Definition of Characteristics of the EMS and European Currency Unit (ECU)

Characteristics of the EMS

The following are the major characteristics of the EMS:

European Currency Unit (ECU)

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.

                                                                                                     Composition of the ECU as on 21st September 1989

It is apparent form the above Table that economically strong currencies have a very high weightage. For instance, the first three currencies (Deutschmark, French Franc, and Pound) among them account for nearly two-third of the total weightage. It may be noted that the number of countries included in the above Table is eleven. However, with effect from 1st January 1996, the number of countries has gone up to fifteen. He constitution of the ECU should obviously reflect the relative weightage of the economies of all these countries. But, with the coming into effect of the Maastricht Treaty on 1st November 1993, the composition of the ECU has been frozen. It will continue at the frozen level till the adoption of a single currency. This measure is likely to bring about a greater stability of the ECU.

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 instruments (such as, long-term borrowings and inter-bank commercial paper, Euro-bonds, Euro-credits, etc.), 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.