4 ECU as Unit of Account
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

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 success 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, realignments 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 approaching the ideal of a zone of monetary stability.

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 success 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, realignments 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 approaching 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 participating 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 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 overcrowded as a result of the entry of new member states into the Community 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 currencies of all member states of the Community, or even of all participants in the ERM.

The composition of the ECU from January 1, 19791 to September 16, 1984 is shown in the following table:

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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”) currencies decreases.

The composition of the ECU basket from September 17, 19842 to September 20, 1989 was as follows:

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The revision brought the drachma into the basket and changed the weights of other currencies. The treaty admitting Greece to the Community 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 prescribed for re-examination of the basket had expired. One school of thought feared that revision of the basket would shake market confidence in the ECU as a unit of account and would reduce the dimensions 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 immediately before and immediately after a revision of the basket, so as not to disturb the exchange markets. The same principle is observed with respect to changes in the SDR basket. Over time, however, the value of the ECU and of the SDR may differ from what they would have been had the revision not been made4, but a new definition 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 January 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 interval 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:

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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 inclusion 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. The divergence indicator has had much theoretical but little practical importance, so that the decline in its effectiveness is not likely to have dramatic consequences.

The resolution of the Council of December 18, 1978 that set forth the original composition of the ECU stated in Article 2 that:

The Council, acting unanimously on a proposal from the Commission after consulting the Monetary Committee and the Board of Governors of the [European Monetary Cooperation] Fund, shall determine the conditions under which the composition of the ECU may be changed.

A formula for determining the original composition of the ECU or for making changes in the composition has not been published. The Council’s resolution of December 5, 1978 on the establishment of the EMS says only that the criteria for revisions will be made in line with underlying conditions. The criteria for arriving at percentage weights (and therefore currency amounts) probably reflect such economic factors as shares in the Community’s gross national product, in intra-Community trade, and in the Community’s financial facility called the Short-Term Monetary Support Credit Facility. It is probable that criteria have not been published so as to avoid speculation based on forecasts about changes. The practice of not publishing criteria avoids rigid dictation by economic data, and leaves some elbow room for political negotiation, an activity that has been noted already in connection with the SDR notwithstanding publication of the criteria for changes in the method of valuation.

The IMF has concluded that publication of the criteria will promote predictability and be helpful for entities that use the SDR as their unit of account. The IMF has taken steps to reduce the likelihood of changes, for example by reducing the basket to five currencies and by providing that a currency will not replace a currency already in the basket unless the exports of the issuer of the former currency exceed the exports of the issuer of the latter currency by at least 1 percent. For both the SDR and the ECU, the prospect of frequent changes is reduced by the practice of normally considering revisions at quinquennial periods only.

The Council’s Resolution of December 5, 1978 provides that the weights of currencies in the ECU would be re-examined and if necessary revised six months after entry into force of the EMS and thereafter at quinquennial periods or, on request, if the weight of any currency rises or falls by 25 percent when compared with the original weight. Italy requested an adjustment in the weight of the lira in the first review, because the currency had lost more than 25 percent of its initial weight in the basket, but it was decided to maintain the weights of all currencies without change. From time to time, fluctuations in exchange rates have brought about substantial changes in the percentage weights of currencies in effect at the inception of the ECU basket, but requests for revision were not made. It is not said which entities may make the request: it may be the participant issuing the currency that has changed in weight, or any participant that has a currency in the basket, or, in accordance with the Council’s resolution of December 18, 1978, the Commission. Revisions occur also when the currency of a new member of the Community is to be included in the ECU. The absence of precise details in the provisions that govern many aspects of the EMS and the ECU is typical of the policy of joint and pragmatic management of the EMS by participants and Community bodies.

Revision of the weights is to be “mutually accepted,” and the Council, acting unanimously, determines the conditions in which the composition of the ECU may be changed. There must be unanimity, therefore, in favor of a revision among the participants that have currencies in the basket and probably the participants issuing currencies to be included for the first time. Unanimity for decisions to change the weights in the SDR basket would be too constraining, but the majorities of 70 percent and 85 percent of the total voting power of members of the IMF are high. According to the Council’s Declaration of September 15, 1984, the change in the ECU weights that was to take effect on September 17, 1984 was made by the Council on a proposal advanced by the Commission after consultation with the Monetary Committee and the Board of Governors of the European Monetary Cooperation Fund (EMCF). This procedure is in accord with the Council’s resolution of December 18, 1978.

The flexibility of joint management of the EMS that the legal instruments permit was probably deliberate, particularly because it was intended originally to move from the initial phase of the EMS to the more developed institutional phase after two years. The move has been postponed sine die. The Delors Committee Report issued in 1989 foresees three stages for the achievement of such union under whatever changes in treaty law might be required for this purpose.

The method of valuation of the ECU must be distinguished from changes in the parity grid resulting from changes in the relationship between the ECU and a currency, namely realignments within the EMS. The composition of the ECU has been changed only once so far. Realignments have occurred on 12 occasions. Only 5 have taken place since 1983.

Private Uses

A fundamental reason for the increasing success of the ECU as an official and private unit of account is that it is both a symbol of, and an instrument for, progressively closer relationships among the member states of the Community in an enormous range of activities. The member states recognize the contribution that the ECU has made to this process, and they take action to promote further advances. It has been said that

EC institutions and certain European governments have actively supported the use of the ECU in private markets through suasion, through market operations in the unit, and in some instances through preferential treatment.5

This zeal is unmatched by the members of the IMF in their attitude toward the SDR. There is no political motive among them that corresponds to the aim of member states of the EC to constitute a veritable community with a synergetic power in the world.

Power in monetary affairs means to a large extent freedom from the consequences of the power of the United States. The gyrations in the exchange rate of the U.S. dollar have had painful effects on European economic conditions. The ECU is seen as something that could become a currency with a status not less than that of the dollar and the Japanese yen.

Evaluation of the success of a unit of account as a safeguard against risk depends always on a comparison with other possible units, including the currencies that are especially relevant to a private party’s interests. As transactions are usually bilateral, stability is a concern shared by both parties, because one party’s benefit is matched by the other party’s detriment. A composite unit may be less satisfactory in hedging against risk than hedging with currencies that more exactly match the interests of parties, but this form of hedging is likely to be more burdensome and perhaps more costly. It is also possible that a perfect match is too difficult to achieve, and perhaps impossible, because of the illiquidity of some exchange markets.

In addition, a composite unit may satisfy the desire for greater stability than can be achieved by the use of a single currency, although this is not inevitable. The basis for the expectation of greater stability is that the movement in one direction of one or more currencies in the composite may be matched by the movement of the other currencies in the opposite direction. The ECU offers the possibility of stability not only because it involves the idea of averaging among the exchange rates of currencies, but also because the currencies are tied to each other within an exchange arrangement that is subject to legal regulation. In the latter respect, the SDR offers no comparable promise of stability.

Considerations of stability have special importance in an area such as Europe. The member states of the Community have close economic ties and conduct a substantial volume of their external trade with each other. More European commercial entities may be involved in intra-European trade than are involved in worldwide trade for which prima facie the SDR might be more appropriate if a composite unit of account is under consideration. Even for non-European firms that engage in business in Europe, the ECU as a unit of account may seem to be less cumbersome and less costly, as well as less risky, than dealing in a range of European currencies. For both European and non-European firms, these advantages may be a sufficient inducement to use the ECU as a unit of account even if it is not a perfect match for a firm’s business interests. Similar considerations may apply to the denomination of financial assets and obligations.6 The operating rules of the EMS and the composition of the ECU give a sense of security that the ECU will be reasonably stable in terms of most currencies in the ECU basket when compared with other possible units of account, and as time goes by experience may intensify this confidence.

In the earlier days of the ECU market, the use of the ECU was largely confined to financial transactions, but it was recognized that the main breakthrough would come with the use of the ECU as the unit of account for billing or invoicing in commercial transactions. The evolution of this practice, however, continues to be slow,7 although it has been suggested that development of the private ECU has benefited in the early stages by being a financial rather than a commercial phenomenon. Innovation is easier in the more homogeneous world of finance than in the more heterogeneous world of commerce.8 It would seem, however, that there will be an interaction among the banking, bond, and commercial markets, so that increased ECU activity in any one of them will produce expansion in ECU business in the other two.

The participants in the EMS have responded to the call of Community organs to promote the private ECU by freeing it progressively from the regulations that have circumscribed domestic banking and capital markets. Community organs have recommended that the ECU should be treated as a foreign currency. Transactions in foreign currencies have not been subject to some of the regulations that applied when the domestic currency was involved. The creation and growth of the Euromarket demonstrated the desire of private parties to escape from the constriction of controls. With the increasing fluctuation of exchange rates, the desire of private parties to enjoy both freedom and exchange rate stability became more pronounced. The ECU as a unit of account seems to promise progress toward this ideal.

The ECU market may be seen as a competitor to the Euromarket.9 A difference between ECU transactions in an EMS country and Euro-transactions is that the ECU includes an amount of the local currency where a transaction is entered into, while the Eurocurrency contains no element of local currency. In the case of the ECU transaction, the local currency portion may not be large, but it was sufficient to influence some members of the Community to refuse to treat the ECU as if it were a foreign currency. Regulations applicable to the national currency have applied to the national currency portion of the ECU.

The success of the ECU as a private unit of account promotes further success. A true market is a prerequisite of progress: there must be sufficient buyers and sellers so that there will be adequate liquidity. When the private ECU began its career, this condition was not satisfied. If a bank accepted a deposit in ECUs, it had to find a borrower or purchaser willing to do business in ECUs, and borrowers or purchasers might be too few. In these circumstances, the bank had to protect itself by “unbundling” the ECU: the bank had to protect itself by acquiring all the currencies in the ECU and in the same proportions as in that composite. This form of protection was awkward and costly for the bank, and it increased the cost charged by the bank for doing business in the ECU.

As the market grows, offsetting transactions in assets and liabilities become easier without unbundling. Costs are reduced, and the lessened variability of exchange rates enhances the attractiveness of the ECU as a unit of account. The whole process is sometimes described as one in which the ECU becomes transmuted from a basket of currencies into a basket currency.10

ECU Clearing System

The Community organs and member states have taken steps to make the ECU a popular unit of account for private purposes, but private entities, particularly banks, have taken initiatives of their own. The success of the ECU as a unit of account is indeed largely the result of spontaneous action by private parties. It was realized at an early date that a clearing system would broaden the market and make it more efficient. The ECU would then become more clearly a monetary unit sui generis, and the need to unbundle it into its component currencies for the purpose of settlements or other transactions would be greatly reduced. A clearing system was perceived to be necessary both as the consequence of the growing use of the ECU and as an impetus to an even broader use.

The development of a clearing system took place in stages. At first, if one bank had to make a transfer to another bank in respect of an obligation denominated in the ECU, the procedure was cumbersome because transactions in all the component currencies were necessary. This disadvantage led to ECU clearing arrangements by which any two banks could establish ECU-denominated accounts with a third bank as the clearing bank, with the result that transfers could be made on this bank’s books without the transfer of funds. As several banks performed this clearing function, the next stage was clearing arrangements between any two clearing banks in order to deal with the balances on their books resulting from the first set of clearing transactions. Settlement of balances at this second stage was not required up to a certain ceiling. Balances above the ceiling were settled in the component currencies of the ECU. This arrangement was coupled with an agreement that the final settlement would be made through one of the clearing banks on behalf of the others, with each participating bank acting for one month on a rotating basis.

Clearing arrangements have been facilitated by the fact that the market has moved to an “open” definition of the ECU. When the ECU came into being under the Basle Agreement, the definition of the ECU coincided with the definition of the European unit of account (EUA) as adopted by the Monetary Committee of the EC on March 18, 1975. The EUA was a “closed” basket, which means that the fixed amounts of the nine currencies in the basket were not subject to change. The ECU basket, however, was “open” to change. Since 1981, financial and commercial parties have moved to the open basket, namely, the basket as defined from time to time under EMS arrangements and not as defined at some earlier time, such as the date of entry into a transaction.

Originally, the market consisted of short-term time deposits denominated in ECUs, and the “closed” basket gave more assurance of stability in relation to the maturity of the account. When the market expanded to include long-term Eurobonds, it seemed advantageous economically to follow the official line on valuation. This development has enhanced the status of the ECU by excluding the concurrent existence of a variety of ECUs, which would have impeded transactions among them because of the different values of these ECUs. In addition, it has become easier to deal in private ECUs without the necessity for discharging ECU-denominated obligations in the component currencies, “Closed” (sometimes called “fixed”) definitions of the SDR have not disappeared, and one such definition has been resorted to recently by at least one international organization.11

The clearing system outlined above was not optimal because the number of participating banks, and therefore the volume of transactions, was limited. A truly multilateral clearing system was desirable. In 1982 the Commission of the European Communities took the initiative to appoint a working group, consisting ultimately of a number of banks from all member states of the Community, the Commission, the European Investment Bank (EIB), and the European Banking Federation, to study and report on a worldwide clearing mechanism for the private ECU. This remarkable step by an official entity, involving the cooperation of both official agencies and private parties, has had no parallel in the case of the SDR.

The result of the official initiative has been the creation of an institutionalized ECU clearing system. The legal instruments for this purpose include By-Laws of the ECU Banking Association and an agreement between the Association and the Bank for International Settlements (BIS) signed on March 21, 1986 in Paris.12 The Association consists of a group of banks in member states of the Community that are actively engaged in the ECU market. The aim is to have as members of the Association at least one headquarters or branch bank in every member state of the Community.

The Association is a nonprofit-making entity organized under French law. The purpose of the Association is “to organize, facilitate and develop operations in ECU in all possible forms.”13 This purpose is followed by four specific purposes, of which the fourth is to

design, with the help of third parties, a clearing system to enable its members to offset their reciprocal claims and debts in Ecu and to balance their creditor or debtor positions in Ecu.14

The Association is authorized by its By-Laws to adopt rules governing the participation of clearing banks in the clearing and settlement system. The By-Laws declare that the Association intends to act in compliance with the regulations regarding the ECU of the Community, the central banks of member states of the Community, and the EMCF.

The BIS acts as the central clearing house. The clearing system is outlined in a press release distributed by the BIS and the Association. The final step in the clearing process is a debit or credit each day to the ECU account each clearing bank holds at the BIS. The banking functions under the agreement are performed by the BIS. The technical functions of “netting” are performed by SWIFT (Society for Worldwide Interbank Financial Telecommunications) under its agreement with the Association. The system is so designed as to protect the clearing banks and the BIS against defaults either for technical reasons or because of insolvency.

The system came into effect on October 1, 1986 for a trial period of 12 months. On the basis of the experience gained during that period, the agreement between the BIS and the Association was amended and supplemented, principally in order to facilitate the daily execution of the clearing operations. The revised agreement of April 30, 1987 replaced the agreement of March 21, 1986.15 By March 31, 1990, the number of banks participating in the system had reached 45.16

The ECU Banking Association has appointed a number of committees, including a Legal Committee. The purposes of this Committee are to examine the legislative, monetary, and currency regulations of each member of the Community with regard to the ECU, and in the light of these examinations to evaluate the prospects for greater use of the ECU in national and international transactions. The Committee is also to determine, at the levels of the Community and member states, the most effective way to guarantee the conditions for this greater use of the private ECU.

The Single European Act suggests that member states will take further action to expand the use of the private ECU. The new Article 102A inserted in the Treaty of Rome provides a new—and perhaps the first clear and comprehensive—legal basis for the EMS and the ECU. In cooperating to ensure convergence of the economic and monetary policies necessary for the further development of the Community, member states

shall take account of the experience acquired in cooperation within the framework of the European Monetary System (EMS) and in developing the ECU, and shall respect existing powers in this field.

Article 102A declares also that insofar as further development in the field of economic and monetary policy necessitates institutional changes, the provisions of Article 236 of the Treaty of Rome shall be applicable. This formulation means that unanimity among the member states and ratification by national legislatures would be required for the necessary amendments. Changes requiring amendments, therefore, might be more difficult to accomplish than adoption of the EMS itself proved to be. The pace of change and the necessity for legal measures are discussed in the Delors Committee Report.

Relationships Between SDR and ECU

The topic of the relationships, present or potential, between the two major composite units of accounts has not been the subject of much consideration. The topic is largely, although not wholly, one of the relationships between the SDR and the ECU as official reserve assets. The IMF is not able to receive ECUs from members in settlement of repurchase obligations arising from transactions carried out through the General Resources Account: the IMF can accept only SDRs or the currencies of members, other than the currency of the repurchasing member, specified by the IMF.17 It is not impossible however, to imagine situations in which the IMF could hold ECUs without transgressing its Articles. Under Article V, Section 2(b), the IMF can administer resources contributed by members for purposes consistent with the Articles, without involving recourse against the IMF’s other assets. Council Regulation No. 3066/85 of October 28, 1985 provides that the EMCF can grant to international monetary institutions the status of “other holders” of ECUs on terms and conditions with respect to the acquisition, holding, and use of ECUs.18 The EMCF could grant this status to the IMF so that it could undertake a service involving the administration of ECUs that was beneficial to members and could be performed by the IMF under Article V, Section 2(b).

Under the Basle Agreement, claims by a creditor central bank against a debtor central bank arising from financing operations under the Agreement are denominated in ECUs. Insofar as settlement is effected only partially by transferring to the creditor central bank its own currency or ECUs, settlement is to be completed by transferring other reserve assets in accordance with the composition of the debtor central bank’s reserves at the end of the month preceding the settlement. The debtor central bank’s assets can include SDRs or a reserve position in the IMF, which is denominated in SDRs according to the IMF’s Articles.

The technical problem arises of determining the rate between the ECU and the SDR for the transfer of SDRs or the SDR-denominated reserve position of a member in the IMF.19 The Basle Agreement provides that the debtor balances in ECUs settled by means of these transactions shall be made on the basis of the daily rates for the ECU established by the Commission’s staff. Under Article XIX, Section 7(a) of the IMF’s Articles, the exchange rates for transactions in SDRs between members shall ensure that the transferee of SDRs receives the same value whatever currencies are provided and whichever participants provide the currencies.20 The effect of Article V, Sections 10 and 11 is that the exchange rates that apply to transactions conducted through the Special Drawing Rights Department apply to transactions conducted through the General Resources Account as well.

To effectuate the transfers mentioned above, the IMF had to establish a rate between SDR-denominated reserve positions in the IMF or SDRs and the ECU. The IMF has adopted the following decision:

After consultation with the European Monetary Cooperation Fund, the representative rate for the ECU in terms of the SDR under Article XIX, Section 7(a) and Rule O-2 shall be obtained by using the reciprocal of the U.S. dollar equivalent of the ECU as calculated and published by the European Commission and the SDR equivalent of one U.S. dollar as calculated and published by the Fund for the same day. If both these rates for the U.S. dollar are not available for the same day, the rates for the next preceding day on which both rates are available will be used. The rate determined by this method shall be applied in connection with a transfer of SDRs as part of the settlement of a member’s debt with the European Monetary Cooperation Fund. The European Monetary Cooperation Fund and the Fund will consult concerning any change in the method of calculating the representative rate for the ECU in terms of the SDR.21

This decision was necessary for another purpose. Under Article XIX, Section 2(c) of the IMF’s Articles, the IMF can decide, by a 70 percent majority of the total voting power, to prescribe operations involving SDRs in which a member is authorized to engage in agreement with another member. The IMF can establish such terms and conditions for these operations as it deems appropriate. The IMF has prescribed that members may settle financial obligations between them with SDRs. One of the conditions is that the obligation is denominated in SDRs, the currency of a member, the currency of a nonmember of the IMF, or a unit of account that is composed of currencies and is applied under an intergovernmental agreement.22 The reference to the last of these forms of denomination was drafted with the ECU in mind. The same language appears in the IMF’s decisions prescribing other operations involving SDRs in which members have been authorized to engage.23

Could the IMF enter into liabilities denominated in ECUs? The IMF has a power to borrow from members or from other lenders, public or private.24 The Articles state only that the borrowing agreements shall be on terms and conditions agreed between the IMF and the lending member or (by implication) any other lender. As the SDR would have to apply to transactions with members in which the IMF uses the proceeds of a loan, and the transactions by which the members terminate their use of these resources, it could be disadvantageous for the IMF if its borrowing agreements were denominated in ECUs.25

The IMF has various express and implied powers to invest resources for special purposes. The express powers are limited to investment in marketable obligations of members or in marketable obligations of international financial organizations denominated in SDRs or in the currency used for investment.26 No such limitation would apply of necessity to investments under implied powers. An existing decision on the exercise of an implied power of investment requires that the obligations in which the IMF invests must be denominated in SDRs.27

ECU in Treaty Law

If the use of the SDR as a unit of account in treaty law has been broader than the use of the ECU, a notable use has been made of the ECU as the unit of account in the proposed Agreement establishing the European Bank for Reconstruction and Development (EBRD). Article 4, paragraph 1 of the Agreement expresses the authorized capital stock of the EBRD as a prescribed amount of ECUs, and under Article 6 the ECU is one of the means of payment for subscriptions. This example in the career of the ECU in treaty law is noteworthy because the Agreement is a multilateral one and membership is not confined to member states of the EC, participants in the ERM, or European States. The non-European countries listed in Annex A to the proposed treaty as prospective original members are Australia, Canada, Egypt, Japan, the Republic of Korea, Mexico, Morocco, New Zealand, and the United States.

In furtherance of these understandings, if all signatories become members of the EBRD, the member states of the EC, the EC itself, and the EIB, all of which are among the signatories, will hold a majority of the capital stock. Furthermore, it is provided that the admission of new members,28 increases in the capital stock of the EBRD,29 or increases in the subscription of a member or allocations of shares to a member within the authorized capital that are not taken up by other members30 shall not have the effect of reducing the capital stock held by member states of the EC, the EC itself, and the EIB below the majority of the total subscribed capital stock.

It has been explained that the ECU was chosen for the purposes mentioned above because of the essentially European character of the EBRD. This fact is recognized by the contracting parties in the preamble of the Agreement. The ECU was recognized as being at the center of the EMS and formulated in relation to a basket of EC currencies, the weights of which are re-examined by EC finance ministers every five years, or, on request, if the weight of any currency has changed by 25 percent. These statements of EC practice were probably intended to give an assurance of the present and future realism of the ECU as a unit of account for the purposes of the treaty.

1

Council Regulation (EEC) No. 3180/78 of December 18, 1978, European Communities, Official Journal of the European Communities (Luxembourg), No. L 379 Vol. 21, December 30, 1978.

2

Council Regulation (EEC) No. 2626/84 of September 15, 1984, European Communities, Official Journal of the European Communities (Luxembourg), No. L 247, Vol. 27, September 16, 1984. See Ralph J. Mehnert, “The ECU ‘for Beginners’,” Europe (Washington), 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.

4

Revision of the weights of currencies in the ECU basket does not change a participant’s central rate for its currency in relation to the ECU or the obligatory intervention points, but divergence thresholds are affected.

5

The Role of the SDR in the International Monetary System: Studies by the Research and Treasurer’s Departments of the International Monetary Fund, IMF Occasional Paper, No. 51 (Washington: International Monetary Fund, 1987), p. 38. In a Communication of May 24, 1983 to the European Council (COM(83)274 final), the Commission stated that “steps must be taken to secure the development of the private use of the ECU; such a development is, in fact, a necessary means of reinforcing the European monetary identity, internal and external.”—ECU Newsletter, No. 5 (May 1983), p. 3. Numerous critics argue that the success of the ECU as a private unit has been exaggerated and is disappointing so far.

6

“It is obvious that in this role the ECU is in competition with the SDR, which has the advantage of greater simplicity as its basket has been reduced to only a few major currencies. However, the greater complexity of the ECU does not seem to me to be a definitive disadvantage. The better weighting of the ECU gives it better average stability, better matching the interests of both lenders and borrowers.”—Pierre Werner in ECU Newsletter, No. 1 (February 1982), p. 2. See Ralph J. Mehnert, “The European Currency Unit and Its Use in Developing Countries to Solve Foreign Exchange Related Problems: The Case of the People’s Republic of China,” International Tax & Business Lawyer (Berkeley, California), Vol. 7, No. 2 (Summer 1989), pp. 299–352.

7

“The Commercial Use of the ECU: Invoicing and Import-Export Practices,” ECU Newsletter, No. 31 (January 1990), pp. 16–30.

8
“European Firms and ECU Invoicing,” ECU Newsletter, No. 15 (January 1986), pp. 3–32. The invoicing or financing of intra-company trade has made some progress in intra-company transactions if the corporation and its subsidiaries operate in different EC countries. Most of the ECU payments among these entities net out and obviate the need for a large flow of payments. See “Invoice us in ecu, if you please,” The Economist (London), January 13, 1990, pp. 76, 78. See also “M. de Larosière discusses the possibilities of making the ECU the European Community’s common currency and the scope for central banks to foster this process in the near future,” Bank for International Settlements, BIS Review (Basle), No. 35 (February 19, 1990), pp. 1–6, at p. 2:

“a) Utilization of the private Ecu currently appears to have met its limits.

–although the Ecu capital market continues to develop, its use in bank intermediation appears to have reached a plateau.

–the expansion of commercial use of the Ecu is naturally restricted by its definition as a basket of currencies: insofar as there is no genuine money market in Ecus, banks often have to break it down into national currencies, which obviously entails higher transaction costs than in the national currencies.

–for as long as the Ecu continues to fluctuate against national currencies, certain companies unevenly represented in Europe will undoubtedly prefer their own currency or one of the national currencies to the Ecu.”

9

It has been suggested that the abrogation of capital and other controls might result in a decline in the use of the private ECU (The Economist (London), December 10–16, 1988, p. 85). On the growth of the ECU market, see Bank for International Settlements, Fifty-Fifth Annual Report (Basle, 1985), pp. 127–33; for the reasons, see particularly pp. 132–33.

10

For some of the official or perceived obstacles to a broader private use of the ECU, see A Strategy for the ECU, a report prepared by Ernst & Young and the National Institute of Economic and Social Research on behalf of the Association for the Monetary Union of Europe (London: Kogan Page, 1990), Chapter 6, pp. 79–125.

11

See the following pamphlets by Joseph Gold in the IMF’s Pamphlet Series: SDRs, Currencies, and Gold: Seventh Survey of New Legal Developments, Pamphlet No. 44 (1987), pp. 17–18; SDRs, Gold, and Currencies: Third Survey of New Legal Developments, Pamphlet No. 26 (1979), pp. 7–10; Floating Currencies, SDRs, and Gold: Further Legal Developments, Pamphlet No. 22 (1977), pp. 46–48, pp. 66–67; Floating Currencies, Gold, and SDRs: Some Recent Legal Developments, Pamphlet No. 19 (1976), pp. 61–62. The IMF itself at one time accepted the idea that different methods of valuation of the SDR might coexist as the result of terms in the IMF’s borrowing agreements, but later the IMF preferred options for lenders that would not bring about such a result (Pamphlet No. 26, pp. 8–9). See also Joseph Gold, “Development of the SDR as Reserve Asset, Unit of Account, and Denominator: A Survey,” George Washington University Journal of International Law and Economics (Washington), Vol. 16, No. 1 (1981), at pp. 7–10.

12

ECU Newsletter, No. 16 (April 1986), pp. 19–29; Bank for International Settlements, Fifty-Sixth Annual Report (Basle, 1986), pp. 172–73; Jean-Paul Abraham, Filip Abraham, and Yvonne Lacroix-Destree, “EMS, ECU and commercial banking,” Revue de la Banque (Brussels), February 1984, p. 27.

13

ECU Newsletter, No. 16 (April 1986), p. 21.

14

Ibid.

15

Bank for International Settlements, Fifty-Seventh Annual Report (Basle, 1987), pp. 183–84.

16

Bank for International Settlements, Sixtieth Annual Report (Basle, 1990), p. 216.

17

Article V, Section 7(i). There are, however, a number of provisions in the IMF’s Articles under which reserves have a function, and a member’s holdings of ECUs would be considered part of its reserves under these provisions.

18

The terms and conditions spelled out by the EMCF so far in Decision No. 18/85 of November 12, 1985 might not be appropriate for administration by the IMF under Article V, Section 2(b), but the decision could be amended.

19

The transfer of reserve position is effected by the debtor’s purchase to the necessary extent of the creditor’s currency by means of a transaction conducted through the General Resources Account.

20

The so-called principle of equal value.

21

Executive Board Decision No. 7041-(82/8) G/S, January 13, 1982, entitled “Representative Rate for t h e European Currency Unit (ECU),” Selected Decisions, Fifteenth Issue, p. 379.

22

Executive Board Decision No. 6000-(79/1) S, December 28, 1978, as amended by Executive Board Decision No. 6438-(80/37) S, March 5, 1980, Selected Decisions, Fifteenth Issue, pp. 363–64.

23

Ibid., pp. 364–73.

24

Article VII, Section 1.

25

The effect of Article V, Section 10(b) might be that for practical reasons borrowing agreements by the IMF must be denominated in SDRs.

26

Article V, Section 12(g); Article XII, Section 6(f)(iii).

27

Executive Board Decision No. 6845-(81/75), May 5, 1981, Selected Decisions, Fifteenth Issue, pp. 314–15.

28

Article 5, paragraph 2 (EBRD). “New” is not the style of the EBRD Agreement. The word is used here to mean countries that do not become members under Article 61 and are admitted to membership pursuant to Article 3, paragraph 2 (EBRD).

29

Article 5, paragraph 3 (EBRD). This effect would be achieved by exercise of the pre-emptive right of members to subscribe to increases in stock proportioned to the share of a member’s subscribed stock in total subscribed capital stock immediately before the increase. This right is safeguarded by providing that the provision establishing the right can be amended to modify the right only by acceptance of the proposed amendment by all members (Article 56, paragraph 2(i)(b), EBRD).

30

Article 5, paragraph 4 (EBRD).