,

~--_

.,-r-

_
;.

-.....>~~~4~'{

-;!-~j;~_ -'~~

i:b=~'~""""

_ ~_ ',_<~_

/,

~
/

, .

/J

E IJ nop

E AN

r.q 0 NET

AR' Y.

"I N T E G RA, T ION

..;-~

'U

Report

of Federal Trust Studl,l

January 1972

Group

'"

.~

Federal Trust, 12[1 Maddox Street, .'London WIR 9P[,.

FOREWORD

.Nor., that the negot:ia.tions fo.!: entxy are fina.lly complete, we in 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~!o g l.1!~(!oJ1g these issues p one of the most impox"tant is the Communi ty s cnmm.i tmeni: tomonetar9 unlono TI]() present report, f',hi ch analyses the problems of Em:npcan monetary int:eqr~1t:ion and.. examines a nef" proposal for il soluti(>nl' is therefore extremel!J rve11 timed
0

Nor is the report any less timely from tileEuropean point of vie,.,o For its pub.l:J..cation follows a severe setback to the Communit!!'s mdsting pro.iect for monet:a:r.g union, wl1ic11 Wc1S ta have begun t'Ii th thDD,rrm"ing of the hand" of' fluctuation beJeen the currencies of the Communi ty countries and to c::,ulminat:e in the irz'eversible locking f:ogetl1er of their exchanCjo rlJt:cso This process f'ras suddenly thrown into 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 suggest:"1 GJdsting i.!Qvantages coun::cim;

Commun.i t~J needs that: i t should

C'lll';COnC!! .. the

EUJtop(;I. -

c1/ new start in this fielc1; lnd this report concent.r.ate on Hw creation of a European r,1t:he.'C Hum on lockinq the pari ties of the

cur:z:'encieso -Tn thiswa!} "re can beg.in to derive the of integ:l'ation wi f;hoU~ impail.'inq the capaci tu of member to. deal f",i th tlwi:c bE!limcc,-of~paymentsdiff.icul ties Once

,"

bagm2/J
Europa

tl1e process

eDin contimw

in Em inez'emental

manner:

the

f'Jould be a priTJ'c1te c1ssetp fulfilling fOr example the functions that: the Eurodollar hashit':1wrto performed, as f'Je.U as a reserve medium; and nm., uses could be dC\!'eloped fOL' 1 t as and when the members of the Communi ty docided that they r..!Cre ready i'or a further instalment of

intL>grationo

'l'he Eurim t"oul d also enable tJw Communi ty to pIa9 i ts part more efFectitTe.l!! in tile interna tional monetary system, fol1o~,ing the i~g:n'!eJ11ent of the GrOll]) of ~Cenin Washington last: December to realign 'tbeir ]1osi tions and then to neqotiai:e on .interruJtional monetary reformo TIJe ideas put i'oLwax:r'l in this report are f!111~1 consistent It11 f:110 pi.-oposed replac'cmont: of tiledollar (probahlybu tile SoDoRo) as the 12Um:rr1iloe and elS the principal reseIve medi u1J1oWi thin such a s~Ts{;em, the Europa t'iould enable the Communit17 members to gain more

cont:rol

over

their

monC!tar~l po.licies

and to ensure

that Europe's

economic par-Jer is p1.'oper.Z!J ref.lected by Hw WOJtld monctJr'!l aEal.rso

f .4~

Communi ty' s posi tion in

During

1972,

there

will be a summi t meeting of

the

lleads

ol'

state,

C!nlazc;cd Communit!1o Thetl 1.J.i.I.l wish to strenqthen effecU.von8Sg: 1':0 i1'Jcr'Gasc tlw cil]Jcitr] of {~}JC member count>:ies t'oY: collective' action, and to,enhance what the Frencll call tbe ml1:0p8<'.Jn personali tg' The p:coposal outlined .here shows how this calJ he done in' the cxucial sector of monetary integration.

an:1Cmrermllent of the
Uw ConiIlllmit!!'s
0

John Pinder
January, 1972

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 to pl'ocli'lim the goal of converting the EUl'opean ,.Economic Communi ty into an E1conomfc and monetary union, The subsequent history of this ambition has not~ so far~ been happy. A committee chaired by

M. Pierre Herner, the Primer Hinister of

advise
.

Lmmmbourg
Its report
~

on how

thr1 goal might

he achievo(L

Has creatr1d to
(the

Report

)provoked

considerable contJ:'ovOl"SY

and

criticism;
_

even

Her-nel'

some
0

of th? modest
",

first

been l.mplemented,
The unsettled

on have ~ltim.~t~lY ofa~reod n~:er bLng aman[; the ca.,u.llt:t.e,., the Dollar Crls1.",.

~tep8

th~t: 1.JOrC

(
'

state

of the international

monetary

system

'>

may

increase
hut it

1:he diffic,].llti.os
increases

of constructing
and

a European

monetary

area,

urr,ency of the task even more. It is the aim of this Feport to develop a sh"ategy that Hill enable the drive tom:lrd monetary lntegri':ltion to be rosumed~ Hhatevar the outcome of the Dallal'" Crisis.' Th5.s strategy involves filling some of the gaps that Here left by the Herner Repo!"t, notably Hi th r(~gal"c1 to 1;he importance

the. intermediate_.8ta,g_e of partial monetm'y integratiOn. But it diffcrsfl"om the Herner approach in that the lat.ter envisaged intergration solely as a proct~SS of th/1 convergence of existing
.

currencies

(especially

presentR(~port al'gtK!S that

/1
eai"ly
"Em:'opa"

creation
0

Hhile the. tatc~d by the of ilneH currency, Hhich is provisonally t:ittlcd the
9.

wi th

regard to intcgrat:1.on

nxchange pates) could bp. facili

The wmeral
Report
:

poli tical outlook of the Group respons:lble for

for European integration coupled Hith

this
a

is one of sympathy

to retain the rich diveI'd ty ~that history has bequeatbed to contemporal"y Europe. Inte,sration is desiri1ble, not as an end in itself9 hut becaus0.there are somG fieldFJin Hhich nation states are \ too small to be viable dedsion units In the jn'oscmi: ar;e, In some cases ~ this is because efficiency demands a lal'ger' m<:ll"ket than the nation.can " providc; In others bec;ause sp:Lllovo.rs beyond national boundaries h<lve
become critically important; and in others because the small nation ,they
..

desire

states
act

of former
together,.

agoG cF!r'Y.'yIi ttl0.

~'lhere such

weight
as

on the HorId
these

scene

unless
.

( of centralising

factors
~

indicate the desirability But should be resisted and

.

decision-making

where no such rationale exists, ccntrallsation individual countries, or regions, dlOUld be encouraged to develop in

integration

should be pursued.

their own individunl way.

.1

1.

,J:b~]i~~ni..1!

1~d._~:~i~_n.,~g.~~~~t!~~~!~~ty..2.!:,!~g'.E,~!J;.~!:'

Full monetary union implies a single currency circulating throughout the union and managed by a single central bank systeme Monetary union may be taken as virtually complete when individual currencies,
though still existing, have bean irl'cvocably locked together by the
of

..\i
I'

total

abandonment
~

of independent

parity

changns~

the

sunpression

the

margins

and

the

establishment

of

complete'! convertJJJility.

',I;

l
ff

A state of economic union exists when all the principal levers of economic policy, and not just the monetary levers, are centralised. This in eludes in particular, fiscal policy, incomes policy, planning, and regional policYe "
,

One may distinguish monetary union:

lour

economic

advantages

of creating a

a.

The increased efficiency resulting from simpler transfers and calculations and the elimination of exchange risk;
The elimination of traditional style balance-of-payments problems through increased capital mobility (although

b.

of

course

developments

tl1at

nOH

cl'eato

payments problems

could

still

give

rise

to regional

problems);

c.

The economies in reserve-holding provided by pooling

of exchange reserves; The possibility of re-establishing of European monetary conditions,

d.

European control

Insofar

as monetary

inter,ration

was

successful need

in achieving for :integration

these

advantages ,it would contribute to creating the for progress in other spher'cs where a functional
exists,

political concli:t:ions

Conversely,

however,

the

cause

of European

integration

would

be

retarded if monetary integrat:ion wore to be ptll"8uec1 but the ttempt Here to faiL The potential dangers of monetary intgl'ation stem from the
I'

.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/or the more inflationary countries \-dtha loss of prosperity that Hould be the more intractable precisely because it Hould be mo.nifest as a I\"'!gional problem ~f(,i:her than a balance-of-payments problem, This 'danger is particularly acute, In the European context because different national tradi.tions and 5.n8ti tutions could give rise to incons;tent trends in unIt costs in different ni1tlonal "r-egions". This development Hould be so disastrous. if l"f:,alised. that it Hould inevitably lead to
the destruction of monetary uniono

The advantages

of monetary

integration

can only be

completely

realised through

full monetary union,

so

it

is

dC!~drable

to retain

this

-.~ .

... .

. .

" '.1 .

though pructence may ctomand that mavinr; to this one has confidenc0. that concl:i tions have been created uncler Hhicp the potential ctanr;ers of monetary intq;ration will not materialise. fut there is considerable scope for real:sinr; the advantages of intep;ration by a more .limited,. mC!i1sure of intpr;:ration? involving the creation of a EUl'opt:an monetary area wi th its mm otlI')~~nY.9_~en before these c~'hons have been created. ThIS1nterm.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 IT discusses the candi t10ns necessary for tramn t10nto full monetary union.
as the

ultimate goal, even goal be delayect until

,I,

II.

Outline

.o~~e\-t

Pl~~....Y~!~Ji:~

It
be a state

is ,proposed
of full

that
monetary

the

final
union,

stage of monetary
as envisaged in the

integration

would
0

Warnor Rep01~t: Prior to this there Hould be an intermcrlia{:e stage; this 1'ToulG bo. of indeter:minate duration, since transi don to the final stage Hould i1\lai t realisation of the conditions needed to ensure that the danger of inconsistent cost trends did not materialise. The intermediate sta~e

,.. "

.. '

,would be characterised by limited intra-European mcchange-rate flEmibility (as compared to that botHean European currencies and the rest "of the Hor-Id), the active use of the, EtirOpa to serve as international money and circulate in para1eJ-to existing Euronean curl'cnciQs, and the aboli tion of intra- E\ropean mcchange controls Since the EUl'.'opa would serve ~s the intervention curJ'ency during the intermediate s1:<1ge, it ,muld not};e practicable to change directly from the prim~ont sti'ltc,
0

of affairs to the intermediate strige. There Houlel need to be a preliminary stage to launch the Europa and build up its use as a It is envisaged t.hai: this preHminm~y stage should ~t brief.
0

be

(1)

The Pre1i_~!~~.L~lI~

founding have been previous it Hould adoption

,

The'programme of monetary integration would be inaugurated by the of a European Bank. This zBa~ t10uld perform the functions that assigned to a EUl~opean 'I?-~f.('Ch Tund or Stabilisation Funel in
proposals, but it Hould not be limited to these. Tn pi1rticular,

be responsible for launchinr;

Europa and cmcouraglng its as a monetary unit:by those engaged in international transa'ctions.

the

Existing intervention arrangements Hould not be altered drastically

during the preliminapy stage, since it is desirable that this be as brief as possible in order to obtain tho benefits of moving to the intermediate stage quickly. If the dollar was still being used as. intervention CHI'r2ncy andi.t was desired to have an intra-European band that Has 1 ess than h1ce
I

the European/dollar band, this could be achieved by concerted intervention as proposedby the Wernel"Committeo (the vsnake in the tunnel'). ..
. "

It would also
'"

be desirable

~monisation

and liheralisation of capitalflows that t110 Herner'

conc(:ntr~tcd
in instrum~, anel to. the preliminm~y

'I .

advocated fOl" the first stagc. that Qolicv harmonisation ~~hould be pd,mi1rily
r~al apply i! fm:tiorl stage)
0

to commence the f',J;ep.__towards Q,olicy R0.port (HowevoY'~ in Section V it is suggor;tcd

on1l10netW"v
emphasi:~ \<10111<1

this difference

(2).

The Intermediate
...,.-~ ~

Stage
--,~
-~.;.~-

The transitio'n from the preliminary st<1.ge to the intermediate stage Honld be made as soon as, the Europa Has snff:,ciently widely held in private hands to permit the dolli1J~ to be replnced by the Europa ; the
.

intervention currency. Tho national

centr<:ll

bnnks

Hould have the

- l~ -

'.

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.'rOVT intra-EuI'opean Hi th a ~ride band between the Europa and the dollaro
...

band

coupled

//

int:r'a~European band would require conjunctural However, the :intermrHate stage Hou.ld be sUPP~ession of diV'm~gent trends in unitcosts~ because intra~European parity changes Hould 8tH1 be perrniss:l.bleo The Hide band between the Europa and the dollar Hould enable Eu1"opo to :regain a

Maintenance of a narrow harmonisation vrithin Europco practicable before the total

greater measure of freedom fr'om {JoS 0 monetary policy, although it could not insulate Europe from the effects of any future American fundamental' disequilibriurno The md.stence of the Europa Honlel make it possihle themcchange rate between the dolIR!' and t.h EUrOpeiln c.urY\ene:.Ec~s to fOJ"
anyimaginab}(~ relationshipso dollar include

hot

money

the uhole currency (e,go the dnut:schemark in May 107:1); "md tho. redl1ction in subsidy that central banks pay to il1t(~rnational companlcs \Vho suitch their funds from one financial cm:1't:rc to another to take advimtnp;e sequence of parity changeso

against the the greater ability of the whole EUJ"opean ar8a to ab::;orb Hithaut being overHh(~lmed ~ as compared ta a situation in Hhich ~"o)oght is concentrated on the strongest individual European
the of a

~lay (including .Other advantages

float'ing) ~'-1ithout disrupt.ing of }~m"op~ moving ~lointly

in intra-Luropcan Vc":!1:'V

(3)

The

Final Stage
~_'O':.~'""...UII;..'-''''"''.
0

This would inval vc full monetary union wi th a common curl'ency The transition f-rom the intermediate to the final stage Hould be contingent on satisfactorily overcoming the problem of divergent cost trendso This

",QuId require,
. IJ
. ..

among other
..

'If e-"""o~ i c PQ,lic Y., since

a centralised. ~ rtomatic f_isCa.l transfers and to regiQ!1aJ__policy are among tho factors that contribute c!nabffig a
..

things ~ a f~r measure of

centr\lI::::ation of

. Hi th intet'nal exch(:mge'~ratc ch1np;es Al though a meaSure of fiscal unification .fould be desIrabl0. and nece,o>si11"Y', this certainly does not mean that total r.entralisation Hould 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 economic union had provided the necessary concH tions for pl"oceeding ta the final stage,national, currencies vlould be ~.Ji thdral.JD and repL1CC(] by Europns.
0

monetary union to dispense

-, 5 -

I I I.
.Ji

!~~~.!:\,I29.P.~?~r:~~r:,~~I].i~;l~~:.....

~~~~p-~

It will be evidfmt from the preceding outline that the Europa constitutes a central featul"e of the proposed strategy, and that the ~lropean Bank1S being assigned a key role in fostm"ing monetaY'yi.ntep;ration. It is approprJ.ato to sketch tho rt1tionale of theso S'l:Y.'<'1:tcr;l('. (/ .~
proposals.
,

The case for creating

Europa

an internationalmoney and the unsuitability of

recent yemC'8 tho dollar has been i:he dominant

stems from the pract:ical need for the al ternativos In

.

form

of

into1"national

to

moneyt and the Euro-dollaX' market has grmm up primarily in response the dm::ire of those engaged in intm:'ntional busin(~ss to hold int er"
national ncm"est

money.
approach

The
to a

Euro-dollm' common

mm"ket
European

in this

capacity

been a potont

factor
n

has in fact com;tltuted the and capital market, nnc1 has 1:"avouring financial integration
money

Hithin Eu1"'opo. But it hilS suff(~red from the - 0mbi1l~rJBP,fIlent of also being, closely lihked to the lJ.!:; money market 9 th us 80.l:'ving to transmi t Amel"'lcan monetary polides to Europe. f;ince American monetary policy is (understandably) determined Hi th refol'0.ncc to the U. S. domestic si tuation ~ tho res uI t of th is arY'angomont has boen to imposemonetary canditions on EUl"ope that W'!l"C at timeD stX'ongly at variance Hi th local conjunctural needs. So long as the dollar rema:i.nE, the international ,money ~ any E'.lr?pean. c~untJ"'1[ ~ttemptin~ to ~nf:':uld.t:its,elf f1"om American TIlonetary pollcles wlll also Insulate :l tself fT'om 1.t8 F.uropean partners,
by .. exchange contJ"ols OY' by
-

''II

fIr ei ther

exchange-rate

fle,dbili

ty. .

One could

seek

to

replace

the

dollar

by adopting

one

of the
would
1-11108e

European
tend to
currency

currencies
repl~oduce

<l? the
the

international currency. This ~ hOHeve1~~ same kindr; of difficulties, since the country

Has

selected

view to domestic
be mi t:tgated susceptible proved to be.

naturally VIish to c1eter'mir:: its monetary policy l.dth a rather than pan-EUl'opean conditions; thf~ problem would only to the C}{tcnt that il. European country would pl'OVC more to i t8 partnersI reprosentations than the Uni ted StiTces has would

I(
I
I

Sinc~~ national ~ney,

IS

were specifical Ly designed

to vrhile create

the ~

to be only

;m official intermo~y,

is [OJ" il private

international

.J:!

in vieH of the disadvantages of using a national currency. may be l"egarded a~ a cornpromisp. beb-Teen the positions of the "monetarists" anel the "economists". It endorsf1 the "monetarist" vie~T that common monetary arrangement:s need to be developed in the short run and not merely after lengthy m{perimentation l-1i th harmonisation, but it also incorpora.tes the "economists" vieH that prematm"e commitments to rigid exchange rater, need to be avoidccL

necessary

a neH un} t This solution

The

case

for

a EUrOI)Ban

J3ank~

performing

the

is ncco:,,:say'Y ch&rf!:ed Hi th -developing and managingthe EUl"'C)"O.a. Secondly, the policy harmonisation that is il p1"econdi tlon for the tT'al1si tion to full monotary union eRn best be furtheL'ed by the crea'don of a11 institution t-rith significant powers to inflt1p.nc..L1_h~ me,mbor c()Unt~d8s and a vested interest

reserve bank,

:is ThTofolcl.

first9 it

functions i:o crei'l':e

of an

an embryonic 1118t:1 "l:ut:ion~

in promoting
r----

'.--.-_,

harmonisation.

-6 -

'0

f1J The Bank would be formed on the rreneral lines that Triffin has V( long advocated for foundinrr a European Reserve Fundo That is 9 countries would pay in to the Bank a specif:ed proportion of their reserves lus a quota of domestic currency, Th0. latter Hould bo ,suff ciently large to have the effect of reproducing the SUI)po:rt f\Cili ties thGt Eo Eo C. members have agreed to provide under the Barre Plan. Countl"ies Hould l~ec{~ive :In retm"'n deposits denominated in Europas 'l'hes'c depos5- ts Hould count as a part of countT.'ien u reserves 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, uhich might comprise the governOl"'S of th national central hanks together tdth a chairman appointed by the Council of Ministers of th('! EUl'opean Communities 0 'l'he BoaEd Hould he responsihle to The C()lInc:l;l of Ministrs In order to enSUre that the Council Has ble to mcereise effective control of the continuous policy-making that Hould he involvod in detcrmin in g European monetary policy tit Hould b8 neccssm'y
,

to elimi
~ea.
be'feasible

the right of individual

The e - -ec lVe an
on the basis

nations
thE.'

to exel"rdse European'

in

thi

speedy

administration

of those poliy
level Houlel only

weapons that were specifically placed at

of majority voting.

The European ,a.

Bank

would

have

the following

rMPonsibilities:

It would act as a ,European Reserve Fund date of its inception.

from the

b.

Once the preHmlnary stage had given way to the intermediate stage, it would intervene to stabilise the Europa! do lIar exchan~'/, rato_

---

c.
d.

It

would

recommend

('hrlT)ge~

In

1-111"parit',Lof

-.

the

Europa in terms of gold/SDRs to the Council Hinioterso

of

It would CQTIt-roJ oueraJ 1 F.uropp.aILmone..tar,jLp.olic,Y_t and "1Ould attempt to ensure consistency bet-Heen the general Community policy and the policies being
pursued in individual. states. (This would include
0

su~ervision of
e.

intra-European

m{changg~i1t:es)

It would nurture the growth of the~

Rrivate_ monet:arY_~0set, principally by acting as a central bank to commercial hanks operating in the~
Europa market
0

,.

The pari ty of the Europa would be defined iT}terms of the international monetary unit, Hhich at present consists of f!old and SURs rigidly linked togethero The parity Hould be ,changclbJe hy i1 decision of the Council-of-Hinisters ~~who 1-1ould be advised on this subject by the European Dank. The govern:Lng pd,nc1_ple in determininr, p:i ty changes between t-he Europa and 1:1~ rest of the -~qorld Houlc1 he tht of mintaining the Dank's mcternal liquidity at 11level sufficientlyhig!l to safeguard the pursuit -of a high rate --~ of balanced growth in tho Comrnunity, but not
,

_< ,,"____. _

so ~xessive~
to thh'd

hi~
0

as to involve a Haste of resources and

embnrrassm0.nt

l
(

countr'ios

all~ hem'ever, the Europa Is on'1saged as as a pan'-Eur'pe1n moneyo I:I' it succeeds, Euro'-daI1ar has erformed for the past dC'!cade in acting as an 1.n8 'r111Tlen. -nx' t 1e creation of unified Europf~an money anel capital markets In due course the Europa could be expected to displace the Euro=dol1ar, at }r,ast so far a:3 EUl"opean lendem are concernedo This would have the advantages of hOl'r'oHel"'S helping toand insulate intra"'EuT\";j)E!an pelationships from instab:lli ty emaf1ltingfpom the other side of th(~ AtlantIc, of enabling Europe to exercise some measure of contY'Ol ovcr this Import;;nt cnmpancmt of the effective European money supply~ and of permltting Euy'ope to (mercisoflmdbility against the rest of the Horld without d"1~ptIng the stability of intra-European
0

The Eurons "lOuld serve as bankso (Unless J>relc~(mt trends reversed, one t-roulcl not expct non-European count:rles;' Ao()ve a privatc~ asset .able to function it will fill the role that the

rt ropsp.rve rnedl'urn for the European.central m-ray from "the reserve=curren~y system re it 1:a bf,cornE, a reserVe r.urrcncy held hy

exchange

r.ates

It has often been started that mon:les gr'aw naturally and that~ attempts to impose a new monoy artifcially are hound to faiL Ther'c is much truth in this cont(mti0l'1o If the EUf."opa is to succeed, it Hill only be
because it is an aSSE:"(: with mor
(,

d,'Os lL'ablp

Pl'Orf.H'ties

of thp. prospective

hOlders,

f',

broc ds on success; once itseJH'ill enhance its position~ because case of using the asset as ,:t means of payment and of the r~~siliency 9 breadth and depth of its financial markets The (Ufficult P::lT't of the problem is to Hin initial acceptance of the Europa as a unIt fOL' denomini1tlnp; market aS~::;ets There arc, hm-Tever, a la!'g(~ numbcr of mCi1SUJ:"es that could be taken to stimulate the establishment o:fthe Europa as a marie'!: aSf;ot Sonw of these measures might initinily involve a slSght c:lemcmt of additional Caf; t to the authorities ~ but this Hould disappear (and mi[~ht wlbe I'eversed) as soon as the Europa had become thol"oughly acceptedo The me;1<~u:res ,.thnt could be adopted to foster the establishment of the Europa m:'e as fol1mJ'S:
0
0

~che: dollar, an asset had, hecome than

fpom the success vieHpoint In large ~ measure firmly establi~~tJed, this fact in

(1) The issue by Community institutions, SUdl Coal~St~el Community ilnd the European
of (2) Europa.~dcnoml.nat d asst~
0

as

the

European

Investm(mt

Ban]:,

A Community requirement that somE'! proportion of tho nat:ionill debt: of each m(~mhr stah~ be J.rmued in Em'pa~c1enomini1t()d assetso The' imps.h:ion

(3)

of an obligation on commercial

banks

to

hold

ra or"U.on of their' ,:lssc.tsin Etll'oCJa-denominated a~:;~:-;(',tso This might involve the bank8 in c~ithc I'unning an unbalnncod EUl"opa posit:l.ol1~ Hhich should be acceptable if pl't'Jty ch:lnge~;
<,md ofc;',()t by intere,s t rates ~ or olso in covering the11:' Eu'rapa po~:-;it:i('jn fon-rard, h'hlch the Em~opoi'm Barlk might aS8:;~;t by pl'ovidl.ng any necessl1'Y support in .the fox'wm.'d mark<~.d
0

Here alNays small,

- 8,-

( I.)

A willingness Europas The European

by national
Bank providing
0

governments
clearing-house
"!..

to accept

tmws

in
for'

(5)

facilities

Elu"lopa tY'ansactionn
(6) The European

..
~Europ-

Bank making

a se.conda~ket
0

denominated
..1

T~asUl'y

Dills

..

(7)

. Once the intermediate stage had heen reached, the European BAnk could take the responsihili ty of acting lender of last resort in the Europa bill mark.m:
0

as

(0)
"

The attractiveness of the Europa Hould also be enhanced hy 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 making them relatively large in tcprns of the dolli1l'o

\
~

It is sometimes supposed that,

dollar

market

was fed by a prolonged

because the growth of the Euro'UoSo defidit, there would he an

~.

analogous need for a European dfici t in order to support the gl'owth "of, a,Europa market. This is erl'oneous 0 fi. European deficit would assist in turning the Europa into rC!serve curl'cncy, and it Hould no cibubt be, helpful ,in developing the Europa as a vhicle currency [(,r \ use b V\ par t ~es externa. to t le '.upopa area, ut 1.t 1.8 lrre evant to tne I I E b 1 ' estab lishment of the Europa wi thin Europe ( 1)
'
'

. . .

F()'1tnote: [osition
of' eJCl'orts

(1) e.g.
to

This can !Je seen by considering a 3-month 1;;uro-dol1ar deposit,

the U.S'o h!J a German Finnp r'lith

a typical representing
.1 E'llJ:o-ol.1ar

Euro-dollm:the proceeds

bank in

London; and .1 3-month loan b~] the Eu;m"'r1011ar hank to 1 Dutc11 firm I"hich procl'Jederl to convert its borror-lings into ~'Illi1c1ers. Suppo::::e that, i:Jt the end of the' ]-month term, botJ1 the German lJnd Dutch firms rdshed to 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 Hw Europa. (as opposed to the dollar) 1erl llJem to ,,,ant the .loan to be <"md denominated in Europa!>. There ~ou1a hp. nothing to pr:eV:E!J1tthc Eurodollar hank re-denominating both loam; c1cCoLY]ingl~J .1i: the prD~'c1ilij]g exchange rate, in wIli ch case ". sW.t f:ch to the Europa market r-lQu.ld take place wi thout m19 mo'(rement of funds at aLl.

-9

It is of interest

to examine

the Hay

in which

the f.uropean Bank

would
i terns:

perform

:t'ts

functionsa

Its balance-sheet

would

contain the follmTing

~.

~~.~.~~TI

(~h~~.L')..;L!:~~~_?P~!,I?_l2.~~~
Assets Gold! SDRs, National curr,mces EUT'0pa-denominated hills
Europa-denominated loans

,,

Liabilities

and reserves deposits by central'ba.nks Europa depositsby commercial banks

Capital Europa

The Bank would

----.,

engage

in the following

types

of operations:
, --

a.

It ""auld intervene
debi ting the

in the Europa/dollar market;

of the commercial hanks

for
on Hhich

example hy selling dollars from

accounh":;

its portfolio and dollars vrere draVTn

0

the
ho
.

EuT'opi'!. cheques

to pay fol'the non,-Europ,"!an

.
. .

It would
examPle,
as to
.

deal
9
.

with

central banks; for

' .

maintain
. .

bY e,:XCh'ir. 'r 1g gOl d and

appropy'iate
.

SDEs for dOllar ') (so dollar working balances)! and by making
. .

[
c.

. by engaging in swap transactions!

purchi1ses

(Ol.'" r'e'='purChi'(S(~f'::;

from

the

0 Mor

It would
example

deal

with

its member central banks; for

acquired excessive Eurpa
be

if il member

deposits,

because of a payments surplus, these might

e){tinguished

by the country repurchasing some of its Europa-denominated bills held in the B;mkis portfolio.

d.

It would engage in open=mi'!'I,,1a>tt"rp",~ in the Europa bill market! buying or selling bills with a result:ant impact on the Europa deposits of commercial banks
0

central

The terms on which banks a.re bound

the European Bank would to depend gpon the form

deal wi th non-Europei1n of the global monetary

'...

paragraph
that

~s tem th at emerges from the Dollar C.!:"JSis~ The examplesgiven in (h), above assume, as se;ems p1"ooi1b1e at thedme of hl'l"J.ting,
this wiTl be ~niversal! reserve aSSPT
0

Ta1LF ~cE":ntl"ed svstem in ",hich SDRs become and are used to funel outstanding ba.L:mcos of reserve currencies in excess of workIng balances (I f thIs doef; not: happcn~ and the world polarises into 1 set: of defens:i:.ve monetary blocs dollar convertihili ty HiLl presmably not be restored and it wi11 not ~

the principal

at the required Horking 1.0\'01 through t.'Y'1nsactions H.lth the Federal Reserve or the LMof. Th(~ :i",,~,-::tt would no doubt be a floating Europa! dollar l"'te, wi t:h EUl'ope gradl!ily disposing of its excess do11ar h:ldlngs Another pr,obi1re (,0nscC}l1cnce of such a development Hotllcl be the emer'f',ence o:f the Eurcma tSa n?serve currency, whi ch would involve nOTlqEur'opeancentral banJes holdinr; Eurnp1. c1POrrts at the European Dank on essent'icdly thE~ f',ITne Terms a~~ those envisaged for commercial-bank dposi tG, )
0

be possible to maintain

dllar

balances

~,

10

One important purpose of replacing Euro-dollars by Euro'Das ~..,ould be to establiGh a measure of control this important constituant of the .2Y.!' effective European ~oney supply. Such control requires that it should be relatively difficult to 8Hitch bA't1,TPPTI Fm"npns and r:uro~c101l1rs, r>:ineo

otherHise, any lttempted

monetary

policy

could

he side-stepped th}"ough

il

transfer of business to or. from the Euro-dollar mElY'ket, T!10.:re al"e tHO Hays of counteracting Cl.tendency for undesired sHitehing, .Qn.e..is to allow 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}cchmgecontrol barrier. This might involve forbidding residents of the arCil to borrow or hold short-term externally-denominated assets without permission. The best policy would probablyinvolve model"ate rCCOUl"e to both techniques.,

In the

pastEuro~dollar

hold

than

national

assets, as a remllt

~ 80 se "erely,
j

Euro-dollal" mal'ket. it Hould be necessary

, dollars. "pr'oblem
"So

f as to make Europas unattractIve to hold relativeto EuroNo doubt the Dollar Cris:is l"i11 help to mitigate this pal'ticular

often of the In order to alloN Europas to avoid regulating the

asset~

have

heen more attl"activeto

lack of J"egulatlon of the to displace Euro-dollars Europa market so soon ~ or

by l"educingthe

Elttractiveness of the dollar ar;Elvehicle cu):'r'ency,

that some influence

on the

Europa

market couldbe exercisedby opcn-

"market opel"ations from an "early stage, In due course it should prove possible to establish additional leverage by introducing moderate reserve. r'quirements: indeed, if this ~..,er! not done there would be a danger of the ,Europa making exces:sive encroachments on national money markets.
Onc~ the Europa is formally established and thel"e are effective mon1tary

walls insulating :the Europa area, it might well prove more .important to align Europa l'esel"verequirement8 Hi tb those in the nationi statps rather than wi th those in the J"omnants of the EUl'o-'dolliu' mapket , especially since one hopes to operate with minimal exchm-contl"'ol barriers betvTcen the Europa and inc1i vidual European curren eies.

~ ~ -: :-="

Il

~-- -_.~
-~ -~ ---~

~,

. IV. ~!?h.~,!1.K~~C!!~-.9.~!tnlL.!h~2!.:~!1_~JJ-L~~

The proposed

arrangements

regarding

exchange

rates

during

the trans-

itional stages before full monetary union are motivated by thl'e0. "The first is that the "economists" are right in m'guing that

convictionr1.

locking cannot force a harmonisation of cost tY'ends; it \-JOuldmonet<1l''y hE! foolhardy to lock pari ties in the belief that this alone Hould produce a comre:r.genco of, costs. The second conviction is that the "monetarists" ar(! ::--:1[;h1: :In arguing that a harmonisation of conjunctural policy can be inc1uc(:~dby locking e,whange rates together. The third conviction is th<1t, other things being equal, it is desirable to limit flexibility Hith a vieH to reaping the

gains,

that

were discussed in Section

I.

(1)
,

Intr~u~C?P~~!1

P~ri~Le..~
in different national reqUlre offsetting hy regions pi1pity cease

The above principles dictate that Rarities l'emain changeahle until

such time as inconsistent cost trends to be a prohlem sufficiently acute to

chang~.

~ '

Necessary pari tv changes should be executed promptly and wi th as little disruption as possible. They should be small and timely rather than large and .delayed; predsely how small the steps vJOuld neeelto he would depond upon the siz of the threshold that tvould provoke disrupti",.e speculative movements in an environmEmt of minimal exchange contrial behreen national currencies and the Europa. Nat} or~aJ differentials in intp.r('st

rates

can rilav

a maior

role _in Hmi ting

speculative

flo~~ pr'ovided that parity changes are modest in size; it is envisaged that intC1'0st rate,; Hould be allowed to ad~Just in an appropriate Hay.

It would be important p~ri ty changes

to create an environment

that would promote

speedy implementation of necessary parity changes. It would not~ h01vever. be advisable to try to construct some automatic formula to detm:"ffilne
9 because (a) this Vlould make it eitshw' for speculltOl'"'S to anticipate impending changes; (h) there is little prospect of constructing a formula that Hould be of much help ~ becausE' of the variety of factors that ,are relevant to cletE.ormin:i'ng H1H,1'thm' a parit:y dJ.ange is desirable; and (c) \o1hen an apparent need foy' a parity change emergestit would alHaVs be ,desirable to examine whether some other policy change(s) might not he more appropriate. ~e hopeful approach than that of se("!king automatic '"/ formulae is to provIde that the pod.odic Communi ty-lovel revim.Js of'
'

I'.
,I

~,'

I policy.

economic policieB regularly include discussion of exchange-rate Although:ln practice the final ,l'espQnsibi 11'..t,yfox' determininr, parity changes Hould no doubt, remain _,.t the nationallevel t one might recogn;e the Community interest by for-mally providing that chanp;cs in the. parities of national CHl'renc:f.es in tey'ms of the Europa could be
by either 1:he country OP the Eropaan Bank and Hould T'cqlliro the

national

proposed approval

of both.

It is envisaged that the

~oli~

like all other pricef~

J2!'ices
fixed

by

fixed

Communi ty

under

the common ()Y'gan:r~i'lti()ns. agricultuY'i'l1 Hould be tl'ansJ. follmldd tionaJ the

'determined in EUY'opas. There "Iould reliof measuren aftl' nat':l.ty changes

~ 12

be no need for 8pe~.ial (such as those Hhich

~

'"

and revaluation of the deutschemark in 1969) so long as parity changes Here small! since the chanp;es in domes tic price lcveb Hould only he modest Limited parity flexibility (unlik0. . 0 o \ 0", t C t f <1.,.. fI oa t l.ng or h 19 par1. t y cllange.~ t 1 r ni as prac 1.CfH J. n .. e _e : years J 1.u ' t ln '" " qui te compatible Hi th the aims of the common i1l:,icnltm."al polley.
0

devaluation

of

the

French

franc

'

/
(2)' The Width
---, ~~..~

./

of

the

Bands
,

.,;.... "'-

While the necessary extent of parity flxihility is principally determined hy the need to offset diffcr-ential co~~t trends n th0. Hidth of tho hand :is primarily determined by the cxtmi.t of pm"allol:lsm :In conj ~lncturi1l policy" If one is sqoJd.ng to min:1udse C}cchango-r'ate variabili ty, then -the band should be as nnrrO\lT 1.:1Sis consiGtcnt Hi th the needs of anti-cyclical stab1lisationo This criterIon leads to very different conclusions regard:Lng the dcsh"ahle Europa./dolla:(' band i:lnd intra-Europoan band, Uo So reliance on monetary policy as its main :mticyclical Hoapon has in recent years X"sultcd in European policies being strongly d1stortc.~d Hhen the cycles bt'Jtt.Teen j\mm,~ica, 81ld Eu:C'opo Here out of phase! t~npecially since the Uni ted States deter'mined. its monotary policy unilaterally and with scant rGgi1l'd for the spillover offects on other counh"ies. To insulate El~ope from ttesfJ spillover cff(.~cts it is clearly necessary to cnvisage a s:'ini:fican"1:ly Hider band than mdsted
.

prior to the Dollar Cr:lf~cs In contrast, the co-ord:lnation of monetary policy Hi thin Europe that Hould be nGedec1 to ensure i'1. narl"oH :tnb'a-' European band Hould be both feasiblo (although it TV'Ouldrequire wore active fiscal policics in some count.r:tes, notilily Germany and Italy n to compcns<1te fOl:' the loss of the monotilX'Y tool fm:' intornal sta.bilisatin purposes) and poU.t:1cal1y accept.able (since! rnoncrtary policy HOl1ld be deter-mined by a consen~ms rathel" than being (llctatecl by a Gingle country)
0 0

Europa/dollar band could only band hy concorted intervmltion policies of the sort proposed in the Horner Roport (the 'snake in tho tunnel' ). During the in'i::el~medilte stage, hotTeVel"n this problem Hould be handled automatically by having the European Dank defend the Europa against the dollm~ Hithin a Tv-ide band while the ni::rtiona1 central DanJes defended their individual currencies against the Em'opa wi thin nm'rOH

During

the

preliminary

stage a "dde

be reconciled t..r1 th a narrow intra-European

hands

(3)'

F~,~p'e/Re~~"t~L'~~!,l~_P~!:i

tie.::,:

During "the preliminary

phase

there

Hould be no special
0

mechanism

foraC':oncpted European moveo One of the i1dvantt1gc8 of the intF'(>medL'I) phase is ~ of course, that this Hould cease to be truC! In the intm"medi1te phase the parity of the Em'opa in t(-)r'ffiS of gold/SDRS could be changed according to Hhatc)V0r ):,ulcs Here norll1al for I ofJf.F 0 mCITlDGY.'s ~ ,md any such change Honlel rosult in :l :]olnt move .tn n1l the EurOlX\i:\n currencies
majority
a Decisions on varying tho EU1:'op\par:tty Hou1d be fI1,1deby vote in the Council of Hinistcrs and Hotd be gui<10.d by the l:.quidlty position of the European Dank J'.n terms of "tc:n1ll asset:f..~
0

- 13
...,,

o'

'.!!J._~9_n'"M ~~~!~;:'Lg!!.~~:L~9.~.~_..;~~E_T~~I].~!!~~~~!,_~~<l_.~_~.:i.?:!2Sy_~!.~..19..~.

Creation of a European mO'l1eta'l"Y !.T'ei'!.as proposed above Hould reestablish F:uropean eont'.l of Enl'pean monetary .cnchtions Hh:Llo. strengthening economic :LDtgr'atJof)o But Etu'opean economic intcgration will fall short of that: found Nithin nntion'~statp.s untJl mOno.tE\l'Y integration is (;'()i1SUll\ffiRtedby th!", c:reatlon of ct monetary u.nion" This u.It:imate step poses problemsanc1 di:inger's that are a1):ogetht'1r more profound than those involved In limitedintc,grat:ion, because national governments would be deprS.ved bf the inst:r'mnent of E!xchange.o.rato policy which has up to now provided an ultimate escape from the need to

conform to the pr'ice

trends in thc:, Comnm:n:J:ty ,18a whole a

Governments can scarcely be e:x:pcc:t:ed to gv(~ up this alitonomy unless they i1X"e satlsfi(~d that thE? common pattern to Hhich they Hould have to confo:t'J11 Hould be reasona)ly cun:~istent Hi th their S0.t of policy objectives Since inflation rEiS been a per.smnial (and :fncreasingly tr'oublesome) problem in the po~>l>Hap period ~ :1t is natural foY.' those countries that have enjoYf:,d the /;l"'2i-1tf~:'t pl"ice stabil.ity 1':0 fear the inflationary, potential ,inhp;rEmt in poo:Ling their e,r.ternal reserves and monet:ary pollc:Les t-rith countFteS HhO::f~ r9cord of inflation leaves more to be desil"'ed" Conversely" the mor;::, inflation-'pn::ine countl"1EJS may fear that theil' gJ'owth a.nd employmelt policies would be jeopardined by tying themselves to cOl1ntrles whose groater stability seems to be. JL,off:' Jt"Jly explicnhle by a moy'\? f,woU'Nible unemployment0

inflation

tri1de<"off
0

l'atn",p

than

by

dlffeT'imt:

prior.tIm-:

regarding

\'

objectives It is clear that monetary union would not be HOl'thHhile if it led either to a levlJl.ng'~up in pates of inflation or to a check to grm~th in significant parts (jf th(! Communi tYa Indeed ~ either' of these develo'rnents Hotd be so distlstr.:ms that it is doubtful Hheth~':!r a monetary union that led to their emergEmce could hope to survive
a

that Y"equires discussion is whether the ("'economic interdependence, reInfol'ced by conscious attempts t'tt polley hnrmonisation9 C2n be expected to ameliorate these p:t"oble:msta the point Hhm'n they bocome amenablo to 'The important qlestion

automatic

results of increasing

a foasibloancl

politieally'-acceptttble

rog1.onal

policy

.!~_~~p'~:..~et~~!}...?.~
In principle, a country can move :into
regional probl(~m can ~m:r'!~e~ : thc"l' beca.m;e

itive or because of an adve'J:'se struct'lwal however 9 ]"('.gional problems within nations gneral1y have structnp, causes It seems that, '!<rithin nattons,. there mdst inherent foren:> th.t limi,t divergent cost tr(..nd~,,;: the resulting inte!""regional Nage rigidi ty serves both to hIndc,'!" dE,pl~Ssd regions l"covoring their prosperity but also to fJ!'Fwmt rf:~glons actively bidc1:tnr; up loc/al '<Tage rates to a poin'\~ that'j':J>p1l't.ss their pr'ospcy'it:y 0 rt is ther'oforE',
a

payments deficIt, or a its p'd,ces become uncompetshift in demanda rh pl"ac1:ce

important to establish l.jhc>tl1C S1.m1.1,n'

on a Em>opE:i1n ~"cal0 as a
r'eult

foy.ces

are

likoly

to

devolop

of

inLegrationo

c",

lIt

"0

There are in fact a number of reasons for e)<pectinp.: theincreasinp.: interdependence of ~Ie European economies to promote a growing convergence in economic performance. Ever-increasing trade floHs will tend to sharpen competition and make it more unlikely that the competitiveness of one

country Hill fall badly out of .linewith that 'of :Ltspartn0ps. Thp p.:rovrth of mul ti-national corporations Hi.ll tend to make productivity performance
more uniform. The emel~[';ence of transnational unions would rerlllce th(~ probability of an isolated Hage explosion underminin['; the comp0t::itlveness of one country. The idoption of a common monetary policy would elimbate

the possibility of divel"(mt price trends

this help important check source

arisinp.:

fL~om

policies. As price trends conver'[';e ~ .so Hill pl~ice

tend to be eliminated.
divergent

differing mOn0.Tat'V mmectat::1.ons:hencr:

of pressure for differentii11 Hap,e incrO-ases HIll The incY'case in labam" mobility is lih11y to wage trends~ especially ",hen it: is reinforcerl by
'\roca1:ional tT'aining. Indrec], the
cor"

common policies in
adoption of common

such fields as
policies

in a Hide

range

of divol'sO fields

wi th

re[';ard

to research, ene1"gy ~ transport, and competition

a convergence in price performance.

seem likely

to promote

, '

For such reasons <'is these it seems unl~kely that an interrlepenrlent and monetary-unified European economy Hould experience cumulltive divergencies in cost trends. It is more likely thi1t Europe "rould experience that have
old-established
ct

been

particularly acute form of regional pn,blems of the character manifested Hi thin nation-states, where re[';ional problems

generally seem t:oreflect either

natural

disaclvanti1es

the

cleclirw

of

industries, or an initial position of under-ievelopment. Even if this is true, of course, :itis no cause for complacency 9 because there would remain an Ul'[';ent n(~ed to ensuro that geogl"aphical variations in unit cas ts Here such as to promote rc[';ional.ly-balanced [';r'oHth 0

Harmonisation
&--.---.......--.....------.-......

The automatic effects of

by the deliberate
institutions. in the attempt

increasinp, interrlepcndence can be reinforcd harmonif',ation of economic objectives ~ policies and Such harmonisation will necessi1pily playa central L'ole to create the conditions fOl' monetary union.

;'

A natural first step in any pro[';ramme of harmonisation is agreement on a mutually-consistent set of ob~jcctivQS for all memher-countries The Community has, in fact, alre1.dy a[';reed on harmonisation of modiumterm objectives, and specific tar[';ets hlve been laid dmm.
0

The harmonisation of objectives is only a first step. In itself if to anSHer the l"eally difficult questio'1 of Hhat should lw done Hhen it becomes apparent that the ohjectives Hill not he a.ttainecl -, a
fails

question that is particnlal'ly acute Hhen

the

rC1.son

f01~ failure

Lei that

to be incompatibleo It: is reason1.ble to suggest .that 1. country Hhich discovers that: it is unlikely to achieve its t11:'gcts should i1utomatically

the set of objectives accepted by a country turn out to be mutually inconsistent, or ",hen 1:he objectives of differcnt countries prove

have i t8 st1~atemr T'e-examined sometimes lead to constructive

at

Comnnmity

level.
l"egr:u'C}in[';

Hopefully
the

sur,gostions
~

resolution

this Hi 11 of

15

apparent
" '

policy

conflicts,

that

the

country
Hould
~

should

a proc(:;!dure

incomes policien rate changGs.

Noverthe.1ess,

to a consensus regarding the priori ties to conflicting ()b~Je\-;tiv0.so No doubt "uch Emm.:'t pressure on the m()mbnr countries to pur-suo effect:ive since theso al~e potcntia.1:ly a substitute for mcch1ngp.or
eIE)

attach

..

the,

lag

behreer.

the implementation

of

policy

change

and theconsequontial changesin the "aluos of tho policy ti1rr;ets is such asta limit severely the ()ffectiveness of Commnity control Nhich is limited to dlscussion after it has become appi1.l"ent that agreed fargets HiLl not be ,achieved. Because of this lagprohleT.o, effective hll"Tl1onisation must p.ytend to the instr.uments of economic policy as Hell as to the tm,'gd:D. Hithin a full monetary union ,there is a built-in mechanism Hhich makes for harmonisation 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 independent monetary policier; impractical. Dur'ing the transitional stap;es this
effecti vc, and monetary policy in the be determined by thC! polley being pursued 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.n Unianp Belgium-Lmmbollrg~ Switzerland and the United Stato[). This suggests that harmonisation of po1:~cy :instruments should be centl'ed on the harmonisation of monotary policy. Fiscal policies might Nell be left to the cntrol of the individual nation (~mb~j(~ct, of couy'se, to the need for enough tmt harmonisat.ion to pe1:'ffilt the total clismi'mtIing of frontier barriel~s), to "be used for purposes of local stabilif~ati.on Hhen the conjunctural needs of a p3.1~ticular area run counter' to those in the Community as a Hhole
0

mechanism individual

Hould become incPf1i1singly states would incpcasingly

~~I2~!lal2'?.1iL9.ie~9..
Event if ,the growing inforcedby the deliberate expected efff!ct of limiting
,

differentareasof the Community,it I-Jould be unrealisi:ic

balanced

policies the utmost importance in creating the conditions for monetary union.

to Hhich unit costs diverge in to e/~pect gl"oV1th throughout the Community unless dollbor1te regional Here adopted. ,It follovrs that an effective l"egionl polcy is

interpenetration harmon:lltion the extent

of European
of economic

economies policy, has

rethe

of

It national

one another in offel"-::.llg lncentives to attract of 1-rhich will be to incr'ea:;e industrial profits without achieving any systomatic effoet in gtecring industry tOH:11:'d tho less-prosperollf regions. It is faY.' this reason' that the Community has industry, the TIf!t result
'i
..

would be a mistake responsibility. is that in the absence of regions will compete Hi th

to leave regional policy to be entirely a There are Hn'ee reasons for this The first central contr'ol there is a real dangel' that
0

lll'oady imposed a :Limitation on thp. sums that can be spent on sllbs:idis in The second IX~J.;On investment ~1.n the IcentralarcaI of the Community. is that fiscal .tr;:msfersconst:'l tute onc of the most pOHel'fulfar:i.:ors tending to maintain income Hithin a re.gion of J.11economic amI monetary union Hhich e'~periences a decline 5.n demand for its output. A~; r:ountK'ios lose the oDDor'1:un;i''' of' ('omnenE81..tnr: fO'i~ M d0.clin0 in demand hv nlTl"p.TIn:

IG
_on. ~_~__

.";

the e,cchanRe rate t they will require the Community's fiscal pmTers to be exereised in a Hay that acts as a substitute. A third reason is that th!'! decrease in the l'eRional multipliel' will make an inj ectirm
of central funclsmol"e essential. Hithin the frammlOrk provided hy Communi ty rules and Community fiscal and cl'edit 'policie!19 it is desirable 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'edistributive impact that is regionally favourable. These effects could usefully be
reinforced by transferrinR the unemployment towards
.

insUl'ance programme Hhel'e prosperity

to the was

Communi ty level. This redirection at' fiscal ebbing.

1-TOuld

result in an automatic
regions

and immediate

transfers

OJ';,'

The fiscal instrument which would seem best-suited to the.ohjective of promotinr; balanced regional growth is a rcgionallv-differentiate(l ,payroll ta~{/subsidy n It is desirable to relato the tax and subsidy payments to payrolls t rather than to investment or' value-an(Ien, so as . to provide the stronr;est incentives for l(1)ouy'-intensi ve industries to move to areas of labour surplus. (It my be 1-Torth noting that labourintensive industries m'e not necessarily the same as low-Hage ~ lmTefficiency industries; economic development is of course best advancod ,by introducinR modern inrlustries which nevertheless have high labour requirements). The tax rate (in the prosperous regions) ()rsubsidy (in the less prosperous rer;ions) should clearly be related to the unemployment percentage, so as to provide the appropriate incentives for industry to choose the less-prosperous regions unless ther'e ,,yere s'ufficiently compelling reasons to ~justify location elsewheJ'c. There is also much to be. said for increi1sing the ti1Xrate in areas Hher,'":'! wage-rates are high, and increasing the subsidy rate in low-wage regions. This would make a direct contribution to equalising incomes throughout the Community, and it would also provide a helpful incentive to unions to recognise that rer;ional can matori ally '''age diffnrentials contribute to an equalisation of prosperity If, for example, the unions in one country Here to push Hages above the level ~justified by productivity and thereby induce excess unemployment in that areat this formula would relieve the rest of thc Community of the oblir;ation to subsidise thi1t region throur;h thc mechanism of the payroll tax. The payroll subsidy tvould t in effect~ only be available to rer;ions that Here prepared to contribute to their' own gr'oHth by exercising modc:t'ation in income claims.
.

The effectiveness of regi.onal policies could be further enhanced by utilising credIt policy .in parallel with fiscal policy. Easier access to (subsidised) cl'edit for investment :inthe less Drosperou~; reg:ions would prevent any desir(~ to invest in those arE~as as a 1'88\11 t of -the fiscal incentives' being frustrated by lack of Hnance, as well as creating an i.ndependent inccmtive to increaso activi tv there.

Even national

aggregates

in countries that have 10nR been unified, policies based on alone have been founel inadequate. The businer:s cycle

.1.7

,.'

,-'t.; ',f

does not coincide in space with national boundaries, hut rather with the economincally-homogeneous regions. Disinflationary nolicies Hhich'oo not discriminate hehleen economic regions, according as to ~Thether or not they are actually affected by excess ctemand, inflict an unnecessarv damage to the "leaker regions, Hhere 'v("rheating,'. is often the 1'0.8111 t of cyclical conditions external to them. And yet the impact of restrictive policies tends to, concentrate there. Hhen credit is cut, most C1sur: tics are to he found in these rep,ions, since they have a larp;er share of' smi'lllcr f!"IT1s, and banks as a rule find it marC! convenient to reduce lending to such firms. A differentiated credit policy should, on the onc hand, mike possihle 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 oetermining the Community's monetary policy. But this field Houlc1 also appear to, offer scope for direct action on the part of the Community, narc" specifically, a European creelit institution enclO1-reel Hith lar[1,eenough r8S0Ul"ce.s and powers might contrihute to the pursuit of regionally-differenti1h!c1 ~olicics. It is a matter for consideration whether this task would hest be accomplished by an adequate expansion in th0. European Investment Hank or by the proposed European Bank adding a Development Division to function in parallel with its central banking activities, In favour of the former solution is thetradi tional sepaJ"ation of mone"tary activity from finance for development purposes, but the latter might he best suited to rna:dmise results, in terms of the imDact which overall credit condit:ions throuEhout,

the Community "lould have on economic trends in the weaker l'ep;ions" )'ifcyrcover, because the European Rank, as proDosed in a previouschaptE~)", woulel go beyond the concept of a reserve funel, whose activity is m1inly conHneel to official settlements, and would thus deal directlv ,;[ithcommercial kmks and 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 monetary

"

unification would in this event hy hi1rnes1~ed to bJ:'ng about i1more oven pattern of demand and economic activity, and to paise rates of p;rowth, This Hould help to ovrcome the reservations that prudence enp;encler's towards divesting national p,overnments of theil' powcps in the field of
money, c1ptial and exchange rate policies.

Political ---~

Conditions ~._,""

(:
'

.}

significant scale, It is scarely possihle to conceivC' of t:he~;,-:; 811])8thntia1 pOWel"r;; in adeLt t10n to the cont:Y'ol of European monetary policy resulting from the control of the Europeai1 Dank .- being exol:'c:1so.cl H:1.tho\1t some development in tbe Community's sys'i:em of political control,

The preceding sections have argued that the pre-conditions for a successful monetary union include growing interrenetratiol1 of the European economics, deliberate harmonisation of economic objectivs ;md of monetary policy instruments, strong regonal policies (including the sub8id.1sing of the less-prosper'ous hy the prosper'ous regiom~, and the: deliberate direction of Gheap Cl"ee1it 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(~ on

I(

- 18 -

There are many other considerations that Hill be relevant to any changes that may be made in the Community's political or administrative m'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 and
therefore i ts accountability to the Ell"f'Opean ParJ,.iamcnt..2 in purallel
.

\'lith

the .direct election of the Parliament. Or the Council of/iL1nistcl's might remain the forum Hi th final authori tv in these areas ~ but the Council mir:ht he strenthened hy introducing one or'mOl~e 'European Ministel~s' J'ho mir;ht, for example , he appointed hy the European Par-liament) char'god wi th specific responsibility for formulating und e'{j:)l'essing thep:enerl Eur'opean int,~rest,
"

to supplement the national ~1inisters 1<1hosoprimary loyalty is to the1~ respective national governments. De that as it may, the pOHer,~involved in
the economic control of a monetary union are so important that somG method of strenthening political control is essential unless democracy itself is
to be threatened.

;
l

''''f(

19

VI.

Conclusion
---------

Ii

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

The preceding Report sugr;ests that a new initiative for Euronean monetary inter;ration should be based on the early creation of l European monetary area. This <'Ire a vT011l.0 be -characterised by minimal internal exchanr;e-control barriers, narrow bands between the currencies of the members, the widespread Use of a new monetary, unit (the Europa) to faci1i tate financiAl i nter;ration and replace the Euro-dollAr :in the role it has come to occupy as a nan-European currency,.JillQ. the c:reation_' of a Euronean Bank to further monetary inter;ration, narticula:rly he p:romotinr; and managinr; the Europa. Since the Europa would dreu} lte iD_J:arallel to the f'Xl st; nr: Euronean currp.nci 1'>" t this intermediate star;e would be consistent wi th t h e maintent:mce of lim
~

Creation of a European monetary area, especially if reinforceo hv 'a wide hand between the Europa and the dollar, would be an important achievement which Hould permit the re-'estobllshment of Euronean control of European monetary conditions. It will be more (Hff:icul t to proceed to the final goal'.of full monetary union t-1i th. a common currency as envisaged in the Werner Feport Realisation of this ambitious p;oal would pose conside'rahle dangers in the i1bsence of stronp; il1terp8nptration of the economies, ffect:Lve policy hannonisation, stronr, rer;ioni1l policies~ ( and supporting political developments, all of which Houldbe necE>ssary to overcome the problems thi1t are posed hy inconsistent cost trends. It is 'not at present possihle to nredict the time that will rapse l)efore these problems are solved and filII monetary union, Hith its inevitahle abandonment of internal exchanr;e-rate flexibility, becomes feasible; hut the best way of accele~atinr; that time is to make a sneedy stort to the construction of a European monetary orca.

Giovi1pni Mar;nifico ,John Hilliamson

2()

APPENDIX

I
THE H1PLICATTONS FOR TBr. CI'!'Y or LOtJDON
---,-~ ~--.,

Much

h1s heen
0

for the City of Community (EEC)

Lonoon Th:is

wrltten (wer the last few mon-ths~ hout the 1mplirilt:lons of Hpitish i1<':Cl"[;~C: ion to the r.uropean r.conomi c
note
for

hils

a mm'e specific

nurpose :

to

insnect

the

practical :imnlications Report, ano particularlv the existing notional

the Citv of the actual pronasals set of the pr()po~,er1 introdu(Ction of r.uronos currencies of Er.C memherso

out in this 110ngside

In its present position on the eoge of, hut outside, the r.EC, the City of London plays two Cjuite <iist:inct rnles ilS a financlill centre. On the one hand, it acts as the domestc fioilncial centre for the Onited Kingdom; on the other, i t act~; ilS an internation finilnciill (Centre ond particularly as the leading cenh'e for the interni'1tional SJ10pt, medium and long-tepm capitalmarke'tc; providedl1V the euro'--curpency ond eupo-hond \." mar k ets A It JlOUr;'11 many Cl"" ty lnst:ctutl.ons partlclncl"t:e SJ In uO th '\... " " " mu 1 tilneou8..v 1 " " these domestic and international 'roles" the r1)mestic 1.nd interni1tional mnev and capital markets of the Cityarp kept rir;clly 'apct rJY exchanr;e control.

~~hen the final stage of European monet1.ry integration is rCilched, in plan set out in section hm, the:: Cty can pPObelhlv eXDect to nnd itself still fulfilling this cinalrole:: of il domestic and an intepnationa1 financial centre, ",ith 1:],0 :mpDr'tant difference 1:h3.t the "domestic" field anci clientele will covel' rhn Hhole of the EEr, while the "in~pnotional" field Hill cover the re~3t of the HorId, The present fence of ey.chmr;e control hetween the Unitc:,ci Kinr;nom <,mn the rest of the tEC w111 J,ythen h,we the

heen dismantled; J)ut

heen e~ected around

at the, ::-:ame time, one mu~;t expect i1neH fence to have the Hhole r:EC nrohihi ting, or certainlydi:-:couraginr;,

free movements of funds into emd out ()f the EECfrom and to outside sources, such as the eupo-dolli1r marb.,t: or the dome:-:tic monev market:s of the Unitcel Sti1tes As sur;r;ested in :-::ec;tlon three, this fence lpOlmc1 the Hho1e r.EC could be createel bv cm effective exchmr;e control hi1prier or hv illloH:ng sir;nificant fluctuations in the exchange riJ.te between the J~uroni'1 1.ndnonr.uropean currencies: in practi(Ce, thehest DoLlcv Houle! Dpohablv involve
0

moderate

recourse

to hath

techni(]ueso

In the final star;e of- monetapv int:er;ration, there 1.S everv nrospect that the City will emerge as the main financial centre (meaninr; the main money and capital m1.pket) of the EEC, y'ather than -just one of spveral pogional financial centpe in the i'1pea; anrl the institutions of the City clearly have a stronr; commercial incentive to estnlllish such il Dositiono In this finn1 stage, natIonal curpencies Hould Jle withdraHn oT1C1 )~enl(lcecl

hy Eupopas:

the supest

1'rav

for City institutions to est(11)lish t11:1r

ascendancy in this final s t:ap;e Houlct 11e to 1<1Y the founcbti ons of F:uronadenominated money markets in London at the eapl1est: Doss:i'hle moment in thp
preliminiJ.ry stage of
the nevr Dlano

proposals of

One of the hip;r;est hurdles this Report mlJsi:he

to he overcome in the imDlementiltion of the the g<ininr; of acceptah:"tlitv of r~uroDas

- 21 -

hy the EuropeAn comrncrdill will-exists to create the

And

fi'ntmc:lill

c;omrnunitv:

even

if

tJle

nol:t:cill

f.ur:Jpi1 as a neH Tllcmeti1:ry unit, its croatian would. have no practical sip,nificance unless t H;:;re to become fully :1' lcceptable in the nrivtlte 1n()n0.V and c.'lDltal markets as ,1 tH)] t f(w c1enominAtinp, mi1Y'ket Assets" Not only mu:';t such as i1cceni:ance of rllrOni1S Jle "eon (I" a precondition of full mnnetar\1 union; and it ccm the

important

catalyst in sncNLo
have

the process of monet1rv

the ad.vocates of European

monetY'V un.l.on into the practical

le s(>en a" an both IlniorL Thus financi<ll :nstltlltion~ of

Dr; the

alsn

the City of London

introduction

ae::rucial common interest in enp,inee}":l

world of fini1nce.

of Europas

The first initiative :In estahlishinp; Europi1s in the money markets must clearly come from the Communitv and naLlonill authorities Once the European Bank has heen "et un, it will 1ie un to the Bank, the Communitv and national p;overnments to take stens to inject Euronas into 'the nrivate
0

financial world - a numher

denominated i1re sup,p;estpd

of such

stems ,) f;IlCh'as

the

issue

of

rurona-

ohlip,ations 11V Commun ay imd ni1tional official institutions, in section threo" On\~e r:UY'ODi1S hi1ve Jleen p,ot into nrivate haneb in this Hav, tJlcn the: private fini1nc:liilinstitutions Cim nro1lahlv Jie relien upon to deveJopth" in fr'ilst-ru'tU1"c: of f.urona'-'d"nomini1ted mapkets The main pre-requJ.site for ::~1Jch il d(~velopment is rf!lite sif1lplv 1:/1e eZl stoncR of institutions vd. th :;urpLuf; EIlf'Cl[),;S (0. c intere,;t received on hone1s 1"" iss ued J)y ni1tlonaJ governmen ts) ann of othp.p ins ti tutions wi th r.urOTii1

requiremen.ts(0."r,. fm' tax paymp.n,) :the development of the euro-cJo.Lli1r market has shown quite clearly how financial institutions - and narticularly those of the CiTV <if Lonr1c')n - Vl1uU brinp, top,ether such counterparties and in so dotnr, C'l'ea te i1new mi:,rkc.t
0

The speed

at

Hh:i'ch F.urooas

r;et

into

nrivate han(1s is to a larp,e extent

up to the initiativc of Community and natiODi1l ilutJlOrJ ties, The speed at Hhich Europas ])ecome ilCCPr> teel <md \1serlhy p1"i v ate holcJers {n 1ntraEuropean transi1ctions must depend in lare measure on the initiative of
national governments as well, and particularly in the mi1tter of exchanr;e controL If the p;overnmentc; of Er:C memlicrs felt al)leto nermlt individuals anel cOT'porations resident iD their terd toriesto mi1ke and ~recejvepayments in Europas as freely a~, they meW now (10 in the:!r national currencies, then the Europa Hould not only hecome the natural m(~ans of n1yment for intraEuropean trade, it would aLso renlace Lhe euro-dolli'lr as nrinc:lDi11 T1]ed.illm

for intra-EurO)Jean short-term cari tal movements Since the sunnlv of Euroras 9 unlike that of euro-dollars,vroulc1 ultimately be under the collective control of the EU(>opean national authopities, such an initiative J in eXCh111gc cntJ'ol H01d not renre;ent a very revolutionAry sten.
0

Again,

the

enthusiasm

of

the

nrivate

financial

institutions

to ctevelo~

the r:uropi'! would at once lose one of its pY'ncipal disac1vantar:es as ~ a then c0J11TT1crclallyused currency vis-a-vis national currencies: hanks And other FinanciAl institutions will be ml1st les~:; cautious in borrmving aneJ lenc1in); Euron1s f they are confident of the existence of a lencJer oj: last resort I\nd: f another sur:r:estion of section three 1S l.~1ken up - that t11e Euronean Bnk
:i 0

markets in EUl"opas and T~lH'ona-c1Rnom;nated ohlip,ations Hould he f1lUcf1 affected by the facilities nrovicledhv the centri11 r.uronean monetarv \rthorities. If the European rank were preparecJ to stand hy as ct lencJer of la~'t r'esort in the Europa hiJl market, il!'; ,'mgr;estec1 in section three

2?

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

far the most important practical implicat:1on of the introduction of Europas would he the nossih:tJity it Hotlld provide for a Europcan-wde
B,r

money 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 into

private hands

develop as well a market for

the privilte fi.nandal community bUY:1n[; <1ncl seillinp;

could he relif'd upon to Eu:ropas, snot And forward

~

ar,ainst other currencies. The extent of'such a market~ and the speed of its development ~ h'ould donend in large measure on the exchcmr:e control
rep;ulations imposed hy ~he national p;overnments; hut the fcrtility of affinlv the

financial

community

in its ahiLLtv

to create

nCH mi1rkets has heen

dCT:lonstrote<J

the market
grew Hans in

:hy ~ for example ~ the market in premium <JaIlors In London or IjIfinanc1ilL" as o[)lIoscn to "commcrcL" French francs up overnip;ht as r1 rest t of il chmp;e :ln Prench C!xchi1nr:e contraI '--Ih:ich rep;ulafor
1971.

The c~nclusion must he that the private financial institutions of the City of London have a maior interest in the .imnlemcntation of the recommendations of this Pep art , in that these recommendations offer t11e nroSlIect of
ultimote monetary union in Eurone and the emergence of a sinp;le main finrmd.al centre EC11Jallv ~ thC! s\1ccessful imDlcmentation of these recommen0

dations rlepends in larp;c meAsure on t:he i'lccentability of Eut'oP1s to the private financial and commercii'll institutions of the City And of the FEC in general: the City itself thus has Cl leClcHnp; raIe to nIav in thc imnlementation. The precedent of the euro-dollar market is nrohablv adern1i1te demonstration that, p;iven the cxchanp:e control environment a.nr1 tf'chni cal hacking from the European Bank sI1p;,r;osted in this'note~ the private financial institutions have the expeptise and initiative to create ancl cleveloD the Europa markets Hhich lie C1t the centre of this Hcport:s proposals.

tTahn

rooner

7.3 ->

APPENDIX II
MONETARY PO!,lY
,_'-.r

H]TECR1\TTON (CAP)
'

ANI) THE

C~1MON AGnICtJLT!JR1\L COMMUNITIES

-

Of' Tm-: DJROPE1\N

~ ~~"_~

The success of the Community in

ar,ricul tU1~al policy has tJeeT~

formul1tinp;
hy the

anrl

imnlementinp;
f1lure

1 common
of

that either !satisfactol'Y balance in the F:UT'Oneiln market for ilgricultural goods or a smooth transf.:::.mation in the structure of rurill society wi thin the mf~ml)l~l' cDlmtrie~:; But despite its ~JO.!~tcominr:s the CAP will remain an important aspect of F:uY\')rean ecoYlomic policy for some time to cameo Any proposaIs fnr ftther eccmomic ln(l monetary intcr:ration must take into account the l.mpact on the agrl.cultnri11 policy, and any modifici1tlons in the CAP made necessary DV ,;uch proTJosi11s H:1.11 have i1 hearinr; on the accertahility of the move tOW'1Y>d inter:rai:ion in the moneti1!:"Y rleld.
overshadmoJecJ apparent

policy to 1chieve

The CAP has of courc~e heeq di~n'''lmted in the last two yei1PS hy exchimr:e amonr; EEC mem]K~r COlm tr'les, But diverr;ent cost trends in the absence of exc:J1ange l'atevar'.1tion::; also inri.nencn the level of TJrotection r:iven hy the common pl11.c,y in rlifferc:nt countr'i(~s, tho\1[';h in a 1088 ohvious way The ])1sic decislon as to ~~hethe:(' to protect the farm sector from economic forces such <1:-; ..nflat.lon revaluation or Hhet!wr to r:ear the policy to reach:\nr: an e~-:C)/1:)m;c level of farm TJroduction and enconraginr: of the implied resource aclju,.-itmNih; cannot: 1iC avoided. Hithin the' (y,ntext i1 common price polie'\!' T'iW()!".oh:Lem is ::;om(~Nhat more complex in th"t countres relinq uish the instrument nt 1:.rclde centro1s; ppotection of overall farm incoml" he comes more diffcui.t t11011r;h Uw economic allocation of farm

rate chanr:es

()J~'

resources

is

presumahIyimprev(':(L

It follows that if the steps tnwarrl monetary inter:ration imply 1 reduction in the divergent cost trends then the conflict between these two possihle aims of the CAP is Ie:c;sene(j, And the fi nal stilr:e of monetary inter;ration removes finally the no[;~;ihilty of disruTJtion of the free movement of farm goods as i1 ['e~~1l1t of exchanr:e rate variations. nut if in the intermedii1te ~;taf',es exchanr.el'ates al'e allovred to vary amonr: European countries then the mechanism Cif thc, ClIP has to I)e marle flex]'b le enol1fTh .. . . . 1

to take such chlnge::; into a~~c()unt, The rest of this intEraction hetvJ0C':1 IJarl. ty ct1mges and the mechlnics

note discusses of the CAP"

this

import

The Common Ar;ricultural P,')'13.cy largely supplant~s the pre-existinr: regulations regar.r'ting trar;e in the major ar:riculturi11 I'J'!)(!:; fJ'om

third

countries..

In gener'lL1 j(!'v'Yls imposed

to hring

the landpd

1 (~vy-'pa{d

price of imports t:o a precere!'mined :level(threshold price), The CAP <11so har'monises the slfopor''C. buy '.Lng op'{'o"'Jtion:; thl'oughout the communitv by settnr; common interi1cntlc)n pricc!o;" noth the threshold price il" '1~;)p inteJ"vention prct~ ,1I'e notionally 'related to a tarr;et (p;ulc1e, 1n,~ c, or indicative) price, This priu~ > at nresent set cmnuallv for (>;L:h commodi ty and exrressed in lmS. ts of account,

The CAP was

felt

barriers

amonp;

membc,:(\s

countries that Hould

necessary as i1 corolllry to the remova.l of trade ,,' Lt pr',c>ventcd the rapid adjustment in memher have follololcrl liner'lllsationo Free intril-Cr~C ~)' Ij. -

trane :In ap;riculturalr;oods has heen suhstantiallv harder taxes Here re'l.ntrcJdllced follm6.nr; the Dilr-tv
and 1r;ain in 1971.

1chieved, thour;h some movem0ntsnF1f,c)

acJministere(J floor ,md ceilinr: exch1.nr:e T'ate~; if "Deculative floHS of ap;ricultural roans we to I)e avoir1ed. In 19r,9 much of the output of German r;rain pronucers was purchased for intervention (Hhile millers and compounders hou~1t from rrance) because the Germn intervention price Has hir;her than that indicated hv the forHard Deutschemark/ Fri'mc exchanp;c rates.

rree :Internal trA.de rerplres'th'at

prices in the mer'1her countries reflect Clfrrent

that German farm orr;anis1tionsshould their Government to relieve them of the ill-effects of revlluatior; (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; to he expressed in neutschcm;lrk r,qther than u. ao In economic terms th 1.8 implies that farmerswould rAther comrete with rrench farmers than Hith German industry.
press

BOHever, it is underst1.nnahle

r.xchanr;e

rate

chAnp;e~; thus

poHcv.

The first

is

o()litical

pose three can one

00,

tynes of prohlem for the fArm

p:et fi'm orp;ilnis<1tior\s

to
environ-

accept such ch<1np;es

they or unless this can be achiei,'c(;. ni1tional rtr:ricul turn! nol cie:::; m.l.\> have to provide compcns nt'] on for larp;e exchanr;e rlte chanr,:es" The second prohlem is histoT'ica1. The country Hith the stronvest currencyhiljlDens 1l so to hi1ve 'heen t11i1t countY'''vrhich hnd to rwh1CC! thC!]r SlITJnort nrices to h"lrmonise with thc CAP" German p;rain Li r':'1(,(>'; have facen. (Jeclininp; DeutschemarK prices rar sevcn years The thIrd prohlc'm is mechanical: can onc run a CAP \,Tith regularly chanr:in,r'; pArit'l(~s without en,~enr1erinr; snecuL1tiv0 comrlOdt'1
0

ment in Vlhich

1S a necessarv ODel'atc~.) Ontij

1r1lustment in the economic

floHS or Y'e-erectinp; intra-EEC note, deals with the third tvpe

trade harriers? of pcolem.

The remainder

()f this

steady

One must n.istinr;uish hetween prohlems createn hy a float nrounn. a parity ann. a secular ch<1nr:e of n1.Flty in one (Hrection fluctuations around a parity introduce uncertainty into ar;ricul tural markets as
0

they Hould in all other tY'il.rlinp, marketso the currfmcy market or fOr'H,'lrr1 cornmod-'ity is in fact sOJ11e uncertainty at present
importer is, fixed for ri Dcriod for the import licence. There should
exchange

markets mip,ht:
<1S the levv

Tril.ders Tnip;hthedp,e more in develop There

0

naV1hle

liV

im

of three months seems no reason

add to the instalyili ty inherent in this

ilt the time of Anpl] c<1tion Hhy narity fluc+u~tions mArket. n<1v-to-eLi)

rate chanr;es can hardly il.ffect importers' decisions if 'they info'rmation three months hef()n~ landinp;. Althour;h it is the traders that have heen the most VC.0~ In opposition to the system of floatinr; rates, there would ~eem to ~0 no good case for modifyinp,thc r:/\P on these r;1'ounrJs.

make these decisions basen on market

'

rarmers are

i'lffected

even

less

hv floatinp;

exchimp:e

ratf'S

f'l

rst of

all it is only the maximum

and minimum

notiona.1 m<1rket nrices

tni1t:lre affected.

"

:'>5 -

If such fluctuations are small then the nrice will at most times lie away from the floor and ceilinr; (intervention and tarr;et) prices for most producers, Fluctuations Hill in anv event he At the wholesale level and not directly at the farm r;ate, Prices at present fluctui1te throur;hout the season and from year to year; a(~(H tional small chc-mp;es
in national equivalencies of common prices do not necessarily add to instahility, Lonr; term planning of production can hardlv he affected by exchanr;e rate fluctuations around a stahle leveL The Commission works hy a rule-of-thumb that exchange rate changes Hithin the F:EC have to he larger than 2,5 per cent before goods are significantly diverted across borders to take advantage of intervention orice differentials. The major effect on the farm sector is to increase marp,inallv the
returns 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 Tleutschemark than Hould French farmers their Franc prices. fut this orohlem
cannot he avoided hy fixin~ parities, since the alternative of more ranio inflation 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 no economic cost is sllstaine(L Horeover no lcJministrative maninulation of the denomination of ti1Y'r;et prices would offset effects of this trend,

In terms of the Study folIoHing implications:

Group

pronosals

these

comments

have

the

fufore the introduction of a F:uropa, there reason Hhy the uoa, should not he retained denomination for administered CAP prices,

is no as the

CU)

Flexibility i1mong community currencies presents no serious prohlems if T'>ilrity changes do not exceed, say, 2 per cent a year" add margi naLl y to traders costs as w~th anv other industry hut harelv affect the farmer.

CH i) S hort-term

parity fI uctuat:1ons

(iv) Target prices would he fixed for the Communi tv hearing .in m.ind the proha}e development of currency vallws over the relevant neriod.
Cv)

Individual

countries

Hould

retain

instruments

to

compensate for sudden and susti1ined pari tv chanr:es which were unanticipated in the setting of EEC levels,

thoup;h these
be measures

would
not

l1e

financed

hV the

countY'V concerned,
to trade, scale. i1nd he

directly antagonistic phased out according to a predetermined

~i)

Threshold prices would as now he related to target prices and hence Hould vlry Hith offi dal parity changes: intervention prices hOHPver Hould he set in national

26

-.

currenci~s and adjusted occasionally during the season accordinr; to an ar-reed TH'ocedure. Thegap betvreen target and intervention nric' vrould therefore change somevrhat during the year.

(vii)

F'lththe introduction of a r:l1rona denominated asset this would repli1c' the U,ao in the expression of common administered prices, As this f10ate(1 or
crawled relative to the dollar, the level of_ protection of F.uropean agriculture would change. Since all memhers are errua11y affecten this should cause none of the internal problems associated T,.,rith individual changes,

Tim

,Tosling