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 EMS, but it was always an accounting unit rather than a real currency.

The European Currency Unit (ECU) was introduced on 13 March 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 1 January 1999.

The ECU was a composite artificial currency based on a basket of 12 EU member currencies, weighted according to each country’s share of EU output. The currencies were the Belgian franc, the German mark, the Danish krone, the Spanish peseta, the French franc, the British Pound, the Greek drachma, the Irish pound, the Italian lira, the Luxembourgish franc, the Dutch guilder, and the Portuguese escudo.

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 Spanish peseta, 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 economy 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.