European Currency Unit

European Currency Unit

The European Currency Unit (ECU) began in 1979 as what is called a basket currency, a composite currency based upon a weighted average combination of European currencies. It had a predecessor in the European Unit of Account (EUA), which dated back to the 1950s and was used for official transactions between countries. The ECU was similar in concept, but it experienced a totally unforeseen growth in private sector use, suggesting that there might be a strong demand for an international currency. The initials, ECU, were consciously devised as a reference to the ancient French coin, ecu, which was equal to three French livres.

The ECU acts as a unit of account for keeping books and defining the terms of contracts, but does not circulate in the form of a paper currency. The European Monetary Fund kept its funds designated in ECUs. The ECU was an intermediate step toward a common European currency that European Union countries launched in mid-1998.

At its first introduction, an ECU consisted of specified amounts of the following currencies:

• West German mark 0.828
• French franc 1.15
• Belgian franc 3.66
• Luxembourg franc 0.14
• Italian lira 109.00
• Danish krone 0.217
• Dutch guilder 0.286
• Irish pound 0.00759
• British pound sterling 0.9885

Later the ECU basket incorporated the currencies of Spain, Portugal, and Greece. As various currencies were devalued or revalued, the weights were reconfigured accordingly.

ECUs could be expressed in terms of single ECU units or in terms of equivalent amounts of separate national currencies. Member countries of the European Monetary System cooperated to maintain desired exchange rates between individual national currencies and the ECU.

The ECU began as a basket currency, but it soon took on characteristics of an independent currency. A market for ECU-denominated assets developed independently of the market for assets denominated in component currencies, and ECU deposits earned interest, which was often different from a weighted average of interest rates paid on deposits of component currencies. By 1985 ECU transactions in Paris ranked third, after the U.S. dollar and the German mark, and by 1987 ECU futures on the Chicago Mercantile Exchange approached 3 million transactions. Financial assets denominated in ECUs included certificates of deposit, commercial paper, bank loans, and fixed rate and variable rate bonds. Central banks created ECUs for settling payments between individual countries, and private banks bundled individual currencies to create ECU financial instruments as needed.

The ECU represented an important step in the development of a European currency. Presumably with the introduction of the euro in 1998, a European basket currency such as the ECU will no longer serve a purpose.