European Currency Unit (ECU)

What Is the European Currency Unit (ECU)?

The European Currency Unit (ECU) was the official monetary unit of the European Monetary System (EMS) before it was supplanted by the euro. The value of the ECU was utilized to determine the exchange rates and reserves among the members of the EMS, yet it was dependably an accounting unit as opposed to a real currency.

Grasping the European Currency Unit (ECU)

The European Currency Unit (ECU) was presented on March 13, 1979, alongside the exchange rate mechanism (ERM), which was intended to reduce exchange rate variability and accomplish monetary stability in Europe prior to the presentation of the euro, at parity, on Jan. 1, 1999. The ECU supplanted the European Unit of Account in 1979.

The ERM was intended to limit changes between ECU currencies. The ECU was utilized in different international financial transactions, permitting ECU-named securities to offer foreign diversification.

The ECU was a composite artificial currency in view of a basket of 12 European Union (EU) member currencies, weighted by every nation's share of EU output. The currencies were the Belgian franc, German mark, Danish krone, Spanish peseta, French franc, British Pound, Greek drachma, Irish pound, Italian lira, Luxembourgish franc, Dutch guilder, and Portuguese escudo.

Special Considerations

The EMS was marked by currency instability and political infighting over proper national exchange rates, as different currencies were forced to follow the Bundesbank's lead on monetary policy. The exchange rates of strong currencies, similar to the Deutsche Mark, and those of more fragile ones, similar to the Spanish peseta, were occasionally adjusted. Be that as it may, after 1986, changes in national interest rates were utilized to keep the currencies inside a narrow reach.

In any case, since Germany and Britain's economic cycles were to a great extent out of synchronize — in part due to German reunification — Britain attempted to stay competitive inside the ERM. It crashed out in 1992 subsequent to Sterling went under attack by speculators, including George Soros, on Black Wednesday. The UK and Denmark could never join the eurozone, and Greece joined late.

The name of the euro was first presented in 1995 in Spain. As an accounting currency, the euro was presented in 1999. It supplanted the ECU at a 1:1 ratio. Euro coins and banknotes were put into circulation in 2002, making it the daily operating currency for the region. Presently, the euro is the official currency of 19 of the 27 EU members, including four European microstates that are not part of the EU.

The euro is the second-biggest and second-most traded currency in the world, behind the U.S. dollar. As of Dec. 2019, there were over 1.3 trillion euros in circulation.

Features

• The ECU was presented in 1979 and supplanted by the euro in 1999.
• It was a composite of 12 European Union member countries.
• The exchange rate mechanism (ERM) was presented alongside the ECU, intended to reduce exchange rate variability and accomplish monetary stability in Europe.
• The European Currency Unit (ECU) was the monetary unit utilized by the European Monetary System (EMS) before being supplanted by the euro.