, 1998, the rates of the 9 currencies that are part of the ECU basket as well as euro-11 member currencies were irrevocably fixed. Weights are evaluated at the prevailing exchange rates on December 31, 1998.

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