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What is the European Currency Unit?

Jess Rhodes
Jess Rhodes

The European Currency Unit, also known as ECU, was the accounting currency of the European Monetary System from 1979 to 1998, and the precursor to the Euro. Its currency code was XEU, but sometimes EDU was used as well. The European Currency Unit was not an actual currency, as no bills or coins existed. It was a fixed basket of currencies — a group of currencies from several countries — with the purpose of stabilizing exchange rates and encouraging monetary stability in Europe.

The European Currency Unit, a tool of the Exchange Rate Mechanism (ERM), established a weighted average of all participating European currencies. This created a collective artificial currency meant to harness and stabilize the currencies of European member states. The ERM also fixed all currencies through a bilateral obligation to a +/- 2.25% range.

The European Currency Unit predates the Euro.
The European Currency Unit predates the Euro.

The European Monetary System decided to calculate the European Currency Unit as a fixed currency basket. Currency baskets use a predetermined set of currencies to establish a collective value or amount. When calculating the value, the amount of each currency stays fixed — established initially and changed upon revision — and the weight of each currency varies. Weights were calculated by percentages of Gross National Product of the European Community (EC), international trade levels, and the importance as a reserve currency.

International investors benefited from the European Currency Unit, as it was more stable than its component European currencies. This was to be expected, as a currency based on a weighted average demonstrates more gentle rate variations than the movements of individual currencies. This stability allowed foreign investors to diversify and expand without having to rely on the currency of a single country, increasing the breadth and the power of the member communities.

The European Currency Unit became the largest created artificial currency. International companies within the EC calculated assets and liabilities in European Currency Units, bonds were issued in these units, and by the late 80s, the units were being traded outside of Europe. Widened markets allowed European Currency Units to adopt many roles of an actual currency.

Despite its large role in investments and bond issuance, the European Currency Unit was rarely used to conduct domestic transactions. Most domestic monetary policies, in fact, ignored the effects of the currency basket, as the transactions relative to domestic money supplies were insignificant. Not all commercial banks offered the option to pay in European Currency Units, although some traveler’s checks were issued in the currency.

The birth of European Currency Units came from the hope of an eventual single European currency. As such, the Euro virtually replaced the currency basket in 1999 at a 1:1 ratio. Euro notes and coins began circulating and replacing the domestic currencies of Europe in 2002.

The European Currency Unit’s implementation in bond markets and for investment purposes have inspired suggestions for additional collective currencies. The proposed Asian Currency Unit and World Currency Units have both modeled their ideas from the European Currency Unit. Both suggested currencies have met many obstacles, however, and remain theoretical in nature.

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    • The European Currency Unit predates the Euro.
      By: Kaarsten
      The European Currency Unit predates the Euro.