European Currency Unit (ECU)

The primary objective of the EMS is to promote and enhance monetary stability in the European Community. Its other objectives include working towards the improvement of the general and economic situation f the countries of the European Union in terms of growth, full employment, standard of living, reduction of regional disparities, etc. Above all, it also aims at bringing about a stabilizing effect on international economic and monetary relations.

The following are the major characteristics of the EMS:

• There is a single uniform monetary unit of the European Union, namely, the European Currency Unit (ECU);
• A stable but adjustable exchange rate has emerged. The ECU is the central element of the EMS. It is a basket composed of different currencies of the European Union, weighted according to the economic strengths of each one of them.
  • (a) Relative weightage of each member country currency with respect to the ECU; the composition of the ECU is shown in the following Table.
  • (b) Another important premise is that central banks of parties to the EMS are required to defend the fluctuations in the exchange rates of their currencies.  Initially, this range was + 2.25 percent around central parties. Some member countries found it extremely difficult to maintain the fluctuations of their currencies within this range. Therefore, in August 1993, it was raised to 15 percent.
  • (c) There is a built-in mechanism to help one another in times of need.  Necessary finances for the purpose are to be appropriated from the assets constituted at the level of each central bank.
  • The ECU is a unit of payment among central banks of the European Union. It is also used for according financial assistance to member states which face economic difficulties due to BOP. ‘Private ECU’ has also found a greater instrument, can be documented in ECU. There exist future contracts in ECUs too. In the international capital markets, the ECU occupies an important place. On a commercial plane, some enterprises have adopted it as the currency of billing; the accounts of some multinationals are made in ECUs.