1971 Federal Trust Report

7/29/2019 1971 Federal Trust Report

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FOREWORD

. N o r . , that th e n egot:ia .tio ns fo.!:entxy are fina.lly complete, wein Drita.in shall lMJVo to focus ouy' minds upon the issues that will(.'()JJ.fX0l1t the united Kingdom as a memhC of' tJw Buropean Communit~!ol.1 !~ (!o J1gh ese is su es p one of the mos t impox"tant is the Communi ty gscnmm. i tmeni : tomonetar9 unlono TI]() present report, f',hi ch analyses theproblems of Em:npcan monetary int:eqr~1t:ion and.. exam ines a nef" p ro po sa lfo r il soluti(>nl' is therefore extremel!J rve11 timed0

Nor is the report an y less timely from tileEuropean point ofvie,.,o For its pub.l:J..cation follows a severe setback to the Communit!!'smdsting pro.iect fo r monet:a:r.g union, wl1ic11 Wc1S ta have begun t'Ii th th-DD ,rrm"ing of the hand" of' fluctuation beJeen the currencies of theCommuni ty countries and to c::,ulm inat:e in th e irz'eversib le lockingf:ogetl1er of their exchanCjo rlJt:cso This process f'ras suddenly throwninto reverse at the very outset: by last yeargs ,~!Orld currency crises,S2Ge r"hen tIle Communi ty has lacked a crediblc! strategy for monetar~l.lll::Ggration 0

Tlw Commun.i t~J needs c1/new start in this fielc1; lnd this reportsuggest:"1 that: i t should concent.r.ate on Hw creation of a EuropeanC'lll';COnC!! .. the EU Jtop(;I. - r,1t:he.'C Hum on lockinq the pari ties of theGJdsting cur:z:'encieso -Tn thiswa!} "re can beg.in to derive thei .!Qvantages of integ:l'ation wi f;hoU~ impail.'inq the capaci tu of membercoun::cim; to. deal f",i t h tlwi:c bE!limcc,-of~payments diff.iculties Oncebagm2/J . tl1e process eDin contimw in Em inez'emental manner: theEuropa f'Jould be a priT J'c1te c1ssetp fulfilling fOr example the functionsthat: the Eurodollar hashit':1wrto performed, as f'Je.U as a reserve medium;and nm., uses could be dC\!'elopedOL' 1 t as and when the members of theCommuni ty docided that they r..!Cre ready i'or a further instalment ofintL>grationo

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'l'he E urim t"oul d also enable tJw Communi ty to pIa9 its part moreefFectitTe.l!! in tile interna tional monetary system , fol1o~,ing thei~g:n'!eJ11ent of the G rO ll]) of ~Cenin Washington last: December to realign'tbeir ]1osi tions and then to neqotiai:e on .interruJtional monetaryreformo TIJe ideas put i'oLwax:r'l in this report are f!1 11~1 co nsiste ntI t11 f:110 pi.-op osed repla c'cm on t: of tiledollar (probahlybu tile SoDoRo)as th e 1 2Um:rr1ilo e an d elS the principal reseIve medi u1J1oWi thin sucha s~Ts{;em , the Europa t'iould enable th e Communit17 members to gain morecont:rol over their monC!tar~l po.licies f and to ensure that Europe'seconom ic par-Jer is p1.'oper.Z!J ref.lected by Hw Communi ty' s posi tion inWO Jtld m onctJr'!l aE al.rso

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During 1972, there will be a summi t meeting of the lleads o l ' s t a t e ,an:1Cmrermllentf the C!nlazc;cd Communit!1o Thetl 1.J.i.I.l wish to strenqthenUw Con iIlllm it!!'s effecU.von8Sg: 1':0 i1'Jcr'Gasc tlw cil]Jcitr] of {~}JCmembercount>:ies t'oY: collective' action, and to, enhance what the Frencll calltb e 0 ml1:0p8


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INTRODUCTION

" One of the principal decisions reached by the Heads of State of'the Sr,{~ at their conference at Tho Hague in nec( ~mber 19G9

~ Has topl'ocli'limthe goal of converting the EUl'opean ,.Economic Communi ty intoan E1conomfc and monetary union, The subsequent history of thisambition has not~ so far~ been happy. A committee chaired byM. Pierre Herner, the Primer Hinister of Lmmmbourg ~ Has creatr1d toadvise on how thr1 goal might he achievo(L Its report (the Her-nel'.R eport )provoked considerable contJ:'ovOl"SY and criticism ; even some (", of th? modest first ~tep8 th~t: 1.JO rC ~ltim.~t~lY _ a~reod on have 0 n~:ereen l.mplemented, bLng aman[; the ca.,u.llt:t.e,., of the Dollar Crls1.",.

'> The unsettled state of the international monetary system may. increase 1:he diffic,].llti.os of constructing a European monetary area,hut it increases 1;he importance and urr,ency of the task even more.It is the aim of this Feport to develop a sh"ategy that Hill enablethe drive tom:lrd monetary lntegri':ltion to be rosumed~ Hhatevar theoutcome of the Dallal'" Crisis.' Th5.s strategy involves filling some ofthe gaps that Here left by the Herner Repo!"t, notably Hi th r(~gal"c1othe. intermediate_.8ta,g_e of partial monetm 'y integratiOn. But itdiffcrsfl"om . the Herner approach in that the lat.ter envisagedintergration solely as a proct~SS of th/1 convergence of existingcurrencies (especially wi th regard to nxchange pates) 9. Hhile the.presentR(~port al'gtK!S that intcgrat:1.on could bp. facili tatc~d by theeai"ly creation of ilneH currency, Hhich is provisonally t:ittlcd the"Em:'opa" 0/1

The wmeral poli t ical outlook of the Group respons:lble fo r thisReport is one of sympathy for European integration coupled Hith a

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desire to retain the rich diveI'dty ~that history has bequeatbed tocontemporal"y Europe. Inte,sration is desiri1ble, not as an end initself9 hut becaus0.there are somG fieldFJin Hhich nation states ar e\ too small to be viable dedsion units In the jn'oscm i: ar;e, In some cases"this is because efficiency demands a lal'ger' m


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1. ,J:b~]i~~ni..1! 1 ~ d . _ ~ : ~ i ~ _ n . , ~ g . ~ ~ ~ ~ t ! ~ ~ ~ ! ~ ~ t y . . 2 . ! : , ! ~ g ' . E , ~ ! J ; . ~ ! : '

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Full monetary union implies a single currency circulating through-out the union and managed by a single central bank systeme Monetaryunion may be taken as virtually complete when individual currencies,though still existing, have bean irl'cvocably locked together by thetotal abandonment of independent parity changns~ the sunpression ofthe margins ~ and the establishment of complete'! convertJJJility.

I'

',I;A state of econom ic union exists when all the principal leversof economic policy, and not just the monetary levers, are centralised.lp This in, eludes" in particular, fiscal policy, incomes policy, planning,ff and regional policYeOne may distinguish lour economic advantages of creating a

m onetary union:- a. The increased efficiency resulting from simplertransfers and calculations and the elimination ofexchange risk;b. The elimination of traditional style balance-of-payments

problems through increased capital mobility (althoughof course developments tl1at nOH cl'eato payments problemscould still give rise to regional problems);

c. The economies in reserve-holding provided by poolingof exchange reserves;d. The possibility of re-establishing European control

of European monetary conditions,

Insofar as monetary inter,ration was successful in achieving theseadvantages ,it would contribute to creating th e political concli:t:ionsfor progress in other spher'cs where a functional need for :integrationexists,

I'

Conversely, however, the cause of European integration would beretarded if monetary integrat:ion wore to be ptll"8uec1 but the ttempt Hereto faiL The potential dangers of monetary intgl'ation stem from the.1088 of the pmJer of al ter:ing the national exchange rate; such R loss, could threaten the. more stable countries Hith exc(,f,siveinflation and/orth e more inflationary countries \-dtha loss of prosperity that Hould bethe more intractable precisely because it Hould be mo.nifest as aI\"'!gional problem ~f(,i:herhan a balance-of-payments problem, This'danger is particularly acute, In the European context because differentnational tradi.tions and 5.n8ti tutions could give rise to incons;tenttrends in unIt costs in different ni1tlonal "r-egions". This developmentHould be so disastrous. if l"f:,alised. that it Hould inevitably lead tothe destruction of monetary uniono

The advantages of monetary integration can only be completelyrealised through full monetary union, so it is dC!~drable to retain this- 2 .-

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'.1 .

. .as the u ltimate goal, even though pructence m ay ctom and that mavinr; tothis goal be delayect until one has confidenc0. that concl:i tio ns have beencreated uncler Hhicp the potentia l ctanr;ers of monetary intq;ration willnot m ateria lise. fut there is considerable scope for real:sinr; theadvantages of intep;ration by a more .lim ited,. mC!i1sure of intpr;:ration?involving the creation of a EUl'opt:an monetary area wi th its mmotlI')~~nY .9_~ en before these c~'hons have been created. ThIS1nter-m.Q~te stage' of monetary intQp.:ration Hould be feasible in 't!1e near-,--.~ . .future. The nm(t. three sect1.ons of th1.8 Report are therefore concerned"ith' developing l'~p~sals fol' the intermediate state, while Section ITdiscusses the candi t10ns necessary for tramn t10nto fu ll monetaryunion.

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II. Outline .o~~e\-t Pl~~....Y~!~Ji:~

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It is ,proposed that the final stage of monetary integration wouldbe a state of full monetary union, as envisaged in the Warnor Rep01~t: 0Prior to this there Hould be an intermcrlia{:e stage; this 1'ToulG bo. ofindeter:m inate duration, since transi don to the final stage Hould i1\lai trealisation of the conditions needed to ensure that the danger ofinconsistent cost trends did not materialise. The intermediate sta~e,would be characterised by lim ited intra-European mcchange-rate flEm-ibility (as compared to that botHean European currencies and the rest"of the Hor-Id), the active use of the, EtirOpa to serve as internationalmoney and circulate in para1eJ-to existing Euronean curl'cnciQs, andthe aboli tion of intra- E\ropean mcchange controls 0 Since the EUl'.'opawould serve ~s the intervention curJ'ency during the intermediate s1:


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'. fi responsibility of intervening to defend the rate between their national//

currencies and the Europa, while the Eurpean Bank .muId defend the"

Europa/dollar rateo Th(~re would be a ni11.'rOVTntra-EuI'opean band coupledHi th a ~ride band between the Europa and the dollaro...

Maintenance of a narrow int:r'a~European band would require conjuncturalharmonisation vrithin Europco However, the :intermrHate stage Hou.ld bepracticable before the total sUPP~ession of diV'm~gent trends in unitcosts~because intra~European parity changes Hould 8tH1 be perrniss:l.bleo The Hideband between the Europa and the dollar Hould enable Eu1"opo to :regain agreater measure of freedom fr'om {JoS 0 monetary policy, although it couldnot insulate Europe from the effects of any future American fundamental'disequilibriurno The md.stence of the Europa Honlel make it possihle fOJ"themcchange rate between the dolIR!' and t.h EUrOpeiln c.urY\ene:.Ec~s to Vc":!1:'Vinanyimaginab}(~ ~lay (including float'ing) ~ '-1ithout disrupt.ing intra-Luropcanrelationshipso .O ther advantages of }~m"op~ moving ~lointly against thedollar include the greater ability of the whole EUJ"opean ar8a to ab::;orbhot money Hithaut being overHh(~lmed ~ as compared ta a situation in Hhichthe uhole ~"o)oght is concentrated on the strongest individual Europeancurrency (e,go the dnut:schemark in May 107:1); "md tho. redl1ction in thesubsidy that central banks pay to il1t(~rnational companlcs \Vho suitchtheir funds from one financial cm:1't:rc to another to take advimtnp;e of asequence of parity changeso(3 ) The Final Stage~_'O':.~'""...UII;.. '- ''''"''.This would inval vc full monetary union wi th a common curl'ency 0 Thetransition f-rom the intermediate to the final stage Hould be contingenton satisfactorily overcoming the problem of divergent cost trendso This",QuId require, among other things~ a f~r measure of centr\lI::::ationof'. If e-"""o~ . i.. c PQ,lic ..Y., since ~ .. rtomatic f_.

isCa.l transfers and a centralised.IJ regiQ!1aJ__policy are among tho factors that contribute to c!nabffig amonetary union to dispense Hi th intet'nal exch(:mge'~ratc ch1np;es

0 Al though ameaSure of fiscal unification .fould be desIrabl0. and nece,o>si11"Y ', thiscertainly does not mean that total r.entralisationHould be needed (as~for m,ample~ the American oxperience of f>Tate fis cal autonon1'1' demonstl'i1ter;).1.1hen the i.nterlocking of the economies and the consTruction of an econom icunion had provided the necessary concH tions for pl"oceeding ta the finalstage,national,urrenciesvlould be ~.Jihdral.JD and repL1CC(] by Europns.

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I I I . ! ~ ~ ~ . ! : \ , I 2 9 . P . ~ ? ~ r : ~ ~ r : , ~ ~ I ] . i ~ ; l ~ ~ : . . . . . ~~~~p-~.Ji

(/It will be evidfm t from the preceding outline that t h e E u r o p a c o n -stitutes a central featul"eof the p r o p o s e d strategy, and that the

~ l r o p e a n Bank1S being assigned a key r o l e in fostm"ing monetaY'yi.nte-p ; r a t i o n . It is a p p r o p r J . a t o to sketch t h o r t1 t io n a le of theso S ' l : Y . ' < ' 1 : t c r ; l ( ' ..~p r o p o s a l s .The case for creating a E u r o p a stems from the pract:ical need foran internationalmoney and the unsuitability o f th e a l t e r n a t iv o s . In

recent yemC'8 tho dollar has been i:he dominant form o f into1"nationalmoneyt and the Euro-dollaX'market h a s grmm u p primarily in r e s p o n s eto the dm ::ire of t h o s e engaged in intm:'ntionalusin(~ss to hold in t e r "n a t i o n a l money. The E u r o - d o l l m ' mm"ket has in fact com;tltuted then c m " e s t a p p ro a c h t o a c o m m o n E u r o p e a n m o n e y and capital market, nnc1 hasin t h i s capacity been a p o to n t fa c to r 1:"avouring f i n a n c i a l integrationHithin E u 1 " ' o p o . But it hilS suff(~red from th e - 0mbi1l~rJBP,fIlent of also

(being, c l o s e l y lihked to the lJ.!:; n money m arket 9 th us 80.l:'ving to transmi t

, Amel"'lcan monetary p o l i d e s to E u r o p e . f;ince American monetary policyi s ( u n d e r s ta n d a b ly ) determ ined Hi th refol'0.ncc t o t h e U . S . domesticsituation t h o r e s u I t o f t h is arY 'angomont has boen to imposemonetarycandi tions on EUl"ope that W'!l"C at timeD stX 'ongly at variance Hi th local

fI r

conjunctural needs. So long as the dollar rema:i.nE, the international,money ~ an y E '.lr?pean . c~untJ "'1 [ ~ ttemptin~ t o ~ n f : ' : u ld .t : - its,elf f1"om AmericanTIlonetary pollcles wlll also Insulate :lself fT 'om 1.t8 F.uropean partners,ei ther by exchange contJ"ols OY ' by exchange-rate fle,dbili ty.''II .. - .

One could seek to replace the dollar by a d o p t i n g one of the Europeancurrencies


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'0 f1 J The Bank would be formed on the rreneral lines that Triffin hasV( long advocated for foundinrr a European Reserve Fundo That is9

'ountries would pay in to the Bank a specif:ed proportion of theirreserves lus a quota of domestic currency, Th0. latter Hould bo,suff ciently large to have the effect of reproducing the SUI)po:rtf\Cili ties thG t Eo Eo C . members have agreed to provide under theBarre Plan. Countl"ies Hould l~ec{~ive :In retm"'n deposits denominatedin Europas . 'l'hes'c depos5- ts Hould count as a part of countT.'ien ureserves and could,be draHn on in the event of a payments deficito

The .European Bank would be T1}anar;ed by a Board of Governors,I ' uhich might comprise the governOl"'S of th national central hankstogether tdth a chairman appointed by the Council of M inisters of th('! ,EUl'o pean Commun ities 0 'l'he BoaEd Hould he responsihle to The C()lInc:l;lof M inistrs In order to enSUre that the Council Has ble to

mcereise effective control of the continuous policy-making that Hould heinvolvod in detcrm in in g European monetary policy tit Hould b8 ne ccssm'yto elimi the right of individual nations to exel"rdse in thi R~ea. The e - -ec lVe an speedy administration of those poliyweapons that were specifically placed at thE.' European' lev el Houlel onlybe'feasible on the basis of majority voting.The European Bank would have the following rMPonsibilities:,a. It would act as a ,European Reserve Fund from the

date of its inception.b. Once the preHmlnary stage had given way to the

intermediate stage, it would intervene to stabilise---he Europa! do lIar exchan~'/, rato_-.c. It would recommend ('hrlT)ge~ In 1-111"parit',Lof theEuropa in terms of gold/SDRs to the Council ofHinioterso

d. It would CQTIt-roJ oueraJ 1 F.uropp.aILm one..tar,jLp.olic,Y_tand "1Ould attempt to ensure consistency bet-Heen thegeneral Community policy and the policies beingpursued in individual. states. (This would includesu~ervision of intra-European m{changg~i1t:es)

0

e. It would nurture the growth of the~Rrivate_ monet:arY_~0set, principally by acting as acentral bank to commercial hanks operating in the~Europa market 0

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The pari ty of the Europa would be defined iT}terms of the inter-national monetary unit, Hhich at present consists of f!old and SURsrigidly linked togethero The parity Hould be ,changclbJe hy i1 decisionof the Council-of-H inisters ~~who 1-1ould be advised on this subject bythe European Dank. The govern:Lng pd,nc1_ple in determ ininr, p:i ty changesbetween t-he Europa and 1:1~ rest of the -~qorld Houlc1 he tht of m intainingthe Dank's mcternal liquidity at 11level sufficientlyhig!l to safeguardthe pursuit -of a high rate of balanced growth in tho Comrnunity, but not, --~ ~

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so ~xessive~ hi~ as to involve a Haste of resources an d emb nrrassm 0.nt lto thh'd countr'ios 0 (The Eurons "lOuld serve as rt ropsp.rve

rnedl'urn for the European.centralbankso (Unless J>relc~(mt trends m-ray from "the reserve=curren~y system rereversed, one t-roulcl not expct it 1:a bf,cornE, a reserVe r.urrcncyheld hynon-European count:rles;' Ao()ve all~ hem 'ever, the Europa Is on'1saged asa privatc~ asset .able to function as a pan'-Eur 'pe1n moneyo I:I' it succeeds,it will fill the role that the Euro'-daI1ar has erformed for the pastdC'!cade in acting as an 1.n8 'r111Tle n. -nx' t 1e creation of unified Europf~anmoney anel capital markets0 In due course the Europa could be expectedto displace the Euro=dol1ar, at }r,ast so far a:3 EUl"opean hO l'r'oH el"'S andendem are concernedo This would have the advantages of helping toin su late in tra"'E uT \";j)E !an pelationshipsfrom instab:lli ty emaf1ltingfpomthe other side of th(~ AtlantIc, of enabling Europe to exercise somemeasure of contY 'Ol ovcr this Import;;nt cnmpancmt of the effective Europeanm oney supply~ and of permltting Euy'ope to (mercisoflmdbility againstthe rest of the Horld without d"1~ptIng the stability of intra-Europeanexchange r.ates 0

(,f' ,

It has often been started that mon:les gr'aw naturally and that~ attemptsto impose a new monoy artifcially are hound to faiL Ther'c is muchtruth in this cont(mti0l'1o If the EUf."opa is to succeed, it Hill only bebecause it is an aSSE:"(:ith mor d,'Os lL'ablp Pl'Orf.H 'ties~ fpom the vieHpointof thp. prospective hOlders, than ~che: dollar, In large measure successbroc ds on success; once an asset had, hecome firmly establi~~tJed, this fact initseJH 'ill enhance its position~ because case of using the asset as ,:tmeans of payment and of the r~~siliency 9 breadth and depth of itsfinancial markets 0 The (Ufficult P::lT 't of the problem is to Hin initialacceptance of the Europa as a unIt fOL' denomini1tlnp; market aS~::;ets

0 Therearc, hm-Tever, a la!'g(~ numbcr of mCi1SUJ:"es that could be taken to stimulateth e estab lishmen t o:fthe Europa as a marie'!: aSf;ot 0 Sonw of these measuresmight initinily involve a slSght c:lemcmt of additional Caf; t to theauthorities ~ but this Hould disappear (and mi[~ht wlbe I'eversed) as soonas the Europa had become thol"oughly acceptedo The me;1


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..1 ..

( I.) A will ingness by national governments to accept tmws inEuropas(5 ) The European Bank providing clearing-house facilities for'Elu"lopa tY'ansactionn 0

"!.. ..(6 ) The European Bank making a se.conda~ket ~Europ-denom inated T~asUl'y Dills 0(7 ) . O nce the intermediate stage had heen reached, theEuropean BAnk could take the responsihili ty of acting aslender of last resort in the Europa bill mark.m: 0

"(0 ) The attractiveness of the Europa Hould also be enhancedhy the exchange-rate provisions that are cmvisaged (see~;ection IV), since these would minimise th(~ fluct11ation

of European currencies in te1~ms of the Europa HhiJe makingthem relatively large in tcprns o f the dolli1l'o\ It is sometimes supposed that, because the growth of the Euro'-~ dollar market was fed by a prolonged UoSo defidit, there would he an~. analogous need for a European dfici t in order to support the gl'ow th"of, a,Europa market. This is erl'oneous 0 fi. European deficit wouldassist in turning the Europa into rC!serve curl'cncy, and it Hould nocibubt be helpful ,in developing the Europa as a vhicle currency [(,r useb \ ' t

,I I ' E b . . . 1 '\ par ~es externa. to t le '.upopa area, ut 1.t 1.8 lrre evant to tneestab lishment of the Europa wi thin Europe 0 ( 1)

F()'1tnote: (1 ) This can !Je seen by considering a typical Euro-dollm :-[osition e.g. a 3-month 1;;uro-dol1ar deposit, representing the proceedsof' eJCl'orts to the U.S'o h!J a German Finnp r'lith .1 E'llJ:o-ol.1ar bank inLondon; and .1 3-month loan b~] the Eu;m"'r1011ar hank to 1 D utc11 firmI" hic h p ro cl'J ed erl to convert its borror-lings into ~'Illi1c1ers. Suppo::::e that,i:Jt th e end of the' ]-month term , botJ1 the German lJnd Dutch firm s rdshedto roll forrrard their loans for .1 furt:her 3 months, but: th1t, the greater~xchange-rate stabiLitl] betwt~en their respect.lyre nat.l0nal currenc.ief1


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. I

It is of interest to examine the Hay in which the f.uropean Bankwould perform :t'ts functionsa Its balance-sheet would contain the follmTingi terns:

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~~.~.~~TI ( ~ h ~ ~ . L ' ) . . ; L ! : ~ ~ ~ _ ? P ~ ! , I ? _ l 2 . ~ ~ ~Liabilities Assets,

Capital and reservesEuropa deposits by central'ba.nksEuropa depositsby commercial banksGold! SDRs, National curr,mcesEUT'0pa-denominated hillsEuropa-denominated loans

The Bank would engage in the following types of operations:----., , --a. It ""auld intervene in the Europa/dollar market; forexample hy selling dollars from its portfolio anddebi ting the accounh":; of the commercial hanks on Hhichthe EuT'opi'!. cheques to pay fol'the dollars vrere draVTn 0ho

[It would deal with non,-Europ,"!an central banks; for

. examPle.

, 9.

bY.

e.

, :XCh'ir ..'r

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1.g gOl

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d.

and SDEs for. .dOll

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' ar.

') (soas to maintain appropy'iate dollar working balances)!by engaging in swap transactions! and by makingpurchi1ses (O l.'" r'e '= 'purChi'(S(~f'::; from the I 0 Mor 0c. It would deal w ith its member central banks; for

example if il member acquired excessive Eurpa deposits,because of a payments surplus, these might bee){tinguished by the country repurchasing some of itsEuropa-denominated bills held in the B;mkis portfolio.

d. It would engage in open=m i'!'I,,1a>t-"rp",~ in theEuropa bill market! buying or selling bills with aresult:ant impact on the Europa deposits of commercialbanks 0The terms on which the European Bank would deal wi th non-Europei1ncentral banks a.re bound to depend gpon the form of the global monetary~s tem th at emerges from the Dollar C.!:"JSis~ The examplesgiven in

'... paragraph (h), above assum e, as se;ems p1"ooi1b1e at thedme of hl'l"J.ting,that this wiTl be ~niversal! Ta1LF 0 ~cE":ntl"ed svstem in ",hich S D R s becomethe principal reserve aSSPT and are used to funel outstanding ba.L:mcos ofreserve currencies in excess of workIng balances0 (I f thIs doef; not:happcn~ and the world polarises into 1 set: of defens:i:.ve monetar y bloc s

~ollar convertihili ty HiLl presmably not be restored and it wi 11 notbe possible to maintain dllar balances at the required Horking 1.0\'01, through t.'Y '1nsactions H .lth the Federal Reserve or the LMof. Th(~ : i" ,, ~,- :: t twould no doubt be a floating Europa! dollar l"'te, wi t:h EUl'ope gradl!ilydisposing of its excess do11ar h:ldlngs 0 Another pr,obi1re (,0nscC}l1cnceof such a development Hotllcl be the emer'f',ence o:f the Eurcma tS a n?servecurrency, whi ch would involve nOTlqEur'opeancentral banJes holdinr; Eurnp1.c 1 P O r r t s at the European Dank on essent'icdly thE~ f',ITne Terms a~~ thoseenvisaged fo r commercial-b ank dposi tG , )~, 10 -


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One important purpose of replacing Euro-dollars by Euro'Das ~..,ould beto establiG h a measure of control . 2 Y . ! ' this important constituant of theeffective European ~oney supply. Such control requires that it shouldbe relatively difficult to 8Hitch bA't1,TPPTI Fm"npns and r:uro~c101l1rs, r>:ineootherHise,any lttempted monetary policy could he side-steppedh}"ough iltransfer of business to or. from the Euro-dollar mElY 'ket, T!10.:re al"e tHOHays of counteracting Cl. tendency for undesired sHitehing, .Qn.e.. is toallow significant fluctuation in the Europa/ do 1 1m ." m ,change rate; th is'Hould lead to anyone-Hay movements being nullified by ra.te changes.The other method is to surround the Europa m 'ea by- an effective C}cchmge-control barrier. This might involve forbidding residents of the arCil toborrow or hold short-term externally-denominated assets without per-mission. The best policy would probably involve model"ate rCCOUl"e toboth techniques.,

In the pastEuro~dollar asset~ have often heen more attl"activetohold than national assets, as a rem llt of the lack of J"egulatlon of theEuro-dollal" mal'ket. In order to alloN Europas to displace Euro-dollarsit Hould be necessary to avoid regulating the Europa market so soon ~ or~ f. j 80 se "erely, as to make Europas unattractIve to hold relativeto Euro-, dollars. No doubt the Dollar Cris:is l"i11 help to m itigate this pal'ticular"pr'oblem by l"educingthe Elttractiveness of the dollar ar; Elvehicle cu):'r'ency,"S o that some influence on the Europa market couldbe exercisedby opcn-"market opel"ations from an "early stage, In due course it should provepossible to establish additional leverage by introducing moderate reserve.r'quirements: indeed, if this ~..,er! not done there would be a danger ofthe ,Europa making exces:sive encroachments on national money markets.Onc~ the Europa is formally established and thel"e are effective mon1tarywalls insulating :the Europa area, it might well prove more .important toalign Europa l'esel"verequirement8 Hi t b those in the nationi statpsrather than wi th those in the J"omnants of the EU l'o-'dolliu ' mapket ,especially since one hopes to operate with minimal exchm-contl"'olbarriers betvTcen the Europa and inc1i vidual European curren eies.

- Il -~ ~ -: :-=" ~- - -_.~ -~ -~ ---~


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~ ,

IV . . ~ ! ? h . ~ , ! 1 . K ~ ~ C ! ! ~ - . 9 . ~ ! t n l L . ! h ~ 2 ! . : ~ ! 1 _ ~ J J - L ~ ~

The proposed arrangements regarding exchange rates during the trans-itional stages before full monetary union are motivated byt h l ' e 0 . convictionr1.T h e first is that the "economists" are right in m 'guing that monet


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'". Idevaluation of the French franc and revaluation of the deutschemark in1969) so long as parity changes Here small! since the chanp;es in domes ticprice lcveb Hould only he modest 0 Limited parity flexibility (unlik0.fI t o h . 0t t '" t o 1 .n r C ni \ 0" , ' f ' " ta l.ng or 19 par1. y cllange.~ as prac 1.CfH J. .. e _e : years J 1.u t ln


16/29

1

v o' ' . ! ! J . _ ~ 9 _ n ' " M ~~~!~;:'Lg!!.~~:L~9.~.~_..;~~E_T~~I].~!!~~~~!,_~~l>Hap period ~ :1t is natural foY.'those countries that have enjoYf:,d the /;l"'2i-1tf~:'t pl"ice stabil.ity 1':0fear the inflationary, potential ,inhp;rEmt in poo:Ling their e,r.ternalreserves and monet:ary pollc:Les t-rith countFteS HhO::f~ r9cord of inflationleaves more to be desil"'ed" Conversely" the mor;::, inflation-'pn::inecountl"1EJS may fear that theil' gJ'owth a.nd employmelt policies would bejeopardined by tying themselves to cOl1ntrles whose groater stabilityseems to be. JL,off:'t"Jly explicnhle by a moy'\? f,w oU 'N ible unem ploym ent-inflation tri1dep1l't.ss their pr'ospcy'it:y 0 rt is ther'oforE',important to establish l.jhc>tl1C S1.m1.1,n' foy.ces are likoly to devolopon a Em>opE:i1n ~"cal0 as a r ' e u l t of inL egrationo

c " , l I t " 0

.


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There are in fact a number of reasons for e)


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apparent policy conflicts, or eIE) to a consensus regarding the priori ties" ' that the country should attach to conflicting ()b~Je\-;tiv0.so No doubt "ucha proc(:;!dure Hould Emm.:'t pressure on the m()mbnr countries to pur-suo effect:iveincom es policien ~ since theso al~e potcntia.1:ly a substitute for m cch1ngp.-rate changGs. ..

Noverthe.1ess, the, lag behreer. the implementation of policy changeand theconsequon tia l changesin the "aluos of tho policy ti1rr;ets is suchasta lim it severely the ()ffectiveness of Commnity control Nhich is lim itedto d lscu ssio n after it has become appi1.l"ent that agreed fargets HiLl not be,achieved. Because of this lagprohleT.o, effective hll"Tl1onisation must p.ytendto the instr.uments of economic policy as Hell as to the tm ,'gd:D. Hithin afull monetary union ,there is a built-in mechanism Hhich makes for harmonis-ation of monetary policy ~ ei theJC ' because only one monotm 'y policy exists or.elsf!because moneta!'Y npl11ove1NJ al'B so stl"ong ne to ronder independentmonetary policier; impractical. Dur'ing the transitional stap;es thismechanism Hould become incPf1i1singly effecti vc, and monetary policy in theindividual states would incpcasingly be determ ined by thC! polley beingpursued by the European Bank. In contrast ~ there m 'le abunclmt historl.al(maniplfm of monetal"y unioTIr; that have fl()Ul"ish~d despi te the maintenance.of independent fiscal polic:ies by theconstitllont nn'i:ts (e.g. the IJ1t:i.nUnianp Belgium-Lmmbollrg~ Switzerland and the United Stato[). Thissuggests that harmonisation of po1:~cy :instruments should be centl'ed onthe harmonisation of monotary policy. Fiscal policies might Nell be leftto the cntrol of the individual nation (~mb~j(~ct, of couy'se, to the needfor enough tmt harmonisat.ion to pe1:'ffilt the total clismi'mtIing of frontierbarriel~s), to "be used for purposes of local stabilif~ati.on Hhen theconjunctural needs of a p3.1~ticular area run counter' to those in theCommunity as a Hhole 0~ ~ I 2 ~ ! l a l 2 ' ? . 1 i L 9 . i e ~ 9 . .

Event if ,the growing interpenetration of European economies ~ re-inforcedby the deliberate harmon:lltion of economic policy, has theexpected efff!ct of lim iting the extent to Hhich unit costs diverge indifferentareasof the Community,it I-Jould be unrealisi:ic to e/~pectbalanced gl"oV1th throughout the Community unless dollbor1te regional, policies Here adopted. ,It follovrsthat an effective l"egionl polcy is ofthe utmost importance in creating the conditions for monetary union.

It would be a mistake to leave regional policy to be entirely anational responsibility. There are Hn'ee reasons for this 0 T h e firstis th a t in the absence of central contr'ol there is a real dangel' thatregions will compete Hi th one another in offel"-::.llg lncentives to attractindustry, the TIf!t result of 1-rhich will be to incr'ea:;e industrial profitswithout achieving an y systomatic effoet in gtecring industry tOH:11:'d tholess-prosperollf regions. It is faY.' this re ason' t hat the Community ha s

'i lll'oady imposed a :Lim itation on thp. sums that can be spent o n sllb s:idis in.. investment ~1.nhe IcentralarcaI of the Community. The second IX~J.;Onis that fiscal .tr;:msfersconst:'l tute onc of the most pOHel'fulfar:i.:orstending to maintain income Hithin a re.gion of J.11economic amI monetaryunion Hhich e'~periences a decline 5.n dem and for its output. A~; r:ountK'ioslose the oDDor'1:un;i''' of' ('omnenE81..tnr: fO 'i~ M d0.clin0 in demand hv nlTl"p.TIn:- IG

_on. ~_~__


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J';,'

.";

the e,cchanRe rate t they will require the Community's fiscal pmTersto be exereised in a Hay that acts as a substitute. A third reasonis that th!'!decrease in the l'eRional multipliel' will make an inj ectirmof central funclsmol"e essential. Hithin the frammlOrk provided hyCommuni ty rules and Community fiscal and cl'edit 'policie!19 it isdesirable to maximise local participation in the cletailed implementa-'tionof reRional policy.

Some of the Community's mdsting fiscal instruments (e. R. e'{pendi.-ture on r.e-structuring agriculture) tend to have a y'edistributiveimpact that is regionally favourable. These effects could usefully bereinforced by transferrinR the unemployment insUl'ance programme to theCommuni ty level. This 1-TOuld result in an automatic and immediateredirection at' fiscal transfers towards regions Hhel'e prosperity wasebbing.

.

The fiscal instrument which would seem best-suited to the.ohjectiveof promotinr; balanced regional growth is a rcgionallv-differentiate(l,payroll ta~{/subsidy n It is desirable to relato the tax and subsidypayments to payrolls t rather than to investment or' value-an(Ien, so as. to provide the stronr;est incentives for l(1)ouy'-intensie industries tomove to areas of labour surplus. (It my be 1-Torth noting that labour-intensive industries m'e not necessarily the same as low-Hage ~ lmT-efficiency industries; economic development is of course best advancod,by introducinR modern inrlustries which nevertheless have high labourrequirements). The tax rate (in the prosperous regions) ()r subsidy(in the less prosperous rer;ions) should clearly be related to theunemployment percentage, so as to provide the appropriate incentivesfor industry to choose the less-prosperous regions unless ther'e ,,yeres'ufficiently compelling reasons to ~justify location elsewheJ'c. Thereis also much to be. said for increi1sing the ti1Xrate in areas Hher,'":'!wage-rates are high, and increasing the subsidy rate in low-wageregions. This would make a direct contribution to equalising incomesthroughout the Community, and it would also provide a helpful incentiveto unions to recognise that rer;ional '''age diffnrentials can matori allycontribute to an equalisation of prosperity If, for example, the .unions in one country Here to push Hages above the level ~justified byproductivity and thereby induce excess unemployment in that areat thisformula would relieve the rest of thc Community of the oblir;ation tosubsidise thi1t region throur;h thc mechanism of the payroll tax. Thepayroll subsidy tvould t in effect ~ only be available to rer;ions thatHere prepared to contribute to their' ow n gr'oH th by exercising modc:t'ationin income claims.

The effectiveness of regi.onal policies could be further enhanced byutilising credIt policy .in parallel with fiscal policy. Easier accessto (subsidised) cl'edit for investment :inthe less Drosperou~; reg:ionswould prevent any desir(~ to invest in those arE~as as a 1'88\11 t of -thefiscal incentives'being frustrated by lack of Hnance, as well ascreating an i.ndependent inccm tive to increaso activi tv there.Even in countries that have 10nR been unified, policies based onnational aggregates alone have been founel inadequate. The businer:s cycle

- .1.7 -


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,.'

,-'t-.;', f

does not coincide in space with national boundaries, hut rather with theeconomincally-homogeneous regions. Disinflationary nolicies Hhich'oo notdiscriminate hehleen economic regions, according as to ~Thether or notthey are actually affected by excess ctemand, inflict an unnecessarvdamage to the "leaker regions, Hhere 'v("rheating,'. is often the 1'0.8111 ofcyclical conditions external to them. And yet the impact of restrictivepolicies tends to , concentrate there. Hhen credit is cut, most C1sur : t ic sare to he found in these rep,ions, since they have a larp;er share of' smi'lllcrf!"IT1s,nd banks as a rule find it marC! convenient to reduce lending tosuch firms. A differentiated credit policy should, on the onc hand, mikepossihle a more effective stand against inflation in the regions Hher,~demand for productive factors tends to cxceed snpply; on'the other hand,it should 'help to: shield the "leaker rep;ions from the jolts of 'stop'-go'.

These considerations should be taken into account when oeterminingthe Community's monetary policy. But this field Houlc1 also appear to,offer scope for direct action on the part of the Community, narc" specific-ally, a European creelit institution enclO1-reelith lar[1,eenough r8S0Ul"ce.sand powers might contrihute to the pursuit of regionally-differenti1h!c1~olicics. It is a matter for consideration whether this task would hestbe accomplished by an adequate expansion in th0. European Investment Hank orby the proposed European Bank adding a Development Division to functionin parallel with its central banking activities, In favour of the formersolution is thetradi tional sepaJ"ation of mone"tary activity from financefor development purposes, but the latter might he best suited to rna:dmiseresults, in terms of the imDact which overall credit condit:ions throuEhout,the Community "lould have on economic trends in the weaker l'ep;ions" )'ifcyrc-over, because the European Rank, as proDosed in a previous chaptE~)", woulel

"go beyond the concept of a reserve funel, whose activity is m1inly conHneelto official settlements, an d would thus deal directlv ,;[ith commercial kmksand other bodies, the steps required to give its activity a l"q;ional

'orientation would not be too many, The pl"OCeSS anel machinery of monetaryunification would in this event hy hi1rnes1~ed to bJ:'ng about i1more ovenpattern of demand and economic activity, and to paise rates of p;rowth,This Hould help to ovrcome the reservations that prudence enp;encler'stowards divesting national p,overnments of theil' powcps in the field ofmoney, c1ptial and exchange rate policies.Political Conditions---~ ~._-

,""

.}(:

The p reced in g sections have argued that the pre-conditions for asuccessful monetary union include growing interrenetratiol1 of theEuropean economics, deliberate harmonisation of economic objectivs ;mdof m onetary policy instruments, strong regonal policies (including th esub8id.1sing of the less-prosper'oushy the prosper'ousregiom~, and the:' deliberate direction of Gheap Cl"ee1i t to the le~,s-prosPE:1:'ow> l~ef(ions).and a Community fiscal polcy Hl th ~t0l!!.2!ic t~sf(,rs of incom(~ onsignificant scale, It is scarely possihle to conceivC ' of t:he~;,-:; 811])-8thntia1 pOWel"r;; - in adeLt t10n to the cont:Y'olof European monetary policyresulting from the control of the Europeai1Dank .- being exol:'c:1so.cl H :1.tho\1tsome development in tbe Community's sys'i:em of political control, I(

- 18 -


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There are many other considerations that Hill be relevant to anychanges that may be made in the Community's political or administrativem'gans. So far as the control of monetary and economic policy is concerned,the' need might be met hy a strentheninr: of the Commission I s Dowers andtherefore i ts accountability to the Ell"f'Opean ParJ,.iamcnt..2 in purallel \'liththe .direct election of the Parliament. . Or the Council of/iL1nistcl'smightremain the forum Hi th final authori tv in these areas~ but the Council mir:

"

hthe strenthened hy intro ducing one or' mOl~e 'European Minis tel~s' J'h o m ir;h t,for example , he appointed hy the European Par-liament) char'god wi th specificresponsib ility for formulating und e' {j:)l'essinghep:enerl Eur'opean int,~rest,to supplement the national ~1inisters 1


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VI. Conclusion---------

The preceding Report sugr;ests that a new initiative for Euroneanmonetary inter;ration should be based on the early creation of lEuropean monetary area. This "t this intermediate star;ewould be consistent wi th t

.

h.

e maintent:mce of lim.

ited e'{chanfYe-rateflcxi--hility within ElJro[>e and could therefore be adonted (~ven before successin harmonising cost trends has heen adlieved.

Creation of a European monetary area, especially if reinforceo hv'a wide hand between the Europa and the dollar, would be an importantachievement which Hould permit the re-'estobllshment of Euronean controlof European monetary conditions. It will be more (Hff:icul t to proceedto the final goal'.of full monetary union t-1ih. a common currency as

(

envisaged in the Werner Feport . Realisation of this ambitious p;oalwould pose conside'rahle dangers in the i1bsence of stronp; il1terp8nptrationof the economies, ffect:Lve policy hannonisation, stronr, rer;ioni1l policies~and supporting political developments, all of which Houldbe necE>ssary toovercome the problems thi1t are posed hy inconsistent cost trends. It is'not at present possihle to nredict the time that will rapse l)efore theseproblems are solved and filII monetary union, Hith its inevitahle abandon-ment of internal exchanr;e-rate flexibility, becomes feasible; hut thebest way of accele~atinr; that time is to make a sneedy stort to theconstruction of a European monetary orca.

Giovi1pni Mar;nifico,John Hilliamson

- 2( ) -


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APPENDIX ITHE H1PLICATTONS FOR TBr. CI'!'Y or LOtJDON---,-~ ~--.,

Much h1s heen wrltten (wer the last few mon-ths~ hout the 1mplirilt:lonsfor the City of Lonoon of Hpitish i1


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hy the EuropeAn comrncrdill And fi'ntmc:lill c;om rnunitv: even if tJle nol:t:cillwill-exists to create the f.ur:Jpi1 as a neH Tllcmeti1:ry unit, its croatianwould. have no practical sip,nificance unless :1 ' H ;:;re to become fullylcceptable in the nrivtlte 1n()n0.V and c.'lD ltal markets as ,1 tH )] t f(w c1enominA-tinp, mi1Y 'ket Assets" Not only mu:';t such as i1cceni:ance of rllrOni1S J le "eon(I" a precondition of full mnnetar\1 union; it ccm alsn le s(>en a" animportant catalyst in sncNLo t he process of m onet1rv IlniorL Thus boththe ad.vocates of European monetY'V un.l.on and the financi


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should n'rovide clearinp;-house facilities for furona transActions - then theEuropa market would ft'om the outset he freed fro'm the nrindpal adminstra-tive headache of the euro-dollar market and would be that much moreattractive to the private financial commtmity.

B, r far the most important practical implicat:1on of the introductionof Europas would he the nossih:tJity it Hotlld provide for a Europcan-wdemoney market~ in which lonp; and short-term funds could be lent and harrowed.It should~ of course, he added ~hat as soon as Europas were iniccted intoprivate hands ~ the privilte fi.nandal community could he relif'd upon todevelop as well a market for bUY:1n[;


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APPENDIX I IM O N E T A R Y H ]T ECR1\TTON ANI) T H E C~1MON AGnICtJLT!JR1\L

PO!,lY (CAP) Of' Tm-: DJROPE1\N COMMUNITIES,_'-.r ' ~ ~~"_~ -

The success of the Community in formul1tinp; anrl imnlementinp; 1 commonar,ricul tU1~al policy has tJeeT~ overshadmoJecJ hy the apparent f1lure of thatpolicy to 1chieve either !satisfactol'Y balance in the F:UT 'Oneiln market fo rilgricultural goods or a smooth transf.:::.mation in the structure of rurillsociety wi thin the m f~ml)l~l' cDlmtrie~:; 0 But despite its ~ JO .!~tcom inr:s the CAPwill remain an important aspect of F:uY \')rean ecoY lom ic policy for some timeto cameo Any proposaIs fnr ftther eccmomic ln(l monetary intcr:ration musttake into account the l.mpact o n the agrl.cultnri11policy, and any modifici1tlonsin the CAP made necessary DV ,;uch proTJosi11s H :1.11 have i1 hearinr; on theaccertahility of the move tOW'1Y>d inter:rai:ion in the mone ti 1! :"Y r le ld .

The CAP has of courc~e heeq di~n'''lm ted in the last two yei1PS hy exchimr:erate chanr:es amonr; EEC mem]K~r COlm tr'les, But diverr;ent cost trends in theabsence of exc:J1ange l'atevar'.1tion::; also inri.nencnthe level of TJrotectionr:iven hy the common pl11.c,y in rlifferc:nt countr'i(~s, tho\1[';h in a 1088 ohviousway 0 The ])1sic decislon as to ~~hethe:(' to protect the farm sector fromeconomic forces suc h < 1:-; ..n flat.lon ()J~' revaluation or Hhet!wr to r:ear thepolicy to reach:\nr: an e~-:C)/1:)m;cevel of farm TJroduction and enconraginr:the implied resource aclju,.-itmNih; cannot: 1iC avoided. H ithin the' (y,ntext ofi1 common price polie'\!' T 'iW ()!".oh:Lem is ::;om(~Nhat more complex in th"t countresrelinq uish the instrument nt 1:.rclde centro1s; ppotection of overall farmincoml" he comes m o r e diffcui.t t11011r;h Uw economic allocation of farmresources is presumahIyimprev(':(L

It follows that if the steps tnwarrl monetary inter:ration imply 1reduction in the divergent cost trends then the conflict between thesetwo possihle aims of the CAP is Ie:c;sene(j, And the fi nal stilr:e of monetaryinter;ration re mo ves fi nal ly the no[;~;ihilty of disruTJtion of the freemovement of farm goods as i1 ['e~~1l1t of exchanr:e rate variations. nut if inthe intermedii1te ~;taf',es exchanr.el'ates al'e a ll ov re d to v ar y amonr: Europeancountries then the mechanism Cif thc, ClIP has to I)e marle flex]'b le enol1fTh. . . - - . 1to take such chlnge::; into a~~c()unt, The rest of this note discusses thisintEraction hetvJ0C':1 IJarl. ty ct1mges and the mechlnics of the CAP"

The Common Ar;ricultural P,')'13.cy largely supplant~s the pre-existinr:import regulations regar.r'tingrar;e in the major ar:riculturi11 I'J'!)(!:; fJ'omthird countries.. In gener'lL1 j(!'v 'Y ls imposed to hring the landpd 1 (~vy-'pa{dprice of imports t:o a precere!'m ined :level(threshold price), The CAP at nresent set cmnuallv for (>;L:hcommodity and exrressed in lmS. ts of account,

The CAP was felt necessary as i1 corolllry to the remova.l of tradebarriers am onp; m em bc,:(\s ,,' L t pr',c >ven tcd the rapid adjustment in memhercountries that Hould have follololcrl liner'lllsationo Free intril-Cr~C~)' Ij. -


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trane :In ap;riculturalr;oods has heen suhstantiallv 1chieved, thour;h someharder taxes Here re'l.ntrcJdllcedollm6.nr; the D ilr-tv movem0ntsnF1f,c)and 1r;ain in 1971.

rree :Internal trA.dererplres 'th 'at acJm in iste re(J floor ,md ceilinr:prices in the mer'1herountries reflect Clfrrent exch1.nr:e T'ate~; if "Decula-tive floHS of ap;ricultural roans we to I)e avoir1ed. In 19r,9 much of theoutput of German r;rain pronucers was purchased for intervention (Hhilemillers and compounders hou~1t from rrance) because the Germn interven-tion price Has hir;her than that indicated hv the forHard Deutschemark/F ri'm c exchanp;c rates.BOHever, it is underst1.nnahle that German farm orr;anis1tionsshouldpress their Government to relieve them of the ill-effects of rev llua tio r;

(whilst reti'1ininp; the 1)enef:ts of ['(~eluced infla1:ion and inDut ndces) .In other Horels German farmers pressed for the Drice floor and ceilinr; tohe expressed in neutschcm ;lrk r,qther than u. ao In economic terms th 1.8implies that farmerswould rAther comrete w ith rrench farmers than HithG erm an industry.r.xchanr;e rate chAnp;e~; thus pose three tynes of prohlem for the fArmpoHcv. The first is o()litical 00, can one p:et fi'm orp;ilnis'; have facen. (Jeclininp; DeutschemarK prices rarsevcn years 0 The thIrd prohlc'm is mechanical: can onc run a CAP \ ,Tithregularly chanr:in,r';Arit'l(~s without en,~enr1erinr; snecuL1tiv0 comrlOdt'1floHS or Y'e-erectinp; intra-EEC trade harriers? The remainder ()f thisnote, deals with the third tvpe of pcolem.

One must n.istinr;uish hetween prohlems createn hy a float nrounn. asteady parity ann. a secular ch


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If such fluctuations are small then the nrice will at most times lieaway from the floor and ceilinr; (intervention and tarr;et) prices formost producers, Fluctuations Hill in anv event he At the wholesale. level and not directly at the farm r;ate, Prices at present fluctui1tethrour;hout the season and from year to year; a(~(H tional small chc-mp;esin national equivalencies of common prices do not necessarily add toinstahility, Lonr; term planning of production can hardlv he affectedby exchanr;e rate fluctuations around a stahle leveL The Commission workshy a rule-of-thumb that exchange rate changes Hithin the F:EC have to helarger than 2,5 per cent before goods are significantly divertedacross borders to take advantage of intervention orice differentials.The major effect on the farm sector is to increase marp,inallv thereturns to storage of products und judicious marketinr: over t}1P season,

If, hOHever, a pari tv chanr;e is in the same oirection over time _such as a steaoy revlluation of the Tleutschemi1rkreli1tive to the Franc _then German farmers would face a less rardd increase in their Tleutsche-mark than Hould French farmers their Franc prices. fut this orohlemcannot he avoided hy fixin~ parities, since the alternative of more ranioinflation in Germanv will llso erone the real price to German producers,Fixect prices in Deutschemark terms Hould necessitate ever increasinr;tracte barriers with France. If currencv trends were anticinated then noeconomic cost is sllstaine(L Horeover no lcJministrative maninulationof the denom ination of ti1Y 'r;et prices would offset effects of this trend,

In terms of the Study Group pronosals these comments have thefolIoHing implicati ons:

) fufore the introduction of a F:uropa, there is noreason Hhy the uoa, should not he retained as thedenomination for administered CAP prices,

CU) Flexibility i1mong commun ity currencies presents noserious prohlems if T'>ilrityhanges do not exceed,say, 2 per cent a year"

CH i) S hort-term parity fI uctuat:1ons add margi naLl y totraders costs as w~th anv other industry hut harelvaffect the farmer.

(iv) Target prices would he fixed for the Communitvhearing .in m .ind the proha}e development of currencyvallws over the relevant neriod.

Cv) Individual countries Hould retain instruments tocompensate for sudden and susti1ined pari tv chanr:eswhich were unanticipated in the setting of EEC levels,thoup;h these would l1e financed hV the countY 'V concerned,be measures not directly antagonistic to trade, i1nd hephased out according to a predeterm ined scale.

~i) Threshold prices would as now he related to target pricesan d hence Hould vlry Hith offi dal parity changes:intervention prices hOHPver Hould he set in national

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currenci~s and adjusted occasionally during theseason accordinr; to an ar-reed TH'ocedure. The-gap betvreen target and intervention nric' vrouldtherefore change somevrhat during the year.

(vii) F'lththe introduction of a r:l1ronadenominated assetthis would repli1c'the U,ao in the expression ofcommon administered prices, As this f10ate(1 orcrawled relative to the dollar, the level of_protection of F.uropean agriculture would change.Since all memhers are errua11y affecten this shouldcause none of the internal problems associated T,.,rithindividual changes,

Tim ,Tosling

(

1971 Federal Trust Report

Documents

Transcript of 1971 Federal Trust Report