The European currency unit (ECU) was an accounting currency of the European Monetary System from 1979 to 1998, used to stabilize exchange rates and encourage monetary stability in Europe. It was a fixed basket of currencies, and although not a real currency, it became the largest artificial currency created, with bonds issued and traded outside Europe. The ECU was replaced by the euro in 1999 at a 1:1 ratio. The ECU has inspired proposals for further collective currencies, but these remain theoretical.
The European currency unit, also known as the ECU, was the accounting currency of the European Monetary System from 1979 to 1998 and the forerunner of the euro. Its currency code was XEU, but EDU was also sometimes used. The European monetary unit was not a real currency, as there were no banknotes or coins. It was a fixed basket of currencies – a group of currencies from different countries – intended to stabilize exchange rates and encourage monetary stability in Europe.
The European currency unit, an instrument of the Exchange Rate Mechanism (ERM), has established a weighted average of all participating European currencies. This created a collective artificial currency intended to exploit and stabilize the currencies of European member states. ERM also pegs all currencies through a bilateral bond at a range of +/- 2.25%.
The European monetary system has decided to calculate the European monetary unit as a fixed currency basket. Currency baskets use a predetermined set of currencies to establish a collective value or amount. In calculating value, the amount of each currency remains fixed – initially established and modified at the time of revision – and the weight of each currency varies. Weights were calculated based on percentages of the European Community (EC) gross national product, international trade levels, and 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 weighted average currency demonstrates smaller rate changes than individual currency movements. This stability allowed foreign investors to diversify and expand without having to rely on a single country’s currency, increasing the breadth and power of member communities.
The European monetary unit has become the largest artificial currency created. International corporations within the EC calculated assets and liabilities in European currency units, bonds were issued in these units, and by the late 1980s the units were trading outside Europe. The enlarged markets allowed the European monetary units to assume many roles of a real currency.
Despite its important role in investment and bond issuance, the European currency unit was rarely used to conduct internal transactions. Most domestic monetary policies, in fact, ignored the effects of the currency basket, since transactions relating to domestic money supplies were insignificant. Not all commercial banks offered the option to pay in European currency units, although some travelers checks were issued in the currency.
The birth of the European monetary units was born from the hope of an eventual single European currency. Thus, in 1999 the euro practically replaced the basket of currencies at a 1:1 ratio. Euro banknotes and coins began to circulate and replaced the national currencies of Europe in 2002.
The implementation of the European currency unit in bond markets and for investment purposes has inspired suggestions for further collective currencies. The proposed Asian currency unit and the world currency units both modeled their ideas on the European currency unit. However, both suggested currencies have encountered many obstacles and remain theoretical in nature.
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