European Currency Unit (ECU)
Candlefocus EditorThe ECU operated as a kind of shared currency, with each of the 12 countries keeping their own individual currency. For transactions involving more than one country, the ECU would be used instead of any of the national currencies, thus reducing exchange rate risks between countries. The ERM system managed the ECU’s value against other national currencies, ensuring that the exchange rates between each of them would remain at a certain level with minimal fluctuations.
The ECU was divided into 100 subunits, similar to cents. It was also made up of a basket of currencies, including the German Mark, French Franc, Dutch Guilder, Belgian Franc, Italian Lira and Spanish Peseta, with each currency accounting for a specific proportion of the ECU’s value. Any changes in the relative values of the currencies within the basket were then reflected in the ECU’s value.
The ECU led to reduced exchange rate volatility in Europe, thanks to the ERM arrangements, allowing businesses to operate more freely across borders. It was also seen as a symbol of closer economic integration, with the 12 countries becoming more closely linked 2 with the emergence of the single currency.
Despite its relative success, the ECU had limited scope as it was not a full single currency. It lacked the ability to be used in daily transactions, existing mainly as a currency used in settling accounts between European Union countries. The decision was then taken in 1996 to replace the ECU with the euro and the existing ERM arrangements were abandoned.
The ECU was an important first step towards establishing a single currency in Europe. It helped to reduce exchange rate variability, thus fostering a more supportive environment for business and trade. Despite being replaced by the euro, the ECU will remain an integral part of European monetary history and its legacy can still be seen in the euro.