Does a Basket Currency Require a Fixed Exchange Rate Regime?
The ECU was created as a reference currency for the EMS of fixed (but adjustable) exchange rates. This may raise the question whether the success of the ECU was not conditioned by the EMS. The ACU basket would contain currencies some of which have fixed exchange rates, other are floating with various degrees of management. It needs to be recognized that the EMS, although based on the ECU, did not in its functioning or performance depend on the ECU. Nor did the ECU in an essential way depend on the EMS. The ECU benefited from the official definition and recognition but not from the fixed exchange rate system. Because a basket currency is a standardized diversified portfolio, it has all the advantages (never the worst performance) and disadvantages (never the best performance) of any diversified portfolio. The greater the volatility of the portfolio’s components, the larger will be the gains. From this vantage point, flexible exchange rates are not a problem. Quite the contrary: greater
