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ECU As Unit of Account 4 ECU as Unit of Account Role of the ECU The ECU is at the center of the EMS and has a number of important functions within it. The many functions may help to explain why the ECU, a feature of a regional monetary system, is being used much more broadly as a private unit of account than the SDR, even though the SDR is a unit of account in a worldwide discretionary system of exchange arrangements. Another explanation of the comparative suc­ cess of the ECU as a unit of account is that it is associated with a system of fixed exchange rates and has been relatively stable within the area in which the system operates. Nevertheless, the EMS permits exchange rates to fluctuate within not insubstantial margins around parities, and (in late 1990) within considerably wider margins for two of the currencies that compose the ECU basket. In addition, realign­ ments of exchange rates can take place and have occurred within the parity grid, although the frequency of realignments has diminished. This development supports the observation that the EMS is ap­ proaching the ideal of a zone of monetary stability. Composition of the ECU The ECU is a composite of fixed amounts of the currencies of all member states of the EC whether or not the member states are par­ ticipating in the exchange rate and intervention arrangements (the exchange rate mechanism or ERM) of the EMS. In this respect, the ECU differs from the SDR, because only five of the currencies of the 154 members of the IMF at the end of September 1990 are included 82 Composition of the ECU in the SDR basket. The idea was advanced briefly at one time that the SDR might be composed of specified amounts of the currencies of all members, but although the idea had a formal appeal, it gained no momentum because of its impracticality. An argument has been made that the ECU was becoming over­ crowded as a result of the entry of new member states into the Com­ munity and was becoming less attractive as a private unit of account. The greater number of currencies, however, has not prevented an increasing use of the ECU as a unit of account. The ECU has proved to be more stable in value than the SDR, even though the SDR is composed of a small number of currencies, and even though all of them are backed by substantial economies. The legal texts, however, do not clearly prescribe that the ECU must be composed of the cur­ rencies of all member states of the Community, or even of all partic­ ipants in the ERM. The composition of the ECU from January 1, 19791 to September 16, 1984 is shown in the following table: Percentage Weight at Currency Inception Currency Units Belgian franc 9.3 3.66 Danish krone 3.1 0.217 Deutsche mark 33.0 0.828 French franc 19.8 1.15 Irish pound 1.1 0.00759 Italian lira 9.5 109 Luxembourg franc 0.4 0.14 Netherlands guilder 10.5 0.286 Pound sterling 13.3 0.0885 100.0 It will be recalled that the initial percentages determined the amounts of the units of component currencies, but that at all subsequent dates the percentage weight of each currency in the basket varied with movements in exchange rates. The weight of appreciating ("strong") currencies increases, and the weight of depreciating ("weak") cur­ rencies decreases. 1 Council Regulation (EEC) No. 3180/78 of December 18, 1978, European Commun­ ities, Official Journal of the European Communities (Luxembourg), No. L 379 Vol. 21, December 30, 1978. 83 ECU AS UNIT OF ACCOUNT The composition of the ECU basket from September 17, 19842 to September 20, 1989 was as follows: Percentage Weight at Currency Inception Currency Units Belgian franc 8.2 3.71 Danish krone 2.7 0.219 Deutsche mark 32.0 0.719 French franc 19.0 1.31 Greek drachma 1.3 1.15 Irish pound 1.2 0.00871 Italian lira 10.2 140 Luxembourg franc 0.3 0.14 Netherlands guilder 10.1 0.256 Pound sterling 15.0 0.0878 100.0 The revision brought the drachma into the basket and changed the weights of other currencies. The treaty admitting Greece to the Com­ munity provided that the drachma would be included by December 31, 1985, but before that date if in the meantime the basket were changed. The revision did occur after the period of five years pre­ scribed for re-examination of the basket had expired. One school of thought feared that revision of the basket would shake market con­ fidence in the ECU as a unit of account and would reduce the di­ mensions of the market in private ECUs. The change did not have this effect, perhaps because the deviations from the original weights were kept modest in order not to disrupt the exchange markets. 3 Furthermore, the resolution of December 5, 1978 of the European Council provides that a revision of the basket must not in itself modify the external value of the ECU at the time of the change. The value of the ECU in terms of currencies remains the same im­ mediately before and immediately after a revision of the basket, so as not to disturb the exchange markets. The same principle is ob­ served with respect to changes in the SDR basket. Over time, how­ ever, the value of the ECU and of the SDR may differ from what they 2 Council Regulation (EEC) No. 2626/84 of September 15, 1984, European Commun­ ities, Official Journal of the European <;:ommunities (Luxembourg), No. L 247, Vol. 27, September 16, 1984. See Ralph J. Mehnert, "The ECU 'for Beginners'," Europe (Wash­ ington), April 1989, pp. 20-22. 3 Possibly, the revision eliminated prior uncertainty about the timing and content of the change. If this assumption is correct, the IMF's view that publication of the dates and criteria for changing the method of valuation of the SDR would be stabilizing was correct. 84 Composition of the ECU would have been had the revision not been made\ but a new defi­ nition will have been intended to achieve stability in the value of the unit of account in the conditions that gave rise to the change. Spain and Portugal became members of the Community on Janu­ ary 1, 1986. The Council of Ministers decided at its meeting of June 19, 1989 to revise the composition of the ECU and, at the request of these two members, to include the Spanish peseta and the Portuguese escudo in the ECU as of September 21, 1989. The decision specified the weights and provided that the new composition would be derived from these weights on the basis of the exchange rates recorded on the European markets at 2:15 p.m. on September 20, 1989. The in­ terval between the announcement and the determination of the new basket was designed to provide the private ECU market with a period for adjustment and to avoid disruption of the market. No such interval occurred before the change in the composition that took effect on September 17, 1984. The new percentage weights reflect not only the inclusion of the peseta and the escudo but also some reapportionment of the weights of the other ten currencies. The combined weight of the peseta and the escudo is 6.1 percent, but because of the reapportionment the new weights of the other currencies have not been proportionately reduced by this uniform amount. The composition of the ECU that became effective on September 21, 1989 is as follows: Percentage Weight at Currency Inception Currency Units Belgian franc 7.60 3.301 Danish krone 2.45 0.1976 Deutsche mark 30.10 0.6242 French franc 19.00 1.332 Greek drachma 0.80 1.440 Irish pound 1.10 0.008552 Italian lira 10.15 151.8 Luxembourg franc 0.30 0.130 Netherlands guilder 9.40 0.2198 Portuguese escudo 0.80 1.393 Pound sterling 13.00 0.08784 Spanish peseta 5.30 6.885 100.00 4 Revision of the weights of currencies in the ECU basket does not change a parti­ cipant's central rate for its currency in relation to the ECU or the obligatory intervention points, but divergence thresholds are affected. 85 ECU AS UNIT OF ACCOUNT While the revision of the basket changed the amounts of currencies, the value of the ECU expressed in any one currency was unaffected at the time of transition to the new basket. Similarly, the revision did not bring about any change in ECU central rates of currencies, the grid of bilateral central rates, or bilateral intervention limits, although Spain's participation in the EMS as of June 19, 1989 and the United Kingdom's participation in the ERM with effect from October 8, 1990 did create a new set of central rates and intervention limits. A new set for the lira resulted also from the decision of Italy on January 5, 1990 to reduce the fluctuation margins of the lira in the ERM. Finally, these developments produced no change in the representative rate of the ECU in terms of the SDR as calculated by the IMF. However, the inclusion of the escudo in the ECU but not in the ERM, the peseta in both but with wide margins in the ERM, and the United Kingdom in the ERM with similarly wide margins has had an impact on the divergence indicator. The precision of the indicator will be reduced even further than had been the result of the earlier in­ clusion in the ECU of the pound sterling, the Italian lira, and the Greek drachma, notwithstanding the corrections made for deviations of these currencies from their notional central rates by more than 2.25 percent.
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