EUROPEAN CURRENCY UNIT

ECU-Predecessor to EURO
 The European Currency Unit, ECU for short, was an artificial
"basket" currency that was used by the member states of the
European Union (EU) as their internal accounting unit.
 Conceived on 13th March 1979 by the European Economic
Community(EEC)
 ECU acted as a warning signal to the participating members
Contd..
 Each currency in the EMS was given a central weight in the ECU basket
based on country’s economic importance and its share in EEC trade.
 The weights were subject to revision every five years but in 1994 a
decision was taken to freeze the weights as the periodic reweighting was
viewed as creating uncertainty abd inhibiting the use of ECU.
 The value of the ECU in terms of any currency of its basket is equal to
the sum of the amount of that currency and of the amounts of the other
components, converted into that currency.
Calculation of ECU
Currency Quantity in ECU DM per unit of DM value
foreign currency

Bel/Lux Franc 3.431 0.0484837 0.16635

Danish Kroner 0.1976 0.262162 0.05180
French Franc 1.332 0.298164 0.39716
German D-mark 0.6242 1 0.62420
Irish Punt 0.008552 2.41105 0.02062
Italian Lira 151.8 0.001010101 0.1533
Dutch Guilder 0.2198 0.887526 0.19508
Spanish Peseta 6.885 0.0117548 0.08093
UK pound 0.08784 2.42809572 0.21328
Portugese Escudo 1.393 0.00975561 0.01359
Greek Drachma 1.44 0.006522 0.00939
DM per ECU central rate 1.92573
Central Weight of deutschmark in the ECU=o.6242 x 100= 32.41%
1.92573

Currency Quantity in ECU ECU Central Rates % Weight in ECU

Bel/Lux Franc 3.431 39.7191 8.64
Danish Kroner 0.1976 7.34555 2.69
French Franc 1.332 6.45863 20.62
German D-mark 0.6242 1.92573 32.41
Irish Punt 0.008552 0.798709 1.07
Italian Lira 151.8 1906.48 7.96
Dutch Guilder 0.2198 2.16979 9.49
Spanish Peseta 6.885 163.826 5.15
UK pound 0.08784 197.398 0.78
Portugese Escudo 1.393 0.793103 12.60
Greek Drachma 1.44 295.269 0.70
100.00
Functions of ECU
 a denominator for the exchange rate mechanism.
All EEC currencies participating in the exchange rate mechanism have an ECU-
central rate2. These central rates are expressed as a certain quantity of currency
per ECU. By crossing these ECU central rates, one obtains for each participating
currency a series of bilateral central rates (parity grid) around which the
fluctuation margins of + and – 2,25%3 (6% for the lira) are applied in order to
determine the bilateral intervention limits. The ECU central rates can be
adjusted, subject to mutual agreement of the participant countries in the EMS.
 a reference unit for the operation of the divergence indicator.
The ECU indicator of divergence is defined as the ratio of the percentage
deviation of a currency from its central ECU rate compared to it’s maximum
possible divergence.
a denominator for operations in the intervention and credit
mechanisms.
When a depreciating EMS currency reaches its lower fluctuation
limit against another EMS currency, it has necessarily to be supported.
If, to this end, the central bank of the weak currency sells the strong
one, it is entitled to borrow any amount needed from the issuing central
bank in the framework of the Very Short Term Financing Facility.
a reserve asset
In the EMS framework, central banks deposit with the European Monetary
Co-operation Fund, 20% of their gold holdings and 20% of their dollar
reserves in return for ECU. ECU acquired as reserves are used primarily as
a means of settling debts arising from intervention in Community
currencies.
EURO
• The Euro was introduced to world financial markets as
an accounting currency on 1 January 1999, replacing the
former European Currency Unit (ECU) at a ratio of 1:1.
• The euro has come about after many years of debate, but
it was with the Maastricht Treaty of 1991 that European
Union leaders firmly agreed plans to introduce a single
currency by the year 2000.
 Currency Code Rate Fixed on Yielded
 Austrian schilling ATS 13.7603 31 December 1998 2002

 Belgian franc BEF 40.3399 31 December 1998 2002

 Dutch guilder NLG 2.20371 31 December 1998 2002

 Finnish markka FIM 5.94573 31 December 1998 2002

 French franc FRF 6.55957 31 December 1998 2002

 German mark DEM 1.95583 31 December 1998 2002

 Irish pound IEP 0.787564 31 December 1998 2002

 Italian lira ITL 1,936.27 31 December 1998 2002

 
LUF 40.3399 31 December 1998 2002
Luxembourgian fra
nc
 Monegasque franc MCF 6.55957 31 December 1998 2002

 Portuguese escudo PTE 200.482 31 December 1998 2002

 Sammarinese lira SML 1,936.27 31 December 1998 2002

 Spanish peseta ESP 166.386 31 December 1998 2002

 Vatican lira VAL 1,936.27 31 December 1998 2002

 Greek drachma GRD 340.75 19 June 2000 2002
 Slovenian tolar SIT 239.64 11 July 2006 2007
 Cypriot pound CYP 0.585274 10 July 2007 2008
 Maltese lira MTL 0.4293 10 July 2007 2008
 Slovak koruna SKK 30.126 8 July 2008 2009
• For
There were both political and economic reasons for creating a single
currency.

 the euro will strengthen European unity and help to promote

stability, peace and prosperity in Europe.

 the euro complements the free movement of people, goods, services

and capital set up under the European single market.

 removing the costs of changing money between countries makes life

easier for businesses.

 the single currency would stimulate trade and investment, boosting

jobs and growth.
• Against
it erodes national sovereignty.

it will chip away at the ability of national governments to shape policy.

warn that the policies of the European Central Bank may not always
suit countries whose economies are out of step with others.

They are concerned the single currency will eventually lead to political
union - a "United States of Europe".

They suggest that voters won't have the power to hold those making
economic decisions to account.
Current facts
• The euro is the official currency of the euro zone: 16
of the 27 Member States of the European Union.
• The euro is the second largest reserve currency as
well as the second most traded currency in the world
after the U.S. dollar.
• As of June 2010, with more than €800 billion in
circulation, the euro is the currency with the highest
combined value of banknotes and coins in
circulation in the world, having surpassed the U.S.
dollar.
Thank you