31. 7.75 Official  Journal  of the  European  Communities No C 174/1 
I 
(Information) 
COUNCIL  AND  COMMISSION 
SIXTEENTH  REPORT 
ON THE  ACTIVITIES  OF  THE  MONETARY  COMMITTEE 
FOREWORD 
The purpose  of this  report  is to give  a brief  account  of the activities  of the Monetary 
Committee  during  1974. 
During  this  year  the Committee  held  15 sessions  and  the working  parties  drawn  from 
its own  members  or set up at its initiative  met  on many  occasions. 
At its session  of 10 July  1974  the Committee  elected  its officers.  It elected  as Chairman 
Prof.  C. Oort,  Treasurer-General  in the Netherlands  Ministry  of Finance,  and  as Vice-
Chairmen,  Dr. O. Emminger,  Vice-President  of the Deutsche  Bundesbank  and  Mr C. de 
Strycker,  Vice-Governor  of the  Banque  Nationale  de Belgique.  Mr  J. G. Littler,  of 
H.M.  Treasury  was  elected  Chairman  of the  Committee  of Alternate  Members.  In 
accordance  with  the Council  Decision  of 30 April  1972  aligning  the dates  of renewal 
of the terms  of office  of the members  of certain  committees,  the terms  of office  of the 
new officers  will  expire  on 31 December  1975.  A list of members  as at 31 December 
1974  is annexed. 
The report  was  adopted  as at 31 December  1974. 
INTRODUCTION 
1. In  1974,  world  business  activity  lost  a good  deal 
of momentum;  this  trend  was  accompanied  by a 
further  acceleration  of  inflation  and  by 
balance-of-payments  disequilibria  of  record 
proportions.  The  heavy  swing  in the terms  of trade 
— resulting  from  the increase  in the prices  of raw 
materials  and  especially  from  the  quadrupling  of 
crude  oil prices  from  November  1973  onwards  — 
contributed  to these  developments.  The  disequilibria 
and inflationary  tendencies  increased  in gravity  most 
of all in those  countries  which  already  had  run  into 
difficulties  before  the oil crisis.  The  new  pattern  of international  payments  relations  combined  with 
domestic  economic  difficulties,  particularly  in deficit 
countries,  posed  a seriou.s  threat  to the free  trade  and 
payments  arrangements  developed  since  the war. 
2. The  new  economic  and  financial  situation  also 
hampered  the  process  of integration  in the  Com-
munity.  Consequently  the  Community  authorities 
gave  priority  to reaching  agreement  on practical 
action  to help  Member  States  in difficulty  and  to 
safeguard  the degree  of integration  already  achieved 
i 
No C 174/2 i 
Official  Journal  of the  European  Communities 31. 7. 75 
rather  than  attempting  further  progress  towards 
economic  and  monetary  union  along  the  lines 
mapped  out  in previous  years.  The  rapid  reduction  of 
the extreme  payments  disequilibria  of certain  member 
countries  and  the  restoration  of the  stability  of the 
value  of money  are  among  the  most  important 
preconditions  governing  the revival  of the integration 
process  in the Community,  for without  them  present 
strains  in the Community  cannot  be dispelled. 3. This  report  is divided  into  four  parts.  The  first 
chapter  reviews  international  monetary  events  in 
1974,  and  the  second  chapter  gives  an account  of 
joint'  Community  action  in the  monetary  field 
including  progress  towards  the  establishment  of 
economic  and  monetary  union.  The  third  chapter  is 
devoted  to a review  of the  economic  and  monetary 
trends  in the Community  and  the  fourth  summarizes 
the activities  of the Committee's  Working  Parties. 
CHAPTER  I 
THE  FOREIGN  EXCHANGE  MARKETS 
4. The  Monetary  Committee  followed  closely 
developments  in the  foreign  exchange  markets.  In 
1974  international  monetary  relations  were  hampered 
by formidable  payments  disequilibria.  Although 
internal  economic  factors  were  partly  to blame  in 
some  countries,  the  position  was  aggravated  by the 
sudden  jump  in crude  oil prices  in late  1973. 
5. The  currencies  of most  industrialized  countries 
continued  to  float  throughout  the  year;  the 
modifications  in exchange  rate  relationships  between 
the major  currencies  mainly  reflected  the  economic 
and monetary  trends  in the  various  countries.  For 
much  of the  year,  national  and  international  interest 
rate policies  were  of particular  importance  for many 
currencies:  interest  rate  disparities  proved  an 
important  factor  in capital  movements,  the potential 
size of which  grew  appreciably  as a result  of the 
colossal  surpluses  of the  oil-producing  countries. 
Another  factor  of disturbance  which  was  of some 
importance  for a period  around  the late  summer  was 
uncertainty  about  the position  of some  banks  and  the 
particular  difficulties  experienced  by some  of them  as 
a consequence  of over-extension  in the  foreign 
exchange  markets.  This  was  a relatively  short  period 
of unease  which  was  over  by the end  of the year. 
6. The  trend  in the  rate  of the  US dollar  against 
the currencies  within  the  Community  'snake' 
illustrates  the  changes  which  occurred  in exchange 
rate relationships.  At the  beginning  of the  year  the 
improvement  in the position  of the dollar,  which  had 
been  observed  in the last  few  weeks  of 1973,  became 
more  marked  despite  the  fact  that,  during  that 
period,  several  central  banks  in  industrialized 
countries  sold  dollars  in currency  support  operations. 
During  the  second  half  of January,  the  dollar  rate 
was being  quoted  at about  8 % above  its nominal 
parity  against  the  currencies  within  the  Community 
snake.  This  was  a result  of the  belief  that  the higher oil prices  would  damage  the  US  economy  less  than 
the economies  of most  other  industrialized  countries. 
7. But  in  the  first  weeks  of  1974,  most 
industrialized  countries,  in an attempt  to facilitate  the 
financing  of existing  or expected  payments  deficits, 
began  to relax  the  measures  they  had  taken  to 
control  inward  capital  movements  during  the  period 
of the  monetary  crisis.  Most  countries  introduced 
measures  to facilitate  or encourage  capital  inflows; 
furthermore,  the restrictions  on capital  outflows  were 
tightened  in countries  facing  particularly  serious 
payments  problems.  These  measures  were  supported 
by a high  interest  rate  policy,  constituting  an 
important  element  in the  fight  against  inflation, 
particularly  in the European  countries. 
8. In  the United  States,  the liberalization  of capital 
movements,  and  in particular  the  abolition  of all 
restrictions  on the  export  of capital  combined  with 
an interest-rate  pattern  favouring  investment  abroad, 
led to heavy  outflows  of capital  from  the  end  of 
January  1974  onwards.  As a result,  there  has  since 
been  a depreciation  in the  dollar  on the  exchanges. 
After  reaching  its  nominal  parity  against  the 
currencies  within  the  Community  snake  on  21 
February,  it continued  to  drift  downwards;  in 
mid-May  the depreciation  reached  about  10 % against 
its nominal  parity. 
9. Thereafter,  the scarcity  of liquidity  on the  US 
money  market  which  was  the  result  of a more 
restrictive  monetary  policy,  and  the  prospect  of a 
greater  inflow  of petro-dollars  led to an improvement 
in the situation,  with  the  dollar,  despite  fluctuations, 
gradually  strengthening  until,  in mid-September,  it 
had almost  returned  to its nominal  parity  against  the 
currencies  within  the Community  snake. 
31.7.75 Official  Journal  of the  European  Communities No C 174/3 
10. After  September,  the  dollar  rate  swung 
downwards  again,  mainly  owing  to the  marked 
decline  in short-term  interest  rates  in the  United 
States  compared  with  other  countries  and  to the 
disappointing  trend  in the  trade  balance  and  the 
unfavourable  business  situation  in the  United  States. 
After  steadily  weakening  in the  fourth  quarter,  the 
dollar  had,  at the end  of the year,  almost  returned  to 
its lowest  1974  level,  namely  that  recorded  in 
mid-May;  its depreciation  against  the  Community 
snake  currencies  was  in the neighbourhood  of 10 %. 
11. On  19 January  1974,  after  consulting  the other 
member  countries  and  the  Commission,  the  French 
Government  decided  to discontinue  its participation 
in the Community  exchange  scheme  and  temporarily 
to allow  the  franc  to float  independently.  The 
purpose  of this  step  was  to forestall  speculation  and 
to protect  the reserves.  At the same  time,  the French 
authorities  declared  their  intention  to ensure  orderly 
working  of the  exchange  market.  The  Monetary 
Committee  held  a consultation  on  the  French 
decision.  Immediately  after  this  decision,  which  was 
underpinned  by measures  to curb  capital  outflows 
and to encourage  capital  inflows,  the  value  of the 
franc  on the exchanges  dropped  by some  5 % against 
the currencies  remaining  in the  snake.  In mid-May, 
the franc  touched  its lowest  level,  a drop  of almost 
14 % as against  the  Community  snake,  thereafter 
staging  a gradual  recovery;  by the end  of the year,  it 
was being  quoted  at 5 to 6 % below  the  snake 
currencies. aimed  at moderating  fluctuations  in the dollar,  were 
also helpful  for  the  stability  of the  system.  There 
were  only  two  periods  of strain:  once  between  the 
end of March  and  the  last  two  weeks  in May,  when 
the Deutschemark  was  practically  always  at the 
snake's  upper  limit,  with  the  Belgian  franc  and  the 
Danish  krone  taking  turns  at the  other  extreme. 
Faced  with  this  situation,  which  was  largely 
attributable  to speculative  capital  movements,  the 
Bundesbank  was,  in accordance  with  the  agreed 
rules,  obliged  to support  the  weakest  currencies  by 
taking  in about  DM  4 000  million  of  foreign 
currencies. 
13. The  second  occasion  on  which  the 
Community's  exchange  arrangements  were  strained 
was between  the  end  of July  and  the  beginning  of 
October,  when  the  Belgian  franc  and  the  Dutch 
guilder  were  persistently  at the  snake's  upper  limit 
while  the Deutschemark  was  quoted  for  most  of the 
time  at its  lower  limit.  The  weakness  of the 
Deutschemark,  which,  in view  of the  generally 
favourable  balance  of  payments  situation  in 
Germany,  might  have  seemed  surprising,  was 
attributable  mainly  to interest  rate  differentials  and  to 
the unease  caused  on international  exchange  markets 
by the  collapse  of a German  bank.  In order  to 
stabilize  exchange  rates,  the  Bundesbank  had  to sell 
foreign  exchange  worth  about  DM  3 500  million 
during  that  period.  The  reversal  of exchange-rate  and 
intervention  trends  in the snake  during  the course  of 
the year  demonstrated  the  effectiveness  of the 
Community  exchange-rate  system. 
12. Otherwise,  the  Community  snake  operated 
relatively  smoothly;  the  rates  of the  participating 
countries'  currencies  remained  for  most  of the  time 
comfortably  within  the  authorized  margin  of 2*25  % 
and, generally  speaking,  little  intervention  in 
Community  currencies  was  needed.  However,  it must 
be pointed  out  that  US dollar  interventions  by central 
banks  of the  snake  and  the  DM  interventions  by the 
Federal  Reserve  Bank  of New  York,  which  essentially 14. In  1974,  the  currencies  of  the  countries 
participating  in the snake  appreciated,  in some  cases 
quite  considerably,  against  almost  all  other 
currencies:  from  1 January  to the end  of the year  the 
extent  of this  appreciation  approached  6 % against 
the French  franc,  15 % against  the US dollar  and  the 
pound  sterling  and  25 % against  the lira and  the yen. 
CHAPTER  II 
ECONOMIC  AND  MONETARY  UNION  AND  OTHER  JOINT  COMMUNITY  ACTION 
15. Balance  of payments  disequilibria,  which  were 
already  in existence  in the  Community  due  to 
divergent  economic  trends  and  policies  in the 
member  countries,  were  rendered  much  more  severe by the  energy  crisis  and  presented  the  Community 
with  exceptionally  difficult  problems  in 1974.  The 
strained  situation  harboured  the  danger  that 
individual  countries  might  be  tempted  to  seek 
No C 174/4 Official  Journal  of the  European  Communities 31. 7. 75 
solution  to  their  difficulties  through  unilateral 
measures.  The  main  task  of  the  Community 
institutions  was,  therefore,  to forestall  the possibility 
of protectionist  actions  or  actions  distorting 
competition  and  to promote  joint  action  to help 
Member  States  in  difficulty.  Progress  towards 
economic  and  monetary  union  along  the  lines 
mapped  out  in 1973  remained  in suspense,  but  the 
Community  was  able  to achieve  agreement  on a 
number  of practical  measures  which  effectively 
strengthened  its solidarity. 
16. After  January,  only  five  Community  countries, 
(together  with  Norway  and  Sweden)  still  adhered  to 
the arrangements  concluded  on 24 April  1972  on the 
narrowing  of intra-Community  margins,  for  the 
United  Kingdom  and  Ireland  had  already  left  the 
snake  on 23 June  1972,  Italy  had  followed  suit  on 13 
February  1973,  and  France  on 19 January  1974. 
17. At  a meeting  on  21  January  1974,  the 
Ministers  of Finance  and  the  Governors  of the 
Central  Banks  of the  countries  remaining  in the 
snake,  (BLEU,  Denmark,  Germany  and  the 
Netherlands)  confirmed  their  resolve  to maintain  the 
existing  relationships  between  their  currencies  within 
the framework  of the  'Basle  Agreement',  one 
objective  being  to facilitate  a swift  return  to the 
Community  snake  by the other  Member  States.  They 
also reached  agreement  on  the  principles  and 
procedures  for  the  closer  coordination  of 
arrangements  for  intervention  on the  exchanges,  of 
foreign  exchange  control  regulations  and  of monetary 
and credit  policies,  with  the  aim  of ensuring  the 
smooth  working  of  the  Community  exchange 
scheme. 
18. In  January  1974,  the  Commission  proposed 
that the  Member  States  should  state  their  firm 
intention  to  refrain  'from  any  competitive 
depreciation  of  their  currencies  and  from  any 
restriction  on  trade',  and  hold  consultations  at 
Community  level  on exchange-rate  trends,  interest 
rate policy,  the  use  of the  international  capital 
markets  and  the  utilization  of reserves.  This  was 
agreed  by Council  on 18 February  1974.  In addition, 
the Council  stated  that  the EEC  would  endeavour  to 
ensure  'that  the  whole  of  the  international 
community  adopts,  in the field  of money  and  trade, 
policies  which  would  assure  stable  and  orderly 
relations'.  At the same  meeting,  the Council  formally 
approved  various  legal  instruments  for  the 
strengthening  of economic  and  monetary  union,  on 
which  agreement  in principle  had  already  been 
reached  on 17 December  1973  (see  Fifteenth  annual 
report  on the activities  of the Monetary  Committee, 
OJ No C 123,  14. 10. 1974,  p. 5). Thus,  it renewed  in a more  systematic,  and  sometimes  stronger  form,  the 
arrangements  already  in existence  by taking  decisions 
on: the attainment  of a high  degree  of convergence  of 
the economic  policies  of Member  States,  stability, 
growth  and  full  employment  in the Community,  and 
the creation  of an Economic  Policy  Committee;  it 
also invited  the member  central  banks  to increase  the 
quotas  in the short-term  monetary  support  arrange-
ments. 
19. In  1974,  the  Monetary  Committee  also  dealt 
with  problems  arising  out  of the Italian  situation.  In 
February,  this  country  was  negotiating  with  the 
International  Monetary  Fund  for  a stand-by  credit 
agreement.  In accordance  with  the Council  Decision 
of 8 May  1964,  consultations  were  held  in the 
Monetary  Committee  since  Italy  proposed  to 'have 
recourse  to resources  which  can  be mobilized  within 
the framework  of  international  agreements'. 
However,  it was  only  on 10 April  that  the  IMF 
opened  a credit  line  to Italy  of 1 000 million  SDR.  In 
the meantime,  on 18 March  the Banca  d'ltalia,  with 
the agreement  of the Committee  of Governors  of the 
Central  Banks,  drew  the equivalent  of 1 562 500 000 
units  of account  under  the  short-term  monetary 
support  facility  which  had  been  made  available  on a 
stand-by  basis  from  June  1973.  In order  to have  a 
better  understanding  of the  Italian  situation,  the 
Monetary  Committee  created  a Working  Party  under 
the chairmanship  of Mr  de Strycker.  This  Working 
Party  held  discussions  with  the Italian  authorities  in 
March  and  drew  up a report.  The  conclusions  of this 
report  were  contained  in the Monetary  Committee's 
Opinion  to the  Council  and  the  Commission  of 5 
April. 
20. On  29  April,  the  Italian  Government 
announced  that  it was  introducing  emergency 
measures  under  Article  109  of the  EEC  Treaty.  The 
key measure  was  a requirement  to lodge  with  the 
Banca  d'ltalia  for  a  six-month  period  a 
non-interest-bearing  cash  deposit  totalling  50 % of 
the value  of specific  visible  imports.  This  was  mainly 
intended  to scale  down  domestic  liquidity  and 
indirectly  to facilitate  the restoration  of balance  of 
payments  equilibrium.  The  Commission  immediately 
examined  Italy's  situation,  and  on  6 May  1974 
addressed  a  recommendation  to  the  Italian, 
Government  indicating  those  re-equilibrating 
measures  which  in the  Commission's  opinion  were 
essential  and  urgent.  On  8 May,  it published  a 
Decision  authorizing  Italy  to take  these  emergency 
measures  within  the meaning  of Article  108  (3). 
21. On  6 July  1974,  the  Italian  Government 
adopted  a comprehensive  set  of  stabilization 
measures  relating  to taxation  and  public  service 
charges;  these  measures,  with  a few  minor 
31. 7. 75 Official  Journal  of the  European  Communities No C 174/5 
amendments,  were  approved  by  the  Italian 
Parliament  in August.  Meanwhile  the  Monetary 
Committee  Working  Party  chaired  by Mr de Strycker 
held a further  series  of consultations  with  the Italian 
authorities.  The  short-term  monetary  support  was 
renewed  twice  for  a period  of three  months  on 18 
June  and  18 September.  On the  basis  of one  of the 
Working  Party's  reports,  the  Monetary  Committee 
prepared  an Opinion  in November  (see  Annex  I) 
which  led to a recommendation  by the Commission 
and on 18 November  1974  the Council  approved  a 
Directive  on the  granting  of medium-term  financial 
assistance  to the  Italian  Republic.  The  assistance 
totalled  1 159 200 000  units  of account,  and  is to be 
paid back  in four  equal  instalments  in 1978.  The 
interest  rate  — 7-5625  % — is an average  between 
the corresponding  market  financing  cost  and  IMF 
financing  on comparable  maturity  terms.  The  United 
Kingdom,  which  for  balance  of payments  reasons 
was unable  to take  part  in the  financing  of the 
medium-term  assistance,  continued  to accord  to the 
Banca  d'ltalia  a renewable  three-month  credit  in the 
amount  that  it had  formerly  made  available  in the 
short-term  support  operation.  In accordance  with 
Article  9 of the  Directive,  the  Commission,  in 
collaboration  with  the Monetary  Committee,  will  see 
that the conditions  of economic  policy  to which  the 
assistance  is linked  are properly  observed. 
\ 
22. In  addition  to these  Community  arrangements, 
the Banca  d'ltalia  obtained  a loan  of $ 2 000 million 
from  the Deutsche  Bundesbank  in return  for pledging 
a part  of its gold  reserves,  valued  at market-related 
prices,  as collateral. 
23. One  of the  major  preoccupations  of the 
Committee  during  the  whole  year  has  been  the 
monetary  and  financial  implications  of the  energy 
crisis,  in particular  the recycling  of the oil-producing  / 
countries'  expected  surpluses.  In  February,  the 
Committee  examined  the  proposal  that  the 
Community  should  undertake  a joint  borrowing 
operation  on the  international  capital  markets  with 
the double  objective  of recycling  oil  funds  and 
assisting  Member  States  with  balance  of payments 
difficulties.  In accordance  with  a request  received 
from  the  Council  at its session  of 6 June,  at its 
meeting  of 10 and  11 July,  it adopted  an Opinion  on 
the problems  which  would  be involved  in floating  a 
Community  loan.  In addition,  it set up a Working 
Party  of  both  treasury  and  central  bank 
representatives,  on the  basis  of whose  studies  it 
finally  adopted  an  Opinion  to the  Council  and 
Commission  on 10 October  (see  Annex  II).  On the 
basis  of this  work,  the  Council  considered  the 
question  of Community  loans  at several  sessions  and 
on 21 October  1974  approved  a basic  Regulation  and 
on 19  December  1974  approved  a Regulation 
implementing  the first  Regulation. 24. This  provided  the  Community  with  an 
instrument  enabling  it to help  towards  financing  oil 
deficits.  Under  the  basic  Regulation  it is the 
Community  which  will  raise  the loan,  in one  or more 
operations,  either  directly  from  third  countries  and 
financial  institutions  or on  the  capital  markets. 
Including  interest,  the total  amount  of the loans  may 
not exceed  $ 3 000 million  and  their  average  term 
must  be at least  five  years.  With  the  proceeds,  the 
Community  will  grant  Member  States  loans  to which 
will be attached  economic  policy  conditions  fixed  by 
the Council  in each  case. 
25. The  implementing  Regulation  lays  down  the 
procedure  to be followed  in the event  of a Member 
State  which  has received  a loan  from  the Community 
being  unable  to raise  the necessary  foreign  exchange 
to make  a payment.  In that  event,  the other  Member 
States  undertake  to provide  finance  to enable  the 
Community  to  continue  the  servicing  and 
amortization  of the loan.  Each  Member  State's  share 
in the refinancing  will  be determined  in line  with  its 
short-term  monetary  support  quota.  Member  States 
which  are  themselves  in balance  of  payments 
difficulties  may  be exempted  from  this  refinancing 
subject  to the condition  that  no contributing  country 
will be obliged  to provide  proportionately  more  than 
twice  its quota.  Countries  required  to meet  the 
guarantee  acquire  a claim  on the  Community.  The 
loan amounts  are placed  at the disposal  of the central 
bank  of the borrowing  country,  since  these  loans  are 
intended  solely  for  the  financing  of balance-of-
payments  deficits. 
26. The  Committee  was  also  involved  in arriving 
at a Community  position  on  other  recycling 
proposals  made  in international  fora.  In particular, 
the IMF  oil facility  for 1974  and  later  for  1975  as 
well as the  OECD  Financial  Support  Fund  were 
discussed  in the Committee  on several  occasions. 
27. The  Monetary  Committee  gave  considerable 
attention  during  the year  to the problem  of gold  and 
after  a detailed  discussion  of the  problem,  the 
Committee  adopted  a report  to the Council  and  the 
Commission  at its meeting  of 4 and  5 April.  This 
report,  together  with  that  of the  Committee  of 
Governors,  formed  the  basis  for  the  understanding 
reached  at the  informal  conference  of finance 
ministers  at Zeist  on 22 and  23 April  1974.  The 
substance  of this  understanding  was  presented  by the 
Chairman  of  the  Monetary  Committee  to  the 
Committee  of Twenty  of the  IMF  at its meeting  in 
June  1974  (see  Annex  III).  The  Monetary  Committee 
continued  to keep  the gold  problem  under  review  as 
part of  its  preparations  for  meetings  at  the 
international  level. 
* 
No C 174/6  Official  Journal  of the  European  Communities 
28. The  Monetary  Committee  also  frequently 
discussed  other  international  monetary  problems.  On 
a number  of these  it was  able  to arrive  at a common 
position  which  the  Community  usefully  presented  in 
the IMF,  Committee  of Twenty  (Committee  for  the 
reform  of the  international  monetary  system  and 
associated  questions),  and  the  Group  of Ten.  The 
principal  questions  dealt  with  concerned  the  value 
and interest  rate  of the  SDR,  the  revision  of IMF 
quotas,  amendments  to the IMF  Articles  of Agreement 
and to the  General  Arrangements  to Borrow  (GAB), 
the setting  up of the Interim  Committee  of the Gover-
nors  of the  Fund  ,and  the  particular  interests  of 
developing  countries. 
29. The  Monetary  Committee  discussed  and 
presented  written  reports  on  various  monetary 
questions  linked  to the achievement  of economic  and 
monetary  union,  such  as the  Community  exchange 
rate system,  pooling  of reserves  and  the  unit  of 
account.  At the Council  session  of 16 September,  the 
President  of Council  had  presented  a memorandum 
on European  monetary  revival,  in  which  he 
highlighted  four  areas  as being  suitable  for studying 
the possibility  of immediate  further  progress.  These 
were: 31. 7. 75 
— floating  of a Community  loan, 
— the  units  of account  used  by the Community, 
— modification  of the  Community  exchange  rate 
system, 
— coordinated  action  on the Euro-markets. 
30. In  accordance  with  the  Council  request  to 
begin  work  as soon  as possible  on the  latter  three 
items,  the  Monetary  Committee  submitted  an initial 
opinion  on the  unit  of account  to be used  for  the 
European  Development  Fund  and  then  on the general 
question  of the  European  unit  of account.  The  work 
on this  problem  is still  continuing.  It also  submitted 
an Opinion  on joint  floating  of Community  curren-
cies,  and  began  work  on the problem  of coordinated 
action  on the Euro-markets. 
31. The  Committee  held  consultations  and 
prepared  Opinions  on the exchange  rates  used  for the 
conversion  of  national  currencies  into  units  of 
account  for the purpose  of the  common  agricultural 
policy.  These  consultations  principally  concerned  the 
Italian  lira,  the pound  sterling  and  the Irish  pound. 
CHAPTER  III 
ECONOMIC  AND  MONETARY  DEVELOPMENTS  IN THE  COMMUNITY 
32. The  Committee  held  its regular  examinations 
of monetary  and  financial  developments  in Member 
States,  with  particular  emphasis  on the  monetary 
policy  pursued.  During  the  year,  it held  such 
examinations  of  France,  the  United  Kingdom, 
Germany  and  the Netherlands. Community's  main  international  trading  partners 
were  hard  hit:  in the  United  States  and  Japan,  real 
gross  national  product  declined  sharply.  The  other 
industrialized  countries  were  affected  to differing 
degrees,  but the pace  of growth  slackened  everywhere 
in the course  of the year. 
33. In  1974,  largely  because  of higher  oil prices 
and —- at least  in the early  part  of the year  — higher 
prices  of the  other  main  raw  materials,  the  general 
economic  trend  in  the  industrialized  countries 
changed  direction:  the  long  period  of vigorous 
growth  in the world  economy  came  to an end.  World 
business  trends  became  very  uneven  — in most 
countries  growth  declined  and  in some  countries  the 
GNP  actually  contracted.  The  volume  of 
international  trade,  which  had  expanded  by 15 % in 
1973,  increased  by  less  than  5 % in 1974,  not 
increasing  at all in the  fourth  quarter.  In terms  of 
dollar  value,  however,  growth  in 1974  matched  the 
rate for  1973  (37  %),  which  reflects  inflationary 
tendencies  in  many  parts  of  the  world.  The 34. The  Community  countries  were  not  sheltered 
from  the changed  world  economic  climate.  For  1974 
the growth  of real  gross  domestic  product  fell  by 
half,  from  5-5  % to slightly  more  than  2 % for  the 
Community  as a whole.  This  overall  figure  was  the 
net result  of an appreciable  increase  in the  first  half 
of the  year  and  a pronounced  decline  in the second; 
by the  end  of the  year  industrial  production  was  at 
best marking  time,  when  not  actually  falling.  In 1974, 
as in 1973,  export  demand  was  the  most  buoyant 
growth  factor,  or to be more  exact,  the least  sluggish. 
After  increasing  by 12 % in 1973,  the  volume  of 
exports  of the  Community  as a whole  rose  by only 
about  9 % in 1974,  and  even  this  figure  owed  much 
to an unexpectedly  high  increase  (nearly  50 %) in the 
31. 7. 75 Official  Journal  of the European  Communities No C 174/7 
volume  of imports  of the  oil-producing  countries. 
Private  consumers'  expenditure  (volume)  in the 
Community  as a whole  rose  by a mere  1-7  % in 
1974,  compared  with  4-6 % in 1973,  despite  the rapid 
increase  in incomes  in 1974;  gross  fixed  capital 
formation  fell  in real  terms  by 1-3  % in 1974 
(+ 4-8 % in 1973).  In most  of the member  countries 
these  two  demand  components  deteriorated  almost 
without  interruption  throughout  the  year.  The 
increase  in public  current  expenditure  in real  terms 
also slowed  down  in 1974  but more  moderately  (3 % 
as against  3-6 % in 1973). 
35. Employment  was  inevitably  affected  by the 
decline  in the level  of economic  activity.  During  1974, 
those  countries  which  previously  had  suffered  very 
little  unemployment  also  had  to cope  with  this 
problem.  By the end  of the year  more  than  3 % of 
the labour  force  in the Community  were  out of work. 
In addition,  hours  worked  were  reduced  in many 
industries,  so  that  short-time  working  became 
widespread.  The  hardest  hit by the energy  crisis  were 
industries  whose  prospects  were  suddenly  clouded  by 
the disappearance  of a cheap  energy  source,  the main 
sufferers  being  the  motor  vehicle  industry  and  its 
suppliers.  But  in all sectors  of activity,  the sudden 
heavy  swing  in the terms  of trade  and  the climate  of 
increased  uncertainty  helped  to foster  expectations  of 
a recession  and to bring  out cautious  attitudes. 
36. Inflation  was  gathering  momentum  at the end 
of 1973  and  this  trend  was  confirmed  in 1974;  the 
upward  price  movement  reached  very  high  levels  in 
almost  all  the  Community  countries  under  the 
combined  effects  of the  rise  in oil  prices,  the 
depreciation  of certain  currencies,  the slowdown  in 
productivity  gains  and,  above  all, the sharp  increase in wage  costs.  The  tendency  for excessive  growth  in 
money  supply  which  accompanied  these  phenomena 
was not reversed  in all Member  States  by sufficiently 
restrictive  monetary  and  budgetary  policies.  But  the 
pace of inflation  differed  considerably  from  country 
to country  in the Community.  The  rise in the cost  of 
living  index  was  lowest  in Germany  (5-9  %); rates 
were  higher  in  the  Netherlands  (10-9  %), 
Luxembourg  (11-3%),  France  (15-2%),  Denmark 
15*3 %) and  Belgium  (15-7  %), but not as high  as in 
Ireland  (17  %), the  United  Kingdom  (19-1  %) and 
Italy (19-2  %). At the end of the year,  however,  there 
was evidence  in most  member  countries  that  strain 
was easing. 
37. The  most  obvious  effect  of the  leap  in the 
prices  of  petroleum  products  was  a sharp 
deterioration  in  the  current  accounts  of  the 
industrialized  countries.  In the  United  States,  the 
current  account,  which  had  achieved  a modest 
surplus  in 1973  ($500  million),  accumulated  a 
deficit  of $1 300 million  in 1974  (*); in Japan,  the 
deficit  increased  considerably  from  $100  million  to 
$4 500 million  between  1973  and  1974.  The 
deterioration  was  even  more  marked  for  the 
Community  as a whole,  which  showed  a deficit  of 
some  $13  000 million  in 1974,  compared  with  a 
small  surplus  in 1973  of $800  million.  Beneath  this 
overall  deterioration,  however,  trends  differed 
considerably  within  the  Community,  the  countries 
with current-account  surpluses  before  the oil crisis 
managing  to maintain  or even  increase  their  surpluses 
and those  with  deficits  or balanced  positions  being 
the hardest  hit, as shown  in the following  table. 
(*) These  figures  and all the others  given  in this paragraph 
are OECD  estimates. 
Current  balance  of the Community  countries  (in $ 1 million) 
BLEU Denmark Germany France Ireland Italy Netherlands United 
Kingdom 
1973 
1974 + 1-4 
+ 0-5 
1 1 
h-* o 
O + 4-4 
+ 9-4 — 0-7 
— 6-0 © © 
1 1 — 2-4 
— 7-9 + 1-8 
+ 1-8 — 2-9 
— 91 
Source:  OECD. 
38. By  the end  of 1973,  the authorities  in most 
member  countries  faced  with  accelerating  inflation, 
had increasingly  tightened  up  economic  policy 
measures.  This  pattern  was  maintained  and  even 
reinforced  in the first  half of 1974;  but in the second 
half,  the decline  in activity  and  the  sharp  rise  in unemployment  prompted  most  member  countries  to 
adopt  measures  which,  if not really  reflationary,  were 
designed  at least  to provide  selective  support  for 
economic  activity  and  in particular  investment, 
although  only  Germany  had  as yet had  any  real 
success  in combating  inflation.  Interest  rates  rose  to 
No C 174/8 Official  Journal  of the European  Communities 31.7.75 
record  levels  in almost  all countries.  None  the less, 
accelerating  inflation  meant  that  in all the countries 
except  Germany  the remuneration  of savings  failed  to 
offset  the fall  in the value  of money.  Together  with 
the fact  that  short-term  rates  were  frequently  higher than long-term  rates,  this  helps  to explain  why 
investors  in these  countries  were  reluctant  to place 
their  funds  on a long-term  basis,  and  the relatively 
poor  performance  of the capital  markets. 
CHAPTER  IV 
WORKING  PARTIES  OF THE  MONETARY  COMMITTEE 
39. The  Working  Party  on Securities  Markets 
continued  to examine  developments  in the  capital 
markets  of Member  States  and  in the international 
capital  market  and  discussed  capital  market  policies. 
It presented  a report  on its activities,  the conclusions 
of which  were  approved  by the Monetary  Committee 
(see Annex  IV). 
40. Having  received  a report  in October  1973  (see 
fifteenth  annual  report)  from  the Working  Party  on 
Short-Term  Capital  Movements,  in fulfilment  of its 
original  terms  of reference,  the Committee  defined 
the area  of future  activities  of this  Working  Party.  At 
its meeting  of 4 and  5 April,  it approved  new  terms 
of reference  which  instructed  the Working  Party  in 
the first  stage  to exchange  and  examine  mutual 
information  on national  exchange  control  measures, 
in the second  stage  to reach  a consensus  on what 
constitutes  a minimum  armoury  of  common 
instruments  and  on how  the use of such  instruments 
might  be concerted  and  in the third  stage  to examine the possibility  (at  the  Community  level)  of a 
differential  application  of these  instruments  as 
between  intra-  and  extra-Community  capital 
movements.  As a first  step  in the fulfilment  of these 
terms  of reference,  the Working  Party  submitted  an 
interim  report  in December  which  was  approved  by 
the Monetary  Committee  (see  Annex  V). 
41. At  its meeting  of 4 and  5 February,  the 
Monetary  Committee  adopted  terms  of reference  for 
the Working  Party  on Harmonization  of Monetary 
Policy  Instruments  set up jointly  with  the Committee 
of Governors  in accordance  with  the resolution  of the 
Council  and  the representatives  of the Governments 
of the  Member  States  of 22 March  1971  on the 
achievement  by stages  of economic  and  monetary 
union.  After  the  terms  of reference  were  also 
approved  by  the  Committee  of Governors,  the 
Working  Party  commenced  work  in the middle  of the 
year. 
31. 7.75 Official  Journal  of the  European  Communities No C 174/9 
LIST  OF THE  MEMBERS  AND  THE  ALTERNATES  OF THE  MONETARY  COMMITTEE 
Chairman 
Dr C. J. Oort 
(from  10 July  1974) 
Vice-Chairmen 
Dr O. Emminger 
Dr C. J. Oort 
(until  9 July  1974) 
M. C. de Strycker 
(from  10 July  1974) 
Members 
Mr S. Andersen 
Mr J. Balfour 
(from  25 April  1974) 
M. F. Boyer  de la Giroday 
Mr B. J. Breen 
M. R. de la Geni&re 
(from  24 July  1974) 
M. A. de Lattre 
(from  28 January  1974 
to 23 July  1974) 
M. M. D'Haeze 
M. C. de Strycker 
Mr C. W. Fogarty 
M. J.-Y.  Haberer 
Mr K. Hansen 
M. C. Lamboray 
Mr C. W. McMahon 
(until  24 April  1974) 
Prof.  G. Miconi 
Dott.  U. Mosca 
Mr S. F. Murray 
(until  25 November  1974) 
Mr T. O'Cofaigh 
(from  26 November  1974) 
Dott.  R. Ossola 
M. J. Schmitz 
Drs. A. Szasz 
Dr H. H. Weber 
(from  9 January  1974) Thesaurier-generaal  bij het Ministerie  van Financien  (The 
Hague) 
Vizeprasident  der Deutschen  Bundesbank  (Frankfurt/Main) 
Thesaurier-generaal  bij het Ministerie  van Financien  (The 
Hague) 
Vice-gouverneur  de la Banque  nationale  de Belgique 
(Brussels) 
Gouverneur,  Danmarks  Nationalbank  (Copenhagen) 
Bank  of England  (London) 
Director  in the  Directorate-General  for  Economic  and 
Financial  Affairs  — Commission  of the European  Com-
munities  (Brussels) 
Central  Bank  of Ireland  (Dublin) 
Sous-gouverneur  de la Banque  de France  (Paris) 
Sous-gouverneur  de la Banque  de France  (Paris) 
Directeur  g^ndral  de 1'administration  de la tresorerie  et de 
la dette  publique  — Minist£re  des finances  (Brussels) 
Vice-gouverneur  de la Banque  nationale  de Belgique 
(Brussels) 
H.M.  Treasury  (London) 
Chef  du service  des affaires  internationales  a la direction 
du tresor  — Minist£re  de l'economie  et des  finances 
(Paris) 
Director-General  — Det  0konomiske  Sekretariat  (Copen-
hagen) 
Directeur  adjoint  de la Caisse  d'epargne  de l'£tat  (Luxem-
bourg) 
Director  — Bank  of England  (London) 
Direttore  generale  del Tesoro  — Ministero  del Tesoro 
(Rome) 
Director  General  for Economic  and  Financial  Affairs  — 
Commission  of the European  Communities  (Brussels) 
Department  of Finance  (Dublin) 
Department  of Finance  (Dublin) 
V. Direttore  generale  della  Banca  d'ltalia  (Rome) 
Conseiller  de gouvernement  au minist&re  des  finances 
(Luxembourg) 
Directeur  van  de Nederlandsche  Bank  N.V.  (Amsterdam) 
Ministerialdirektor  — Bundesministerium  der  Finanzen 
(Bonn) 
No C 174/10 Official  Journal  of the  European  Communities 31.7.75 
Chairmen  of the Alternates 
of the Monetary  Committee 
Prof.  Dr J. Mertens  de Wilmars 
(until  9 July  1974) 
Mr J. G. Littler 
(from  10 July  1974) 
Alternates 
Mr M. J. Balfour 
(until  24 April  1974) 
M. J.-M.  Bloch-Lain^ 
Drs. D. H. Boot 
Mr H. Dalgaard 
Drs. G. de Man 
(until  2 December  1974) 
M. A. Dondelinger 
Dr W. Flandorffer 
Mr F. L. Hall 
(from  25 April  1975) 
Hr. G. Jennemann 
M. H. Koch 
(until  26 December  1974) 
M. G. Lefort 
(from  27 December  1974) 
Mr D. Lynch 
Mr D. McCormack 
Prof.  G. Magnifico 
(from  1 January  1974) 
M. J. Mertens  de Wilmars 
Dr B. Molitor 
Mr J. E. Nash 
Dott.  S. Palumbo 
M. M. Schmit 
Mr N. Ussing 
Drs. R. Van  Boven 
(from  3 December  1974) 
M. J. van Ypersele  de Strihou 
Secretariat 
M. G. Morelli 
M. G. Lermen 
Mr A. Chapman Conseiller  economique  de la Banque  nationale  de Bel-
gique  (Brussels) 
H.M.  Treasury  (London) 
Bank  of England  (London) 
Sous-directeur  k la direction  du tresor  — Minist£re  de 
l'economie  et des finances  (Paris) 
Onderdirecteur  van de Nederlandsche  Bank  N.V.  (Amster-
dam) 
Head  of Division  — Danmarks  Nationalbank  (Copen-
hagen) 
Ministerie  van Financien  (The  Hague) 
Commissaire  au controle  des banques  (Luxembourg) 
Ministerialrat  — Bundesministerium  fiir Wirtschaft  (Bonn) 
Bank  of England  (London) 
Bankdirektor  — Deutsche  Bundesbank  (Frankfurt/Main) 
Directeur  general  des etudes  k la Banque  de France  (Paris) 
Directeur  general  des services  etrangers  de la Banque  de 
France  (Paris) 
Department  of Finance  (Dublin) 
Central  Bank  of Ireland  (Dublin) 
Banca  d'ltalia 
Conseiller  economique  de la Banque  nationale  de Bel-
gique  (Brussels) 
Director  in the  Directorate  General  for  Economic  and 
Financial  Affairs  — Commission  of the European  Com-
munities  (Brussels) 
Director  in the  Directorate  General  for  Economic  and 
Financial  Affairs  — Commission  of the European  Com-
munities  (Brussels) 
Dirigente  generale  al ministero  del Tesoro  (Rome) 
Inspecteur  des finances  (Luxembourg) 
Head  of Division  — Det 0konomiske  Sekretariat  (Copen-
hagen) 
Ministerie  van Financien  (The  Hague) 
Chef  de cabinet  adjoint  du minist£re  des  finances  — 
Minist&re  des finances  (Brussels) 
31. 7. 75 Official  Journal  of the  European  Communities No C 174/11 
ANNEX  I 
REPORT  TO  THE  COUNCIL  AND  THE  COMMISSION 
(Grant  of medium-term  financial  assistance  to Italy) 
I. INTRODUCTION 
1. Pursuant  to the  Agreement  establishing  a system  of 
short-term  monetary  support  between  the  central  banks 
of the  Member  States  of the  EEC,  signed  on 9 February 
1970,  and  amended  on  8 January  1973,  short-term 
monetary  support  was  granted  to the Bank  of Italy  on 28 
June  1973  for  an amount  of 1562-5  million  units  of 
account  (US  $1 884-9  million).  At the same  time,  as in the 
case of the  mobilization  by the  Bank  of Italy  of the 
support  facility  on  18  March  1974,  the  Monetary 
Committee  proceeded  to examine  the  economic  and 
monetary  situation  in Italy,  in accordance  with  the  terms 
of Article  VII  of the  Agreement  establishing  a system  of 
monetary  support.  The  conclusions  reached  by  the 
Monetary  Committee  were  given  in a report  dated  24 July 
1973  (Doc.  11/453/73)  and  in the Opinion  of 5 April  1974 
(Doc.  11/194/74)  presented  to  the  Council  and  the 
Commission.  In view  of the  fact  that  the  term  for which 
the short-term  monetary  support  was  granted  expired  on 
18 September  1974,  the  Monetary  Committee  further 
examined  the  situation  in Italy  and  adopted,  on  11 
September  1974,  the  text  of an Opinion  to be submitted 
to the  Council  and  the  Commission  (Doc.  11/496/74).  In 
this document,  the  Committee  expresses  the  view  inter 
alia that  the Community  should  continue  to contribute  to 
Italy's  financing  needs  and  that  such  action  is a matter  of 
urgency. 
2. On  the  basis  of this  Opinion,  the  Council,  having 
noted  the  decision  of the  Committee  of Governors  of the 
Central  Banks  to renew  the  short-term  monetary  support 
granted  to Italy  for three  months,  requested,  at its meeting 
on 16 September  1974,  that  the  Commission,  together 
with  the  Monetary  Committee  and  the  Committee  of 
Governors  of Central  Banks,  should  draw  up concrete 
proposals  regarding  medium-term  financial  assistance  to 
Italy. 
3. At  its meeting  on 6 and  7 November  1974,  the 
Monetary  Committee  carried  out  a thorough  examination 
of the situation  in Italy  on the  basis  of preliminary  work 
by the  ad  hoc  Group  'Italy',  which  met  on  several 
occasions  in Rome  and  Brussels  under  the  chairmanship 
of Mr  de  Strycker.  The  conclusions  reached  by  the 
Monetary  Committee  are given  in the present  report. 
II. THE  ECONOMIC  SITUATION  IN ITALY  AND 
THE  CURRENT  OUTLOOK 
4. After  expanding  strongly  last  year  and  in the  first 
half of 1974,  economic  activity  is at present  tending  to 
weaken.  Whilst  exports  are  still  expanding  very  briskly, 
the trend  of domestic  demand,  especially  for investment, 
is rather  hesitant.  In seasonally  adjusted  terms,  industrial 
production  actually  declined  in the period  July  to August; in relation  to the  corresponding  level  for  1973,  no more 
than  a slight  increase  was  recorded  (not  quite  1 % against 
18-6 and  8-7  % respectively  for  the  first  and  second 
quarters  of 1974).  The  upward  movement  of prices, 
however,  continued  at an extremely  rapid  pace,  with 
consumer  prices  in September  exceeding  by 24-6  % and 
wholesale  prices  by 43-7  % the  levels  reached  a year 
earlier. 
5. The  weakening  of domestic  demand,  together  with 
the simultaneous  expansion  of exports,  seems  to have 
resulted  in an immediate  improvement  in the  current 
balance  of payments  position.  This  latter  was  slightly  in 
deficit  in July-August  (Lit  47 000 million)  as against  a 
deficit  of Lit 2 027 000 million  in the first  quarter  and  Lit 
2 183 000 million  in the  second  quarter.  Furthermore,  for 
the first  time  in recent  years,  capital  movements  showed 
an upward  trend  despite  the fact  that  no further  loans  had 
been  floated  on the  international  financial  markets  by 
State-controlled  enterprises.  Partly  as a result  of a $ 
2 000 million  credit  (Lit  1 321 000 million)  granted  to Italy 
by the  Bundesbank,  gold  and  foreign  exchange  reserves 
held by the Italian  monetary  authorities,  which  amounted 
to Lit  2 793 000 million  in June,  rose  to Lit  4 521000 
million  in September. 
6. For  the  current  year  the  Italian  authorities  forecast 
an increase  in the  GNP  of 4 to 4-5  % by volume  and 
20 % in money  terms.  Consumer  prices  are  expected  to 
rise by 20 %. The  deficit  on account  of goods  and  services, 
which  amounted  to Lit 1 551 000 million  in 1973,  will  rise 
to Lit 5 850 000 million  in 1974  (see  paragraphs  8 and  9). 
7. In  the  event  that  the  current  economic  weakness 
continues  during  the  first  quarter  of next  year,  the 
year-to-year  growth  of the  GNP  in volume  will  not 
exceed  1-5  % in 1975  (*). A rise  of 16 % in consumer 
prices  is forecast,  and  the  total  wage  bill  is expected  to 
rise by the same  order  of magnitude.  Fixed  investment  at 
constant  prices  is expected  actually  to decline  by 1-5  % 
whilst  the  other  components  of domestic  demand  are 
likely  to expand  to only  a slight  extent.  Conversely, 
exports  of goods  and  services  may  reasonably  be expected 
to grow  rapidly  (by  8 % at constant  prices).  This  being 
the case,  the  deficit  on account  of goods  and  services  at 
constant  prices  should  decline  to an appreciable  extent 
such  that  a deficit  of about  Lit 3 400 000 million  seems  a 
plausible  estimate  for  1975  (corresponding  to about  3 % 
of GNP  in money  terms  for 1975,  against  6 % in 1974). 
(') According  to Italian  experts,  the  disappointing  trend  of growth 
results  from  constraints  imposed  by the  balance  of payments  deficit 
and the  high  level  of Italy's  indebtedness. 
No C 174/12 Official  Journal  of the  European  Communities 31.7.75 
The balance  of payments 
8. Forecasts  for  the  current  balance  of payments  in 
1975  (deficit  of Lit 3 250 000 million)  are based  essentially 
on the  assumption  of an increase  of 6 to 7 % in the 
volume  of world  trade.  This  forecast  allows  for a slight 
increase  in the share  of Italian  exports  in world  trade,  as a 
result  of the depreciation  of the lira  since  February  1973, 
In addition,  it seems  probable  that  the  weakness  of 
domestic  demand  will  induce  Italian  businessmen  to 
increase  their  efforts  to penetrate  foreign  markets. 
9. As  regards  the  trade  balance  (fob  figures)  in 1975, 
the Italian  authorities  expect  the oil deficit  to stabilize  at 
the level  reached  in 1974  (Lit  4 700 000 million  or $7 200 
million  at an exchange  rate  of 1 US $ = Lit  655)  (1). 
This  forecast  assumes  that  no change  will  occur  in the 
quantities  and  prices  of oil products  imported  in relation 
to the  average  for 1974.  On the  other  hand,  the  non-oil 
trade  balance,  still  substantially  in deficit  in 1974  (by Lit 
1 600 000 million  or $2  400 million),  should  show  a 
surplus  of some  Lit  700  000 million  next  year  ($1  100 
million).  Furthermore,  a surplus  of the  same  order  of 
magnitude  is predicted  for  the  balance  on account  of 
services  and  current  transfers. 
10. As  regards  capital  movements,  only  the  yearly 
capital  repayments  relating  to the off-setting  loans  (2) can 
be predicted  with  certainty;  they  will  amount  to $1 000 
million  in 1975.  In round  figures,  the balance  on account 
af current  transactions  and  servicing  the external  debt  will 
amount  to about  $6 000  million  next  year.  Any  net 
capital  movements  in  categories  other  than  those 
mentioned  would,  of course,  modify  this  total. 
11. As  of the  end  of October,  the  means  available  to 
finance  this  deficit  were  as follows: 
— gold  stocks  of about  $3 500 million  valued  at a price 
of $42-22  per ounce  (3). 
— foreign  exchange  reserves,  including  SDR's,  of about 
$3 400 million. 
— $4 000 million  of 'swap'  credits. 
— IMF  standby  credits  of $400  million. 
Public  finance 
12. Treasury  receipts  on account  of central  government 
budget  transactions  amounted,  in the  period  January  to 
August  1974,  to Lit 11 656 000 million  and  expenditure  to 
(') For  the  purposes  of this  report,  the  oil  deficit  is defined  as the 
difference  between  the  value  of  total  imports  and  exports  of 
petroleum  products.  For  comparison,  this  deficit  was  Lit  800  000 
million  in 1973. 
(!) These  are  loans  contracted  since  June  1972  on  international 
financial  markets  by  certain  State-controlled  enterprises.  The 
proceeds  of these  loans  were  frozen  almost  in their  entirety  in the 
Bank  of Italy. 
(s) Of this  stock  about  20 % has  been  given  as collateral  for  a loan 
of $2 000  million  from  the  Deutsche  Bundesbank. Lit 15 133 000 million;  levels  for the  previous  year  were 
therefore  exceeded  by 22-1  and  11-1  % respectively.  As a 
result  of the higher  rate  of growth  of receipts,  the budget 
deficit  was  limited  to Lit 3 477 000 million  (Lit  4 068 000 
million  in the period  January  to August  1973).  However, 
as a result  of other  treasury  transactions  (administration 
of the deposits  and  loans  bank  — Cassa  Depositi  e Prestiti 
— and  autonomous  institutions)  the  deficit  on treasury 
account  was  higher  than  in the  previous  year  (Lit 
5 921  000 million  against  Lit  4 292 000 million:  it was 
financed  almost  entirely  by monetary  means.  According  to 
estimates  by the  Italian  authorities,  the  treasury  deficit 
will amount  to around  Lit 8 400 000 million  in 1974.  This 
figure  is higher  than  that  forecast  in September  by Lit 
400 000 million,  due  to certain  expenses  — especially  in 
relation  to the  State  enterprises  ENEL  and  IRI  — being 
brought  forward  from  1975  to 1974. 
13. The  balance  on account  of current  transactions  by 
all public  authorities  has  been  in deficit  since  1971.  This 
deficit  amounted  to Lit  702  000 million  in 1971,  Lit 
2 076 000 million  in 1972  and  Lit  3 463 000 million  in 
1973.  For  the  current  year  it could  amount  to about  Lit 
3 000 000 million.  The  deficit  for the  State  (Lit  534  000 
million  in 1971,  Lit  951  000 million  in 1972  and  Lit 
2 486 000 million  in 1973)  will  decline  to about  Lit 
1 650 000 million  in 1974.  This  decline  is mainly  due  to 
direct  taxation  reforms  and  to the series  of fiscal  measures 
introduced  in July. 
The expansion  of credit 
14. For  the period  1 April  1974  to 31 March  1975,  the 
Italian  authorities  have  committed  themselves  to confine 
the overall  expansion  of credits  to the  economy  to the 
total  of Lit 22 400 000 million  fixed  last  March  during  the 
negotiations  of the stand-by  credit  granted  by the IMF. 
The overall  expansion  of credit  includes  the financing  of 
the treasury  deficit  (excluding  assistance  to financial 
intermediaries),  credits  granted  by  Italian  investment 
banks  and  special  financial  institutions  (4) together  with 
issues  of bonds  by enterprises  and  public  authorities  other 
than  the  treasury.  Increases  in  the  capital  of 
State-controlled  enterprises  or issues  of shares  are  not 
included  in this  definition. 
15. The  effective  increase  in credit  during  the first  five 
months  of the  period  concerned  (April  to August  1974) 
was, on the whole,  maintained  within  the limits  laid  down 
in the annual  target  (for  the period  April  1974  to March 
1975)  i.e.  Lit  22 400 000 million.  The  same  applies  to 
treasury  financing  which,  in  accordance  with 
commitments  entered  into  with  the  IMF,  was  not  to 
exceed  Lit 8 600 000 million  for  this  period  taken  as a 
whole.  Credits  granted  to  other  public  authorities 
(including  the  social  security  organizations)  and  to 
enterprises  in the period  April  to August  1974  followed  a 
trend  corresponding  more  or less  to the  difference  (Lit 
(*) These  institutions  grant  both  medium-  and  long-term  credit;  they 
obtain  finance  by issuing  bonds. 
31. 7. 75 Official  Journal  of the  European  Communities No C 174/13 
13 800 000 million)  between  the total  volume  of credit  and 
total  treasury  financing.  This  latter  figure  represents  an 
increase  of about  17 %, as against  20 % in 1973. 
16. The  overall  expansion  of credit,  (see  Annex  1 for 
detailed  figures),  will  not  exceed  Lit 24 700 000 million  in 
the period  1 April  1975  to 31 March  1976  (*). Taking  into 
account  the reduction  in liquidity  which  would  arise  from 
such  a balance  of payments  deficit  as forecast,  this  ceiling 
incorporates  an increase  in the monetary  base  of the order 
of 16-1  % over  1974,  whilst  the  rate  of increase  1974  on 
1973  should  be 16-3  %. 
This  expansion  of credit  will  allow  for the following  to be 
covered: 
— Treasury  borrowing  requirements  of Lit  8 000 000 
million  for 1975. 
— The  borrowing  requirements  of  other  public 
authorities  and  enterprises  of Lit  16 700 000 million. 
This  borrowing,  taking  account  of internal  financial 
resources  of enterprises  and  the  other  sources  of 
finance  described  in Annex  1 should  permit  investment 
of about  Lit 25 000 000 million  to be undertaken.  It 
should  be  noted  that  these  forecasts  include  a 
particularly  low  growth  rate  in the  financial  assets  of 
enterprises,  being  only  7 to 8 % between  1973  and 
1975. 20. The  Committee  considers  that  the rate  of growth  of 
public  expenditure  should  be limited  to 16 % in 1975. 
This  rate,  which  corresponds  to that  agreed  by the Italian 
Government,  implies  a zero  increase  in real  terms.  The 
budget  forecasts  adopted  by Parliament  (appropriations 
basis)  exceeded  this  figure  and  particular  attention  must 
therefore  be paid  to their  implementation  in terms  of 
actual  receipts  and  expenditure.  To this  end,  cuts  may  be 
necessary  in non-productive  current  expenditure  and  in 
non-priority  sectors.  Furthermore,  the Government  should 
act jointly  with  the  other  public  authorities  to limit  the 
latters'  expenditure  in 1975  by an amount  corresponding 
to that  indicated  for  central-government  expenditure. 
However,  in the  opinion  of the  Monetary  Committee,  a 
reduction  in the budget  deficit  can  only  be obtained  in the 
short  term  by a further  increase  in receipts. 
21. As  regards  credit  policy,  the  Monetary  Committee 
reaffirms  its opinion  of 11 September  1974,  to the  effect 
that the increase  in the  total  volume  of credit  granted  to 
public  authorities  and  enterprises  should  not  exceed  Lit 
22 400 000 million  during  the  12 months  to 31 March 
1975.  Between  1 April  1975  and  31 March  1976,  the 
increase  should  not  exceed  Lit  24  700 000 million. 
Treasury  financing  should  be conducted  in such  a way 
that the resulting  monetary  creation  is compatible  with  an 
expansion  of credit  which  is sound  enough  to ensure  that 
financing  is non-inflationary  in the medium  term. 
III. GUIDELINES  FOR  ECONOMIC  POLICY 
17. The  Monetary  Committee  believes  that  Italy's 
balance  of payments  problems  call  for  action  in depth 
with  a view  to restructuring  the  Italian  economy.  It 
considers  that  immediate  measures  should  be taken  to 
reduce  the  1975  deficit  substantially,  whilst  longer-term 
measures  should  quickly  be implemented  with  a view  to 
eliminating  the  external  disequilibrium  completely  and 
repaying  any  debts  contracted. 
18. The  Italian  Government  proposes  to adopt  an 
economic  policy  designed  to achieve  a surplus  of at least 
$1 000 million  on account  of the  non-oil  items  of the 
trade  balance  in 1975. 
Immediate  measures 
19. As  regards  public  finance,  the Italian  Government 
should  make  a special  effort  to achieve  an improvement  in 
the situation  during  the coming  years.  In this  respect,  the 
deficit  on treasury  transactions,  which  will  amount  to 
about  Lit  8 400 000  million  in 1974,  will  have  to be 
reduced  to Lit 8 000 000 million  in 1975  (2). 
(') Taking  account  of the  forecast  rate  of inflation,  the  increase  in 
total  credit  outstanding  (+ 17-8  %),  will  be practically  zero,  in real 
terms,  on one  year  before. 
(2) These  figures  do  not  include  finance  granted  to financial  inter-
mediaries  (amounting  to  Lit  100  000  million  in  1974  and  Lit 
400 000  million  in 1975),  or the  operations  for  consolidating  certain 
local  authority  debts  (Lit  144  000  million  for  the  eight  months  to 
August  1974). 22. Before  the  end  of 1975,  new  economic  policy 
guidelines  will  be fixed  for 1976. 
Medium-term  measures 
23. One  of the  fundamental  medium-term  problems  is 
to achieve  an improvement  in the state  of public  finances. 
The total  budget  deficit  is of the  order  of 5 to 6 % of 
GNP.  In  particular,  the  margin  between  current 
expenditure  and  current  receipts  is a little  over  3 % of 
GNP.  The  Italian  authorities  should  undertake  measures, 
some  of them  immediately,  with  a view  to its complete 
elimination  within  a period  of five  years.  Furthermore, 
during  this  period,  monetary  financing  of treasury 
borrowing  requirements  should  be  progressively  and 
substantially  reduced. 
24. On  the  expenditure  side,  it would  be desirable  if 
the authorities  could  reduce  the  rate  of  growth, 
particularly  on account  of the  semi-public  institutions,  in 
accordance  with  the  Draft  Law  No 1718  currently  before 
Parliament. 
25. In  transferring  tasks  from  the central  administration 
to the  regions,  care  should  be taken  that  this  operation 
does  not  involve  duplication  of work  resulting  in an 
unjustifiable  increase  in expenditure. 
No C 174/14 Official  Journal  of the  European  Communities 31.7.  75 
26. As  regards  receipts,  the fiscal  and  parafiscal  share  in 
total  national  income  in Italy  is significantly  below  the 
Community  average  due  to the relatively  low  receipts  from 
direct  taxes.  Measures  should  be introduced  immediately 
to improve  the  relative  share  of direct  taxation:  in this 
respect,  it is a matter  of vital  necessity  that  the  struggle 
against  tax evasion  should  be intensified. 
27. The  efforts  already  being  made  to strengthen  the 
infrastructure  of the  Italian  economy  — especially  as 
regards  administrative  organization  —  should  be 
intensified.  In particular,  administrative  procedures,  which 
at present  seem  highly  complex  besides  differing  greatly 
from  one  department  to another,  should  be simplified; 
measures  to facilitate  the mobility  of officials  between  the 
various  departments  within  the  administration  should  be 
introduced,  whilst  at the same  time  certain  tasks  could  be 
decentralized  as between  the  central  government  and  the 
regional  authorities.  This  should  make  possible  a stricter 
control  of the  number  of personnel  employed  in public 
service. 
28. To  improve  the balance  of payments  position  in the 
medium-term,  the  Italian  authorities  should  strive  to 
reduce  consumption  of petroleum  products  in domestic 
use. On  the  other  hand,  in accordance  with  Community 
provisions,  measures  designed  to promote  the  growth  of 
agricultural  production  should  be introduced.  The  Italian 
authorities  should  ensure  the  earliest  implementation  of 
the Council  Directives  concerning  the  modernization  of 
the structure  of agricultural  production  (OJ  No L 96 of 23 
April  1972). 
29. It  is important  that  the  Italian  authorities  should 
take meaures  to adapt  the structures  of consumption  and 
production  to the  new  situation  arising  from  changes  in 
the international  terms  of trade.  In order  to achieve  the 
required  changes  in industrial  production,  it will  be 
particularly  necessary  to modernize  the  employment 
services  and  accelerate  the creation  of vocational  training 
programmes  for  workers.  Those  Community  instruments 
already  available  (especially  the  Social  Fund)  could 
support  the  efforts  which  the  Italian  authorities  will 
undertake  in this  field. 
30. Measures  to encourage  saving  and  influence  its 
pattern  are  also  needed.  In this  context,  for  example, 
consideration  might  be given  to the  introduction  of a 
system  of savings  premiums  to assist  house  purchase  and 
the creatibn  of Italian  investment  funds. 
31. Before  30 June  1975  the  Italian  Government  will 
present  detailed  drafts  of measures  for  implementing  the 
actions  described  in paragraphs  23 to 30. These  drafts  will 
be incorporated  into  an overall  view  of the  situation  at 
the Community  level. 
IV. THE  FINANCIAL  CONDITIONS  FOR 
MEDIUM-TERM  ASSISTANCE 
32. Article  3 of the Council  Decision  of 22 March  1971 
lays down  that  medium-term  financial  assistance  shall  be 
granted  to a Member  State  in difficulties  or seriously threatened  with  difficulties  as regards  their  balance  of 
payments.  The  Committee  believes  that  Italy  is in the 
situation  envisaged  by this  Article  and  thinks  that  the 
amount  of the assistance  should  be the same  as that  of the 
short-term  monetary  support,  which  was  provided  in 
dollars,  i.e.  1562  million  units  of acount  ($1  884-9  mil-
lion). 
33. The  medium-term  financial  assistance  could  be 
implemented  as follows: 
— countries  with  existing  or foreseeable  difficulties  as 
regards  their  balance  of payments  which  decline  to 
participate  totally  or in part  in the  operation  in 
accordance  with  the  terms  of Article  4 of the  Council 
Decision  of 22 March  1971,  would  continue  to provide 
assistance  to Italy,  to the  extent  of their  quota  (or  a 
part of it) in the  operation,  within  the  framework  of 
the short-term  monetary  support  with  a tacit 
undertaking  to renew  this  assistance  until  the  date  of 
expiry  of the medium-term  financial  operation; 
— the amount  to be financed  in the  medium-term,  after 
deducting  the  assistance  being  provided  under 
short-term  arrangements,  would  be divided  between 
the . participating  countries  in proportion  to their 
respective  quotas; 
— in the  event  that  the  short-term  monetary  support 
could  not  be renewed,  in whole  or in part,  right  up to 
the date  of expiry  of the  medium-term  financial 
assistance,  a Council  Decision  would  have  to 
determine  the  methods  of arranging  the  necessary 
financing. 
34. Article  3 (2) of the  Council  Decision  of 22 March 
1971  lays  down  that  credits  can  be granted  for two  to five 
years.  However,  a declaration  written  into  the minutes  of 
the Council  meeting  specified  that  'in order  to ensure  at 
the beginning  a higher  degree  of liquidity,  it would  be 
advisable  to limit  credits  to a period  of two  to three  years 
during  an initial  period  of three  years  maximum  following 
the effective  employment  of the  system'.  In view  of the 
fact that  the  payments  falling  due  in relation  to the 
servicing  of external  debts  already  contracted  by Italy  will 
be quite  heavy  in 1976  and  1977,  the Committee  considers 
that it would  be appropriate  to envisage  repayment  in 
instalments  during  1978.  In this  way,  the effective  term  of 
the assistance  would  be approximately  three-and-a-half 
years. 
35. As  regards  the  currency  in which  the  financial 
assistance  is expressed,  the Council  Decision  of 22 March 
1971  provides  that  claims  and  obligations  shall  be 
expressed  in terms  of units  of account  defined  in weight 
of gold.  The  problem  is to choose  appropriate  methods  of 
converting  the  units  of account  of the  assistance  into 
currencies  of payment  so that  the  claims  of the  creditors 
and the  obligations  of the  debtor  can  be defined.  To 
resolve  this  problem  the  Monetary  Committee  considered 
two possible  alternatives: 
(a) Under  the  first  alternative,  the medium-term  financial 
assistance  would  be provided  by all the  participating 
countries  in US  dollars  and  repaid  by the  debtor 
country  in the  same  currency.  The  unit  of account 
would  be converted  into  dollars  on the  basis  of the 
central  rate  of the  dollar  prevailing  at the  time  the 
31.7.  75 Official  Journal  of the  European  Communities  No  C 174/15 
assistance  is granted;  at present  one unit  of account  = 
$1-20635. 
(b) Under  the  second  alternative,  the  medium-term 
financial  assistance  would  be provided  by all the 
participating  countries  in their  respective  national 
currencies  and  repaid  by the debtor  country  in the 
same  currency.  The  unit  of account  would  be 
converted  into  the different  national  currencies  on the 
basis  of the  central  rate  or market  rate  of these 
currencies  fixed  for the entire  term  at the time  the 
assistance  is granted. 
36. A  declaration  in the minutes  specifies  that  the rate 
of interest  should  be half-way  between  those  current  on 
the open  market  and  those  applied  by the IMF.  Since  the 
IMF rate  for financial  assistance  granted  for similar  terms 
is 4-875,  a single  rate  could  be determined  for the whole 
term of the assistance  on the basis  of this  rate  and  on 
current  rates  on the Euro-dollar  market  for a comparable 
term,  if the assistance  is provided  in dollars.  Should  it be 
provided  in national  currencies,  it would  be necessary  to 
refer  to current  interest  rates  for similar  terms  on the 
relevant  Euro-currency  markets  or on national  markets.  A 
calculation  of the  rates  applicable  to various  currencies 
are given  in Annex  2. 
V. SURVEILLANCE 
37. The  fulfilment  of the economic  policy  commitments 
entered  into  by Italy  and  the periodic  examination  of the 
Annex  1 
Overall  credit  expansion  in the economy 
(in Lit 1 000 million) 
1974 1975 
A. Public  institutions  (other  than  those  included  under  B) 
and enterprises,  including  the housing  sector: 
1. Gross  investment 23 550 25 000 
2. Capital  transfers  received  by the treasury — 2 700 — 2 900 
3. Variations  in financial  assets .1550 2 300 
4. Borrowing  requirements  (1 + 2 + 3) 22 400 24 400 
5. Less: 
— issue  of securities 700 700 
— credits  granted  by the treasury  as financial 
intermediary 1500 1400 
— credits  from  abroad 600 200 
— gross  saving 5 600 5 400 
6. Balance  to be financed  (a) 14 000 16 700 
B. Treasury,  deposits  and loans  bank,  autonomous  institutions 8 400 8 000 
C. Overall  credit  expansion  (A 6 + B) 22 400 24 700 economic  situation  of this country  should  be covered  by a 
regular  supervisory  procedure  carried  out  jointly  by the 
Commission  and  the Monetary  Committee.  In particular, 
respect  for  the  quantitative  economic  policy  objectives 
fixed  by the  Council  when  the  medium-term  financial 
assistance  is granted  should  be subjlect  to surveillance.  To 
this end,  the Italian  authorities  should  communicate  to the 
Commission  on  fixed  dates  (for  example,  monthly), 
certain  statistical  information  concerning  the  economic, 
financial  and  monetary  situation.  In addition,  the 
Monetary  Committee  should  carry  out  a thorough 
examination  of the  progress  of the  situation  in Italy  at 
regular  intervals  (for  example,  every  six months). 
38. To  prevent  a proliferation  of  studies  and 
recommendations,  care  should  be taken  to ensure  that  this 
surveillance  is carried  out  within  the  framework  of 
existing  Community  procedures.  To the  same  end,  it 
would  be advisable  to establish  the  necessary  contacts 
with the appropriate  departments  of the IMF. 
39. If,  in the course  of a study  of this  kind,  or in the 
light of information  provided  by the Italian  authorities,  it 
should  appear  that  economic  trends  are liable  to diverge 
from  the objectives  fixed,  the Commission  will  so inform 
the competent  Community  authorities.  The  same 
procedure  would  apply  in the event  that  any  revision  of 
. the objectives  was  felt to be necessary. 
(a) By the  investment  banks  and  special  credit  institutions  as well  as by the  issue  of bonds. 
No C 174/16  Official  Journal  of the  European  Communities  31.  7. 75 
Annex  2 
Current  interest  rates  in EEC  member  countries  (except  Italy),  on the Euro-markets  and  at the 
IMF for terms  of three  to four  years 
(mid-October  1974) 
I. Rates  on national  markets  (J) 
— Germany 
— yield  on federal  treasury  bills  with  three  to four  years  to 
maturity  10-04  to 10-33 
— yield  on medium-term  federal  treasury  bonds  10-40  to 10-60 
— Belgium 
— five  year  SNCI  and  CCB  treasury  bills  9-75 
— three  year  SNCI  and  CCB  treasury  bills  9-25 
— Denmark 
— yield  on mortgage  bonds  and industrial  financing  institute  bonds 
(four  years  to maturity)  13-50  to 14-50 
— France 
— CNCA  three  year  bonds  8-60 
—- five  year  treasury  bills  9-02 
— Ireland 
— yield  on treasury  bonds  with  three  years  to run 12-10  (end  June) 
— Luxembourg 
— three  year  bearer  savings  certificates  6-00 
— Netherlands 
— yield  on state  bonds  with  four  years  to run 9-16 
— United  Kingdom 
— treasury  bills  with  four  years  to run 9-62 
II. Euro-market  rates 
Euro-dollar 
four year  Euro-pound 10-50 
22-50 
III. IMF  rates 
'oil facility'  credits  (three  to seven  year  maturities) 
— 'extended  fund  facility'  credits  (four  to eight  year  maturities) 
— interest  rate  on four  year  drawings  (including  the Commission) 7% 
Progressive  rate 
according 
to maturity 
(4 to 6-5 %) 
4-875  % 
(') Rates  on national  markets  are  not  strictly  comparable,  and  are  often  not  very  representative  due  to the  low 
volume  of operations  at the  relevant  maturities.  Further,  it should  not  be  forgotten  that  these  rates  are 
the ones  most  often  directly  or indirectly  controlled. 
31. 7. 75 Official  Journal  of the European  Communities No C 174/17 
ANNEX  II 
OPINION  TO  THE  COUNCIL  AND  THE  COMMISSION 
I. COMMUNITY  LOANS 
At its session  of 16 September  1974,  the  Council  in 
dealing  with  the question  of Community  loans,  considered 
the report  from  the  Chairman  of  the  Monetary 
Committee  and  from  the Committee  of Governors  and 
instructed  the Community  authorities  to complete  quickly 
the current  technical  work  within  the  guidelines  laid 
down  in the report  submitted  by the  Chairman  of the 
Monetary  Committee.  The  Chairman  of the Council,  Mr 
Fourcade,  also  asked  member  governments  to indicate 
their  official  reactions  to the report  of the Chairman  of 
the Monetary  Committee. 
At its meeting  of 17 September  1974,  the  Monetary 
Committee  instructed  the joint  ad hoc  group  to continue 
such work  as was  within  its competence  and  to secure  the 
government  reactions  which  the Chairman  of the Council 
had requested.  The  joint  ad hoc  group  of the Monetary 
Committee  and  the Committee  of Governors  met  on 26 
September  1974  and  7 October  1974  and  considered  all 
the official  reactions  which  had.  been  received.  The 
Monetary  Committee,  at its meeting  of 10 and 11 October 
1974,  drew  up the following  opinion  on the basis  of the 
government  reactions  and  the report  received  from  the ad 
hoc group. 
II. GENERAL  CHARACTERISTICS  OF THE 
OPERATION 
Bearing  in mind  the need  to recycle  the surplus  funds  of 
oil-producing  countries,  the Monetary  Committee  agreed 
that the general  characteristics  of the operation  should  be 
the following: 
(a) That  the Council  would  prefer  not to engage  in one 
massive  loan  operation,  but  rather  in one  or more 
loans  of moderate  size. 
(b) The  loan  or loans  would  not take  the form  of public 
bond  issues  for general  subscription,  but  would  be 
placed  with  owners  of large  scale  funds  — principally 
in oil-producing  countries  —'  and  possibly  in part 
with financial  intermediaries.  In the present  situation, 
loans  of seven  to ten years  maturity  would  seem  to be 
the most  appropriate  choice.  It was  felt  that  the 
technique  of roll-over  credits  should  be avoided. 
However,  it was  noted  that  the maturities  and  other 
characteristics  of loans  will  depend  largely  on 
prevailing  market  conditions  at the time  of issue. 
(c) The  decision  to issue  an external  loan  would  be taken 
at the  initiative  of any  Member  State  in need  of 
assistance  to meet  a balance  of payments  deficit 
caused  chiefly  by the rise  in oil prices.  The  greatest 
discretion  should  be maintained  with  regard  to the 
entire  negotiating  procedure  in respect  of each 
operation  in order  to avoid  disturbances  in financial 
markets. (d) The  Council  shall  maintain  control  over  the timing 
and conditions  of each  loan  operation. 
III. CHOICE  OF BORROWER 
The various  alternatives  with  regard  to the  choice  of 
borrower  were  again  considered.  A general  consensus  was 
established  on the following: 
1. The  Community  should  be the borrower. 
2. The  Council  shall  authorize  each  specific  borrowing 
transaction.  It would  also  approve  each  on-lending 
operation  to the interested  Member  State  or States  and 
determine  the economic  conditions  which  would  be an 
integral  part  of such  a loan  agreement. 
3. (a) The  negotiations  on the  terms  of any  borrowing 
operation  with  the lenders  will  be conducted  under 
the auspices  of the  Commission,  who  will 
recommend  the  final  conditions  to the  Council, 
subject  to the advice  of the Monetary  Committee 
and the  Committee  of Governors.  Whilst  they 
might  need  to be preceded  by political  contacts 
undertaken  by the Commission,  these  negotiations 
might,  in practice,  be conducted  at the  technical 
level  jointly  by the staff  of the Commission  and  of 
the EIB,  who  would  report  to a very  limited  ad hoc 
working  party.  This  working  party  would  be 
composed  of competent  people  nominated  by the 
Member  States,  the Commission  and  the EIB,  and 
would  be responsible  for preparing  the operation 
for approval  by the Council  of Ministers. 
(b) The  Commission  shall  negotiate  with  the borrowing 
Member  States  and  recommend  the  economic 
conditions  on which  a proposed  loan  to a Member 
State  is to be granted.  Such  conditions  shall  include 
the entire  monitoring  * system  to be established 
during  the time-span  of the loan.  Subject  to advice 
from  the Monetary  Committee  and  the Commitee 
of Governors,  a Council  Decision  will  then  again 
be necessary. 
The Monetary  Committee  proposes  to look  into  the 
matter  of appointing  a managing  agent  in the near  future. 
IV. REPAYMENT  OF LOANS 
1. It  is considered  that  only  in extreme  cases  would  a 
situation  arise  in which  a borrowing  Member  State  would 
No C 174/18 Official  Journal  of the European  Communities 31. 7. 75 
find it was,  impossible  to meet  a loan  commitment  in 
foreign  exchange.  This  applies  all the more  because  such  a 
situation  could  only  arise  after  three  or four  years 
following  the  granting  of a loan,  during  which  time 
considerable  monitoring  of the situation  would  have  taken 
place. (e) It should  in any  case  be the general  rule  that  both  in 
the case  of original  inability  to pay  by the borrower 
as well  as of temporary  exemptions  from  financing  by 
other  Member  States  all  possible  external  and 
Community  financing  arrangements  should  first  be 
exhausted. 
2. Upon  the  Council  agreeing  to extend  a loan  to a 
Member  State  through  Community  procedures,  each 
non-borrowing  Member  State  would  incur  a contingent 
liability  in respect  of such  a loan.  Such  contingent  liability 
would  be represented  by the obligation  to provide  foreign 
exchange  to the  Community  to meet  one  or more 
maturities  or interest  payments  should  the  borrowing 
Member  State  be  unable  temporarily  to meet  its 
obligations  in foreign  exchange. 
3. It  was  considered  that  a system  be provided  which 
would  fulfil  two criteria: 
(a) ensure,  that  at any  time,  the servicing  of the capital 
and the interest  payments  of the external  debt  shall  be 
carried  out by the Community; 
(b) a ceiling  in respect  of each  operation  should  be set on 
the refinancing  contingent  liability  of each  Member 
State. 
4. The  system  would  operate  in the following  way.  In 
the event  of inability  by a borrowing  Member  State  to 
meet  all or some  of its due foreign  exchange  payments: 
(a) Temporary  foreign  exchange  financing  would  be 
provided  to the  Community  by each  of the  other 
Member  States  in the proportion  which  its quota  in 
the existing  short-term  monetary  support  system  bears 
to the total  quotas  of those  States  (*); 
(b) If one  or more  of these  States  should  be unable  (in 
whole  or in part)  to take  up their  share  of refinancing 
owing  to balance  of payments  difficulties  and/or  a 
serious  deterioration  in their  foreign  exchange  reserve 
positions  then,  subject  to  consultation  and 
Community  agreement,  the  remaining  States  would 
provide  temporary  facilities  to the  Community  to 
cover  the  shortfall,  again  in proportion  to their 
respective  quotas,  but subject  to the over-riding  limit 
that no member  could  be called  upon  to contribute 
more  than  its ceiling. 
(c) Should  any  balance  still  remain  to be financed  after 
stage  (b) above,  Member  States  experiencing  balance 
of payments  difficulties  and/or  a deterioration  in their 
reserve  positions  would  still  have  to cover  this  balance 
in proportion  to their  short-term  monetary  support 
system  quotas  (see  5 (f) below). 
(d) The  ceiling  for  each  Member  State's  financing 
contingent  liability  would  be twice  the proportion  of 
its quota  in the short-term  monetary  support  system, 
expressed  in percentages. 
(1) Proportions  of quotas  of Member  Countries  in the  short-term 
monetary  support  system: 
Germany  22-02  %, Belgium/Luxembourg  7-34  %, 
United  Kingdom  22-02  %, Netherlands  7-34  %, 
France  22-02  %, Denmark  3-30  %, 
Italy  14-68  %, Ireland  1-28  %. 5. The  monitoring  system  should  be geared  to the 
pattern  of each  operation.  It is, however,  understood  that 
the final  rule  shall  be that  the monitoring  system  during 
the whole  period  of the loan  will  be concerned  entirely 
with verifying  the respect  by the borrowing  Member  State 
of the economic  policy  conditions  which  are an integral 
part of the loan  agreement.  The  following  system  could 
be envisaged: 
i 
(a) During  the grace  period  of a loan  from  the Community 
to a Member  State  when  only  interest  charges  are to 
be met,  six-monthly  monitoring  of the development  of 
the principal  economic  indicators,  balance  of 
payments  trends,  and  movements  in the  reserve 
positions  of the debtor  State  should  be carried  out. 
(b) As the first  capital  repayment  then  approaches,  a more 
intensive  monitoring  system  should  be operated  to 
ensure  that  no problems  arise  with  regard  to payment 
on the due  date  or dates. 
(c) Should  it appear,  however,  that  difficulties  are likely 
to arise,  a special  examination  of the debtor  Member 
State's  position  shall  take  place  at an appropriate  time 
before  each  payment  date. 
(d) All monitoring  under  (a),  (b) and  (c) above  will  be 
carried  out under  the authority  of the Commission  in 
collaboration  with  the Monetary  Committee  and  the 
Committee  of Governors. 
(e) During  the  special  examination  referred  to in (c) 
above  the debtor  Member  State  _will  be required  to 
demonstrate  its inability  to meet  a payment  (in whole 
or in part).  If the special  examination  indicates  that 
such inability  exists,  the Commission  proposes  to the 
Council  to decide  affirmatively  upon  a refinancing 
arrangement  as described  in 3 above.  If there  are 
serious  doubts  that  such  inability  exists,  the debtor 
Member  State  may  apply  to the  Council,  who  will 
decide  after  the Commission  has delivered  an Opinion 
and the Monetary  Committee  and  the Committee  of 
Governors  have  been  consulted.  The  decision  of the 
Council  will  be taken  either  on a unanimous  vote  or 
qualified  majority  following  its own  decision. 
(f) Any  Member  State  wishing  to be  temporarily 
exempted  (in whole  or in part)  from  its refinancing 
commitments  will  have  to state  its position  in the 
course  of the same  examination  as referred  to in (c) 
above,  and  the  same  procedure  shall  apply  to its 
request  as is applied  to the  original  debtor  State's 
request.  The  criteria  by which  the Community  bodies 
will assess  the case  of the Member  State  wishing  to be 
temporarily  exempted,  in whole  or in part,  may  be 
less stringent  than  the criteria  to be applied  to the 
original  debtor  State,  taking  into  account,  however, 
the extent  to which  other  Member  States'  ceilings  are 
being  approached. 
31. 7. 75 Official  Journal  of the  European  Communities No C 174/19 
(g) Should  the  Council  agree  to a refinancing  procedure 
as described  in (e) and  (f) above,  then  it shall  be 
considered  that  an emergency  situation  has  arisen  and 
all future  procedures  of monitoring  of the  original 
debtor  State  shall  be substantially  reinforced  until  all 
normal  financial  relationships  have  been 
re-established. 
(h) It shall  be  the  general  rule  that  the  earliest 
reimbursement  or reinstatement  should  take  place  as 
soon  as the  relevant  Member  State's  balance  of 
payments  and  foreign  exchange  reserve  positions  have 
improved  sufficiently. 2. Considerable  discussion  has  taken  place  on whether 
formal  recommendations  should  be made  on the currency 
denomination  of a first  loan  operation.  It was,  however, 
felt that  this  depended  on exogenous  factors  and  was  a 
subject  best  left  to the negotiating  body. 
At the  same  time  it should  be pointed  out  that  the 
denomination  of the  first  loan  does  not  imply  that 
subsequent  loans  shall  be denominated  in the  same  way 
and in this  context  the desirability  of eventually  reaching 
a Community  denomination  should  be kept  in mind. 
V. FINAL  CONSIDERATIONS 
1. The  Monetary  Committee  does  not  consider  itself 
competent  to pronounce  on the  question  of whether  the 
Community  can  undertake  such  a borrowing  operation  as 
described  above  on the basis  of Article  235  of the Treaty 
of Rome.  Neither  does  it consider  itself  qualified  to answer 
all questions  relating  to Community  budgetary  and 
accountancy  procedures. 3. The  Monetary  Committee  believes  that  borrowing 
operations  by the  Community,  provided  they  are not  of 
excessive  size,  should  be realizable.  It feels  that  apart  from 
the engagement  of the  Community,  what  would  be 
required  would  be public  statements  to the effect  that  the 
Council  had  reached  such  a decision  unanimously  and  that 
arrangements  had  been  made  internally  within  the 
Community  to take  care  of all payment  contingencies. 
ANNEX  111 
STATEMENT  OF  THE  CHAIRMAN  OF  THE  MONETARY  COMMITTEE  TO  THE 
COMMITTEE  OF  TWENTY 
I have  been  asked  to report  on an informal  discussion  — 
and I emphasize  the  word  informal  discussion  — which 
the Ministers  of Finance  of the EEC  have  held  on April  22 
and 23 at Zeist  on the subject  of gold. 
Before  I report  to you  on the outcome  of the discussion  I 
would  like  to make  clear  that  it has  resulted  neither  in a 
formal  decision  on the part  of the EEC  countries  nor even 
in a firm  proposal  to be made  in a wider  international 
context.  What  came  out  of Zeist  was  a consensus  on 
certain  substantive  propositions  that  are  to be further 
explored  before  they  are submitted  to one  of the  coming 
meetings  of the  Council  of Ministers  of the EEC.  If at a 
later  stage  the  Council  reaches  agreement  on a certain 
position,  the further  procedure  could  be that  the European 
Community  formulates  a formal  proposal  on how  to deal 
with  the problem  of gold  in the period  before  the reform 
of the international  monetary  system. 
In Zeist,  Ministers  have  agreed  on  two  general 
propositions.  First,  they  have  re-asserted  that  the  SDR 
should  become  the  principal  reserve  asset  in the  future 
system,  and  that  arrangements  for  gold  in the  interim 
period  should  not  be inconsistent  with  that  goal.  Second, 
they have  agreed  that  such  interim  arrangements  should 
enable  monetary  authorities  to effectively  utilize  the 
monetary  gold  stocks  as instruments  of international 
settlement. There  was  a consensus  among  Ministers  that  an increase 
of the  official  gold  price,  although  it might  serve  the 
second  objective,  would  be inconsistent  with  the  first.  In 
order  to mobilize  monetary  gold  as an international 
reserve  asset,  they  have  agreed  that: 
1. Monetary  authorities  should  be permitted  to buy  and 
to sell  gold  among  themsfelves  at a market  related 
price  and  to sell  and  buy  on the  free  market.  The 
monetary  authorities  would  have  complete  freedom  to 
buy or to sell  gold,  and  would  have  no obligation 
whatever  to enter  into  any  particular  transaction. 
2. Certain  delegations  are  of the  opinion  that  gold 
transactions  with  the  free  market  should  not,  over  a 
certain  period  of time,  lead  to a net  increase  of the 
combined  official  gold  stocks. 
3. In order  to apply  these  principles,  various  practical 
solutions  can  be envisaged.  Two  were  mentioned  in 
particular.  One  is that  monetary  authorities  periodically 
fix a minimum  and  a maximum  price  beyond  which 
they would  not  respectively  sell  or buy  on the market. 
The other  consists  in creating  a buffer  stock  to be 
managed  by an agent  who  would  be charged  by the 
monetary  authorities  to sell  or buy  on the market  such 
as to ensure  orderly  conditions  on the free  market  for 
gold. 
No C 174/20 Official  Journal  of the  European  Communities 31. 7. 75 
4. These  arrangements  would  be adopted  provisionally 
and would  be reviewed  in the  light  of experience 
attained  after,  say,  a year. 
In concluding,  Mr  Chairman,  I would  like  to emphasize 
once  more  that  what  I have  just  said  is not a proposal  by the EEC,  but  a report  on  an  interim-stage  in the 
discussions.  Ministers  have  permitted  us to make  this 
report  in order  to inform  you  as early  as possible  of the 
direction  in which  a consensus  among  the  EEC  countries 
is emerging.  They  expect  deputies  to interpret  the  status 
of the information  in the light  of what  I have  just  said. 
ANNEX  IV 
PRELIMINARY  DRAFT  REPORT  OF  THE  WORKING  PARTY  ON  SECURITIES 
MARKETS  n 
General  survey 
During  the  greatest  part  of the  year  all capital  markets, 
national  and  international,  were  affected  by important 
upheavals  in international  capital  movements  as a result 
of the  oil price  increase:  rates  of inflation  which  reached 
levels  never  before  recorded  in peacetime,  huge  balance  of 
payments  surpluses  accruing  to  the  oil-producing 
countries,  and  equivalent  deficits  incurred  by  the 
oil-consuming  countries.  The  immediate  consequences  on 
the capital  markets  was  a rapid  and  continuous  rise  in 
interest  rates,  particularly  short-term  rates,  which  often 
exceeded  those  on long-term  bonds,  over  the  first  10 
months  of the year. 
In these  circumstances,  there  was  a shortage  of capital 
flowing  to the  market  as lenders,  in the face  of inflation, 
preferred  to stay  liquid,  accompanied  by  an extreme 
reluctance  on the  part  of borrowers  to issue  long-term 
loans  at high  rates  of interest. 
The 'abnormal'  structure  of interest-rates,  with  short-term 
rates  higher  than  long-term  rates  for long  periods  (the  rate 
on six-month  dollars  at one  point  rising  to 14  %) 
produced  a market  preference  on the  part  of lenders  for 
short-term  investments.  This  is demonstrated  by  the 
extremely  low  volume  of medium-  and  long-term  bond 
issues  in most  countries,  and  the similarly  large  volume  of 
Euro-currency  bank  loans  (roll-over  credits)  accorded. 
A further  device  which  was  resorted  to by  financial 
operators  in an attempt  to revive  the markets  was  the use 
of floating  rate  issues  even  for  bond  loans,  based  on a 
previously  chosen  six-month  average  (usually  the London 
inter-bank  rate)  with  a premium  ('spread')  which  varied 
according  to the quality  of the borrower  and  the length  of 
the loan.  However,  even  with  the additional  safeguard  of 
a guaranteed  minimum  rate,  the  improvement  in the 
markets  was  not  significant. 
Only  towards  the  end  of the  fourth  quarter  were  there 
signs  of a 'normalization'  on the markets,  with  a recovery 
in the volume  of bond  issues  and  a reduction  in the level 
of interest  rates. The trend  in interest  rates  was  not  identical  in all 
Member  States,  some  countries  reaching  a peak  earlier 
than  others,  with  an ensuing  decline  towards  the  end  of 
the year.  In addition,  the  extent  of the  increase  differed 
considerably  between  countries,  such  that  the interest  rate 
gap became  even  wider.  In general,  those  countries  with 
the lowest  increases  also  peaked  earlier,  Germany  10-9  % 
in October  and  France  12 % in June.  Countries  with  the 
highest  increases  either  have  not  yet  reached  a peak  or 
only  in December  (UK  and  Ireland  over  17 % on long-
term  bonds)  although  in these  last,  short-term  interest  rates 
have  remained  well  below  long-term  rates,  the slope  of the 
yield  curve  being  at times  unusually  steep. 
The volume  of  issues  varied  considerably  between 
countries.  In most,  there  was  a reduction  in the  amount 
raised.  In France,  Italy  and  the  UK  the  reduction  was 
quite  serious.  In others,  despite  a fall  in the  first  nine 
months,  the fourth  quarter  result  was  sufficient  to provide 
a small  increase  over  1973  (Denmark). 
The share  markets  in all countries  were  affected  by the 
prevailing  economic  situation  and  the  general  uncertainty. 
In all countries  there  was  a fall  in the share  index  during 
the year,  but  the  extent  of the  fall  and  the  degree  of 
recovery  towards  the  end  of  the  year  differed 
considerably.  In Germany  the fall  in the share  price  index 
was least  over  the year  as a whole,  it having  recovered  in 
the fourth  quarter  to rise  almost  back  to its end-December 
1973  level.  There  were  also  three  countries  which 
experienced  a rise  in the index  during  the first  part  of the 
year.  In Germany  and  the  Netherlands  this  was  due  to a 
premature  belief  that  the initial  effects  of the oil crisis  were 
over  and  the  recession  would  not  be so serious.  When  it 
became  clear  that  the  world  economic  situation  was  in 
fact worsening,  then  the  index  underwent  the  downturn 
to the  third  quarter.  In Italy,  the rise  in the  index  in the 
first quarter  (up  16 points  between  January  and  April) 
was due  to a belief  that  the  purchase  of equities  was  a 
hedge  against  inflation.  When  subsequent  events  proved 
otherwise,  the index  underwent  a substantial  fall  over  the 
rest of the year.  In the UK,  Ireland  and  Belgium,  the trend 
was a continuous  downward  one.  In France  the  fall  was 
continuous,  but  a certain  recovery  was  noted  during  the 
fourth  quarter. 
31.7.  75 Official  Journal  of the  European  Communities No C 174/21 
National  markets 
In Germany,  the  markets  were  very  depressed  in the first 
three  quarters,  but after  the Bundesbank  took  measures  in 
October  easing  the restrictive  credit  policy,  the situation 
improved  considerably  with  the  expectation  by investors 
that there  would  be a fall in interest  rates.  The  distinctive 
change  from  the  previous  year  has  been  the  general 
reluctance  of privatfc  households  to invest  in long-term 
bonds  as a result  of growipg  economic  uncertainty,  and 
thus concentrating  activity  on the  bond  market  in the 
hands  of the  banks.  Another  feature  has  been  the 
shortening  of the  maturities  of new  issues  (five  to seven 
years). 
In the first  quarter  there  was  a lack  of activity  combined 
with  a fall  in prices  and  a rise  in yields.  This  was 
accompanied  by a strong  tendency  on the  part  of the 
public  to acquire  short-term  liquid  assets  rather  than 
long-term  paper.  This  market  situation  did  not  change 
fundamentally  in the  following  months.  Following  the 
measures  to ease  liquidity  at the  end  of October,  the 
markets  recovered  strongly  in the fourth  quarter,  and  the 
final  volume  of net issues  for the year  1974  as a whole  at 
DM 26 700 million  corresponded  approximately  to the 
volume  in 1973  at DM  26 800 million. 
At the beginning  of the  second  quarter,  the  Bundesbank 
carried  out  interventions  to restrain  the  rise  in interest 
rates,  since  a further  rise  was  considered  unacceptable  for 
economic  reasons,  but  bond  yields  on the  secondary 
market  increased  further  to reach  10-9  % in June,  and 
then stabilized  at around  this  level  until  October.  The 
measures  announced  by the  Bundesbank  on 24 October 
ushered  in a period  of falling  yields  which  ended  the year 
at 9-4 %. 
The volume  of foreign  DM  issues  was  very  low  during  the 
first half  of the year,  as the differential  between  yields  on 
these  bonds  and  yields  on domestic  bonds  narrowed,  and 
during  May  and  June,  even  reversed.  During  the  second 
half of the year,  the market  gathered  momentum  following 
a widening  of yield  differentials,  and  although  the  gap 
narrowed  again  during  the  third  quarter,  there  was  a 
strong  recovery  in the fourth  quarter  with  issues  of DM 
643 million  and  the  yield  at about  1 % above  that  on 
domestic  bonds.  The  total  volume  of issues  was  about 
one-quarter  that  of the  previous  year  with  DM  637 
million  compared  with  DM  2 571 million  in 1973. 
The share  markets  also  had  an  unsatisfactory  year, 
although  the extent  of the fall  was  less  than  that  of other 
centres.  The  share  price  index  fell  from  127  in January  to 
106 at the  beginning  of October,  its lowest  level  since 
October  1967,  but towards  the end  of the year  the mood 
became  more  confident  and  the index  was  almost  back  to 
its level  of a year  earlier.  The  volume  of share  issues  (at 
market  prices)  was  virtually  identical  to that  achieved  in 
1973. 
In France,  for  the  major  part  of the  year,  results  were 
generally  unsatisfactory,  due  to some  very  bad  results  for 
the year  as a whole,  and  to a complete  interruption  for 
five weeks  during  July  and  August.  The  total  volume  of gross  issues  was  about  one-third  down  on that  of 1973  at 
FF 22 550 million  compared  with  FF 34 640 million  the 
previous  year.  For  the  first  three  quarters  in particular, 
results  were  sharply  below  those  for the previous  year. 
On the  side  of the  issuers,  the market  was  characterized 
by an almost  total  absence  of public  enterprises  in the first 
three  quarters,  and  of financial  institutions  in the second 
and third  quarters,  who,  in view  of conditions  on the 
domestic  markets,  preferred  to have  recourse  to the 
international  markets.  They  were  encouraged  in this  by 
the authorities  principally  because  of the weakness  of the 
domestic  market  and  secondarily  for balance  of payments 
reasons.  This  absence  was  to the  benefit  of private 
enterprises  who  thus  accounted  for  a major  part  of 
activity  during  this  period,  and  achieved  a total  volume  of 
FF 8 170 million  for the year  as a whole.  The  recovery  of 
activity  in the fourth  quarter  allowed  the reappearance  of 
the financial  institutions  and  public  enterprises  on the 
domestic  bond  market. 
The movement  of yields  also  reflected  the trends  on the 
bond  market,  as well  as those  on  the  international 
markets.  From  the beginning  of the year  until  June  yields 
rose rapidly  from  9-4 to 11-3  for public  issuers  (for  private 
issuers  rates  were  about  0-5  % higher).  During  the  third 
quarter  they  were  stable  at around  11-5,  with  a slight  but 
regular  fall  from  the  end  of the  quarter  on until  the 
reappearance  of minor  tensions  during  the fourth  quarter. 
At the  end  of the  year,  the  gross  yield  rates  on the 
secondary  market  were  11-21  for public  securities  and  11-9 
for private  sector  securities,  compared  with  10-21  and 
10-47  respectively  at the  beginning  of the  year.  Nominal 
rates  followed  the trends  on the secondary  market,  ending 
the year  at 11-3  % (public  sector)  and  12  % (private 
sector),  a rise  of 1-9 and 2-4 points  respectively. 
Share  issues  were  slightly  up on 1973  in volume,  despite  a 
very low  level  of activity  in the  third  quarter.  This  was 
compensated  for  by a reasonable  level  of issues  in the 
second  quarter  (in contrast  to a rather  low  volume  of 
bond  issues  in that  quarter)  and  by a substantial  recovery 
in the fourth  quarter,  in line  with  most  other  centres.  The 
share  price  index  reflects  the  extent  to which  the  Paris 
Bourse  shared  the  world-wide  slump  in stock  market 
activity,  declining  by about  40 points  between  January 
and September,  but  recovering  slightly  to end  the  year 
about  30 points  down  at 59 from  92. 
Developments  on  the  Italian  bond  market  have  been 
heavily  influenced  by the  tax  reforms  which  came  into 
force  on 1 January,  by a restrictive  credit  policy  and  by 
the trend  of inflation.  Public  demand  for  bonds  was 
extremely  weak  throughout  the year.  The  acceleration  of 
inflation,  the expectation  of higher  interest  rates,  and  the 
appearance  of a gap  between  short-term  and  long-term 
rates  have  all provided  incentives  to investors  to prefer 
more  liquid  forms  of investments.  There  were  very  few 
new issues  in the first  three  quarters  of the year,  and  the 
total  net volume,  at Lit 5 173 000 million  was  about  50 % 
down  on that  for 1973  (Lit  10 476 000 million).  This  was 
No C 174/22 Official  Journal  of the  European  Communities 31.7.  75 
achieved  only  because  a large  number  of issues  were  made 
in the last  quarter  (Lit  4 525 000  million).  Recourse  to the 
international  markets,  at Lit  1 855 000 million,  almost 
reached  the  1973  level  of Lit  1 900 000 million,  despite 
being  concentrated  in the first  half  of the year.  The  sharp 
fall in the  volume  of domestic  issues  which  occurred  in 
the first  quarter  was  almost  totally  due  to a concentration 
of issues  in the  last  quarter  of 1973  in order  to avoid 
increased  tax  burdens  for  bonds  issued  after  1 January 
1.974  following  the fiscal  reforms  which  came  into  effect 
on that  date.  The  markets  continued  to function  at a very 
low level  although  measures  were  taken  to attract  private 
capital  to the market,  such  as variable  rates,  shortening  of 
maturities  and  premature  redemption  clauses.  Under  these 
conditions,  almost  the  total  amount  of each  loan  was 
taken  up  by  the  banking  system,  partly  due  to the 
prolongation  of measures  requiring  credit  institutions  to 
invest  a certain  percentage  of their  funds  in bonds. 
Yields  have  followed  a rising  trend  over  the  year,  from 
about  7-5  % in January  and  February  to 11 % in June, 
rising  further  to around  12 % in October  and  ending  the 
year at 12-7  % in December.  This  increase  in yields, 
accompanied  by  an  interest  rate  structure  where 
short-term  rates  have  consistently  been  above  medium-
and long-term  rates  has  also  contributed  to the  high 
liquidity  preference  of the public. 
The volume  of share  issues  declined  even  more  than  the 
volume  of bond  issues,  with  an  amount  less  than 
one-third  that  attained  in 1973  (Lit  620  000 million  against 
Lit 1 983 000 million). 
The share  price  index  rose  steadily  until  April,  rising  from 
169 to 185,  then  falling  to 115  at the  end  of the  year  as 
uncertainties  on economic  developments  and  the  profit 
possibilities  of firms  made  investors  reluctant. 
In the  United  Kingdom,  uncertainty  created  by  two 
general  elections  and  three  budgets  unsettled  the  markets 
throughout  the  year,  although  there  were  periods  during 
which  the markets  remained  quite  firm. 
The volume  of net  issues  fell  substantially.  At  the 
beginning  of the  year,  while  prices  dropped  and  yields 
rose,  sizeable  sales  of  medium-  and  long-dated 
government  stocks  were  made,  and  a  new 
medium-dated  treasury  tap stock  was  issued.  This  situation 
continued  into  the  second  quarter  when  substantial  sales 
of stock  were  again  made  and  a new  long-dated  and  a 
new short-dated  tap  stock  were  issued,  despite  an easing 
of the  market  during  May  and  June.  During  the  third 
quarter,  the  markets  fluctuated  under  the  influence  of 
various  economic  developments  and  only  one  new  stock 
was issued,  although  the  prices  of all gilt-edged  stocks 
rose over  the  period  as a whole.  The  market  was  firm 
throughout  September,  but  thereafter  turned  very  weak, 
the general  election  in October  and  the  budget  in 
November  doing  little  to  disperse  the  feeling  of 
uncertainty,  and  although  there  was  a slight  recovery  at 
the end  of November,  demand  for stocks  remained  low. The trend  of yields  over  the  year  as a whole  was  in the 
upward  direction,  along  with  that  of most  interest  rates. 
Yields  on long-dated  government  stocks  began  the year  at 
around  13 %, rose  to around  14 % in March  and  up to 
16 % in October,  ending  the year  at over  17 %, although 
short-term  yields  remained  in the range  12 to 13 %. 
The interest  rate  structure  was  'normal'  with  short-term 
rates  lower  than  long-term  rates  throughout  the  whole 
year. 
The equities  market  had  a very  bad  year,  the  share  price 
index  falling  continuously  until  11  December  when  it 
reached  150-4,  its lowest  level  for 20 years.  At the end  of 
the year  it stood  at 161-4,  a fall  of 70 % from  its May 
1972  'high'  of 543-6  and  a fall  of 51 % during  1974, 
compared  with  a fall  of 33 % in 1973. 
Activity  was  extremely  depressed  throughout  the  year, 
particularly  in the  first  three  quarters,  although  the  final 
volume  of new  issues,  at £136  million  was  not  seriously 
down  on  the  result  for  1973  (£162  million).  This 
relatively  favourable  result  is due  to the fact  that  one  issue 
made  in the  fourth  quarter  accounts  for  nearly  half  the 
total. 
Events  on the  Irish  capital  market  closely  followed  those 
on the UK  capital  markets. 
Demand  for  Irish  Government  stocks  was  fairly  strong 
and steady  throughout  the  year,  and  new  tranches  of 
existing  stocks  at various  maturities  were  issued  in every 
quarter.  These  general  trends,  however  sizeable,  mask 
fluctuations  in actual  sales  of stock  over  the  year.  The 
first quarter  began  well,  but  became  weak  later  as prices 
of long-dated  stock  fell,  and  the  net  result  for the whole 
quarter  was  well  down  on the  same  quarter  the  previous 
year.  The  market  remained  fairly  steady  throughout  the 
second,  quarter,  prices  then  falling  slightly  in July  and 
August  from  the end-June  levels  to produce  very  buoyant 
sales  for  these  months.  This  trend  did  not,  however, 
continue,  and  for  the  rest  of the  year  prices  of medium-
and long-dated  stocks  fell continuously,  under  the influence 
of apprehensions  over  the  future  trend  of interest  rates 
which  had  risen  sharply  to 15-25  % in October,  to 17 % in 
November  (for  long-dated  stocks).  This  trend  eased  off in 
December,  and  new  tranches  "of stock  were  issued  to meet 
the re-appearing  demand  for stock. 
Yield  rates  and  interest  rates  closely  followed  those  in the 
UK, the trend  over  the year  being  in the upward  direction. 
At the beginning  of the  year  long-term  interest  rates  were 
still rising  from  the  levels  of the  previous  year,  and  in 
March  yields  ranged  from  12-5  to 14  %. During  the 
second  quarter,  the  spread  widened,  however,  yields  on 
short-  and  medium-  dated  stocks  falling,  while  those  on 
long-dated  stocks  rose  to give  a range  of 12 to 14-5  % at 
end-June.  This  remained  stable  until  the  fourth  quarter, 
31. 7. 75 Official  Journal  of the  European  Communities No C 174/23 
when  long-term  interest  rates  climbed  even  higher  with 
yields  between  12 and  15-5  % in October,  rising  to 
between  13 and 17 % at the end of the year. 
Since  the Irish  and  UK  stock  exchanges  are now  merged, 
trends  follow  a similar  pattern,  and  as in the UK,  the 
share  price  index  fell  continuously  during  the year  from 
234 to 119. 
In the  Netherlands,  capital  markets  have  produced  a 
distinctly  better  performance  in terms  of total  borrowing 
than in 1973:  Fl 3 715 million  against  Fl 1 938 million  for 
public  issues.  The  net amount  of privately  placed  loans 
increased  from  Fl 11100  million  in 1973  to Fl 12 500 
million  in 1974.  Details  on gross  flows  are not available; 
the Bank  voor  Nederlandsche  Gemeenten  placed  loans 
with a maturity  of five  years  and more  to a total  amount 
of Fl 3 160 million  (1973:  Fl 2 515 million). 
Demand  for capital  has  been  quite  buoyant  throughout 
the period,  particularly  from  public  institutions,  and  from 
non-banking  concerns  in the  private  sector.  Issues  were 
not always  easy  to place,  however,  and  to meet  the 
distinct  preference  on the part  of household  investors  for 
short-term  bonds  the maturities  of bond  issues  had to be 
shortened.  The  private  placement  of 25 year  bonds 
became  quite  difficult,  even  with  successive  increases  in 
interest  rates.  However,  there  was  a marked  recovery 
during  the  fourth  quarter  caused  by expectations  that 
long-term  rates  had  reached  their  peak.  This  manifested 
itself  in very  active  markets  for both  public  issues  and 
privately  placed  bonds. 
In accordance  with  international  interest  rate  trends  and 
persisting  inflation,  long  term  interest  rates  continued  to 
rise over  the  first  seven  months  of the  year,  thus 
continuing  the trend  which  had  already  manifested  itself 
in the latter  months  of 1973.  In the early  period  this  was 
reinforced  by the reluctance  of institutional  investors  to 
invest  at prevailing  rates  on a long-term  basis,  and  by 
large  demand  for  capital,  particularly  from  public 
authorities.  By April  they  had  risen  to over  10 %, then  to 
11-5 % for  25-year  loans  in July,  with  yields  on the 
secondary  market  following  suit,  rising  from  9-01  in 
December  1973  to reach  a high  of about  10-4  in August. 
Thereafter,  there  was  an easing  of rates  and  towards  the 
end of the year  the decline  in rates  gathered  momentum 
with yields  down  to 9-1  % in December  (a fall  of 1-3 
The increase  in the  gap  observed  in the  first  quarters 
between  yields  on private  placements  and  yields  on bonds 
as a result  of growing  interest  from  foreigners  in guilder 
bonds  was  followed  in the last  months  by a reduction  in 
this gap,  with  rates  on private  placements  falling  by about 
1-6%. 
With  effect  from  1 February,  the  closed  bond  (or 
'O'-guilder)  circuit  was  abolished,  and  after  the second 
quarter  there  was  great  demand  from  foreigners  for 
guilder  investments  in the form  of fixed  interest  guilder 
bonds  as well  as in short-term  guilder  notes.  After  having 
come  to a virtual  standstill  in the  first  quarter,  issue activity  resumed  in the second  and  > third  quarters  with 
about  Fl 300 million  in each  quarter,  increasing  to Fl 400 
million  in the fourth  quarter. 
The share  market,  traditionally  unimportant  as a source 
of funds,  also  produced  a lower  result  than  in 1973,  and 
the share  price  index  fell from  108 to 88 over  the period. 
In Denmark,  as a result  of the  dominating  role  of tap 
issues  by the  mortgage  credit  institutions  in the  bond 
market,  trends  in this  market  are  reflected  by the 
movement  of prices  and  yields  on the secondary  market, 
following  changes  in the demand  for and  the supply  of 
capital,  especially  for construction  purposes. 
Over  the year  as a whole,  the volume  of issues  stabilized 
at the high  level  attained  after  the considerable  year  on 
year increases  from  1970  to 1973.  The  total  of gross  issues 
was only  slightly  higher  than  in 1973. 
In the first  half  of the year,  however,  the bond  markets 
were  under  heavy  pressure:  accelerating  inflation,  tight 
liquidity  in the  banking  system  and  the  economy  as a 
result  of the  restrictive  credit  policy  pursued  by the 
monetary  authorities  all combined  to produce  a fall  in 
bond  prices  despite  considerable  purchases  by the national 
bank.  The  average  yield  of all bonds  in circulation  rose 
from  14 % in January  to 15-3  % in March  and  to an 
all-time  high  of 17-7  % at the beginning  of August. 
At the end of August,  however,  there  was  a sharp  reversal 
of the market  situation  with  a decline  in rates  both  on 
long-term  bonds  and  in the money  market,  reflecting  a 
drop  in new  housing  starts,  as well  as an improvement  in 
the liquidity  position  of the  banks,  who  recommenced 
purchasing  after  having  been  net sellers  of bonds  in the 
second  quarter  and  the national  bank  became  a net seller 
again.  By the end of September,  yields  had fallen  to below 
16 %. Prices  continued  to rise  over  the fourth  quarter  and 
by the  end  of the  period  yields  had  fallen  to 14-5  %. 
Foreign  purchases  of Danish  kroner  bonds,  regulated  by a 
quota  system,  were  modest  during  the year,  and  during 
the first  nine  months  sales  only  slightly  exceeded 
repatriations.  As from  1 December,  foreign  purchases  of 
Danish  bonds  were  completely  liberalized. 
The volume  of share  issues  was  modest  throughout  the 
year.  The  share  price  index  exhibited  a downward  trend 
to November,  from  188  to 133,  but recovered  slightly  in 
December  to 147. 
Placing  of issues  on the  Belgian  capital  markets  was 
slightly  more  difficult  in 1974  than  in 1973,  particularly  in 
the second  and  third  quarters,  although  the total  volume 
of gross  issues  reached  FB 273 000 million  compared  with 
FB 267  000 million  the  year  before.  But  there  was  a 
reduction  in the net volume  of issues  (FB  134 000 million 
against  FB  143  000 million  in 1973),  which  can  be 
explained  by a considerable  increase  in the  amounts 
devoted  by the State  to contractual  amortizations  and  to 
both final  and  intermediate  redemptions,  the net volume 
of tap issues  being,  however,  distinctly  higher. 
No C 174/24 Official  Journal  of the  European  Communities 31. 7. 75 
During  the first  half of the year,  the State  had recourse  to 
the market  on two  occasions.  Although  the placing  of the 
February  loan  was  fairly  easy,  the loan  in May  did not 
have  the same  success.  However,  after  an improvement  in 
the terms  of loans  and  an increase  in the interest  rate  to 
10 % (1 % over  that  of the  May  loan)  for  a loan  in 
September,  which  was  placed  very  easily,  the market  was 
more  receptive  in the fourth  quarter. 
Over  the first  eight  months  of the year,  interest  rates  rose 
continuously,  but  in September  there  was  a certain 
stabilization  which  continued  to the  end  of the  year. 
Secondary  market  yields  for  public  issues  which  had 
begun  the year  at 7-92  rose  to 9*26  in September,  but 
declined  again  to 9 in December,  while  those  on 
private  issues  rose  from  8-5 to 11*9  in October,  declining 
to 11 in December.  Nominal  rates  on public  issues 
reached  a maximum  of 10 % in September  and  remained 
there  until  the end of the year. 
The share  market  had  a reasonably  successful  year,  the 
total  volume  of new  issues  in the first  nine  months  being 
higher  than  that  recorded  in 1973,  but activity  was  low  in 
the fourth  quarter,  so that  the  total  for the year  as a 
whole  was  lower  than  in both  1972  and 1973. 
The share  price  index  followed  the same  trend  as in most 
countries,  falling  by 35 points  over  the year,  from  164 at 
end-December  1973  to 129 at end-December  1974. 
In view  of the  large  margin  between  money  market 
interest  rates  and  long-term  interest  rates,  the 
Luxembourg  authorities  decided  not to permit  any  issues 
on to the calendar  during  the first  nine  months  of the 
year,  neither  domestic  issues,  nor  conventional  foreign 
issues. 
In August,  the banks  increased  their  terms  for medium-  f 
and long-term  placings,  which  was  followed  by a fall in 
money  market  rates,  and brought  an end to this  period  of 
tight  money.  As a result,  the authorities  admitted  a 'test' 
issue  by the ECSC,  in October.  This  was  followed  by a 
slightly  larger  EIB  loan  in November  and  a Council  of 
Europe  loan  in December,  to produce  a total  volume  of 
issues  of Lfrs  1100  million  compared  with  Lfrs  2 700 
million  in 1973. 
Although  this  low  amount  was  easily  absorbed  by the 
market,  the authorities  insisted  that  the initially  decided 
ceilings  be strictly  observed  in order  to leave  disposable 
capital  free  to reactivate  the secondary  market. 
Yields  on the  secondary  market  remained  fairly  stable 
over the year,  reaching  a high  point  at the end  of the 
third  quarter,  and  declining  thereafter. 
International  bond  markets 
Major  changes  in world  financial  flows  and in the balance 
of payments  of most  trading  countries  as a result  of the oil price  rise  and  the  consequent  surpluses  of the  oil 
producing  countries  as well  as deficits  for  most  oil 
importing  countries  seriously  affected  the  international 
bond  markets  during  the period. 
Over  the first  nine  months  of the year,  investors  showed 
a marked  tendency  to prefer  short-term  liquid  investments. 
This is apparent  from  the  large  amount  of roll-over 
credits  accorded  to the detriment  of conventional  bond 
issues.  In fact,  the volume  of roll-over  credits  (syndicated 
bank  loans  in Euro-currencies)  accorded  is inversely 
related  to the volume  of bond  issues.  During  the first  two 
quarters  of the year,  the ratio  of roll-over  credits  to bond 
issues  was  17 and 26 respectively.  In the third  quarter  this 
had fallen  to 15 and  in the fourth  quarter,  as the bond 
market  recovered,  the  amount  of roll-over  credits  was 
only three  times  that  of bond  issues.  The  total  amount 
was about  $30  000 million,  an increase  of 30 % over 
1973,  but compared  with  a 400  % increase  in 1973  over 
1972. 
The general  malaise  on the bond  markets:  low  volume  of 
issues,  increasing  interest  rates,  and  shorter  maturities  can 
be largely  attributed  to continued  monetary  instability, 
investors  being  reluctant  to invest  in long-term  bonds  at a 
time when  yields  on  long-term  bonds  compared 
unfavourably  with  rates  of inflation.  An additional  factor, 
however,  must  be the marked  liquidity  preference  on the 
part of investors  from  the  oil-producing  countries 
combined  with  the  delay  between  the  capital  being 
received  by the oil-producing  countries  and their  recycling 
it back  to the bond  markets,  in the place  of industrialized 
countries  which  had  previously  been  the major  source  of 
funds.  The  significant  improvement  which  occurred  in the 
fourth  quarter  can  be largely  attributed  to the fact  that 
voluntary  recycling  of capital  via the private  long-term 
bond  market  was  getting  under  way,  combined  with  the 
policy  of lower  interest  rates  being  pursued  by the 
authorities  on the national  markets  to encourage  demand. 
The volume  of issues  fell appreciably  over  the first  three 
quarters  of the year.  From  1 204 million  EUR  in the last 
quarter  of 1973,  it dropped  to 504 million  EUR  in the first 
quarter,  and  to a 10-year  low  of 249  million  EUR  in the 
third  quarter  as a result  of the factors  decribed  above.  In 
the fourth  quarter  there  was  a strong  recovery  to 1 169 
million  EUR  as conditions  improved  to produce  a total  of 
2 300 million  EUR,  which  while  not as low  as had  been 
expected  was  still  barely  half  the  volume  recorded  in 
1973.  The  decline  affected  all the  currencies  of issue 
except  the guilder  and  the unit  of account. 
A breakdown  by currencies  of issue  shows  an increase  in 
the percentages  for the  dollar  (53  from  46 % of total 
volume),  the guilder  and  the unit  of account  (12 from  4 % 
and 9 from  3 % respectively)  to the  detriment  of the 
others.  In contrast  to the previous  year  was  the decline  in 
Swiss  francs  (down  from  15 to 11 %) and  in DM  (25 to 
10%).  During  the second  quarter  of the year,  issues  in 
DM virtually  disappeared. 
Issues  in units  of account  and  'EURCO'  increased 
considerably,  but issues  in EURCO  were  not particularly 
31.7.  75 Official  Journal  of the  European  Communities No C 174/25 
successful.  This  -was  attributed  to the  fact  that  this 
formula  may  be too  complex  for  most  investors  to 
understand. 
There  were  some  changes  in the  pattern  of debtor 
countries  over  the past  year.  The  EEC  share  remained  the 
same,  but within  it some  substantial  shifts  took  place.  Far 
fewer  UK borrowers  floated  loans,  but more  French  and 
Dutch  borrowers  came  into  the markets.  The  share  of US 
and non-EEC  international  organizations  decreased,  but 
that of the rest of the world  went  up. 
Interest  rates  on the  international  capital  markets  were 
seriously  affected  by events  on the money  markets  and the 
changes  in financial  flows.  An increasing  tendency  this 
year was  for loans  to carry  a variable  rate,  based  on the 
LIBOR  (London  Inter-Bank  Offer  Rate)  and  an additional 
'spread'  the rate  of which  varies  according  to the length  of 
the loan  and  the quality  of the borrower.  This  last was  an 
attempt  to overcome  the  uncertainty  and  lack  of 
confidence  prevailing  in the market. 
Interest  rates  on dollar  issues  as measured  by yields  on the 
secondary  market  reflected  both  the  degree  of 
international  confidence  in the  dollar,  internal  political 
events  in the US and the ability  of the US to deal  with  the 
financial  implications  of the  energy  crisis,  as well  as 
international  trends.  Beginning  the year  at around  8*5 %, 
by June  they  had  risen  to 10 % and  reached  a high  of 
12 % in October.  Thereafter,  in line  with  the recovery  on 
the markets,  interest  rates  on dollar  issues  fell slightly  to 
11-25  % at the end of the year. 
With  the exception  of the period  May  to June,  yields  on 
DM international  bond  issues  were  continually  above 
those  of internal  issues.  Despite  this yield  gap,  demand  for 
DM international  issues  was  weak  until  the  autumn. 
However,  towards  the end  of 1974  the volume  of DM 
foreign  issues  increased  sharply  which  can  be explained 
partly  by the return  of confidence  following  the success  of 
the stabilization  policy  pursued  by  the  German 
authorities,  and  partly  by the change  in the behaviour  of 
investors  from  oil-producing  countries  who  began  to 
undertake  longer  term  investments  and  at the same  time 
choosing  to diversify  the range  of currencies  in which  they 
invest.  Furthermore,  it seems  that  issuers  do not expect  a significant  revaluation  of the DM  in relation  to their  own 
currencies  during  the life of these  loans. 
The market  for international  bonds  denominated  in Swiss 
francs,  where  interest  rates  are traditionally  at a low  level 
by comparison  with  other  currencies  of issue,  was seriously 
affected  this  year.  At 6-5 % at the end  of 1973,  the level 
of yields  had risen  to around  8-5 to 9 % at the end of the 
second  quarter.  Despite  a closing  of the markets  by the 
Swiss  authorities,  it was  eventually  admitted  that  the 
pressure  on rates  was  too  great,  and  the markets  were 
re-opened  with  rates  for new  issues-  at 8 % in July  and 
then drifting  upwards  to end the year  at 8*25  to 8-75  %. 
Some  changes  occurred  in the  bond  market  policies 
pursued  by the member  countries.  In Germany,  sales  to 
non-residents  of domestic  bonds  with  more  than  four 
years  maturity  were  authorized  again  at the  end  of 
January.  In September,  the cash  deposit  requirement  for 
credits  taken  up abroad  by residents  was  finally  lifted, 
although  its rate  had  already  been  lowered.  In the 
Netherlands,  in accordance  with  arrangements  with  other 
'snake'  countries  to relax  restrictions  on capital  inflows, 
the 'O'-guilder  circuit  was  abolished  in March.  A new  law 
affecting  the control  of the stock  exchanges  and  of stock 
issuing  companies  was  introduced  in Italy  in June. 
The Working  Party  continued  its examination  of the 
problems  involved  in protecting  the  holders  of fixed 
interest  securities  from  loss  in real  value  and has discussed 
several  aspects  of the problem  in detail,  particularly  the 
experiences  of individual  Member  States  in applying  such 
measures. 
With  regard  to the  problem  of coordination  and 
integration  of capital  markets,  the Committee  exchanged 
regular  information  on developments  in Member  States, 
and has begun  its analysis  of the obstacles  which  currently 
exist  to the free  movement  of bonds  and  other  securities. 
To this  end,  it has commenced  work  on the revision  and 
up-dating  of its 1970  report  on 'bond  market  policy  in the 
Member  States  of the  EEC',  to include  the three  new 
Member  States.  The  Working  Party  completed  its studies 
of capital  market  structures  this  year  when  two  meetings 
were  devoted  primarily  to an examination  of the Irish  and 
Danish  capital  markets  respectively. 
No C 174/26  Official  Journal  of the  European  Communities  31.7.75 
LIST  OF  THE  MEMBERS  OF  THE  WORKING  PARTY  ON  SECURITIES  MARKETS 
Chairman: M. D'Haeze,  Directeur  general  de Padministration  de la tresorerie 
et de la dette  publique,  Brussels. 
GERMANY Dr. K. Andreas,  Leiter  der Hauptabteilung  Kredit,  Deutsche  Bundes-
bank,  Frankfurt/Main. 
Ministerialrat  Dr.  G. Levermann,  Bundesministerium  der  Finanzen, 
Bonn. 
Regierungsdirektor  D. Thorand,  Bundesministerium  der  Finanzen, 
Bonn. 
Regierungsdirektor  H. Stoller,  Bundesministerium  fiir  Wirtschaft, 
Bonn  (from  1 January  1974). 
BELGIUM F. Junius,  Banque  nationale  de Belgique,  Brussels. 
E. Kestens,  Inspecteur  general  au Ministere  des  finances,  Brussels. 
M. Esselens,  Inspecteur  general  a l'administration  de la tresorerie, 
Brussels. 
DENMARK J. Kjaer,  Kontorchef,  Danmarks  Nationalbank,  Copenhagen  (until 
31 December  1974). 
H. Olsen,  Fuldmaegtig,  Handelsministeriet,  Copenhagen. 
FRANCE Y. Berger,  conseiller  aupr&s  du gouverneur  de la Banque  de France, 
Paris. 
J. M. Bloch-Lain6,  Sous-directeur  a la direction  du tresor,  Minist&re 
de l'^conomie  et des finances,  Paris. 
J. de La Motte  de Broons,  Direction  du tresor,  minist&re  de l'econo-
mie et des finances,  Paris. 
Mrs L. Beauvais,  Banque  de France,  Paris. 
IRELAND C. O'Carra,  Department  of Finance,  Dublin. 
M. Coffey,  Central  Bank  of Ireland,  Dublin. 
ITALY 
LUXEMBOURG Dott.  B. Bianchi,  Servizio  studi,  Banca  d'ltalia,  Rome. 
Dott.  G. Monterastelli,  Condirettore  centrale,  Banca  d'ltalia,  Rome. 
Dott.  V. Platino,  Ispettore  capo  del Tesoro,  direzione  generale  del 
Tesoro,  Ministero  del Tesoro,  Rome. 
A. Dondelinger,  Commissaire  au controle  des banques,  Luxembourg. 
E. Israel,  Directeur  k la Banque  Internationale  a Luxembourg. 
Mrs.  P. Weides-Schaeffer,  Conseiller  adjoint  au Commissariat  au 
controle  des banques,  Luxembourg. 
NETHERLANDS  Drs.  M. M. Keyzer,  Nederlandsche  Bank  N.V.,  Amsterdam. 
Drs. P. C. Timmerman,  Onderdirecteur  van  de Nederlandsche  Bank 
N.V.,  Amsterdam. 
Drs. J. Grooters,  Directeur  binnenlands  geldwezen,  Ministerie  van 
Financien,  The  Hague. 
31. 7.75 Official  Journal  of the  European  Communities No C 174/27 
UNITED  KINGDOM J. M. Bridgeman,  Treasury  Chambers,  London  (from  1 January 
until  30 April  1975). 
H. S. Lee,  Treasury  Chambers,  London  (from  1 May  1974). 
D. A. C. Nendick,  Cashiers  Department,  Bank  of England,  London 
(until  31 December  1974). 
COMMISSION  OF 
THE  EUROPEAN 
COMMUNITIES 
SECRETARIAT J. E. Nash,  Director  for  Monetary  Matters  in the  Directorate-
General  for Economic  and  Financial  Affairs  of the Commission  of 
the European  Communities,  Brussels. 
A. Kees,  Head  of Division,  Directorate-General  for Economic  and 
Financial  Affairs,  Commission  of the European  Communities, 
Brussels. 
P. Ohlmann,  Head  of Division,  Directorate-General  for Economic 
and Financial  Affairs,  Commission  of the European  Communities, 
Brussels. 
M. Zucker,  Directorate-General  for Economic  and Financial  Affairs, 
Commission  of the European  Communities,  Brussels. 
G. Morelli,  Secretary  of the Monetary  Committee,  Brussels. 
G. Lermen,  Brussels. 
A. Chapman,  Brussels. 
<v 
No C 174/28 Official  Journal  of the  European  Communities 31. 7. 75 
ANNEX V 
INTERIM  REPORT  BY  THE  WORKING  PARTY  ON  SHORT-TERM 
CAPITAL  MOVEMENTS 
Introduction 
Since  9 October  1973,  when  it submitted  its first  report  to 
the Monetary  Committee,  the  Working  Party  has  held 
three  meetings.  Pursuant  to the  new  instructions  received 
from  the Committee  on 16 April  1974,  the Working  Party 
gave  priority,  in the  first  stage,  to collecting  information 
on restrictions  on capital  movements  adopted  by Member 
States.  In the experts'  opinion,  this  emphasis  was  justified 
by the fact  that  in the period  under  review  (October  1973 
to end-December  1974)  profound  changes  took  place  in 
international  economic  and  monetary  relations,  some  of which  will  have  long-term  effects  that  are  difficult  to 
judge. 
Chapter  I discusses  the most  significant  factors  behind  the 
changes  in  the  volume  and  direction  of  capital 
movements,  and  behind  the  measures  taken  by Member 
States;  it also  includes  a summary  of modifications 
introduced  iji the  method  of the  various  instruments. 
Chapter  II describes  the  measures  adopted  by  the 
authorities  in each  individual  country. 
CHAPTER  I 
The most  significant  factors  affecting  capital  movements  and  their  control  — changes  in the 
method  of application  of the instruments 
A. Events  leading  to the  Member  States  modifying  their 
capital  movement  restrictions 
In the period  under  review,  profound  changes  took  place 
in international  economic  and  monetary  relations,  causing 
Member  States  to  modify  their  capital  movement 
restrictions. 
The following  factors  are worth  noting: 
— the  dollar  was  firm  until  September  1974,  which  was 
due partly  to the  fact  that  oil payments  are generally 
made  in dollars,  and  partly  to the restrictive  monetary 
policy  followed  by  the  United  States  during  the 
majority  of the  period.  Since  then,  the  easing  of 
American  monetary  policy  and  the  small  flow  of 
petro-dollars  into  the American  banking  system  during 
the last  quarter  of 1974  exerted  downward  pressure  on 
the dollar; 
— all Member  States  were  expecting  a  sharp 
deterioration  in their  current  accounts  either  in the 
form  of reduced  surpluses  or in the  form  of an 
increased  deficit,  with  the  deterioration  mainly 
attributable  to the  rise  in the  prices  of imported 
primary  products,  particularly  oil; 
— in the  majority  of Member  States,  the  authorities 
initially  pursued  restrictive  monetary  policies  which 
resulted  in an increase  in short-term  interest  rates.  As a 
result,  interest  rate  differentials  between  the  various 
international  markets  were  considerably  reduced.  From Autumn  1974  on,  in most  Member  States  monetary 
policy  was  eased  gently;  due  to  a considerable 
parallelism  between  the national  measures,  interest  rate 
differentials  between  the countries  did not  increase; 
— despite  the  fact  that  virtually  all  currencies  were 
floating,  there  were  substantial  official  interventions  on 
foreign  exchange  markets  to maintain  exchange  rates 
at acceptable  levels; 
— the  countries  which  experienced  sharp  deteriorations 
in their  current  account  position  used  foreign  currency 
borrowing  primarily  to maintain  the  level  of their 
official  reserves. 
These  factors  brought  about  profound  changes  in the 
volume  and  direction  of short-term  capital  movements: 
— at the  beginning  of 1974  the  pattern  of speculative 
capital  flows  changed  as a result  of the recovery  of the 
dollar  in relation  to European  currencies;  however,  the 
later  reversal  of the  trend  in the  dollar  reinforced  the 
attraction  of investments  in European  currencies; 
— the  volume  of capital  flows  induced  by interest  rate 
differentials  declined,  as a result  of the  converging 
trends  of short-term  interest  rates  on  the  money 
markets  in Europe  and  the  United  States,  and  also  of 
credit  restrictions; 
— floating  currencies  made  foreign  exchange  speculation 
more  dangerous  than  under  the  system  of fixed 
exchange  rates. 
31.7.  75 Official  Journal  of the  European  Communities No C 174/29 
B. Changes  in the objectives  of the measures  taken 
As a result  of the factors  described  above,  restrictions  on 
capital  movements  in most  Member  States  lost  some 
significance.  With  the direction  of short-term  capital  flows 
reversed  at the  beginning  of the  period  under  review, 
many  restrictions  on capital  inflows  no longer  served  any 
essential  purpose.  Furthermore,  the  almost  universal 
adoption  of floating  exchange  rates,  together  with 
concerted  interventions  by central  banks  in Europe  and 
the United  States,  made  it possible  to absorb  without 
serious  difficulty  such  disruptive  capital  movements  as 
continued  to occur. 
C. The  changes  seen  from  a Community  point  of view 
The measures  taken  by Member  States,  although  varying 
in scope,  were  in the same  direction:  easing  of restrictions 
on capital  inflows,  and/or  tightening  of restrictions  on 
capital  outflows. 
Because  of this,  there  was  even  some  degree  of 'harmoni-
zation',  without  eliminating  the differences  between  the 
policies  followed  by Member  States:  while  some  became 
more  liberal  and  eased  restrictions  on capital  inflows, 
others  became  more  'interventionist'  and tightened  restric-
tions  on capital  outflows. 
The changes  in restrictions  on capital  movements  of 
Member  States  did not lead  to any  distinction  being  made 
between  movements  originating  inside  the  Community 
and movements  from  outside;  further,  considerable 
divergences  still  existed  as regards  the  instruments 
employed. 
In the  table  below  an 'X'  in the  appropriate  column 
indicates  the  Member  States  which  during  the  period 
under  review  eased  restrictions  on capital  inflows  and/or 
introduced  or tightened  restrictions  on capital  outflows. 
Country Restrictions  on 
capital  inflows Restrictions  on 
capital  outflows 
tightened 
Germany X 
Belgium X 
Denmark X 
France X X 
Ireland X 
Italy X 
Luxembourg X 
Netherlands X 
United  Kingdom X X D. The  principal  instruments  introduced,  abolished  or 
modified 
(a) Two-tier  foreign  exchange  markets 
The two-tier  market  was  abolished  in both  France  and 
Italy.  In France  this  move  was  made  in order  to enable 
the supply  of borrowed  foreign  exchange  to balance 
importers'  demand  for  foreign  exchange  on a unified 
market.  Maintenance  of the two-tier  market  would  have 
meant  a weak  official  and a strong  financial  franc,  thus 
discouraging  capital  inflows. 
In Italy,  the system  was  abolished  partly  because  of its 
complexity  and  partly  because  of the insignificant  volume 
of transactions  on the free  market  since  the introduction 
of the requirements  on residents  to lodge  an interest-free 
deposit  equivalent  to 50 % of the  value  of foreign 
investments,  and  since  the decision  that  all commercial 
loans  had to be obtained  through  the regulated  market. 
(b) Limited  split  of the foreign  exchange  markets 
In the  Netherlands,  the  'closed  circuit'  system  was 
abolished  ?ifter  the authorities  noted  a decline  in the 
preference  of non-residents  for  fixed-interest  paper 
denominated  in guilders. 
In the United  Kingdom,  rules  on the compulsory  use  of 
either  the  investment  currency  market  or the  official 
market  were  modified  in order  to channel  certain  foreign 
exchange  inflows  into  the official  market. 
In Ireland,  analagous  modifications  were  implemented  in 
view  of the  free  movement  of capital  which  exists 
between  the United  Kingdom  and  this  country. 
c) Regulations  governing  non-residents'  deposits 
— the negative  interest  rates  on non-residents'  convertible 
franc  deposits  were  suspended  in Belgium  and 
Luxembourg;  then  abolished  in Belgium; 
— the ban  on the payment  of interest  on non-residents' 
sight  deposits  in national  currency  was  suspended  in 
France;  in Belgium  and  in Luxembourg  where  it was 
limited  to convertible  accounts,  it was  suspended,  then 
abolished; 
— the ban  on the building-up,  by non-residents,  of time 
deposits  in convertible  accounts  and  on the payment 
of interest  on all convertible  accounts  was  suspended 
and later  abolished  in Belgium  and  Luxembourg. 
(d) Regulations  governing  residents'  foreign  borrowing 
not linked  to commercial  transactions 
In Germany,  authorization  was  no longer  required  for 
foreign  loans  contracted  by residents  after  1 February 
1974,  and  for  the  transfer  of claims  on residents  to 
non-residents  after  15 September  1974.  The  'Bardepot' 
was abolished  with  effect  from  1 October  1974. 
No C 174/30 Official  Journal  of the  European  Communities 31. 7. 75 
In France,  the  ceiling  for  foreign  currency  borrowing 
abroad  by residents  was  considerably  raised. 
In the Netherlands,  the  rules  on loans  between  affiliated 
companies  were  eased. 
In Denmark,  the  rules  on long-term  loans  raised  abroad, 
the proceeds  from  which  are  used  in Denmark,  were 
modified. 
(e) Regulations  governing  the  external  positions  of 
commercial  banks 
In Belgium,  ceilings  on the banks'  debit  positions  were 
relaxed,  but ceilings  on credit  positions  introduced. 
In Italy,  banks  cannot  have  a net external  debit  position 
greater  than  that  as at the evening  of 19 July  1974. 
(f) Fixing  of special  compulsory  reserve  ratios  on banks' 
liabilities  to non-residents 
The compulsory  minimum  reserves  against  banks' 
outstanding  short-term  liabilities  in national  currency  were 
abolished  in France.  In Belgium  and  Luxembourg  an 
identical  measure  was  taken  for the sector  covered  by the 
regulations. 
Compulsory  minimum  reserves  against  changes  in banks' 
oustanding  short-term  liabilities  in national  currency  (in 
the sector  covered  by the regulations)  were  removed  in 
Belgium  and  Luxembourg. 
In Germany,  compulsory  reserves  against  the  increase 
in banks  liabilities  to non-residents  were  abolished  with 
effect  from  1 January  1974. 
(g) Regulations  governing  leads  and lags 
Provisions  concerning  time  limits  for payment  for imports 
and exports  were  amended  in several  countries  to make 
inflows  of capital  easier  (Belgium  and  Luxembourg),  or make  outflows  more  difficult  (France).  In Germany,  with 
the lifting  of the 'Bardepot',  these  rules  no longer  served 
any purpose. 
(h) Purchase  of national  securities  by non-residents 
Restrictions  were  removed  in Germany,  except  for fixed 
interest  securities  maturing  in less  than  four  years. 
In Denmark,  non-residents  were  authorized  to purchase 
fixed  interest  Danish  bonds  which  are  denominated  in 
Danish  kroner  and dealt  with  on stock  exchanges. 
(i) Interest-free  deposits  on certain  imports 
Deposits  of this  kind  were  introduced  in Italy,  the 
principal  objective  being  to reduce  the liquidity  in the 
economy. 
(j) Restrictions  on foreign  spending  by residents 
Restrictions  of this  kind  were  introduced  by Italy  to curb 
exports  of capital. 
(k) Restrictions  on exports  of capital  for direct  investment 
abroad 
In March  1974,  the United  Kingdom  authorities  withdrew 
a previous  relaxation  of the controls  on exports  for direct 
investment  by  United  Kingdom  residents  in other 
countries  of the EEC. 
(1) Limitation  of forward  currency  purchase 
In France,  the  possibilities  for  residents  to engage  in 
forward  currency  purchase  were  considerably  reduced. 
(m) Prohibition  on lending  to non-residents 
In France,  the  authorities  introduced  a measure 
prohibiting  the granting  of loans  in FF to non-residents. 
CHAPTER  II 
The major  modifications  to restrictions  on capital  movements  in Member  States 
In this  chapter,  a summary  is given  of the major  changes, 
specifying  the instruments  abolished  or newly  introduced 
and the related  objectives. 
1. Germany 
Most  restrictions  on capital  inflows  were  progressively 
lifted.  The  renewed  strength  of the  dollar,  together 
with the tendency  for interest  rate  levels  to converge 
reduced  the  danger  of capital  inflows  triggered  by 
speculative  considerations  or  by  interest  rate 
differentials.  Furthermore,  with  the  cost  of imported products  going  up, it was  thought  desirable  to allow 
the DM  to appreciate  in order  to minimize  the effects 
on domestic  price  levels.  There  were  also  outflows  of 
capital,  which  were,  however,  followed  by inflows  of 
capital  at the end of the year. 
Since  the abolition  of the cash  deposit  requirement  (in 
October  1974),  the only  remaining  restrictions  concern 
payment  of interest  on non-residents'  deposits  and  the 
purchase  by non-residents  of money  market  paper  and 
securities  with  a remaining  life of less  than  four  years. 
Minimum  reserves  against  the increase  in the banks' 
liabilities  to non-residents  were  abolished.  On the other 
31.7.75 Official  Journal  of the  European  Communities No C 174/31 
hand,  the compulsory  reserves  against  total  outstanding 
liabilities  are still  applicable.  This  ratio,  incidentally,  is 
still fixed  at a higher  level  than  that  applying  to 
residents'  deposits. 
2. Belgium 
In view  of the oil crisis  and  the expected  balance  of 
payments  deficit,  restrictions  on capital  inflows  were 
progressively  removed  and  rules  were  introduced  on 
the credit  position  of the banks. 
The following  provisions  were  suspended: 
— negative  and  zero  interest  rates  on non-residents' 
convertible  accounts; 
— compulsory  reserves  against  the outstanding  volume 
of and  changes  in these  accounts. 
A ceiling  on banks'  creditor  positions  in foreign 
currencies  on the  regulated  market  was,  however, 
introduced. 
Provisions  concerning  time  limits  for  commercial 
payments  were  changed  in order  to lighten  the controls 
on advance  payment  for exports  (leads)  and  deferred 
payments  for imports  (lags). 
3. Denmark 
In December  1973  the  rules  concerning  incoming 
financial  credits  were  tightened  in order  to prevent 
circumvention  of  domestic  credit  restrictions. 
Thereafter  authorization  was  only  granted  for loans 
used to finance  fixed  investment  by the  borrowing 
company  itself. 
In September  1974,  primarily  in order  to stimulate 
investment  and  to reduce  unemployment,  these  rules 
were  eased.  It is expected  that  inflows  of capital  will 
also contribute  towards  financing  a growing  deficit  of 
the balance  of payments. 
Since  1 December  1974  non-residents  have  been 
authorized  to purchase  fixed  interest  Danish  bonds 
denominated  in Danish  kroner  and  dealt  with  on stock' 
exchanges. 
4. Ireland 
Because  of the free  movement  of capital  between  the 
United  Kingdom  and  Ireland,  this  latter  country  took 
measures  analagous  to those  introduced  in the United 
Kingdom  with  regard  to: 
— the proceeds  from  disinvestments  in non-EEC 
countries; 
— the proceeds  of the  sale  of overseas  sterling  area 
securities; — outward  direct  investment  in the overseas  sterling 
area; 
— the acquisition  of personal  property  outside  the 
scheduled  territories. 
5. France 
The speculation  against  the franc  at the end  of 1973 
and the beginning  of 1974  led the French  authorities  — 
following  a substantial  loss  of foreign  exchange  — to 
temporarily  suspend  the  application  of the  narrower 
margins  agreement.  Subsequently,  the  rise  in oil 
product  prices  helped  to cause  a deterioration  of the 
balance  of payments,  and  the  deficit  was  met  by 
borrowing  abroad.  This  situation  prompted  the 
authorities  both  to abolish  restrictions  on capital 
inflows  and to curb  capital  outflows. 
The measures  taken  included: 
— abolition  of the two-tier  foreign  exchange  market; 
— relaxation  of the  restrictions  applying  to foreign 
loans  raised  by residents; 
— suspension  of: 
— the ban  on  the  payment  of interest  on 
non-residents'  accounts, 
— the obligation  to maintain  reserves  against  these 
accounts; 
— introduction  of: 
— restrictions  on forward  purchases  of foreign 
exchange 
— a ban on French  franc  loans  to non-residents, 
— a six-month  limit  on the  time  allowed  for 
payment  for exports. 
6. Italy 
In view  of the widening  balance  of payments  deficit 
the authorities  gradually  tightened  the restrictions  on 
exports  of capital  and  introduced  restrictions  con-
cerning  payment  for imports  and  on foreign  spending 
by residents. 
The two-tier  foreign  exchange  market  was  abolished 
since  it no longer  served  any purpose. 
In detail: 
— restrictions  were  placed  on the  import  of Italian 
bank  noted; 
— an interest-free  deposit  of 50 % had  to be lodged  in 
respect  of imports  of certain  types  of goods; 
— restrictions  were  placed  on expenditure  by residents 
travelling  abroad. 
In addition,  limits  were  imposed  on banks'  net debit 
positions  (19 July  1974). 
No C 174/32 Official  Journal  of the  European  Communities 31. 7. 75 
7. Luxembourg 
With  the  danger  of speculative  inflows  of foreign 
exchange  receding  more  and  more,  measures 
introduced  earlier  to curb  capital  inflows  were 
suspended: 
— the compulsory  reserve  ratio  against  non-residents' 
convertible  accounts  was  reduced  to zero; 
— the special  commission  payable  on credit  balances 
in non-residents'  convertible  accounts  was  similarly 
reduced  to zero. 
Modifications  to the rules  on the banks'  credit  position 
in foreign  currencies  on the regulated  market  and  on 
leads  and  lags  are identical  to those  described  under 
'Belgium'. 
8. Netherlands 
After  the revaluation  of the guilder  in September  1973 
and after  the  declaration  of  the  oil-boycott, 
expectations  concerning  the long-term  perspectives  of 
the balance  of payments  encouraged  the authorities  to 
liberalize  progressively  existing  restrictions  on inflow  of 
capital.  International  preference  for  fixed-interest 
guilder  securities  had disappeared: — authorization  policy  as  regards  incoming 
intercompany  financial  credits  with  a maturity  of 
five years  and  more  has been  eased; 
— the 'O' guilder  circuit  has been  abolished. 
9. United  Kingdom 
In view  of the balance  of payments  situation  which  was 
in deficit  already  before  the  increase  in oil prices, 
existing  exchange  control  policies  have  been  tightened 
in order  to encourage  inflows  and  to reduce  outflows 
of capital: 
— rules  concerning  borrowing  abroad  by residents  for 
domestic  use have  been  relaxed; 
— financing  rules  for outward  direct  investment  in the 
EEC  and  in the overseas  sterling  area  were  brought 
into line  with  those  for the rest  of the  world  by 
precluding  the use of official  exchange  for the most 
part; 
— rules  concerning  repatriation  of  profits, 
disinvestment  proceeds  from  direct  investments 
abroad  and  sales  by residents  of foreign  currency 
securities  have  been  tightened.