The euro before 1999

On Backtes.to every product is shown in euro. The backtester is built for European investors: whatever currency an asset trades in, for comparison purposes we treat it as flowing into our currency, converting everything to euro.

But the backtester runs very long simulations, up to roughly 100 years. How do you convert an index like the S&P 500 into euro when, a century ago, the euro didn't exist?

1999 to today: the euro

From 1999 onwards it's straightforward: the euro exists, and most ETFs and bonds are already denominated in it. Where they aren't, conversion follows official rates.

Two moments are worth distinguishing:

• 1999: the euro is born as an accounting and financial currency. Markets, rates and many instruments start being expressed in euro, even though notes and coins don't physically exist yet.
• 2002: euro banknotes and coins officially enter circulation in participating countries.

1979–1998: the ECU

Before 1999 there was no euro. To keep a common currency basis across European countries we use the ECU.

What the ECU was

The ECU (European Currency Unit) was the official European monetary unit before the euro. It wasn't a physical coin in citizens' hands but a unit of account, built as a basket of the main European currencies: German mark, French franc, Italian lira, Dutch guilder, Belgian franc and others. Its value came from the weighted combination of those currencies.

It is the euro's direct predecessor: when the euro was introduced in 1999, the changeover happened at 1:1 against the ECU. That is precisely what makes the series continuous without any sleight of hand.

Why we use the ECU

Using the ECU between 1979 and 1998 avoids an extremely complex reconstruction of every European country's exchange rates, year by year. Without it you would have to convert each national series into its original currency, retrieve all historical rates, handle devaluations, revaluations and currency crises, and continuously realign the data, introducing statistical noise, potential inconsistencies and difficulties in historical comparison.

The ECU instead keeps a single currency axis, makes European series comparable, preserves continuity with the euro and simplifies long-horizon backtests.

In practice, we treat it as a "pre-version" of the euro.

Before 1979

Here the situation changes. Under Bretton Woods, many currencies were pegged to the dollar at fixed parities, adjustable only in exceptional cases, while the dollar was convertible into gold at a fixed ratio. That double anchor made exchange rates far more stable than in the decades that followed.

Because currency movements were relatively limited, we do not reconstruct historical exchange rates year by year.

The method

Extending backwards uses a technical approximation: take the last available level expressed in ECU (or euro) and project it backwards as a constant value.

Explicitly, this means:

• we are not simulating the true historical path of exchange rates;
• we are not reconstructing the real currency risk of the period;
• we are creating a numerical continuity useful for long historical analysis.

Limits of the approach

The methodology suits multi-decade backtests, long-horizon comparative analysis, macro and statistical studies, and aggregate historical series.

It is not suitable when:

• currency risk is central to the analysis;
• precise historical conversions are needed;
• devaluations or monetary crises are being studied;
• real returns in local currency are being analysed.

In those cases you would need to reconstruct actual historical exchange rates, national monetary dynamics and the swings between the various European currencies.

Summary

The goal isn't to reconstruct European monetary history perfectly, but to obtain coherent, comparable series that behave stably in long-horizon quantitative analysis.