Converting EMS to EMU: Why not at Par with Sterling?

This paper considers the optimal choice of the numeraire for the curency conversion that will constitute the final step in the transition from EMS to EMU. At the moment it seems to be understood that the current basket-structured ECU will be chosen for this purpose. We argue that this choice is not justified on economic grounds and explore possible alternatives. Our major conclusions are: First, the current ECU is not the cost-minimizing choice of numeraire; it is preferable to use the national currency of an EMS member. Second, The Pound sterling should be the first choice for the numeraire currency. Third, if sterling is politically not feasible because Great Britain does not participate in EMU from the start, the only realistic choice left is the DM.