European Currency Unit (ECU): What it Means, How it Works

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 replaced by the euro. The value of the ECU was used to determine the exchange rates and reserves among the members of the EMS, but it was always an accounting unit rather than a real currency.

Understanding the European Currency Unit (ECU)

The European Currency Unit (ECU) was introduced on March 13, 1979, along with the exchange rate mechanism (ERM), which was designed to reduce exchange rate variability and achieve monetary stability in Europe prior to the introduction of the euro, at parity, on Jan. 1, 1999. The ECU replaced the European Unit of Account in 1979.

The ERM was meant to limit fluctuations between ECU currencies. The ECU was used in various international financial transactions, allowing ECU-denominated securities to offer foreign diversification.

The ECU was a composite of "artificial" currency based on a basket of European Union (EU) member currencies, weighted according to each country’s share of EU output. The ECU started off with nine currencies and by late 1989 through the end of 1999, the basket held 12 currencies. The currencies were the Belgian franc, German mark, Danish krone, Spanish peseta, French franc, British Pound, Greek drachma, Irish pound, Italian lira, Luxembourg franc, Dutch guilder, and Portuguese escudo.

Special Considerations

The EMS was marked by currency instability and political infighting over appropriate national exchange rates, as the other currencies were forced to follow the Bundesbank's lead on monetary policy. The exchange rates of strong currencies, like the Deutsche Mark, and those of weaker ones, like the Danish krone, were periodically adjusted. But after 1986, changes in national interest rates were used to keep the currencies within a narrow range.

However, because Germany and Britain's economic cycles were largely out of synch—in part due to German reunification—Britain struggled to remain competitive within the ERM. It crashed out in 1992 after Sterling came under attack by speculators, including George Soros, on Black Wednesday. The UK and Denmark would never join the eurozone, and Greece joined late.

The name of the euro was first introduced in 1995 in Spain. As an accounting currency, the euro was introduced in 1999. It replaced 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. Now, 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-largest and second-most traded currency in the world, behind the U.S. dollar. As of August 2022, there were over 29 trillion euro banknotes and over 144 billion euro coins in circulation.