The present document contains factual and technical information about the ECU that should be helpful to assess this unit's operational usefulness in the private markets. It also reviews the prospects for the private ECU's further development and its potential contribution to Europe's monetary integration.
I. BASIC NOTIONS
1. Definition of the ECU
The "ECU" is the European Currency Unit as defined by Community legislation, i.e. Regulation No. 3180/78 of 18 December 1978 of the Council of Ministers of the European Communities, as amended by Regulation No. 2626/84 of 15 September 1984 (1), or by any subsequent Regulation.
These regulations define the ECU as a composite currency unit (basket) consisting of specified amounts of the currencies of the Member States of the European Communities. These amounts, which can be revised (see paragraph 3 hereafter), are presently the following:
German Mark (DM) 0.719
French franc (FF) 1.31
Dutch guilder (HFL) 0.256
Belgian Franc (BFR) 3.71
Luxembourg Franc (LFR) 0.14
Danish Krone (DKR) 0.219
Italian Lira (LIT) 140
Irish Punt (IRL) 0.00871
Pound Sterling (UKL) 0.0878
Greek Drachma (DRA) 1.15
Theoretically, the value (or rate) of the ECU in terms of any of its component currencies is equal to the sum of the following elements: the number of units (or fractions) by which this currency is represented in the ECU and, converted into that currency at the going exchange rate, the amounts of the other ECU components. Similarly, the ECU's value in dollars is equal to the sum of the dollar equivalents of all its component currencies.
The Commission of the European Communities calculates each day the rate of the ECU in terms of its component currencies. This calculation is based on the dollar rates recorded at 2.30 p.m. on the market of each EEC country whose currency is in the ECU. The ECU rates of the Peseta and Escudo and those of 10 major non-EEC currencies are also calculated.
The Commission's rates are official in the sense that they apply to the official uses of the ECU, i.e. in the European Monetary System (EMS) and in some other Community areas. They are published daily in the "Official Journal of the European Communities, edition C" and are also available through an automatic telex answering service (2).
The Commission's ECU rates are "middle" rates, calculated
at one particular time of the day; therefore they will differ from the
market rates quoted throughout the day by the commercial banks to users
of the private ECU. However, these market rates will stay closely aligned
with the calculated rates because of the possibility to arbitrage in the
basket of the component currencies.
3. Rules on changes in the ECU's composition
The amounts of the currencies in the ECU-basket are not fixed once and forever; specific rules for change are provided for in the Community texts governing the ECU. Moreover, the ECU's composition may be enlarged following the incorporation of the currencies of new Member States in accordance with the provisions of the Accession Treaties.
(a) Re-examination and revision of the currency amounts in the ECU
The weights of the currency-components of the ECU are subject to re-examination and, if necessary, can be revised.
The "weight" of a currency is the ratio, in percentage terms, between the number of units of that currency in the ECU and the value of the ECU in that particular currency. Thus, for example on 5 March 1987 the ECU was worth 2.074 DM. Since there is 0.719 DM in the ECU, the weight of the DM on that particular day was 0.719 - 2.074 = 34.67%.
Weights do change; they increase for a currency that appreciates against the other ECU components since the variable factor (value of the ECU) of the equation will decrease relative to the fixed factor (currency amount in the ECU); and vice versa in the case of a depreciation.
The procedure for re-examining the weights of the currencies in the ECU and, if necessary, to proceed with a revision of the ECU's composition is outlined in the Resolution of the European Council of 5 December 1978 on the establishment of the European Monetary System (3).
(i) The weights of the currencies in the ECU:
- must be re-examined every five years. The first five-yearly
re-examination took place in September 1984 and led to a revision of the
ECU's composition. The next re-examination is scheduled for September 1989.
- may be re-examined, on request, if the weight of a component currency has changed by 25% or more.
(ii) A re-examination is not necessarily followed by an actual revision. Its purpose is to assess whether or not a revision is needed, considering the size of the discrepancy between the weights of the currencies in the ECU and the relative economic importance of the Member States. Indeed, economic criteria (relative GNP and intra-European trade, shares in the financial support mechanism) have been at the basis of the fixing of the initial as well as the new 1984 composition of the ECU. In the course of time, exchange rate developments may change the currencies' weights out of proportion to what might be indicated by the underlying economic criteria. An excessive discrepancy, diagnosed at a re-examination exercise, will therefore trigger a revision procedure of the ECU's composition.
(iii) An actual revision has to be mutually accepted, which means: a unanimous decision by the Council of Ministers of the Community, on a proposal by the Commission and after consultation of the Monetary Committee and the Board of Governors of the European Monetary Cooperation Fund. A revision aims at re-establishing a satisfactory balance between the weight of the currencies in the ECU and the economic weight of the issuing countries, as indicated by the economic criteria. New weights are not automatically determined as the "arithmetical" average of the different percentages supplied by these criteria; they result from an "agreed" average. In this way, the primary aim of a revision, i.e. maintaining the ECU's representative character, does not preclude that consideration is also given to the need to avoid large sized changes that could be detrimental to the development of the private ECU market.
(iv) A revision of the ECU's composition is not to be
compared to a currency devaluation or revaluation that results in a sudden
"kink" in the market exchange rate of the currency involved. On the contrary,
a revision is implemented in such a way that, on the day of the change,
the value of the "new" ECU is identical to that of the "old" one. This
is done by applying, on the day of the change, to the rates of the old
ECU in terms of each of its component currencies, the new weights chosen
for each of them in order to determine the new specified amounts of these
currencies in the revised ECU. Any "kink" in ECU rates is thus avoided
(4), though from the moment of revision onwards, the ECU's exchange rates
will tend to differ over time from what they would have been under the
(b) Incorporation of the currencies of new members
Apart from being triggered by a re-examination, the ECU's composition will also change as the currencies of new members of the Community are incorporated. Being both symbol and instrument of Europe's monetary integration process, each new Member State has the right to have its currency in the ECU. However this right is not to be exercised automatically; its timing and modalities have been negotiated and are spelled out in the Accession Treaties.
Thus for the Greek Drachma, it was agreed to proceed with incorporation at the latest by 31 December 1985 or, before that date, if the weights of the currencies in the ECU were to be revised. Such revision took place in September 1984 and, consequently, the Drachma became a component of the ECU on that occasion.
For the Peseta and Escudo, the Accession Treaties (5) state that:
- incorporation is a right;
- in implementing this right, account must be taken of the need to ensure the satisfactory functioning of the official and private ECU markets;
- the decision to incorporate the Peseta and/or Escudo could be taken on the occasion of the next five-yearly re-examination of the ECU, i.e. September 1989;
Contrary to the Treaty with Greece, which was negotiated before the EMS and the ECU became operational, no firm commitment is entered into with Spain and Portugal to proceed with incorporation in September 1989 when the matter is due to come up for consideration. This explains also the legal format of these provisions: a joint declaration annexed to, but not part of the Treaty itself.
The change in approach reflects the acknowledgement of
the ECU's increasing official and private roles and, as a result, the intention
to make the timing of the incorporation of the currencies of the new members
dependent on a satisfactory degree of stability of their currencies. Effective
participation in the EMS would be the most convincing proof.
II. THE SEPTEMBER 1984 REVISION OF THE ECU
On 15 September 1984 the composition of the ECU was changed, following the first five-yearly re-examination. The change became effective on Monday, 17 September 1984.
The decision to adjust the ECU's composition was taken because the weights had changed considerably. In 1979, the DM had a weight of 33 per cent. By mid-1984, it had risen to about 37 per cent . Over the same period, the weight of the Lit. dropped from 9.5 per cent to less than 8 per cent; the FF also had lost weight. These changes reflected exchange rate movements rather than shifts in relative economic importance. It was therefore necessary to revise the ECU's composition in order to restore a closer relationship between shares in the ECU and relative economic importance.
In accordance with the provision of the Treaty of Accession, the Greek Drachma was introduced in the ECU on this occasion with a weight of 1.3 per cent.
The old composition of the ECU and the new one applicable from 17 September 1984 onwards is given in the table below. This table also indicates the components' weights: the initial ones, those prevailing just before and after the revision and, finally, the actual weights at the time of writing.
Old composition and (weights) New composition and (weights)
Currencies 13 March 1979 14.9.1984 17 September 1984 5.3.1987
DM 0.828 (33.0) (36.9) 0.719 (32.0) (34.7)
FF 1.15 (19.8) (16.7) 1.31 (19.0) (19.0)
HFL 0.286 (10.5) (11.3) 0.256 (10.1) (10.9)
BFR 3.66 (9.1) 8.1) 3.71 (8.2) (8.6)
LFR 0.14 (0.4) 0.3) 0.14 (0.3) (0.3)
DKR 0.217 (3.0) 2.7) 0.219 (2.7) (2.8)
LIT 109 (9.5) 7.9) 140 (10.1) (9.5)
IRL 0.00759 (1.1) 1.0) 0.00871 (1.2) (1.1)
UKL 0.0885 (13.6) (15.1) 0.0878 (15.0) (12.3)
DRA 1.15 (1.3) (0.8)
As the figures indicate, the September 1984 revision more or less restored the weights that were applicable at the start of the EMS in March 1979.
In deciding on the new weights, consideration was given to the impact of the revision on the ECU's interest rates. Indeed, by reducing the weights of low interest rate currencies like the DM and HFL and in-creasing those of high interest rate currencies such as the LIT and FF, the interest rate on the ECU was bound to rise. In fact, on the day of the change, the calculated (6) short term interest rate on the new ECU was about 0.7-0.8 points higher than on the old one. However, this resulted only in an increase of the market rate level from about 9.45 per cent to 9.60 per cent This small rise was indicative of the precautionary increase in market rates over the calculated rate that had been initiated for some time by the ECU banks in - almost correct - anticipation of the size of the ECU revision. No noticeable effect was felt on the long term ECU market where the calculated interest rate plays a lesser role. All in all, for the final (i.e. non-bank) users of the ECU, the 1984 revision was a non-event.
Since then, exchange rate developments have been operative
in increasing the weights of the DM, HFL and BFR while reducing those of
the UKL, LIT and DRA.
III. OFFICIAL AND PRIVATE ECU CIRCUITS
The Community texts on the ECU are binding for the official
uses of the ECU in the EMS and other Community areas (Budget, European
Development Fund ... ). When the private market started using the ECU,
it adopted the ECU as defined by Community legislation. Consequently, there
is only one, single ECU, simultaneously used on an "official" and a "private"
1. The "official" ECU circuit: the European Monetary System (EMS)
The EMS, set up in March 1979, endeavours to stabilise the exchange rates within the Community with the ultimate aim of furthering price stability and economic growth. Indeed, the founders of the system held the view that for Europe's open economies - the foreign sector represents more than 50% of GNP in some Member States - large currency fluctuations were a drag on growth and a stimulus to Inflation. All Member States participate in the exchange rate mechanism of the EMS, except the United Kingdom, Greece and the two newcomers: Spain and Portugal.
In this system, the ECU plays a central role:
(a) The ECU is the numeraire for the currency parities in the EMS. Each participating currency has a parity expressed in ECU. By crossing ECU parities one derives the bilateral parities for each of these currencies. Intervention limits are than set at 2 1/4% on either side of the bilateral parities (7). For the Lira this margin is 6%. Each participating central bank undertakes to maintain its exchange rate against the other EMS currencies within these limits. If market forces push a currency to its upper or lower limit against another currency, then the central banks involved must take action (intervention, interest rates moves, other measures) to the full extent necessary to keep the limit from being crossed. However, parity rates are not frozen but adjustable: the so-called "realignments".
(b) The ECU is the denominator for the claims and liabilities arising between the EMS central banks as a result of their interventions in each other's currency. Indeed, when a limit is reached and intervention in a Community currency has to be made, the currency needed for intervention can be borrowed short-term from the issuing central bank to the extent necessary. These credit operations are registered in ECU.
(c) The ECU is a reserve instrument. The European Fund for Monetary Coopération (EMCF) (8) has issued ECU to the EMS central banks against the deposit (on a revolving swap basis), by these banks, of 20% of their gold and 20% of their dollar holdings. The total ECU amount issued stands presently (5.3.1987) at 45 billion. These ECU are held as exchange reserves and can be used to settle the ECU debts that originate from the borrowings of Community currencies for intervention purposes, as mentioned in (b) above. For the settlement of these debts, the ECU is "legal tender", i.e. creditor central banks are obliged to accept settlement in ECU, but only, as a general rule, up to 50 per cent of their claim. All other payments in ECU between EEC central banks can only be made by mutual consent.
The "official" ECU circuit therefore consists of a small
number of European central banks (9), among which the ECU can be used as
a means of payment, but to a limited extent so far.On this circuit, completely
separated from the private ECU market, the exchange rate used is the "official"
rate as calculated by the Commission (see Chapter I.2. above), and the
interest rate applicable is calculated monthly as the weighted average
of the interest rates on the Most representative domestic money market
instruments of the component currencies.
2. The "private" ECU circuit: the international exchange-, money- and financial markets
On the "private" circuit, the ECU is created by the commercial banking system. It possesses the functional characteristics of money (numeraire, means of payment, store of value). It is treated as "foreign currency" by the monetary authorities of the Community and by an increasing number of foreign monetary authorities. Consequently, European nationals (and others as well) can use the ECU for their international commercial and financial dealings, in the same way as they would use a more "orthodox" currency, such as the dollar.
The exchange market for ECU is one of the most developed segments of the private ECU market, with commercial banks from all Community countries - and beyond - active in spot and forward inter-bank trading.
ECU syndicated loans made their first appearance in 1980. This segment of the market registered a significant growth from 1983 onwards when an increasing number of private borrowers joined the sovereign borrowers in using the ECU credit facilities. Moreover its geographical range widened with the arrival of African, East-European and Asian borrowers. The outstanding volume of ECU loans at the end of 1986 is estimated to be around 10 billion ECU.
Eurobonds in ECU were launched as recently as 1981. After totalling some 200 million ECU in 1981, their yearly volume increased very rapidly, climbing to 9.4 billion in 1985. The average size of the issues in-creased from 38 million ECU in 1982 to 90 million in 1986. If, in the first years, European issuers were the main driving force, in 1985, issues by non-Europeans represented 1/3 of the total amount issued. As a result of this expansion, the ECU that year became the fifth most widely used currency for the denomination of international bond issues, far behind the dollar, but at a level quite close to the German Mark, Yen or Sterling. In 1986, the expansion slowed down: 79 issues were made, totalling 6.8 billion (10), putting the ECU sixth in rank. In the first half of 1987, 55 issues have already been made for a total amount of ECU 5.2 billion, i.e. more than 75 % of the volume of last year. Fixed rate securities are sti11 in the majority but almost the entire range of the innovations that have appeared on other Euro-markets is also available for the ECU : variable rate issues, issues with warrants, zero coupon bonds etc. An active secondary market has also developed, with the Luxembourg stock exchange being the quoting centre of ECU securities.
Moreover the ECU has also come to play an important role in the international bank-credit and deposit market, as evidenced by the data collected and published by the Bank for international Settlements (BIS). In December 1983, total bank credits outstanding in ECU totalled 14.4 billion ECU; they rose to 68 billion at end-December 1986, thus propelling the ECU into fifth position behind the dollar, the German Mark, the yen and the Swiss Franc.
Increasing use of the ECU is also made for price listing, invoicing and payments of international commercial transactions, not only between Community countries but with an increasing number of third countries as well.
In the wake of the ECU's financial and commercial development, ECU futures and options markets have started operating in the USA.
An ECU Banking Association (EBA) was set up in September
1985 by a group of 18 banks active in the ECU market. Membership bas since
increased to about 80 banks. All EEC countries are represented: moreover,
members include American, Japanese, Swiss, Norwegian, Swedish and Finnish
banks. Following an agreement between the EBA and the Bank for International
Settlements, a new ECU clearing system bas come into operation on 1 October
1986. It replaces the former so-called MESA System which had been run by
seven leading ECU banks for a number of years. In this new system, the
BIS acts as agent and bank of the ECU clearing banks. From July 1987 onwards
more banks will be added to the System.
3. Comparison between the official and private ECU circuits
The official ECU circuit has been in existence before the private one. When the market started using the ECU it adopted the ECU as defined by Community legislation, including the revisions of its composition. Preserving this definitional link is essential for the development of the private ECU markets, since it guarantees the unity and marketability of present and future ECU denominated instruments.
Although linked by a common definition, the official and private ECU circuits remain completely separated. Indeed, only EEC central banks and "other holders" can hold and use the ECU issued by the European Fund for Monetary Cooperation. The ECUs created by the private market can be held and used by all, including central banks. Several EEC and foreign central banks are involved in the private ECU market as buyers and sellers, but their holdings of these ECUs are not "mixed" with their official ECU reserves. They are different assets, not only with respect to their "issuer" and their usability; they differ also to some extent with respect to their exchange and interest rate.
Indeed, the exchange rate applicable to the official ECU is not strictly speaking a market rate but a rate calculated once a day. Similarly, the official ECU's interest rate is calculated as the weighted average of domestic money market instruments, while in the private ECU market the interest rate is based on the Euro-money rates of the component currencies.
However, the common definition of the official and private
ECU guarantees that these differences would not prevent the establishment
of an operational link between the two circuits when, at some time in the
future, the officially issued ECU starts searching for a market and the
private market ECU starts looking for an official issuer.
4. Official attitudes towards the private ECU market
The private ECU is nowhere a "national" or "domestic" currency but, in the area of international trade and finance, it has acquired the functional characteristics of a currency: numéraire, means of payment, store of value. In fact, the ECU bas become a major "foreign" currency. The ECU's story is unique in modern monetary history, market forces transforming a unit of account into a fully usable foreign currency.
However, national authorities have also played a role in this transformation process, as they will in the future development of the ECU.
The private ECU is treated as a foreign currency by the monetary authorities of all the Member States whose currency is in the ECU basket, Germany excepted so far. This has implied formal recognition in countries that apply exchange control measures. In other countries, such as the United Kingdom or the Netherlands, recognition was informal or tacit.
As a result, the ECU can be used by the residents of these countries in the same way as they use other foreign currencies. This implies that foreign exchange control restrictions also apply to the ECU, as they do to other currencies.
Following their treatment of the ECU as a foreign currency, all EEC countries have proceeded to admit the ECU at their daily official "fixing" of exchange rates on their markets. The first EMS country to do so was Italy in October 1981. The "fixing rates" are not calculated rates but market rates, based on supply and demand, with the central banks occasionally stepping in when arbitrage is not adequate.
For countries whose currency is not in the ECU, allowing the ECU to be used by their residents as a foreign currency, granting it official recognition and admitting it to their fixing, hardly presents any legal or regulatory problems. Indeed for these countries the ECU is only a foreign currency, while for the Member States of the Community, with the exception of Spain and Portugal, the ECU is also, in part, a national currency. Because of this, exchange control regulations or domestic money market rules had to be amended in some Member States.
No such problem existing in third countries, the use of the ECU in these countries will tend to depend on the geographical widening of the ECU markets. Thus, the ECU is well introduced, e.g. in the Nordic countries, Switzerland and Austria, where the ECU was recently admitted to the "fixing".
The ECU's use is not limited to Europe; it is significant,
for example, that American and Japanese banks have become members of the
ECU Banking Association. As for the United States, one obstacle to the
ECU's use needs to be mentioned: domestic banks are not allowed to accept
foreign currency deposits from their residents.
IV. MAIN CONTRIBUTING FACTORS TO THE DEVELOPMENT OF THE PRIVATE ECU MARKET
First and foremost, the ECU possesses qualities that make it attractive to both European and non-European users.
For Europeans - i.e. residents of countries whose currency is part of the ECU - the ECU, as a basket nets out both the exchange and interest rate changes of the currencies that compose it. It is an average. Consequently, the ECU rates in terms of a component currency are generally more stable and predictable than the rates between these component currencies. The exchange rate stability of the ECU has further been enhanced by the successful performance of the EMS in gradually limiting the number and size of parity changes among its members, culminating in a period of sustained stability. As a result, the ECU bas been considered as carrying a relatively low exchange risk for European users. Consequently, interest rate differentials have tended to play a dominant role in the financial uses of the ECU, with borrowings made by high interest rate countries like Italy and France, while ECU resources tended to originate from low interest rate countries.
More recently, this exchange and interest rate relationship has tended to reverse itself: the interest rate differential has narrowed while the exchange rate risk has tended to increase, compounded by the sharp depreciation of the pound sterling. This reveals the importance for the ECU's development of a successful EMS performance and the participation of Sterling in the exchange rate mechanism.
For non-European users, the ECU does not, of course, present the same degree of stability in terms of their own currency. However, they can look at the ECU as a satisfactory "proxy" for the whole of its component currencies, more rewarding or less costly to use than the individual component currencies.
Other factors have also contributed to the development of the ECU on the private markets. In the early years, Community institutions have familiarized the banking sector with the management of this basket unit by opening ECU denominated deposit accounts in most Member countries. From 1981 onwards, the European Investment Bank and the Community have been tapping the ECU bond market for sizeable amounts. National authorities - Italy, Denmark, Ireland - have also extensively borrowed in ECU and the ECU is allowed to be used on the same terms as a regular foreign currency in a growing number of countries. Several European central banks have private ECUs in their reserves and have used these ECU reserves for intervention purposes. The private banking sector has enthusiastically adopted the ECU and promotes its use. Incidentally, it may be worthwhile recalling that banks are able to "create" ECUs in their books because the basket definition of the ECU allows them to rely on the money markets of the component currencies for the funding of any open ECU position.
Last but not least, money being not just an ordinary commodity,
one should mention a psychological factor: the ECU tends to be viewed as
instrumental to the long-term goal of Europe's monetary integration. In
the public's eye - at least the European public - it has therefore a dimension
and appeal that the composite units of the past have never possessed.
V. PROSPECTS FOR THE ECU'S DEVELOPMENT
In the longer term and from a European policy perspective, two - not mutually exclusive - roles could be envisaged for the ECU.
A first role would cast the ECU as replacing the Communities' national currencies in their domestic functions. In other words, the ECU would become Europe's single currency, the national currencies being phased out in the process and all prices within the Community being denominated in a single unit, the ECU. Admittedly, this can only be viewed in a long-term perspective. Indeed, monetary integration requires economic integration, for one cannot envisage Europe's national currencies being replaced by the ECU and the various national central banks being merged into a European central bank when, say, budgetary policy would still be determined at the various national levels. And since budgetary matters are eminently political matters, some form of political integration (European Union) would certainly be required as well.
The Agreement of February 1986 on a Revision of the Treaty of Rome sheds some light on these matters. It endorses the progressive realization of economic and monetary union as an objective of the Community and also states that progress in the economic and monetary areas should take into account the experience gained in the EMS and with the ECU. But it is also stated that institutional changes in the monetary area should be implemented in accordance with Article 236 of the Treaty, i.e. a Treaty revision requiring ratification by all Member States in conformity with their constitutional rules. Both the ambitious character of the ultimate goal and the time consuming procedures necessary to implement it, make this endeavour a long-term prospect.
A second role that could be envisaged for the ECU is less ambitions and, consequently, its time horizon shorter. It sees the ECU as developing into Europe's foreign currency, i.e. the currency which Europeans in their commercial and financial transactions with other European nationals and also with third countries would naturally use, or try to use, for pricing, invoicing and payment purposes.
In developing into Europe's international currency, the ECU would greatly contribute to the integration process in Europe.
First, the ECU could help towards Europe's economic integration. The newly revised Treaty provides that by the end of 1992, the Customs Union shall make way for a truly internal market on which goods, persons, services and capital will be free to move as on a domestic market. The unity and price transparency of the market for goods and services would be greatly enhanced if the ECU were generally to be used for the pricing of the intra-Community transactions. Invoicing in ECU would share the exchange risk between importers and exporters, while actual payment in ECU would be cost saving since the need to run cash-balances in a variety of Community currencies would be reduced.
Second, the ECU could be instrumental in fostering the development of an integrated European capital market. Liberalization of capital movements is only a first necessary step towards that end. Indeed, it would result in the mere coexistence of open national capital markets of widely differing sizes, each with its own cost in terms of exchange risk and interest rate. The ECU would do more: compared to these co-existing national markets, the emergence of a broad ECU denominated European capital market would generate significant advantages in terms of size, depth and resiliency. Moreover, in reducing the exchange risk involved and in offering uniform conditions of access and interest rate, it would promote a more rational and efficient allocation of capital resources within the Community.
Third, the cohesion of the EMS could be reinforced by the ECU. At present, world trade is predominantly invoiced in dollars, including an important part of the Community's trade with third countries; most primary products are priced in dollars and almost 3/4 of the international capital market operations are denominated in dollars. Consequently, the exchange- and interest rate evolutions of the dollar affect the economic and financial situation of the Community countries to a significant and varying extent. Increasing the use of the ECU in the external transactions of the Community countries could lessen the dollar's role for the Community and, consequently, the impact of its exchange rate fluctuations.
Moreover, a growing international role of the ECU could also reduce the traditional "balancing act" between the $ and the DM, whereby e.g. downward tensions on the dollar are associated with flows of dollar funds into the sole DM, pushing the DM rate up, both against the dollar and most European currencies. This compels Germany's partners in the EMS to take action (intervention, interest rates) to keep pace with the DM's rise against the dollar. If the shifts out of the dollar were deflected, at least in part, towards the ECU, their exchange rate effect would be diffused over the whole of the EMS currencies, thus shielding the EMS from potential strains.
Fourth, the ECU could develop into the currency that would be the proxy" of the EMS and the Community on the international monetary scene, which is slowly evolving into a multi-polar system. At present, the link between the EMS and the international monetary environment is established by the DM; it is the DM/dollar rate that positions the System as a whole against the dollar. From a Community point of view, the situation would be more balanced and coherent if the ECU were to assume this role. This would imply a reserve and intervention role for the private ECU. Several EMS central banks already hold private ECU in their reserves and have used them occasionally to intervene in support of their own currency. A more general approach is conceivable: it would cast the ECU in the role of "the" intervention currency of the EMS in its relations with third currencies. More specifically, EMS members would use the ECU for co-ordinated intervention operations in the framework of the dollar policy of the System as a whole. Its realization would, however, imply the resolute drive by all EMS members to hold and use the private ECU as a major reserve asset.
In its development so far, the ECU has clearly started to become an international currency. But it still has a long way to go if it is to emerge as Europe's foreign currency.
In assessing the scope for further progress the following points can be made:
1. Pursuing a development already underway, an increasing number of monetary authorities world-wide are likely to become interested in the ECU as a means of reserve diversification. All the more so since, in some countries, exchange control regulations impose that the proceeds of foreign currency borrowing by residents be handed over to the central bank against the national currency. Even in countries where such rules do not exist, the monetary authorities could become involved in the purchase of ECUs if and when the domestic recipient of ECUs sells the proceeds on the market against its own currency. Such situations are likely to present themselves more frequently as the geographical widening of the financial ECU market (bank loans, bonds) continues and as increased use of the ECU is made for the invoicing and payment of inter-national trade. In order to secure the holding of ECU reserves on a durable basis, it would be helpful if the market generated the type of ECU instruments that fit the specific needs of central bank holders.
2. In its commercial uses, the ECU lags behind the progress booked in the financial field. However, potentially beneficial areas of transnational commercial use are numerous. For example:
(i) Europe is covered by a tight network of services: mail, telephone, railroad, shipping conferences, pipe-lines, airlines, tour operators, air traffic control. All these networks require clearing of payment of some kind. The ECU should be a serious candidate as unit of account and of payment.
(ii) European multinationals could use the ECU to their advantage for their intercompany accounting as well as for price listing, invoicing and payment purposes. Several French and Italian multinationals have done so.
(iii) European enterprises increasingly engage in joint ventures (air-craft, airspace, research, engineering, channel) and need some common monetary denominator and means of payment.
(iv) Commodity pricing. Predominantly done in dollars, it could be envisaged to switch to the ECU for those commodities that are mainly produced and consumed in Europe.
(v) In general, intra-European trade as well as trade with third countries could be increasingly priced, invoiced and paid in ECU. Available information indicates progress (11).
The main drive to secure the ECU's development along these
lines has to come from the market itself. In that respect, the phenomenon
of the private ECU gives an additional dimension to the process of Europe's
monetary integration. Up till now, progress in this area has resulted from
initiatives and decisions taken at the official level only, i.e. the national
or Community authorities. By developing the ECU, the private sector becomes
a partner in Europe's integration process.
(1) Official Journal of the European Communities, no L 379, 30.12.1978, p. 1, and no L 247, 16.9.1984, p. 1.
(2) For further details on the calculation method, see "Communication on the calculation of the ECU published by the Commission", Official Journal of the European Communities, n' C 69, 13.3.1979, p. 4.
(3) Article 2.3 of the Resolution states that: "The weights of currencies in the ECU will be re-examined and if necessary revised within six months of the entry into force of the system and thereafter every five years or, on request, if the weight of any currency has changed by 25 per cent.
Revisions have to be mutually accepted; they will, by themselves, not modify the external value of the ECU. They will be made in line with underlying economic criteria."
(4) In the official texts, this is referred to as "maintaining the external value of the ECU".
Official Journal of the European Communities, n' L 484, 15.11.1985.
(6) Calculated : weighted average of the interest rates on the Euro-money markets of the component currencies.
(7) See Statistical part, EMS : Bilateral central rates and intervention points.
(8) The EMCF was set up in 1973 as the forerunner of Europe's central bank in the framework of the currency stabilisation scheme ("snake") which ended in 1979 when the EMS took over.
At the end of 1985, the official ECU circuit has been expanded to central banks of third countries and to international monetary institutions that have been granted the status of "other holder" by the EMCF. So far, only the Bank for International Settlements (BIS) has acquired this status.
(10) See Statistical part, ECU bonds issues on the inter-national market.
The issue of coins and bank notes in ECU would be important
for its psychological impact on the general public. But such development
is certainly not imperative as long as the ECU is not to be used as a domestic
currency, parallel to the various national currencies. In its role as Europe's
foreign currency, the ECU hardly calls for coins and notes; the recently
issued ECU travellers' cheques constitute an adequate substitute. It is,
however, worth mentioning that on the occasion of the 30th anniversary
of the founding text of the Community, the Belgian Government have issued,
on 23 March 1987, a certain number of ECU gold and silver coins with a
face value of ECU 50 and 5 respectively.