15. 8. 77 Official  Journal  of the European  Communities No C 195/1 
I 
(Information) 
COUNCIL  AND  COMMISSION 
EIGHTEENTH  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  in the course  of 1976. 
During  the year,  the Committee  held  13 sessions  and the working  parties  drawn  from  its 
own members  or set up at its initiative  met on many  occasions. 
At its session  of 30 January  it elected  its officers.  It elected  as chairman  Mr K.-O.  Pohl, 
Secretary  of State  in the Federal  Finance  Ministry,  Bonn,  and,  as Vice-Chairmen,  Mr J.-Y. 
Haberer,  Ministry  of Finance,  Paris,  Mr S. Palufnbo,  Ministry  of the Treasury,  Rome  and, 
while  awaiting  a Council  Decision  creating  a thir^  vice-chairman,  provisionally  elected  Mr 
S. Andersen,  joint-Governor  of Danmarks  Nationalbank  to this post.  This  was confirmed  at 
its meeting  of 31 March.  The terms  of office  of the new  officers  will expire  on 31 December 
1977.  A list of members  as at 31 December  1976  is annexed. 
The report  was  adopted  as at 31 December  1976. 
INTRODUCTION 
1. In 1976,  the world  economy  saw  marked  progress, 
with production  and trade  showing  growth  rates  similar 
to those  obtaining  before  the oil crisis.  This  favourable 
development  was  not,  however,  a return  to the status 
quo. Balance  of payments  disequilibria  continued  to re-
flect the aftermath  of the quadrupling  of oil prices.  The 
external  deficit  of the  non-oil  producing  developing 
countries  was reduced  somewhat,  but there  was a sharp 
deterioration  in the  external  position  of the  indus-
trialized  countries  as a whole,  which  moved  back  into 
deficit,  and the surplus  of the OPEC  countries  was even 
higher  than  in 1975. 
2. For  the Community,  1976  marked  an upturn  out of 
the recession.  The  growth  of output,  very  high  in the 
first half of the year,  but more  moderate  later,  was  not however  accompanied  by any  reduction  in unemploy-
ment,  because  of the size  of spare  productive  capacity 
and the increase  in wage  costs.  The  average  rate  of in-
flation  diminished,  although  the differences  from  one 
country  to another  remained  large.  On the other  hand, 
the Community's  current  account  showed  a sizeable  de-
ficit, particularly  due to a worsening  in the current  ac-
count  position  of some  countries  which  were  already  in 
deficit.  In these  conditions,  divergences  in the exchange 
rates  of Community  currencies  were  further  accen-
tuated.  The  activities  of the Committee  were  concen-
trated  on analysing  these  features  and on trying  to con-
ceive  of methods  to cushion  the effects  of those  prob-
lems on Community  affairs.  Moreover  the Committee 
constructively  worked  on solutions  to monetary  ques-
tions  in a worldwide  context. 
No C 195/2 Official  Journal  of the European  Communities 15. 8. 77 
COMMUNITY  ACTION  AND  THE  ACTIVITIES  OF THE  COMMITTEE 
3. In 1976,  the Committee  devoted  a large  part  of its 
time to examinations  of the  economic  situations  of 
Member  States,  paying  particular  attention  to monetary 
policy  measures  used  in response  to the  overall 
economic  situation.  During  the year  all Community 
countries  were  examined  at least  .once,  and  some  of 
them  much  more  frequently.  These  more  frequent  ex-
aminations  were  either  undertaken  in conformity  with 
the provisions  governing  the use of Community  credit 
mechanisms  or as a consequence  of the non-participa-
tion of Member  States  in the financing  of intra-Com-
munity  assistance. 
4. One  of the countries  whose  economy  was examined 
by the Committee  on numerous  occasions  was  Italy.  At 
the beginning  of the year,  the ad hoc  working  party 
chaired  by Mr de la Geniere  prepared  a report  to the 
Committee  on the economic  situation  in Italy  and  the 
economic  policy  conditions  which  could  be attached  to 
a Community  loan  to that  country.  The  Committee 
adopted  that  report  at its February  meeting  and submit-
ted an opinion  to the Council  and the Commission  (An-
nex I). This  opinion  was  taken  into  account  when  the 
Council  adopted  a Decision  on 15 March  1976  fixing 
the economic  policy  conditions  to be observed  by Italy. 
In November,  the de la Geniere  group  delivered  a new 
report  on the Italian  economy  which  was  approved  by 
the Committee  and submitted  to the Commission  in De-
cember  1976.  The Italian  lira came  under  renewed  pres-
sure in late April  and May,  and the Italian  Government 
requested  the  Commission's  authorization  to take 
emergency  measures  under  Article  108 of the EEC  Trea-
ty. The  Monetary  Committee  was  consulted  on this oc-
casion,  and  again  on 2 October  when  the Italian  au-
thorities  decided  to introduce  a temporary  (for 15 days) 
tax on purchases  of foreign  currency  and on 26 October 
when  this  tax was  re-introduced  although  at a lower 
rate, along  with  a whole  series  of other  measures  aimed 
at stabilizing  the Italian  economy.  The  Committee  con-
tinued  to monitor  the Italian  situation  on a permanent 
basis  right  through  the year. 
5. The  Committee  twice  examined  the situation  in the 
United  Kingdom,  as required  by that  country's  non-par-
ticipation  in the provision  of medium-term  financial  as-
sistance  for Italy.  The Committee,  aided  by the work  of 
the ad hoc working  party  chaired  by Mr Andersen,  ag-
reed that  the United  Kingdom's  non-participation  was 
justified  by its balance  of payments  and  reserves  posi-
tions. 
6. During  autumn,  the pound  sterling  came  under  se-
vere pressure  on the exchange  markets,  and at its meet-
ings in September  and  December,  the Committee  held 
an examination  of the economic  situation  in the United 
Kingdom  and  of the economic  and  monetary  policy measures  being  taken  to meet  this situation.  The  Com-
mittee,  during  its deliberations,  kept  itself  informed  ab-
out financial  assistance  made  available  to the UK by 
other  international  organizations. 
7. The  working  party  chaired  by Mr Andersen  also 
met in December  to prepare  a report  on the economic 
situation  in Ireland  and  the  extent  to which  the 
economic  policy  conditions  for 1976  in connection  with 
the Community  loan  to that  country  had been  met.  The 
Committee  took  note  of the progress  made  and  esti-
mated  that  a basis  for further  progress  in 1977  had been 
established. 
8. In response  to the communication  'Economic  and 
Monetary  Policy  Measures'  presented  by the Commis-
sion to the European  Council  on 1 and 2 April,  and to 
the suggestions  put forward  by the Netherlands  Presi-
dent of the Council  for strengthening  the economic  and 
financial  cohesion  of the Community,  the Committee 
devoted  a number  of meetings  to examining  three  as-
pects  of monetary  problems  which  presented  themselves 
to the Community.  These  were  the Community's  ex-
change  rate  arrangements,  the fixing  of quantitative 
monetary  policy  objectives,  and control  of the Euro-cur-
rehcy  markets.  At the end of its discussions  it adopted  a 
report,  which  was  submitted  to the Council  and  the 
Commission  (Annex  II). 
(a) Discussion  on the Community's  exchange  rate  ar-
rangements  was  based  on proposals  made  by the 
Netherlands  members.  Account  was  also  taken  of 
proposals  made  by the French  members  in 1975. 
The objective  of both  sets of proposals  was to aim at 
a more  coordinated  and less divergent  system  of ex-
change  rates  in the Community.  The  Dutch  propos-
als reflected  a desire  for a better  cooperation  be-
tween  snake  countries  and  those  countries  whose 
currencies  float  independently  without  recreating 
exchange  rate  rigidities.  The  essence  of these  pro-
posals  was  to provide  a framework  for discussion 
within  the Community  on exchange  rate  policies 
and related  measures  by introducing  a system  of so-
called  target  zones  expressed  in effective  exchange 
rates.  The  Committee  concluded  that  the introduc-
tion of a coherent  system  to cover  all Member  States 
along  the lines  suggested  would  not be feasible  at 
present,  given  the wide  divergences  in the trends  of 
the economies  of the Member  States  as well  as dif-
ferences  of opinion  on various  aspects  of the pro-
posed  scheme.  However,  the Committee  proposed  to 
the Council  that  it continue  its discussions  on the 
proposals.  Work  is now  proceeding  to see how  and 
15. 8. 77 Official  Journal  of the European  Communities No C 195/3 
under  what  circumstances  the proposals  could  be 
implemented  and the Committee  will report  back  to 
the Council  in early  1977. 
(b) Discussion  on the fixing  of quantitative  monetary 
policy  objectives  was based  on an initial  exchange  of 
views  on the experiences  of Member  States  in using 
this kind  of instrument,  and on a preliminary  report 
prepared  by the Working  Party  on Harmonization 
of Monetary  Policy  Instruments  (Annex  III).  The 
Committee  concluded  that  internally  established 
monetary  objectives  which  vary  from  one Member 
State  to another  should  be discussed  from  time  to 
time in the Committee,  which  should  compare  the 
outturn  with  the objectives,  examine  and  account 
for any  deviations  and  discuss  possible  remedies. 
The theoretical  and  technical  studies  of ways  and 
means  of gradually  aligning  intermediate  objectives 
without  encroaching  upon  national  powers  and 
areas  of responsibility  is being  pursued  in the work-
ing party. 
(c) The  examination  of ways  of controlling  the Euro-
currency  markets  was  prepared  by the Working 
Party  on Short-term  Capital  Movements,  which 
submitted  a report  to the Committee  on 'The  Euro-
currency  markets  and the regulation  of international 
financial  flows'  (Annex  IV).  The  Committee  was 
sceptical  of the practical  possibility  of introducing 
control  of the Euro-currency  markets  by monetary 
policy  means,  and concluded  that  only  steps  aimed 
at improving  transparency  of these  markets  could  be 
undertaken  at present.  It supported  efforts  being 
made  in various  fora  to improve  the available  in-
formation  on countries'  indebtedness  and to resolve 
the problems  involved  in a greater  degree  of col-
laboration  between  national  risks  bureaux. 
9. In March,  the Council  took  a decision  to raise  a 
Community  Loan  in favour  of Italy  and  Ireland.  This loan,  upon  which  the Committee  was  consulted,  for a 
total amount  of $ 1 100 million  and DM  500  million, 
was made  up of four  parts.  Firstly,  a fixed-interest,  six-
year bond  issue  of $ 300  million,  a fixed-interest 
seven-year  bond  issue  of DM  500  million,  a fixed-rate 
four-year  private  placement  of notes  of $ 500  million, 
and a five-year  floating  rate bank  loan  of $ 300 million. 
Later  in the year,  it was  considered  opportune  and use-
ful to consolidate  a part  of the floating-rate  bank  loan 
into a medium-term  fixed  interest  loan.  The  Committee 
was consulted  on this proposal  at various  stages  of the 
negotiations,  and on the filing  of the registration  state-
ment  with  the SEC  following  the assignment  of a triple 
A rating  to the Community.  This  operation  was  success-
fully  concluded  in October  with  the floating  of a $ 100 
million  five-year  note  issue  on the New  York  market. 
10. As usual,  the Committee  discussed  international 
monetary  problems  on a number  of occasions,  including 
the finalizing  of the revision  of the IMF  Articles  of 
Agreement,  and problems  arising  out of the sale of gold by 
the IMF,  with  a view  to arriving  at a common  position 
of Community  countries.  In addition,  it monitored  the 
work  of the fourth  commission  (finance)  of the Confer-
ence on.  International  * Economic  Cooperation.  The 
Committee  was  also  instrumental  in arriving  at com-
mon positions  of Member  States  for the annual  meet-
ings of the World  Bank  and  International  Monetary 
Fund  at Manila  in October. 
11. The  Committee  also  examined  various  other  mat-
ters, the main  ones  being  foreign  exchange  market  prac-
tices and  regulations  in Member  States,  proposals  to 
change  the conversion  rates  for national  currencies  into 
units  of account  for the purposes  of the Common  Agri-
cultural  Policy,  and  monetary  compensatory  amounts 
within  the Common  Agricultural  Policy. 
WORKING  PARTIES  OF THE  MONETARY  COMMITTEE 
12. The  Working  Party  on Securities  Markets  met four 
times  in 1976,  and continued  to examine  developments 
in the capital  markets  of the Member  States  and in the 
international  bond  markets  and  also  discussed  capital 
market  policies.  In view  of the growing  tendency  for is-
suers  to use variable  rate techniques  for raising  loans  in 
a period  of monetary  erosion  and instability  of interest 
rates,  the working  party  decided  to undertake  a study  of 
the different  formulae  used  for issuing  floating  rate 
notes  on the international  market,  and the implications 
of this  method  for the future  of the national  fixed-in-
terest  bond  markets  as a means  of raising  long-term 
capital.  This  work  has begun  and  will  be continued  in 
1977.  In addition,  the working  party  also  held  an ex-change  of information  on accounting  procedures  and 
tax treatment  of transactions  in securities. 
13. The  Working  Party  on Harmonization  of Mon-
etary  Policy  Instruments,  a joint  group  of the Committee 
and the Committee  of Governors,  met  several  times  in 
1976.  In June,  it submitted  an interim  report  (Annex  III) 
to the two  Committees  who  examined  it and,  on this 
occasion,  confirmed  the direction  in which  the working 
party  proposed  to orient  its work.  As a result,  the work-
ing party  then  commenced  a new  series  of studies  of 
simulation  exercises  with  monetary  policy  instruments 
arid analyses  of the transmission  process  of monetary 
policy. 
No C 195/4 Official  Journal  of the European  Communities 15. 8. 77 
14. Following  the revised  terms  of reference  given  to it 
by the Committee  and  the Committee  of Governors  in 
1975,  the  joint  Working  Party  on Short-term  Capital 
Movements  continued  its work  on the 'Euro-currency 
markets  and  the  regulation  of international  financial flows'.  It submitted  a report  on this  matter  to the two 
parent  Committees  in June  (Annex  IV) and  this  report 
formed  the basis  for the Committee's  discussions  and 
subsequent  report  on this  topic  (see  paragraph  8 (c) 
above). 
LIST  OF MEMBERS  AND  ALTERNATES  OF THE  MONETARY  COMMITTEE 
Chairman 
Mr K.-O.  Pohl 
Vice-Chairmen 
Mr S. Andersen 
Mr J.-Y.  Haberer 
Dott.  S. Palumbo 
Members 
Mr M. J. Balfour 
Mr F. Boyer  de la Giroday 
Mr B. J. Breen 
(until  17 November  1976) 
Mr R. de la Geniere 
Mr A. Dondelinger 
Dr O. Emminger 
Mr K. Hansen 
Mr M. Horgan 
(since  10 September  1976) 
Mr G. Janson 
Mr N. Jordan-Moss 
(since  19 January  1976) 
Mr R. Kirsch 
Prof.  G. Magnifico 
Dott.  U. Mosca 
Mr T. O'Cofaigh 
(until  10 September  1976) 
Mr T. O'Grady-Walshe 
(since  17 November  1976) 
Dr C. J. Oort 
Drs. A. Szasz 
Mr J. van Ypersele  de Strihou 
Dr H. H. Weber 
Chairman  of the Alternates 
Mr J. G. Littler Staatssekretar  — Bundesministerium  der Finanzen  (Bonn) 
Nationalbankdirektor  (Copenhagen) 
Chef du service  des affaires  Internationales  a la direction  du tresor 
ministere  de Peconomic  et des finances  (Paris) 
Dirigente  generate  al Ministero  del Tesoro  (Rome) 
Bank  of England  (London) 
Director  in the Directorate-General  for Economic  and Financial  Affairs  — 
Commission  of the European  Communities  (Brussels) 
Central  Bank  of Ireland  (Dublin) 
Sous-gouverneur  de la Banque  de France  (Paris) 
Commissaire  au controle  des banques  (Luxembourg) 
Vizeprasident  der Deutschen  Bundesbank  (Frankfurt-am-Main) 
Departementschef  — Det 0konomiske  Sekretariat  (Copenhagen) 
Department  of Finance  (Dublin) 
Directeur  de la Banque  nationale  de Belgique  (Brussels) 
H.M.  Treasury  (London) 
Conseiller  de gouvernement  — Ministere  des finances  (Luxembourg) 
Banca  d'ltalia  (Rome) 
Director-General  for Economic  and Financial  Affairs  — Commission  of 
the European  Communities  (Brussels) 
Department  of Finance  (Dublin) 
Central  Bank  of Ireland  (Dublin) 
Thesaurier  generaal  bij het Ministerie  van Financien  (The  Hague) 
Directeur  van de Nederlandsche  Bank  NV (Amsterdam) 
Conseiller  du ministre  des finances  (Brussels) 
Ministerialdirektor  — Bundesministerium  der Finanzen  (Bonn) 
of the Monetary  Committee 
H.M.  Treasury  (London) 
15. 8. 77 Official  Journal  of the European  Communities No C 195/5 
Alternates 
Mr H. Baquiast 
(since  24 June  1976) 
Dott.  V. Barattieri 
di San Pietro 
Mr J.-M.  Bloch-Laine 
(until  24 June  1976) 
Drs. D. H. Boot 
Mr C. F. Cavanagh 
(until  25 March  1976) 
Mr H. Dalgaard 
Dr W. Flandorffer 
Mr R. H. Gilchrist 
(since  21 June  1976) 
Mr F. L. Hall 
(until  21 June  1976) 
Mr P. Jaans 
Mr G. Jennemann 
Mr G. Lefort 
Mr D. McCormack 
(until  30 January  1976) 
Mr J. Mertens  de Wilmars 
Mr L. Meulemans 
Mr J. E. Nash 
Mr G. Reynolds 
(since  30 January  1976) 
Mr M. Schmit 
Mr B. Scully 
(since  25 March  1976) 
Mr N. Ussing 
Drs. R. Van  Bovfea 
Dr M. Wegner Sous-directeur  a la direction  du tresor 
finances  (Paris) 
Banca  d'ltalia  (Rome) ministere  de l'economie  et des 
Sous-directeur  a la direction  du tresor  — ministere  de l'economie  et des 
finances  (Paris) 
Onderdirecteur  van de Nederlandsche  Bank  NV (Amsterdam) 
Department  of Finance  (Dublin) 
Kontorchef  — Danmarks  Nationalbank  (Copenhagen) 
Ministerialrat  — Bundesministerium  fiir Wirtschaft  (Bonn) 
Bank  of England  (London) 
Bank  of England  (London) 
Secretaire  general  au commissariat  au controle  des banques  (Luxembourg) 
Bankdirektor  — Deutsche  Bundesbank  (Frankfurt-am-Main) 
Directeur  general  des services  etrangers  de la Banque  de France  (Paris) 
Central  Bank  of Ireland  (Dublin) 
Conseiller  economique  de la Banque  nationale  de Belgique  (Brussels) 
Inspecteur  general  a ^administration  de la tresorerie  (Brussels) 
Director  in the Directorate-General  for Economic  and Financial  Affairs  — 
Commission  of the European-  Communities  (Brussels) 
Central  Bank  of Ireland  (Dublin) 
Inspecteur  des Finances  (Luxembourg) 
Department  of Finance  (Dublin) 
Kommiteret  — Det  ©konomiske  Sekretariat  (Copenhagen) 
Ministerie  van Financien  (The  Hague) 
Director  in the Directorate-General  for Economic  and Financial  Affairs  — 
Commission  of the European  Communities  (Brussels) 
Dott.  A. Zodda 
Secretariat 
Mr G. Morelli 
Mr G. Lermen 
Mr A. Chapman Ministero  del Tesoro  (Rome) 
No C 195/6 Official  Journal  of the European  Communities 15. 8. 77 
ANNEX  I 
REPORT  TO THE  COUNCIL  AND  THE  COMMISSION  ON  THE  ECONOMIC  SITUATION  IN 
ITALY  AND  THE  ECONOMIC  POLICY  CONDITIONS  WHICH  COULD  BE ATTACHED  TO A 
COMMUNITY  LOAN 
Introduction 
1. At its meeting  of 16 February  1976,  the Council  authorized 
the opening  of the negotiations  necessary  for a Community 
Loan  operation  in favour  of Italy.  Council  Regulation  (EEC) 
No 397/75  concerning  Community  loans,  lays  down  (Articles 
3 and  8) that  the  Council,  acting  on a proposal  from  the 
Commission,  which  consults  the Monetary  Committee  on the 
matter,  shall  decide  the economic  policy  conditions  to be fulfil-
led by the beneficiary  Member  State  in order  to redress  its bal-
ance  of payments. 
2. In accordance  with  this  Regulation,  on 27 February  1976, 
the Committe  held  an examination  of the economic  situation 
in Italy,  prepared  by an ad hoc  working  party  chaired  by Mr 
de la Geniere,  First  Deputy-Governor  of the Banque  de France. 
The Monetary  Committee's  conclusions  on this  matter  are 
summarized  in this  report,  which  revises  and  up-dates  that 
which  the  Monetary  Committee  prepared  on 28 November 
1975  (11/858/75)  in the  framework  of the  medium-term 
financial  assistance  granted  to Italy  by Council  Directive 
74/637/EEC. 
Economic  situation  in Italy 
3. The  "Italian  economy  was  hit by the recession  in 1975.  The 
main  economic  indicators  show,  however,  that  the trend  pat-
tern varied  during  the year:  the recession  steadily  deepened  in 
the first  three  quarters  but a turning  point  was  reached  in the 
fourth,  when  signs  of a recovery  appeared.  Compared  with  the 
same  periods  last year,  the unadjusted  index  of industrial  pro-
duction  fell 119%  in the first  quarter,  122%  in the second, 
12 3% in the third  and  2-5%  in the fourth,  a drop  of 9 8% for 
the year  as a whole.  As a result,  the gross  domestic  product  in 
terms  of volume  for 1975  was  some  3 4% below  the 1974 
level. 
4. The  downturn  in production  in 1975  led to a progressive 
deterioration  in the employment  situation  and  an increase  in 
unemployment,  on an annual  comparison  of 0 5% in the first 
quarter,  37 8% in the second,  17 6% in the third,  and  15 6% 
in the fourth  (source:  ISTAT).  It should  be added  that  these 
figures  do not tell the full story,  since  they  do not take  account 
of short-time  working,  whether  or not  'compensated'  by the 
Cassa  Integrazione  (the  number  of hours  covered  by payments 
from  this body  increased  three-fold  between  1974  and  1975). 
5. The  rate  of price  increases  slowed  down  somewhat  in 1975. 
Thus,  compared  with  the previous  quarter,  wholesale  prices, after  rising  04%  in the first  quarter,  increased  only  01%  in 
the second  quarter  but 0 9% in the third  quarter  and  2-4%  in 
the fourth.  The  rise in consumer  prices,  after  reaching  3 6% in 
the first  quarter  of 1975  and  2-7%  in the second  quarter,  was 
1-9%  in the third  quarter  and  3-0%  in the fourth  (still  com-
pared  with  the  previous  quarters).  A further  increase  of 
1-1%  was  recorded  in January  1976.  For  1975,  the rise  in 
wholesale  prices  averaged  8-5%  and  that  in consumer  prices 
170%. 
Although  the rate  of increase  (year-on-year)  lost  momentum, 
the trend  in recent  months  remains  a source  of concern. 
These  price  rises  were  accompanied  by a sharp  increase  in 
wages  and  salaries.  During  the year,  hourly  wages  rose  by 
27%,  representing  an increase  in real  wages  and  salaries  and 
hence  a considerable  extra  burden  for firms  whose  profit  mar-
gins had already  considerably  narrowed. 
6. The  balance  of payments  improved  in 1975:  the  overall 
deficit  narrowed  to Lit  1 129 000  million  (as  against  Lit 
3 588  000  million  in 1974)  and  so roughly  matched  the drop 
in official  reserves  (Lit  1 239 000  million).  On the  basis  of 
foreign  currency  statistics,  the deficit  on the trade  balance  (cif-
fob) was  Lit  2 520  000  million  (as  against  Lit  6 481  000 
million  in 1974),  and  the balance  of service  transactions  and 
transfers  showed  a surplus  of Lit  1 079 000  million  (Lit 
607 000  million  in 1974),  giving  a deficit  on current  account 
of Lit 1 368 000  million  (Lit  5 830  000  million  in 1974). 
The most  striking  feature  of this  development  was  the recovery 
of the trade  balance,  which  is all the more  remarkable  since  it 
took  place  in a period  of contraction  in the volume  of inter-
national  trade.  Imports  fell  5-7%  in terms  of value  in 
January-December  and  14%  in terms  of volume  in January-
November  1975,  compared  with  the corresponding  periods  in 
1974.  By contrast,  exports  during  the same  periods  increased 
15-6%  in terms  of value  and 1-7%  in terms  of volume  (all on a 
trade  statistics  basis).  These  figures,  however,  indicate  the pre-
carious  nature  of the recovery  as it is shown  to be primarily 
due to the fall in imports  following  the contraction  in domestic 
demand:  it should  be noted  that  a third  of the trade  deficit  in 
1975  was  recorded  in the fourth  quarter,  when  the recovery 
got under  way. 
The economic  policy  pursued  in 1975  and  observance  of the 
economic  policy  conditions  laid  down  for  the  grant  of 
medium-term  financial  assistance  to Italy 
(Articles  6 and  7 of Council  Directive  74/637/EEC  of 
17 December  1974) 
7. From  the beginning  of 1974,  the authorities,  faced  with  the 
stagnation  of domestic  demand,  had  eased  the  restrictive 
nature  of monetary  policy;  the depth  of the recession  in 1975 
15. 8. 77 Official  Journal  of the European  Communities No C 195/7 
prompted  them  to adopt  a monetary  policy  aimed  at assisting 
the recovery  of domestic  demand.  This  policy  resulted  in a sig-
nificant  fall in interest  rates,  a return  to a 'normal'  structure  of 
rates  and,  at the same  time,  a revival  on the financial  market. 
Together  with  a sharp  expansion  in the Treasury's  borrowing 
requirement,  it caused  the ceilings  fixed  in connection  with  the 
grant  of medium-term  financial  assistance  to be considerably 
exceeded. internal  and external  situation  would,  if no corrective  measures 
were  taken,  cause  the ceilings  fixed  in that  Directive  to be once 
again  considerably  exceeded  in 1976.  Under  these  circum-
stances,  the Italian  authorities  could,  in connection  with  the 
grant  of a Community  loan,  contemplate  taking  measures  to 
ensure  compliance  with  these  conditions,  some  of which  could 
even  be tightened. 
8. The  growth  in total  lending  will  probably  exceed  the ceiling 
of Lit 24 700  000  million  fixed  for the period  from  1 April 
1975  to 31 March  1976  (Article  6 of Directive  74/637/EEC 
mentioned  above)  by about  Lit  5 000  000  million,  as the 
Treasury  deficit  is likely  to be much  higher  than  expected. 
Total  lending  has been  running  ahead  of this  ceiling  since  Oc-
tober  1975;  until  then,  the intermediary  objectives  had  been 
observed. 
The ceilings  on public  finances  fixed  in Article  6 of the Direc-
tive were,  likewise,  very  substantially  exceeded:  the rate  of in-
crease  in central  government  expenditure  was  of the order  of 
23%  in 1975  instead  of the 16%  laid  down,  and  the deficit  on 
Treasury  transactions  exceeded  the  figure  of Lit 8 000  000 
million  by about  Lit 5 400  000  million.  It should,  however,  be 
noted  that,  while  in 1974  three-quarters  of the Treasury  deficit 
had been  financed  by recourse  to the Banca  d'ltalia,  in 1975 
only about  40%  of it was  financed  in this  way. 
Outlook  for 1976  and  the economic  policy  conditions  to be 
observed  by the Italian  authorities 
9. According  to macro-economic  forecasts  prepared  by the 
Italian  experts,  the growth  of GDP  in 1976  could  well  amount 
to 1 to 2% in real  terms.  These  forecasts  assume  a growth  of 
6% in the volume  of world  trade,  with  Italian  exports  main-
taining  their  relative  share.  The  expected  rate  would  be based 
on a 2 to 3% increase  in private  consumption  and  a continua-
tion,  although  at a slower  pace,  of the decline  in investment 
(affecting  primarily  plant  and  machinery).  There  will  probably 
be a further  increase  in unemployment  over  and above  the high 
level  reached  at the end  of 1975.  Prices,  measured  in terms  of 
the GDP  deflator,  will  probably  rise  by 16%.  Finally,  the pay-
ments  deficit  on current  account  is likely  to be of the order  of 
Lit 500  000  to Lit 1 000 000  million. 
Recent  economic  developments  in Italy  have  thus  highlighted 
the fragile  aspects  of the  economy.  Budgetary  measures 
designed  to stimulate  demand,  coupled  with  an easy  monetary 
policy,  have  led to a certain  upturn  in activity  but also  to a de-
terioration  in the balance  of payments  and  to the risk  of a 
quickening  in the pace  of inflation. 
10. Given  these  macro-economic  forecasts,  the  Committee 
has, together  with  the  Italian  authorities,  reviewed  the 
economic  policy  conditions  laid  down  in Council  Directive 
75/784/EEC  of 18 December  1975  adapting  the conditions 
laid down  for the grant  of medium-term  financial  assistance  to 
Italy.  It has been  found  that  the recent  deterioration  in Italy's 11. Directive  75/784/EEC  provided  that  the growth  of total 
lending  in 1976  would  be limited  to Lit 31 000  000  million. 
The Italian  authorities  could  lower  this  ceiling  to Lit 
30 000  000  million,  necessitating  a contraction  in the public 
sector  borrowing  requirement  and,  at the same  time,  a reduc-
tion in the growth  rate  of the private  sector's  financial  assets, 
which  recently  triggered  flights  of capital  out of the country.  In 
these  circumstances,  the rate  of growth  of money  supply  in 
1976  will  be at a similar  level  to previous  years  (about  18%). 
12. Directive  75/784/EEC  had  limited  the rate  of increase  in 
central  government  current  expenditure  to 15%  in 1976.  The 
present  forecasts  of current  expenditure  suggest  that  the rate 
laid down  will  be exceeded.  The  Italian  authorities  have  pro-
posed  that  it be replaced  by a cash  ceiling  on total  expenditure; 
so as to curb  expenditure,  they  could  accept  a ceiling  of Lit 
40 000  000  million,  which  is slightly  lower  than  the forecast  of 
Lit 40  600  000  million  in the  Monetary  Committee's 
November  report  (doc.  11/858/75).  The  rate  of growth  of total 
expenditure  will  thus  stabilize  in 1976  at about  25%,  the same 
as in 1975. 
13. The  deficit  on Treasury  transactions  had  been  limited  to 
Lit 14 800  000  million  in 1976.  The  Italian  authorities  feel 
, that this  ceiling  could  be lowered  to Lit 14 300  000  million. 
The main  emphasis  would  have  to be on cutting  or postponing 
certain  items  of expenditure,  but,  to achieve  the objective  laid 
down,  it would  also  be necessary  to increase  the tax burden. 
14. By contrast,  the Italian  authorities  have  pointed  out that 
the ceiling  of Lit 5 700  000  million  fixed  for central  bank 
financing  of the  deficit  on Treasury  transactions  cannot  be 
lowered  and  might  even  be exceeded. 
15. Finally,  it should  be noted  that  Italy's  application  for a 
Community  loan  of around  $ 1 000  million  comes  at a time 
when  a deficit  on the current  balance  of up to Lit 1 000  000 
million  ($ 1 200 million)  is forecast.  In addition,  there  is the 
need  to take  into  account  debt  maturities  totalling  $ 2 300 
million  (about  Lit 1 800 000  million)  in 1976. 
16. The  Committee  has  noted  the economic  policy  measures 
taken  by the Italian  authorities  on 25 February  1976  to reduce 
internal  liquidity.  The  Committee  has  also  noted  the adjust-
ments  envisaged  by the  Italian  authorities  to the  economic 
policy  targets  for 1976  fixed  by the Community,  to take  into 
account  recent  developments  in the  Italian  economy.  While 
appreciating  the efforts  that will  have  to be made  by the Italian 
authorities  to respect  the revised  targets,  the Committee  em-
No C 195/8 Official  Journal  of the European  Communities 15. 8. 77 
phasizes  that  the restoration  of internal  and  external  equilib-
rium  necessarily  implies  a significant  reduction  in the rate  of 
monetary  expansion  which  last  year  exceeded  nominal  growth 
of GNP  by 5-9  percentage  points  (nominal  GNP  growth 
15-6%,  M2  growth  21-5%).  A significant  reduction  in the 
Treasury  deficit  would  facilitate  the achievement  of this  objec-
tive. Moreover,  the target  for Treasury  financing  by the Cen-
tral Bank  is excessive  and  should  be further  reduced. 
Outside  the strictly  monetary  and  financial  sphere;  the Com-
mittee  suggests  that  an essential  element  for the re-establish-
ment  of equilibrium  in the Italian  economy  is a moderation  in the rate  of increase  of nominal  incomes.  Monetary  and 
budgetary  policy  cannot  by itself  moderate  in a satisfactory 
manner  pressures  which  are incompatible  with  growth  of out-
put in real  terms. 
Finally,  the  Committee  recongized  that,  in accordance,  with 
their  specific  declarations,  the Italian  authorities  will  not take 
any measures  of a financial  or commercial  nature  to restrict 
imports  or subsidize  exports.  In this  context,  the Committee 
recognizes  that,  given  the Italian  balance  of payments  prospects, 
the proposed  Community  Loan  operation  is opportune. 
ANNEX  II 
REPORT  TO THE  COUNCIL  AND  TO THE  COMMISSION 
1. In a communication  entitled  'Economic  and  Monetary 
Policy  Measures'  the  Commission  presented  certain  proposi-
tions  to the European  Council  on 1 and  2 April  1976.  At the 
Council  meeting  (Economic  and  Financial  Affairs)  held  in July 
1976,  the  Netherlands  President  put  forward  certain  sugges-
tions  for strengthening  the economic  and  financial  cohesion  of 
the Community.  It was  these  two  events  which  led the Commit-
tee to examine  three  aspects  of the present  currency  problems 
which  are very  closely  interlinked  and  of great  importance  to 
the Community,  namely,  the  Community  exchange  rate  ar-
rangements,  the fixing  of quantitative  monetary  policy  objec-
tives  and  control  of the Euro-currency  markets. 
In accordance  with  the Council's  request  of 26 July  1976,  the 
Committee  now  submits  a summary  of its findings. 
Community  exchange  rate  arrangements 
2. A working  paper  presented  by the Netherlands  Members 
served  as basis  for discussion  of this  topic.  Account  was  also 
taken  of proposals  made  by the French  delegation  in 1975,  The 
Committee  noted  that  the two  sets  of proposals  are motivated 
by the same  considerations.  Both: 
— are  based  on the belief  that  the present  situation  is unsatis-
factory; 
— reflect  a desire  for  a better  cooperation  between  snake 
countries  and  those  whose  currencies  float  independently 
without  recreating  rigidities  to the detriment  of currencies 
which  are currently  outside  the snake; 
— are  based  on the recognition  of the fact  that  exchange  rate 
developments  of all  Community  currencies  should  be 
subject  to some  kind  of Community  coordination. 3. The  essence  of the Netherlands  Members'  proposals  is: 
(a) to provide  a framework  for discussion  within  the  Com-
munity  on exchange  rate  policies  and  related  measures  (in 
particular  monetary  policy,  intervention  and  exchange  con-
trols)  with  the  aim  of coordinating  the  various  policy 
aspects; 
(b) to avert  the threat  of a politically  undesirable  division  be-
tween  those  Member  States  which  take  part  in the Euro-
pean  snake  arrangement  and  those  which  do not.  Snake 
members  have  clear  obligations  towards  each  other  which 
make  coordination  of policy  a necessity.  Member  countries 
which  do not participate  in the snake  arrangement  do not 
have  the  same  obligations  in respect  of exchange  rate 
policies  as snake  members; 
(c) to create  certain  flexible  guidelines  which  could  contribute 
to improving  the coordination  of economic  policies.  These 
guidelines  might  include: 
(i) fixing  of non-binding  'target  zones'  in terms  of effective 
exchange  rates  either  for the floating  currencies  alone 
or for  all Community  currencies.  These  target  zones 
will initially  serve  only  as a trigger  for consultation  on 
the Community  level,  when  market  rates  move  outside 
the target  zone; 
(ii) negative  intervention  and  monetary  policy  obligations 
(no obligation  to keep  the  exchange  rate  within  the 
target  zone,  but the commitment  to refrain  from  policy 
measures  which  would  push  the exchange  rate  out  of 
that zone  in a downward  direction); 
(iii) possibly,  in a later  stage,  the  obligation  to direct 
monetary  policy  at preventing  a depreciation  below  the 
target  zone. 
15. 8. 77 Official  Journal  of the European  Communities No C 195/9 
4. The  Committee  welcomed  the determination  of the present 
members  of the 'snake'  to maintain  their  participation  in it and 
noted  that  this  was  in itself  a measure  of the success  of 
economic  policy  coordination  in these  countries. 
The Committee  also  recognized  that in circumstances  in which 
there  were  large  differences  in domestic  rates  of inflation  both 
within  the Community  and outside,  a system  of floating  rates 
had to a certain  extent  played  a stabilizing  role and had helped 
to avoid  the adoption  of undesirable  trade  restrictions.  How-
ever,  it expressed  concern  about  excessive  fluctuations  in ex-
change  rates  and pointed  to the danger  that these  might  spread 
their effects  to other  currencies,  thus  increasing  the general  in-
stability  and even  creating  the risk of retaliatory  protectionist 
measures. 
5. The  Committee  is of the opinion  that  a higher  degree  of ex-
change  rate stability  in the Community  would  be desirable,  but 
that its achievement  presupposes  stability  of underlying 
economic  conditions  as well  as close  convergence  in the trend 
of the economies  of the Member  States,  which  is directly  de-
pendent  on the effective  coordination  of general  economic 
policy.  The coordination  of monetary  and credit  policies  is par-
ticularly  important  in this connection  owing  to their  direct  im-
pact on capital  flows  (see the second  part  of this report).  How-
ever,  while  stressing  the key role of coordination,  the Commit-
tee recognized  that  even  with  closely  coordinated  policies,  the 
economic  development  in the various  countries  could  still di-
verge. 
6. The  Committee  acknowledged  that  the system  of target 
zones  offers  flexibility  as the operating  rules  can be made  as 
binding  as desired.  Moreover,  there  are several  alternative 
ways  of defining  the target  zones  and their  size.  The Nether-
lands  approach  would  allow  the present  snake  machinery  and 
rules  to be retained,  with  wider  and less binding  target  zones 
being  established  for countries  with  independently  floating  cur-
rencies  and possibly  also for snake  currencies  taken  as a group. 
This means  the approach  does  not imply  a weakening  of disci-
pline  in the snake  mechanism,  and does  not require  the coun-
tries with  independently  floating  currencies  to accept  binding 
obligations  to intervene  in the exchange  markets. 
7. Opinion  in the Committee  was  divided  on the question  of 
whether  target  zones  should  be established  only  for indepen-
dently  floating  currencies  to the exclusion  of snake  currencies, 
taken  as a group  or individually. 
Those  in favour  of target  zones  for the independently  floating 
currencies  only  are afraid  that  the obligations  entailed  in the 
fixing  of target  zones  for snake  currencies  might  conflict  with 
snake  rules.  They  stress  die fact  that  the snake  is meant  to 
serve  as an instrument  under  which  the Member  States  ex-
change  rate  policies  vis-a-vis  each  other  are governed  by pre-
cise rules,  but externally  it is intended  to constitute  a joint 
float.  By definition,  this excludes  the Community  from  main-
taining  the currencies  of non-member  countries  at given  levels 
on the exchanges. 
Those  opposed  felt that separate  treatment  for snake  and non-
snake  currencies  constituted  an undesirable  distinction. 
Member  States  participating  in the snake  should  pursub  a policy  coordinated  at Community  level  vis-a-vis  other  Com-
munity  currencies  and the currencies  of the rest of the world, 
in particular  the US dollar.  Only  in this way  could  an asym-
metrical  pattern  between  the burdens  and  duties  of both 
groups  of countries  be avoided. 
•It was further  argued  that,  both  because  of the dollar's  general 
importance  as a vehicle  and reserve  currency  and because  of its 
different  weight  in member  countries'external  transactions,  it 
will be difficult  to achieve  a reasonable  degree  of stability  be-
tween  snake  and non-snake  member  currencies  (and  even  to 
avoid  tensions  within  the snake)  without  concerted  endeavours 
to keep  exchange  rate  movements  between  the snake  and the 
dollar  within  reasonable  bounds. 
8. Some  members  suggested  that there  would  be a case  for al-
lowing  countries  with  independently  floating  currencies  in cer-
tain circumstances  and in consultation  with  countries  affected 
to intervene  in snake  currencies.  The Committee  noted  that the 
Committee  of Governors  is studying  the question  and it may 
consider  the matter  further  when  the Governors'  conclusions 
are available. 
9. Opinion  was  divided  over  the scale  of lending  facilities  — 
some  automatic,  others  less so — at present  available  in the 
Community.  Some  members  felt that it was  essential  to estab-
lish adequate  machinery  for Community  credit  as without  this 
the task  of organizing  exchange  arrangements  in the Commu-
nity would  be impossible.  Other  members  argued  that  suffi-
cient  credit  facilities  already  existed  within  the Community  and 
through  the International  Monetary  Fund,  and that  the provi-
sion of new  drawing  facilities  might  have  inflationary  implica-
tions.  The  Committee  noted  however,  that  countries  with  in-
dependently  floating  currencies,  are always  able  to draw  on the 
existing  short-  and medium-term  credit  facilities  of the Com-
munity  if they  comply  with  their  rules  and conditions.  It was 
'suggested  that,  in order  to reinforce  the process  of convergence 
of economic  policies,  the credit  mechanisms  of the Community 
should  be made  instrumental  to that  end.  This  could  be 
achieved  by partitioning  die credits  available  to a country  in 
tranches  and  imposing  stricter  conditions  for drawings  in 
higher  tranches.  Both  the adequacy  and the conditionality  of 
credit  will be studied  further. 
10. The  Committee  agreed  that,  at present,  given  the wide 
divergences  in the trends  of the economies  of Member  States, 
particularly  inflation  rates,  as well  as differences  of opinion  on 
various  aspects  of the proposed  scheme,  it would  not be fea-
sible to introduce  a coherent  system  along  the lines  suggested. 
However,  the Committee  expressed  its willingness  to continue 
its discussion  of these  proposals,  which  are part  of a more 
comprehensive  package  aiming  at convergence  of economic 
policies  in the Community.  They  should  be studied  further 
both as proposals  for Community  action  and in the framework 
of the preparation  of discussions  in the International  Monetary 
Fund  on this subject. 
No C 195/10 Official  Journal  of the  European  Communities 15. 8. 77 
II. Fixing  of quantitative  monetary  objectives 
11. In its Communication  to the European  Council  of 1 and 2 
April  1976,  the  Commission  emphasized  the  need  for better 
coordination  of economic  policy  for  the  Community.  Since 
monetary  policy  has  an appreciable  impact  on growth,  the 
value  of money  and  employment,  the  coordination  of mon-
etary  policy  in the Community  is an essential  component  of the 
coordination  of economic  policies.  Its aim  must  be the re-es-
tablishment  and  maintenance  of stability  in the countries  of the 
Community.  It is also  one  of the preconditions  for greater  sta-
bility  in exchange  rate  relationships  between  the member  coun-
tries (see  paragraph  5). Stability  is not a goal  in itself,  but the 
key condition  that  must  be fulfilled  if full  employment  and 
balanced  economic  growth  are to be ensured. 
12. The  Committee  agreed  that  coordination  of economic  and 
monetary  policies  with  a view  to stabilization  is not  only 
necessary  for the maintenance  of the European  exchange  rate 
system  (the  'snake')  but  is also  indispensable  if European  in-
tegration  is to make  progress. 
13. When  discussing  the scope  for coordination  of monetary 
policy,  the Committee  began  by considering  what  have  so far 
been  the intermediate  objectives  of monetary  policy  at national 
level,  and  reviewed  experience  gained.  This  discussion  showed 
that there  has been  a trend  in recent  years  towards  heavier  em-
phasis  on money  supply  objectives.  One  Member  State  has 
established  and  published  monetary  targets  for the past  two 
years  while  two  Member  States  have  established  similar  targets 
for the first  time  this  year.  However,  both  the national  defini-
tions  of money  supply  and  also  the degree  to which  quantita-
tive targets  are regarded  as binding  still  vary  substantially  from 
country  to country. 
At present,  the money  supply  is treated  -as a dominant  inter-
mediate  monetary  objective  in four  countries  and  as an ancil-
lary intermediate  objective  in two  other  countries.  In only  two 
countries  is the money  supply  disregarded  altogether  as an in-
termediate  objective. 
In some  member  countries  global  credit  is the  main  inter-
mediate  monetary  objective,  though  here  again  definitions  vary 
from  country  to country.  Interest  rates,  bank  liquidity  and  the 
monetary  base  are also  used  as intermediate  monetary  objec-
tives. 
14. The  differences  in the choices  made  by the various  gov-
ernments  of intermediate  objectives  are mainly  a matter  of the 
varying  importance  and  weight  of the following  factors: 
(i) relative  importance  enjoyed  by monetary  policy  in the 
overall  framework  of economic  and  financial  policy; 
(ii) size  of and  method  of financing  the public-sector  deficit; 
(iii) structure  of the national  financial  markets; 
(iv) economic  impact  of, and  relations  with,  the  rest  of the 
world; 
(v) theoretical  approach  adopted  and  credit  policies  pursued 
by the relevant  central  bank. 15. The  Committee  members  agree  that  a reduction  in the dif-
ferences  between  the intermediate  objectives  would  be useful  in 
itself,  because  these  differences  would  have  an increasingly  dis-
ruptive  effect  the more  progress  is made  towards  economic  and 
monetary  union.  They  are aware  of the danger  that  too  hasty 
an alignment  of intermediate  monetary  objectives  might  fail to 
take sufficient  account  of the structural  differences  between  the 
Member  States  and  could  therefore  limit  the effectiveness  of 
monetary  policy. 
The basis  for coordinating  monetary  policy  must,  in the first 
instance,  be the intermediate  objectives  tested  at national  level; 
subsequently,  efforts  could  be made  to reduce  gradually  the 
differences.  It should  also  be remembered  that  any  improve-
ment  in monetary  policy  cooperation  depends  essentially  on 
the political  will  of those  concerned. 
16. At present,  a majority  of Member  States  are prepared,  not 
only to attach  more  importance  to management  of money  sup-
ply, but  also  to establish  quantitative  intermediate  monetary 
objectives  and to use them  as benchmarks  for their  own  policy; 
there  is also  a broad  measure  of recognition  by the members  of 
the Committee  of the great  importance  for those  involved  in 
the economic  activity  of publishing  monetary  and/or  credit 
guidelines.  Admittedly,  these  objectives  range  from  general  no-
tions  about  medium-term  monetary  trends  to fairly  binding 
quantitative  objectives.  It must  also  be remembered  that  the 
scope  available  to the  central  banks  for  influencing  the 
economy  is by no means  unlimited  and  that  some  room  must 
also be left  for revising  monetary  policy  objectives  given  the 
complexity  of actual  economic  activity  and  the  multiple  and 
sometimes  conflicting  objectives  of economic  policy. 
Those  Member  States  whose  economies  are  particularly  de-
pendent  on external  factors  take  a more  cautious  approach  to 
the idea  of fixing  quantitative  intermediate  monetary  objectives 
which  would  be binding,  their  main  concern  being  their  need 
to be able  to react  flexibly  to exchange  rate  fluctuations. 
17. The  Committee  considers  that  it would  be appropriate  to 
make  pragmatic  use of any  opportunity  of aligning  monetary 
policy  objectives  without  encroaching  upon  national  powers 
and areas  of responsibility. 
The Committee  therefore  concluded  that  internally  established 
national  monetary  objectives  which  vary  from  one  Member 
State  to another  should  be discussed  from  time  to time  in the 
Committee,  which  should  compare  the outturn  with  the objec-
tives,  examine  and  account  for any  deviations  and  discuss  pos-
sible  remedies.  The  theoretical  and  technical  studies  of ways 
and means  of gradually  aligning  intermediate  objectives  should 
be pursued. 
III. Control  of the Euro-currency  markets 
18. On  the basis  of a report  submitted  by the Working  Party 
on Short-term  Capital  Movements,  the Monetary  Committee  has 
15. 8. 77 Official  Journal  of the European  Communities No C 195/11 
studied  the problems  involved  in controlling  the Euro-markets. 
The BIS was  represented  at the Committee's  discussion. 
19. Improvements  in arrangements  for prudential  supervision 
have  been  made  in recent  years  to shield  the Euro-markets 
from  critical  developments.  The  authorities  have  strengthened 
protective  measures  at both  national  and  international  level. 
The Euro-banks,  too,  have  generally  become  more  cautious  in 
their  business  policy,  ftowever,  there,  is a latent  danger  of dis-
turbances  occurring  in view  of the amount  and  mobility  of 
Euro-funds  and  the  constantly  developing  and  changing 
general  situation. 
20. The  Committee  has  conducted  an exchange  of views  on 
the possibility  of improving  control  over  the  potentially 
disturbing  effect  of the  Euro-markets  on monetary  and  ex-
change  rate  policy  by joint  credit  policy  measures  (e.g.  by in-
troducing  minimum  reserve  requirements  on foreign  currency 
assets  or liabilities  in all member  countries  of the EEC).  Differ-
ent views  emerged  on the usefulness  and practicability  of such 
controls  and  also  on whether  or not  the Euro-markets  are a 
source  of liquidity  creation. 
21. Some  members  are of the opinion  that  the Euro-markets 
only act as an intermediary  between  national  money  and  capi-
tal markets  without  creating  money  to any  significant  degree. 
In the  view  of some  other  members,  the Euro-markets  are 
capable  of creating  money  autonomously,  increase  global  cre-
dit supply  and  can  become  an additional  source  of inflation 
when  uncontrolled  developments  occur. 
22. The  way  in which  the  usefulness  of joint  measures  is 
judged  depends  on the different  views  referred  to in paragraph 
21 above.  It depends  also  on differences  between  national  ex-
change  control  practices.  Several  members  consider  that  capital 
flows  through  the  Euro-markets  are  no different  in their 
monetary  and  exchange  rate  effects  from  any  other  interna-
tional  capital  flows  and  that  it is possible  and  practicable  for 
individual  countries  to isolate  themselves  against  disturbing  in-
fluences  associated  with  international  capital  flows  by means 
of suitable  national  controls  (restrictions  on capital  transac-
tions).  Some  of them  therefore  see no need  for joint  manage-
ment  of the  Euro-markets  by credit  policy  measures.  Some 
other  members  whose  countries  apply  capital  restrictions, 
however,  stress  the national  inability  to ward  off massive  in-
flows  from  the Euro-markets,  especially  in times  of monetary 
upheaval.  They,  therefore,  are in favour  of joint  measures  to 
curb  the expansion  of the Euro-markets,  Finally,  joint  mea-
sures  are of particular  interest  to those  countries  that  resort  to 
capital  controls  only  in extreme  cases.  In circumstances  where 
capital  transactions  are in principle  free  of direct  controls  the 
national  market  is always  exposed  to influences  originating  in 
the Euro-markets.  This  also  applies  under  flexible  exchange 
rates  which  can  cushion  disturbances  originating  in the Euro-
markets,  but cannot  ward  them  off completely. 23. There  are also  differences  of view  regarding  the feasibility 
of effective  monetary  controls  over  the Euro-markets.  If joint 
management  by means  of credit  policy  measures  is conducted 
in a limited  region,  there  is a danger  — which  will  increase 
with the severity  of the measures  adopted  — of an acceleration 
' of the tendency  which  already  exists  for Euro-market  business 
to shift  to areps  where  no control  can  be exercised  and  in 
which  banking  supervision  is perhaps  carried  out  with  less 
stringency.  In the opinion  of some  members,  the effect  of joint 
measures  would  thus  be thwarted.  These  members  consider 
that it would  hardly  be possible  to get agreement  on joint  con-
trol measures  over  a wider  area  encompassing  major  financial 
centres  outside  the  Community.  Other  members  see  little 
danger  of business  shifting  its location.  In their  view,  any shifts 
would  be within  narrow  limits  owing  to the established  struc-
ture of banking. 
24. During  discussions  within  the  Monetary  Commitee,  a 
number  of members  pointed  out that  management  of the sup-
ply of funds  through  Euro-banks  in a regulated  area  by means 
of credit  policy  measures  would  need  to be complemented  by 
restrictions  on the demand  for capital  in the Euro-markets  by 
non-bank  residents  of the area  (perhaps  by means  of a cash 
deposit)  in order  for it to be effective.  This  would  prevent 
non-bank  residents  of the regulated  area  from  going  to banks 
outside  the area  when  taking  up loans.  However,  it was  also 
pointed  out  that  such  a combination  of measures  cannot  be 
considered  a permanent  solution  but  only  a temporary  one 
when  critical  monetary  developments  occur. 
25. Given  the present  differences  in assessing  the role  of the 
Euro-markets,  progress  towards  a coordinated  or common  ac-
tion would,  in the view  of the Committee,  presuppose  that  a 
political  consensus  to this  effect  be achieved  and  manifest  itself 
within  the EEC  Council.  Some  members  emphasized  their  view 
that,  if the Community  is to become  a zone  of monetary  stabil-
ity, a more  active  and coordinated  Euro-market  policy  is neces-
sary. 
26. Under  these  circumstances,  the Committee  is of the opin-
ion that  only  steps  aimed  at improving  the transparency  of the 
Euro-markets  can  be undertaken  at present.  The  Committee 
therefore  welcomes  the work  recently  initiated  by the central 
banks  of the member  countries  of the EEC  and the other  mem-
bers of the Group  of Ten  and  Switzerland  to improve  the in-
formation  available  on countries'  indebtedness.  Transparency 
in this  area  is still  not  complete.  The  reporting  procedure 
should  cover  as large  a number  of countries  as possible,  includ-
ing the major  financial  centres  outside  the Community. 
27. In addition,  the Committee  notes  that  efforts  are being 
made  by the Commission,  in its Working  Party  for Coordinat-
ing Banking  Legislation,  to resolve  the problems  associated 
with the possible  establishment  of a system  of collaboration 
between  national  risks  bureaux  of Member  States  on indi-
vidual  large  loans. 
No C 195/12 Official  Journal  of the European  Communities 15. 8. 77 
ANNEX  III 
INTERIM  REPORT  OF THE  WORKING  GROUP  ON  HARMONIZATION 
OF MONETARY  POLICY  INSTRUMENTS 
Introduction 
In the first  stage  of its work,  the expert  group  has focused  on 
intermediate  objectives  of monetary  policy.  These  constitute,  in 
its opinion,  an important  reference  point  for the coordination 
of monetary  policy  in the Community  (see  points  1 and  2 of 
the mandate)  and  a study  of them  should  logically  precede  the 
examination  of instruments. 
Thus  Chapter  I of this  report  gives  an account  of the inter-
,mediate  objectives  chosen  in each  member  country  while 
Chapter  II presents  a comparative  analysis  of them  and sets  out 
the reasons  for differences  between  the intermediate  objectives 
which  are set. 
In Chapter  III the group  develops  some  preliminary  ideas  on 
the problem  of the harmonization  of intermediate  objectives, 
while  emphasizing  that  its scope  should  become  more  clearly 
defined  as the work  of the group  proceeds. prospects.  Bank  credit,  or more  generally  domestic  M2  crea-
tion,  serves  as an important  complementary  intermediate  ob-
jective.  While  total  M2  creation  affects  the level  of demand 
and thereby  the current  account  of the balance  of payments, 
the domestic  component  of M2  creation  not only  affects  the 
size of M2  itself,  but also  to an important  degree  determines 
the relative  shares  of domestic  and external  sources  in M2 cre-
ation  through  its direct  and  indirect  influences  (recourse  to 
foreign  lending  and interest  rate  effects)  on the capital  account 
of the balance  of payments. 
3. In France,  the objective  of the monetary  authorities  is to 
adapt  the actual  or probable  future  amount  of money  in cir-
culation  to the value  of production  and  trade.  As there  is no 
accurate  way  of recording  and analysing  monetary  flows  in the 
economy,  the  central  bank  tends  to refer  to representative 
aggregates  that  are easy  to obtain.  Thus  the most  widely  ac-
cepted  intermediate  monetary  objective  is the growth  of the 
money  supply  (M2  is taken  as the best  indicator),  defined  in re-
lation  to the projected  trend  of GNP. 
I. Intermediate  objectives  in the different  member  states 
1. In Germany,  the  intermediate  objectives  of monetary  policy 
are the monetary  aggregates,  that  is the money  stock  in its var-
ious definitions,  but above  all central  bank  money  (notes  in 
circulation  plus  compulsory  reserves  on banks'  domestic  liabi-
lities,  calculated  at constant  reserve  ratios). To fix this objective,  the authorities  assume  a certain  degree  of 
stability  in the ratio  of money  supply  to GNP,  but allowance  is 
made  for changes  that  may  occur  in the attitude  of economic 
agents  towards  the holding  of cash  balances  and liquid  assets. 
On the other  hand,  the level  of interest  rates  is not an objective 
in itself  and  interest  rate  policy  has  only  an instrumental 
character.  The  success  of monetary  policy  is not measured  by 
the level  which  interest  rates  reach  but by the achievement  of a 
desired  monetary  expansion. To attain  the desired  rate  of growth  of the money  supply,  the 
authorities  seek  to control  all sources  of money  creation.  By far 
the most  important  source  is still  credit  to the economy  (i. e. 
bank  lending  to companies,  households  and  local  authorities) 
and in periods  of restrictive  monetary  policy  specific  limits  are 
set on its expansion. 
For 1975  the Bundesbank  announced  for the first  time  an in-
termediate  objective  in the form  of a quantified  rate  of growth 
of central  bank  money.  For 1976  this  objective  has been  for-
mulated  as a rate  of growth  of, on average,  8% over  the previ-
ous year. 4. In Belgium,  the  intermediate  objectives  of the monetary  au-
thorities  are global  credit  to the corporate  and  household  sec-
tors and  the level  of interest  rates. 
2. In the Netherlands,  also,  monetary  policy  seeks  to influence 
monetary  aggregates.  The  resulting  levels  of interest  rates  are 
accepted  unless  the  policy  is jeopardized  by external  con-
straints.  The  most  important  intermediate  objective  is the level 
of the ratio  between  the liquidity  of the economy  (M2  accord-
ing to the national  definition)  and  nominal  net national  pro-
duct.  In relating  the stock  of M2  to nominal  income,  account 
may be taken  of the scope  for changes  in velocity  of circula-
tion,  which  in conjunction  with  the rate  of M2  creation  pro-
vides  the basis  for the appraisal  of the monetary  situation  and Since  de-specialization  has  reached  a very  advanced  stage 
among  financial  intermediaries  and  there  is a high  degree  of 
substitution  among  the  various  forms  of financial  asset, 
monetary  aggregates  of any  kind  undergo  distortions  which 
considerably  reduce  their  validity  as intermediate  objectives.  In 
formulating  their  intermediate  objectives,  monetary  authorities 
use analytical  forecasts  of the financial  deficits  and surpluses  of 
each  sector  (government,  companies,  households  and external). 
15. 8. 77 Official  Journal  of the European  Communities No C 195/13 
5. In Denmark,  loans  extended  to the private  sector  by finan-
cial institutions,  especially  banks,  are the main  intermediate 
objective.  There  has,  however,  been  a tendency  to favour  a 
wider  concept,  namely  the overall  expansion  of credit  from 
either  domestic  or foreign  sources. 
After  a long  period  of surplus,  the budget  has recently  moved 
into deficit  and the monetary  authorities  have  therefore  been 
led to pay greater  attention  to the growth  of the money  supply. 
Interest  rates  play  a more  limited  role  as external  constraints 
call for an adequate  margin  between  domestic  and foreign  in-
terest  rates,  especially  in the short-term  range. 
6. In Italy,  the major  intermediate  objectives  are credit  to the 
private  and  public  sectors  (credit  granted  by banks  and 
specialized  credit  institutions,  and  global  credit),  monetary 
base (in particular,  the total  reserves  of the banking  system) 
and interest  rates. 
The money  supply  is regarded  as less significant  than  it is in 
other  countries,  because  there  is a high  degree  of substitution 
between  money  and  other  financial  assets,  which  is rendered 
greater  by the fact  that  banks  are able  to pay very  high  interest 
rates  on current-account  deposits. 
To provide  a formal  framework  for the choice  of intermediate 
objectives,  the Italian  monetary  authorities  make  forecasts  of 
financial  accounts,  on the basis  of which  an overall  compari-
son can  be made  of the financing  capacity  and  financing  re-
quirements  of the different  sectors  and  forecasts  of financial 
flows  consistent  with  these  aggregates  can be formulated. 
7. In the United  Kingdom,  the formulation  of intermediate  ob-
jectives  is carried  out against  the background  of overall  fore-
casts  for the real  economy  and for financial  flows.  Those  fore-
casts  — amended  to reflect  any  policy  measures  that  are 
adopted  in response  to them  — constitute  an accepted  com-
promise  between  final  objectives  that may  be in conflict:  objec-
tives  for the level  of domestic  economic  activity,  for the state  of 
the external  balance  on both  current  and  capital  transactions 
and for price  stability.  The  forecasts  also  produce  projections 
for various  monetary  aggregates  — Ml,  M3,  DCE  (Domestic 
Credit  Expansion)  and bank  credit  to the private  sector  — and 
for the pattern  of interest  rates,  which  are judged  to be mutu-
ally consistent  and may  therefore  be included  in the category  of 
intermediate  objectives.  -
None  of these  intermediate,  objectives  is 'normative'  in the 
sense  that  a departure  from  forecast  would  promptly  lead  to 
policy  action  to restore  it. The  policy  response  to departures 
from  forecast  depends  on an evaluation  of many  factors:  the 
instability  and  uncertainty  of the relationships  between  real 
and financial  variables,  and  even  between  different  financial 
variables,  may  allow  some  of the latter  to depart  from  their 
projected  levels  without  invalidating  the forecast  as a whole. 
Greater  weight  would  normally  be attached  to a major  aggre-gate,  such  as M3,  than  to one  of its individual  counterparts, 
such as bank  lending  to the  private  sector.  The  emphasis 
placed  on different  intermediate  objectives  shifts  over  time  as 
the goals  of overall  economic  management  change  and the role 
given  to monetary  policy  in economic  management  varies. 
8. In Ireland,  monetary  policy  is based  on the existence  of a 
reasonably  stable  relationship  between  monetary  aggregates 
and national  income.  The  intermediate  objectives  are, first,  the 
money  supply  and,  secondly,  bank  credit. 
The growth  rate  of money  supply  is fixed  in the light  of fore-
casts  of national  income  in value  terms.  The  intermediate  ob-
jective  for credit  (credit  granted  by banks  — including  the cen-
tral bank  — to the private  and public  sectors)  is calculated  by 
subtracting  the expected  increase  in external  monetary  reserves 
from  the projected  growth  in the money  supply. 
Interest  rates  in Ireland  cannot  differ  appreciably  from  those  in 
the United  Kingdom  without  provoking  heavy  capital  move-
ments,  because  of the close  monetary  ties between  these  coun-
tries. 
II. Comparison  of intermediate  objectives  within 
the Community 
9. Monetary  aggregates  (money  stock  and  central  bank 
money)  are treated  as the key intermediate  objectives  in Ger-
many,  the Netherlands,  France  and Ireland  and  are also  consi-
dered  important  in the United  Kingdom  and,  quite  recently,  in 
Denmark.  However,  the definition  of money  stock  varies  con-
siderably  from  country  to country. 
10. The  supply  of bank  credit  to the private  sector  is the key 
intermediate  objective  in Denmark.  In Italy,  Ireland,  France, 
the United  Kingdom  and  the Netherlands,  the monetary  au-
thorities  also  make  use of this  concept,  but rather  more  as a 
complementary  intermediate  objective. 
In France  and  in Italy  bank  credit  is adopted  as an objective 
with the principal  aim  of controlling  internal  demand.  In the 
Netherlands  and  in Denmark,  account  is also  taken  as far as 
possible  of the way  in which  this objective  may  affect  the over-
all balance  of payments  outcome. 
11. Global.  credit  is the key intermediate  objective  in Belgium 
and Italy  and a similar  notion  is used  in Denmark.  The  concept 
of global  credit  differs  from  one country  to another  according 
to the definition  of lenders  and borrowers.  With  regard  to the 
former,  global  credit  may  be defined  to include  not only  that 
extended  by the banks  and  other  financial  intermediaries,  but 
also finance  obtained  on the capital  market  and  by borrowing 
abroad.  As to the borrowers,  there  is a difference  between  the 
concept  used  in Denmark  and  Belgium  of companies  and 
households  only,  and  that  in Italy  where  the Treasury  is also 
included. 
I 
No C 195/14 Official  Journal  of the  European  Communities 15.8.77 
Predominant 
intermediate  objective Complementary 
intermediate  objective 
Money  stock 
(1) Ml,  M2,  M3 France 
Ireland 
Netherlands United  Kingdom 
Denmark 
(2) Central  bank  money Germany  (FR) 
Bank  liquidity Germany  (FR) 
Belgium 
Monetary  base •Italy 
Credit 
(1) Bank  credit Denmark France 
Ireland 
Netherlands 
United  Kingdom 
Italy 
(2) Global  credit Belgium 
Italy Denmark 
Interest  rates Belgium Italy 
United  Kingdom 
Denmark 
12. Interest  rates  represent  an important  intermediate  objec-
tive in Belgium,  and also  to a lesser  degree  in the United  King-
dom,  Italy  and  Denmark.  The  rates  taken  into  consideration 
may be those  ruling  on the money  market,  those  ruling  on the 
capital  market  or those  applied  by financial  intermediaries.  On 
the other  hand,  rates  of interest  under  the direct  control  of the 
central  bank  are regarded  as instruments. 
13. Bank  liquidity  constitutes  a complementary  intermediate 
objective  in Germany  and  Belgium.  The  definition  adopted  in-
cludes  not only  free  reserves  held  by the banks  with  the central 
bank,  but also  assets  which  the latter  is committed  to purchase 
together  with  the banks'  unconditional  lines  of credit  at the 
central  bank. 
14. Monetary  base  represents  a complementary  intermediate 
objective  in Italy.  It consists  of notes  and  coin,  claims  on the 
central  bank  (compulsory  and  free  reserves)  and  all assets 
which  can be converted  into  central  bank  money  at any  time. 
Monetary  base  (excluding  postal  deposits)  virtually  corres-
ponds  to central  bank  money  plus  bank  liquidity  as defined  in 
Germany. 
15. The  financial  variables  treated  as intermediate  objectives 
are closely  related  to each  other. 
— There  is for example  an interdependence  between  the level 
of interest  rates  on the one hand  and  the money  stock  and 
the volume  of credit  on the  other.  The  monetary  au-
thorities  may  be led to adopt  specific  measures  in order  to 
diminish  such  interdependence;  thus  they  may  for example, 
when  restrictive  measures  are required,  resort  to credit  ceil-
ings in order  to limit  the rise in interest  rates. — There  is, equally,  interdependence  among  other  inter-
mediate  objectives.  Manipulation  of the monetary  base  or 
of bank  liquidity  influences  market  rates  of interest  and 
monetary  developments.  In the transmission  process  (the 
effect  which  instruments  have  on intermediate  objectives 
and, through  them,  on final  objectives)  bank  liquidity  and 
monetary  base  are closer  to the instruments,  while  money 
stock  and  credit  are closer  to final  objectives. 
— A similar  comment  may  be made  about  the relationship  be-
tween  bank  credit  and  the money  stock.  The  former  is re-
lated  to the assets  and  the latter  to the liabilities  of the 
banking  system.  The  difference  between  the  two  mag-
nitudes  may  nevertheless  be considerable  if money  creation 
by the Treasury  (for  example  in the form  of postal  de-
posits)  and  by the external  sector,  or issues  or purchases 
of bonds  by the banks  are important.  Clearly  the difference 
between  the money  stock  and  the volume  of credit  is even 
more  substantial  if the notion  used  is that  of global  credit. 
16. The  reasons  for differences  in intermediate  objectives  are 
fundamentally  the following: 
(a) the means  of influence  and  control  which  existing  institu-
tional  arrangements  make  available  to the monetary  au-
thorities  (§17); 
(b) the characteristics  of financial  intermediation  and  in par-
ticular  the nature  and  size  of financial  circuits  outside  the 
banking  system  (§ 18); 
(c) the structure  and  the influence  of non-financial  sectors  (ex-
ternal,  public,  households  and  companies)  and,  in particu-
lar, their  financial  surpluses  or deficits  (§ 19 to 21); 
15. 8. 77 Official  Journal  of the European  Communities No C 195/15 
(d) the theoretical  approach,  the traditions  of central  banks 
and practical  considerations,  for example  the availability  of 
statistics  (§22). 
All these  factors  are at work  in each  country,  but their  relative 
importance  varies.  Thus  it is generally  a number  of causes  and 
only exceptionally  a single  cause  which  determines  the attitude 
of die monetary  authorities  in the selection  of intermediate  ob-
jectives.  • 
Thus,  whereas  some  countries  only  make  minor  adjustments  to 
their  intermediate  objectives  over  a period  of time,  others 
adopt  a more  eclectic  approach,  having  a 'basket'  of inter-
mediate  objectives  and  giving  them  different  priorities  as cir-
cumstances  require.  The  two  ends  of this  spectrum  are rep-
resented  by Germany,  which  has a single  intermediate  objec-
tive, and the United  Kingdom,  where  the weight  placed  on dif-
ferent  intermediate  objectives  changes  over  time. 
17. The  means  of influence  and  control  available  to the 
monetary  authorities  in the various  Community  countries  de-
pend  on a large  number  of factors.  The  comparative  roles  as-
signed  to monetary  and  financial  policy  are important  in this 
respect,  as is the extent  to which  priority  is given  to a policy 
geared  to a market  economy.  Monetary  policy  instruments  will 
therefore  focus  on different  aspects  depending  on the situation 
of the country  concerned  and will  be tailored  to suit  a specific 
policy.  This  situation  affects  the choice  of intermediate  objec-
tives. 
18. The  structure  of a country's  financial  markets  can also  in-
fluence  the choice  of intermediate  objectives.  If a large  part  of 
financial  intermediation  takes  place  on the capital  market  or 
through  non-banks,  it is more  likely  that  the money  stock  will 
be distorted  as a result  of substitution  between  financial  assets. 
The phenomenon  of substitution  becomes  more  important  if 
there  exist  financial  assets  which  economic  operators  regard  as 
liquid,  but  which  are not  included  in the definition  of the 
money  stock.  On the other  hand,  it is less substantial  if finan-
cial flows  are relatively  segmented,  as is the case  in France. 
Some  countries  have  resolved  the problem  by letting  liquidity 
fall into  the background  and  concentrating  instead  on credit. 
In particular,  the choice  of global  credit  as a complementary 
objective  enables  the authorities  not to be misled  by any distor-
tions  arising  from  substitution  between  different  sources  of 
credit. 
The characteristics  of financial  intermediation  may  also  lead 
the monetary  authorities  to seek  to maintain  a certain  structure 
of interest  rates,  with  the aim  in particular  of preventing  un-
wanted  shifts  of funds  between  intermediaries  whose  rates  of 
interest  respond  more  quickly  to market  forces  and  those 
whose  rates  are less flexible. 
19. The  influence  of external  factors  on a country's  choice  of 
intermediate  objectives  is positively  related  to the importance 
of its international  trade  and  the degree  of openness  of its fi-
nancial  markets.  The  most  obvious  example  of external  influ-
ence occurs  when  a country  has to adjust  its quantitative  objec-
tives  because  the resulting  rates  of interest  provoke  undesired capital  movements.  In such  a case  the 'external  constraint' 
(which  has been  reduced  but not eliminated  by the system  of 
floating  exchange  rates)  may  lead  Member  States  to base  their 
actions  rather  more  on interest  rates.  The  constraint  depends 
on the size  of the country,  on the level  of foreign  exchange 
reserves,  on whether  it belongs  to the 'snake'  and  also  on 
whether  its money  serves  as a reserve  currency. 
20. The  size  of the national  debt  and  of the public  sector 
deficit  may  also  explain  the inclusion  of interest  rates  among 
intermediate  objectives.  For example,  the desire  to facilitate  the 
placing  of government  bonds  may  lead  the  monetary  au-
thorities  to pursue  a policy  of stabilizing  prices  on the capital 
market.  Further,  some  central  banks  regard  the public  sector 
deficit  (and  to a certain  extent  its monetary  financing)  as a 
constraint  which  leads  them  to base  their  action  more  on bank 
credit  (or on global  credit)  extended  to the private  sector. 
21. The  financial  structure  of the household  and  corporate 
sectors  also  has an influence  on the choice  of intermediate  ob-
jectives  and on the effectiveness  of monetary  policy.  Thus,  the 
size of the corporate  sector's  net financing  requirement  and 
changes  in its financing  capacity  and  its indebtedness  are 
likewise  factors  influencing  the choice  of credit  as an objective. 
22. The  choice  of intermediate  objectives  can also  be affected 
by the theoretical  approach,  which  is often  related  to specific 
knowledge  about  the transmission  process. 
Finally,  administrative  and  organizational  factors  also  play  a 
role.  Examples  are the ways  in which  statistics  are collected 
and processed. 
III. The  harmonization  of intermediate  objectives  and  their 
role in the coordination  of monetary  policies 
23. Harmonization  of intermediate  monetary  objectives 
within  the Community  implies  the gradual  improvement  of 
mutual  knowledge,  which  might  in turn  progressively  reduce 
existing  differences.  Such  harmonization  can  only  arise  in so 
far as a closer  coordination  of final  objectives  is achieved  and 
as progress  is made  towards  monetary  integration.  At present, 
forced  attempts  at harmonization  would  involve  the risk  of 
reducing  the effectiveness  of monetary  policy  in some  member 
countries.  The  Council  resolution  of December  1972,  in which 
all the Member  States  were  called  upon  to limit  the growth  of 
M2, is an example  of premature  harmonization;  although  in 
itself  this  resolution  contributed  to the fight  against  inflation, 
the Member  States  had difficulty  in fulfilling  it. 
24. The  expert  group  has examined  two  questions: 
— how  far differences  in intermediate  objectives  represent  an 
impediment  to the coordination  of monetary  policy,  both 
at present  and in the future; 
— what  possibilities  there  are of reducing  these  impediments 
to coordination. 
No C 195/16 Official  Journal  of the European  Communities 15. 8. 77 
25. On  the first  question,  the working  party  came  to the view 
that at the present  stage  a reduction  of differences  in inter-
mediate  objectives  would  already  be useful  because  it would 
facilitate  the work  of the Committees  concerned  with  monet-
ary coordination  within  the  Community.  However,  nothing 
would  be gained  by agreeing  on more  closely  aligned  inter-
mediate  objectives  if this  meant  that  the  effectiveness  of 
monetary  policy  was  reduced  in some  of the  countries.  As 
further  steps  are  taken  towards  achieving  economic  and 
monetary  union,  differences  could  definitely  have  a disturbing 
effect.  Possible  ways  of reducing  them  cannot,  however,  be 
looked  at in isolation  from  other  efforts  towards  achieving 
economic  and  monetary  union.  The  choice  of intermediate  ob-
jectives  depends  essentially  in some  cases,  as stated  above,  on 
the final  objectives  pursued.  Harmonization  of intermediate 
objectives  therefore  cannot  be considered  in isolation  from 
harmonization  of final  objectives  and  of financial  structures. 
Moreover,  even  if such  an interrelationship  does  not exist,  the 
choice  of intermediate  objectives  is often  a reflection  of how 
monetary  and credit  policy  is conducted  in a given  country  and 
of how  its role  and its effectiveness  are seen. 
26. In so far as the second  question  is concerned,  it is obvi-
ously  not possible  simply  to 'transpose'  the intermediate  objec-
tives  of one  country  into  the  intermediate  objectives  of 
another.  It is not a question  of concepts  which  can replace  each other,  but of taking  account  of different  situations  which  may 
diverge  considerably  in their  development.  Consequently,  work 
towards  'harmonization'  of intermediate  objectives  should  ini-
tially  be based  on enabling  individual  countries  to have  a better 
understanding  of the intermediate  objectives  of the other  coun-
tries by getting  each  country  to analyse  its own  development  in 
terms  of the  intermediate  objectives  pursued  in the  other 
member  countries  as well,  even  where  it considers  these  inter-
mediate  objectives  would  be analytically  unsuitable  if applied 
in its own  country.  For  example,  such  an exercise  would  re-
quire  country  A, which  applies  M2 as its principal  intermediate 
objective,  to compare  the trend  of that  aggregate  during  a cer-
tain period  with  the evolution  of credit.  Similarly  country  B, 
which  applies  credit  as its objective,  would  observe  the trend  of 
M2. This  experience,  and  further  work  by the  Group,  will 
make  it possible  to extend  the consensus  on the way  monetary 
and credit  policy  works  and  on the advantages  and  disadvan-
tages  of various  intermediate  objectives. 
27. The  future  work  of the Group  will  concentrate  on extend-
ing its mutual  understanding  of intermediate  objectives.  It will: 
— continue  the comparison  of the evolution  of different  in-
termediate  objectives  described  in § 26 which  has already 
been  started  by the Group, 
— start  work  on the transmission  process  of monetary  policy 
on the lines  of point  5 of the mandate. 
EXPLANATION  OF THE  CONCEPTS  USED 
1. The  final  objectives  of monetary  policy  are the same  as 
those  of general  economic  policy,  i.e. price  stability,  external 
equilibrium,  growth  and  full  employment,  to the extent  that 
these  can be materially  affected  by monetary  policy.  The  im-
portance  attached  to each  of these  objectives  varies  as between 
countries  and  according  to circumstances. 
2. Intermediate  objectives  are  the financial  variables  affected 
by the  instruments  of monetary  policy.  Examples  of inter-
mediate  objectives  are:  money  supply,  credit,  bank  liquidity 
and rates  of interest. 
3. Indicators  are  variables  which  make  it possible  to identify 
the direction  and  measure  the intensity  of monetary  policy  and 
which  also  permit  the authorities  to determine  whether  their 
objectives  have  been  achieved.  These  variables  are often  inter-
mediate  objectives  at the same  time,  but they  are then  fixed  ex 
ante,  while  as indicators  they  are observed  ex post.  Never-
theless,  intermediate  objectives  and indicators  do not necessar-
ily coincide;  for example,  when  an intermediate  objective  for 
bank  credit  is not attained  because  demand  has been  too low, 
interest  rates  and  bank  liquidity  become  better  indicators  of 
the direction  of monetary  policy. 4. Instruments  are  the  means  used  by the  monetary  au-
thorities  to achieve-  the intermediate  objectives  which  they  have 
set themselves.  Instruments  can be classified  into  direct  and  in-
direct.  The  use of direct  instruments  (for  example  credit  ceil-
ings and the fixing  of minimum  levels  for banks'  lending  rates) 
may extend  to administrative  intervention  in the economy  by 
means  of regulations.  Other  instruments,  such  as rediscount 
policy  or open-market  operations,  operate  indirectly  through 
market  forces. 
5. At  this  stage  the group  has restricted  itself  to giving  provi-
sional  explanations  of coordination  and  harmonization.  The 
following  are therefore  to be taken  as merely  working  con-
cepts. 
(a) Coordination  of the monetary  policy  of Member  States  im-
plies  the fixing  of mutually  consistent  final  objectives,  and 
examining  the instruments  used  to achieve  them.  At its pres-
ent stage  of integration,  coordination  means  the  joint 
development  of policies  which,  while  based  on different 
techniques,  can  ensure  the highest  practical  state  of co-
herence  in final  objectives. 
(b) Harmonization  means  the progressive  reduction  of the in-
stitutional  and  conceptual  differences  which  exist  between 
member  countries.  Complete  harmonization  implies  the use 
of intermediate  objectives  and  instruments  of die  same 
type. 
15. 8. 77 Official  Journal  of the  European  Communities No C 195/17 
ANNEX  IV 
THE  EURO-CURRENCY  MARKET  AND  REGULATION  OF INTERNATIONAL  FINANCIAL 
FLOWS 
(Report  of the Working  Party  on Short-term  Capital  Movements  to the Monetary  Committee  and to the 
Committee  of the Governors  of the Central  Banks) 
Introduction 
This report,  which  is intended  for the Monetary  Committee 
and the Committee  of the Governors  of the Central  Banks,  is 
part of the working  party's  work  on the regulation  of inter-
national  financial  flows.  In accordance  with  the wishes  of the 
Monetary  Committee,  the working  party  has mainly  dealt  with 
national  measures  (J) which  are liable  to exert  an influence  on 
the Euro-currency  market  and  which  might  be susceptible  of 
harmonization.  Questions  concerning  the Euro-bond  market, 
banking  supervision  and  intervention  by the central  banks  as 
'lenders  of last resort'  remain  outside  the scope  of this examin-
ation. 
I. Participation  of Member  States  in the Euro-currency  market 
In principle,  the participation  of Member  States  in the Euro-
currency  market  may  be assessed  on the basis  of the following 
criteria: 
— use  of national  currencies  on the Euro-currency  market; 
— role  on the Euro-currency  market  of banks  established  in 
the various  member  countries  of the Community; 
— role  of non-banks  within  the Community  as initial  sup-
pliers  or ultimate  recipients  of funds  generated  by or chan-
nelled  through  the Euro-currency  market; 
The statistics  given  below  are from  the Bank  for International 
Settlements  and  are intended  to illustrate  these  three  criteria. 
They  do not reveal  the growth  of total  volume  or the shifting 
composition  of the market  over  time,  as they  reflect  only  the 
situation  as per end  of 197.5.  No figures  are given  for Ireland 
and Denmark,which  are not members  of the Group  of Ten  and 
therefore  do not report  to the Bank  for International  Settle-
ments. 
1. Use  of national  currencies  on the Euro-currency  market 
The following  table  illustrates  the relative  share  of each  cur-
(') The  Member  States'  experts  have  supplied  the working  party  with  full infor-
mation,  which  may  be obtained  from  the secretariat  of the Monetary  Commit-
tee. rency  in the external  foreign  currency  claims  of banks  in the 
nine European  countries  reporting  to the BIS (2). 
(Situation  as at 31. 12. 1975)  (3) 
Currency in US 9 
'000 million % 
US $ 190-2 73-7 
DM 41 6 16-1 
FS 15-4 6-0 
FF 2 6 1-0 
Fl 2 1 0-8 
£ Stg 20 0-8 
Others 4-2 1-6 
258-1 100-0 
The US dollar  has always  been  the most  widely  used  currency 
on the  Euro-currency  market  but  the  DM  share  has  been 
growing  rapidly  over  recent  years. 
For a given  country  the share  of its national  currency  in the to-
tal volume  of the Euro-currency  market  is not the only  element 
determining  the extent  of the possible  impact  of that  market  on 
its balance  of payments,  exchange  rate  and  internal  monetary 
policy.  On the contrary,  given  full  convertibility  of all Euro-
currencies  it is the total  volume  of the market  and its ability  to 
mobilize  funds  quickly  that  is relevant  to problems  which  the 
Euro-currency  market  might  pose  for Member  States. 
2. The  role  on the Euro-currency  market  of banks  established 
in the various  Member  States  of the Community 
The activities  of banks  established  in the  various  member 
countries  of the Community  may  be assessed  in terms  of rela-
tive shares  or absolute  amounts  of external  liabilities  and 
(:) As defined  by the BIS,  the external  foreign  currency  positions  of banks  in the 
nine European  countries  reporting  to the BIS comprise  the claims  and liabilities 
of these  banks  in respect  of non-resident  banks  and non-banks.  The  positions  do 
not include  the banks'  foreign  currency  claims  and liabilities  in respect  of resi-
dents  of the respective  countries. 
(3) Latest  figures  available. 
No C 195/18 Official  Journal  of the European  Communities 15. 8. 77 
claims  in foreign  currencies  of the banks  of the nine  European 
countries  (seven  member  countries  of the EEC,  two  non-mem-
bers)  which  report  to the BIS.  The  following  figures  include interbank  loans:  76 % of the assets  represent  claims  vis-a-vis 
non-resident  banks. 
(Situation  as at 31. 12. 1975)  (*) 
Liabilities Assets Net position 
US $'000 
million % US $'000 
million % US $ '000 
million 
EEC Member  States 
United  Kingdom 128-2 49-6 118-2 45-9 — 10-0 
France 38 1 14-8 390 15-2 0-9 
Luxembourg  (2) 23 3 9-0 24-5 9-5 1-2 
Netherlands 164 6-4 173 6-7 0-9 
Italy 15-0 5-8 15-0 5-8 0 
Belgium  (*) 14-5 5-5 144 5-5 — 01 
Germany 9-3 3-6 10-6 4 1 1-3 
Non-member  countries 
Switzerland 12 0 4-6 16-3 6-3 4-3 
Sweden 1-8 0-7 2-6 1-0 0-8 
258-6 100-0 257-9 100-0 
(') Latest  figures  available. 
(2) The  figures  for Luxembourg  do not include  positions  in foreign  currencies  visa-vis  residents  in Belgium  and vice-versa. 
This does  not fully  reflect  the volume  of Euro-currency  trans-
actions  carried  out by banks  established  in Switzerland,  since 
assets  and  liabilities  reported  by banks  in Switzerland  do not 
include  trustee  funds. 
Gross  positions  of banks  in Italy  which  are mostly  active  in the 
interbank  market  have  been  sharply  contracting  since  April 
1974;  in September  1974  the positions  were  only  half  of the 
amount  registered  at the  beginning  of 1974  but  they  have 
recovered  remarkably  in the last quarter  of 1975.  By contrast 
the gross  position  of banks  in the other  European  countries 
have  not increased  since  April  1974;  this  applies  especially  to 
banks  established  in Luxembourg. This breakdown  of the market  by country  does  not correspond 
to that  of the currencies  used  on the market:  banks  in Ger-
many  play  a minor  role  compared  with  the important  share  of 
the mark.  The  share  of banks  established  in various  countries 
of the Community  in the Euro-currency  market  would  seem  to 
depend,  apart  from  questions  of expertise  and tradition,  on the 
different  national  regulations  concerning  monetary  policy  and 
international  capital  transactions.  In addition  this  share  is in-
fluenced  by the proportion  of foreign  trade  transactions  which 
are carried  out in national  rather  than  in foreign  currencies. 
It is to be noted  that,  as a result  of the definition  of Euro-cur-
rency  transactions,  the tables  do not show  the foreign  claims 
and liabilities  of banks  denominated  in national  currencies. 
15. 8. 77 Official  Journal  of the European  Communities No C 195/19 
3- The  role  of non-banks  as initial  suppliers  or ultimate  recipients  of funds  channelled  through  the 
Euro-currency  market 
This role  can be seen  with  the help  of the following  table: 
Positions  in Euro-claims  and  Euro-liabilities  (*) of non-banks  in each  of the nine  reporting  countries 
vis-a-vis  resident  banks  and  vis-a-vis  banks  of the other  European  reporting  countries  at 31 December 
1975 
(US $ '000  million) 
Non-banks 
of the following 
countries Liabilities  owed  to banks Claims  on banks 
Net position 
vis-a-vis 
banks  in -
the nine 
reporting 
countries Non-banks 
of the following 
countries 
resident in the 
eight  other 
countries in the nine 
reporting 
countries resident in the 
eight  other 
countries in the nine 
reporting 
countries Net position 
vis-a-vis 
banks  in -
the nine 
reporting 
countries 
EEC Member 
States 
United  Kingdom 15-8 1-7 17-5 5-5 0-6 6-1 — 114 
Germany 08 8 6 94 0-5 0-7 1-2 — 8-2 
Italy 1*4 29 43 0-6 1-2 1-8 — 2-5 
France 28 1*0 3-8 0-9 1-2 2-1 — 1-7 
Belgium/ 1-7 0 8 2-5 1-7 0-9 2-6 + 0-1 Luxembourg 1-7 2-5 1-7 0-9 2-6 + 0-1 
Netherlands 06 1-4 20 0-9 0-5 1-4 — 0-6 
Non-member 
countries 
Switzerland 0-9 19 28 1-8 3-6 5-4 + 2-6 
Sweden : 1-3 1-3 0-7 0-1 0-8 — 0-5 
(') — These  claims  and liabilities  are always  in foreign  currency  from  the point  of view  of the bank  on which  the claim  is held  or to 
which  the liability  is owed. 
— This  table  is a different  presentation  from  table  4 published  by the BIS in its bulletin:  Euro-currency  statistics  — fourth  quarter 
1975  of 29 April  1976. 
During  the past  years  the increase  in liabilities  to banks  of the 
nine European  reporting  countries  conducting  Euro-currency 
business  has been  most  pronounced  in the case  of non-banks  in' 
the UK,  mainly  due  to public  sector  borrowing  in order  to 
finance  deficits  of the balance  of payments.  The  liabilities  of 
German  enterprises  to the Euro-currency  market  are remark-
ably high,  which  can  be explained  by the fact  that  they  have 
exploited  an interest  rate  differential  on DM  loans  due  to the 
absence  of minimum  reserve  requirements  for foreign  banks. 
Less important  is the  volume  of Euro-credits  taken  up by 
non-banks  in Italy  and  France  which  are mostly  explained  by 
efforts  to cover  balance  of payments  deficits. 
Significant  differences  in the proportion  of credits  taken  up 
with  resident  banks  by the non-banks  of the same  country  can to some  extent  be explained  by the relative'  importance  of the 
different  banking  systems  in the Euro-currency  market. 
The amount  of Euro-currency  claims  of non-banks  on non-
resident  banks  is influenced  by the extent  to which  home  coun-
tries permit  capital  exports  within  the exchange  control  regula-
tions.  This  explains  for instance  why  claims  of non-banks  in 
Switzerland  on non-resident  banks  are several  times  greater 
than claims  of non-banks  in the UK on non-resident  banks. 
Euro-claims  of non-banks  on resident  banks  are  important 
only in the UK,  in Belgium/Luxembourg  and  in Switzerland.  It 
is believed  that  these  claims  are generally  held  by large  interna-
tional  companies  or by their  holding  companies,  as they 
periodically  have  to make  large  transactions  in foreign  curren-
cies and prepare  themselves  in advance  for these  transactions. 
No C 195/20 Official  Journal  of the European  Communities 45. 8. 77 
The Irish  and  Danish  experts  have  indicated  that  non-banks  in 
these  two  countries,  while  they  do not constitute  a net source 
for funds  placed  on the Euro-currency  market,  have  often  had 
recourse  to loans  on this  market  on behalf  of the public,  semi-
public  and  private  sectors. 
The regulation  of international  financial  flows  in the con-
text of the Euro-currency  market In so far as the Euro-currency  market  generates  or transmits 
net inflows  (outflows)  of capital  to (from)  the national  mar-, 
kets,  these  flows  could  aggravate  the problems  faced  by the 
monetary  authorities  in countries  with  a balance  of payments 
surplus  (deficit).  Also,  the liquidity  creation  or destruction  ef-
fect of these  inflows  or outflows  might  conflict  with  the 
monetary  policy  objectives  required  by the internal  economic 
situation  of countries  at the time  these  flows  occur.  However, 
it is held  that  under  normal  conditions,  more  flexible  exchange 
rates  should  tend  to reduce  somewhat  the size  and frequency  of 
speculative  capital  movements. 
1. Problems  for the national  economies  posed  by the exist-
ence of the Euro-currency  market. 
The working  party  looked  at the question  of whether  the exist-
ence of the Euro-currency  market  posed  problems  in the man-
agement  of economic  policies  for the monetary  authorities  in 
the Member  States.  This  market,  representing  the  channel 
through  which  a sizeable  proportion  of international  liquidity 
is held,  may  conceivably  affect  Member  States'  economic 
policies  in two  ways: 
(a) directly,  as a result  of capital  flows  between  national  credit 
markets  and  the Euro-currency  market,  which  may  inter-
fere with  the management  of domestic  monetary  policy  and 
the operation  of the exchange  market  and  affect  balances 
of payments; 
(b) indirectly,  through  the autonomous  growth  of international 
liquidity,  increasing  world  demand  and  inflation. 
Given  the present  state  of knowledge  characterized  by conflict-
ing theories  and  insufficient  empirical  evidence,  the group  did 
not consider  that  it was  in a position  to offer  a significant  con-
tribution  to the discussion  of the latter  problem,  and  therefore 
has concentrated  its attention  on the direct  effects. 
As the existence  of the Euro-currency  market  is held  by many 
experts  to increase  the international  liquidity  and  velocity  of 
capital,  they  consider  that  the Euro-currency  market  might  in-
tensify  problems  which  are associated  with  international  capi-
tal flows  in general.  Nevertheless,  it would  not be possible  to 
determine  precisely  what  proportion  of international  flows 
considered  undesirable  by the monetary  authorities  might  be 
attributed  to the Euro-currency  market  rather  than  to the con-
ventional  foreign  currency  markets. 
The direct  effects  of capital  flows  channelled  through  the 
Euro-currency  market  on the economies  of individual  member 
countries  vary  over  time,  and from  one country  to another,  de-
pending  on the following  factors: 
— the  state  of the economy  and  the balance  of payments  situ-
ation, 
— the  direction,  volatility  and  size  of these  flows, 
— the  measures  taken  by the authorities  to restrict  or neu-
tralize  harmful  effects, 
— the  degree  of monetary  controls  over  the  Euro-currency 
markets. The real  impact  of funds  generated  by or channelled  through 
the Euro-currency  market  on economies  of member  countries 
depends,  of course,  to a large  extent  on the willingness  and 
ability  of the authorities  to adopt  measures  to restrict  or neu-
tralize  these  flows  and  the effectiveness  of these  measures.  In 
this respect,  the  differences  between  member  countries  are 
quite  pronounced.  While  all member  countries  subscribe  in 
general  to the greatest  possible  freedom  of capital  movements 
as an external  policy  objective,  in practice  the majority  of 
countries  are  inclined  to restrict  such  movements  in cases 
where  internal  and/or  external  policy  objectives  are felt to jus-
tify such  action.  This  has  depended  on the circumstances  in 
which  countries  have  found  themselves  and  the priorities  ac-
corded  to the  different  objectives  of internal  and  external 
equilibria.  Some  member  countries,  on the other  hand,  have 
only reluctantly  had  recourse  to such  measures  in crisis  situa-
tions  and  on a temporary  basis  only.  The  latter  category  of 
member  countries  is consequently  more  concerned  about  the 
adverse  effects  of the Euro-currency  market  on the effective-
ness of their  own  monetary  policy.  They  consider  overall  mea-
sures  of monetary  control  normally  to be more  appropriate 
than direct  national  interventions  in the free  flow  of capital. 
Furthermore,  the working  party  considers  that,  in the light  of 
past experience,  national  measures  aimed  at restricting  out-
flows  of capital  have  generally  been  more  successful  than  mea-
sures  intended  to restrict  inflows  of capital.  Some  experts  have 
tried  to explain  these  different  results  by pointing  out  that 
measures  used  to control  outflows  differed  from  those  used  to 
restrict  inflows  according  to the different  sets  of national  in-
struments  and  according  to national  priorities  with  respect  to 
direct  controls  and  market-oriented  instruments.  However, 
other  experts  have  stressed  the fact  that  domestic  funds  avail-
able to residents  in order  to finance  outflows  are normally 
limited  under  domestic  credit  regulations  compared  to interna-
tional  capital  available  to non-residents  in order  to finance  in-
flows.  The  question  remains  open  which  of these  alternative 
explanations  fits the empirical  evidence  better. 
The working  party  recognizes  that  the effect  of capital  flows 
emanating  from  or channelled  through  the Euro-currency  mar-
ket depends  more  on its overall  size  than  its geographical 
breakdown  or composition  by currency.  Nevertheless,  it was 
noted  that  the existence  of a substantial  Euro-market  in a par-
ticular  natidnal  currency,  as is the case,  for example,  with  the 
DM,  may  pose  particular  problems  for the effectiveness  of that 
country's  monetary  policy.  Indeed,  German  resident  non-banks 
may borrow  in Euro-DM  at conditions  which  — because  of 
15. 8. 77 Official  Journal  of the European  Communities No C 195/21 
the absence  of minimum  reserve  requirements  abroad  — are 
more  favourable  for them  than  at home  and without  having  to 
bear the costs  of exchange  operations  and  exchange  risk  cover 
which  recourse  to other  Euro-currencies  would  entail.  Experi-
ence  in Germany  has shown  that  in periods  of heavy  specula-
tion even  direct  controls  were  not enough  wholly  to prevent 
undesired  capital  movements  executed  via the Euro-currency 
market.  This  problem  does  not exist,  however,  to the same  ex-
tent for countries  whose  currencies  are not to the same  extent 
demanded  by the market  and  which  therefore  may  more  effec-
tively  use direct  controls  on borrowing  by residents  from  non-
residents. 
2. The  regulation  of international  financial  flows  at national 
level 
The working  party  examined  the question  of whether  the pres-
ent use  of instruments  for regulating  international  financial1 
flows  by the monetary  authorities  in the Member  States  en-
abled  the problems  outlined  above  to be solved  or whether  these 
national  measures  should  be incorporated  in concerted  action 
with regard  to the Euro-currency  market. 
A look  at the national  instruments  described  in the experts' 
contributions  shows  that  no Member  State  has at its disposal 
instruments  specifically  covering  net inflows  and  outflows  of 
capital  emanating  from  or channelled  through  the Euro-cur-
rency  market.  This  situation  is due  to the fact  that  the net in-
flows  and  outflows  of capital  which  the monetary  authorities 
in a Member  State  may  consider  undesirable  in the light  of the 
domestic  and  external  monetary  situation  of the country  in 
question  have  a similar  effect  whether  or not these  flows  are 
originating  in or channelled  through  the Euro-currency  mar-
ket; in addition,  it is not always  possible  to verify  the origin  or 
destination  of international  capital  flows  in applying  restric-
tions  to capital  movements. 
It must  also  be emphasized  that  all the restrictions  on capital 
movements  in force  in the Member  States  apply  indiscrimi-
nately,  that  is to say without  distinguishing  between  the vari-
ous foreign  currencies  and  between  the supplying  or receiving 
countries.  National  measures  differ  as to their  purpose  and  in 
the range  of instruments  used.  Whenever  countries  have  been 
resorting  to controls,  their  objective  has been  to protect  their 
balance  of payments  and  their  exchange  market  and/or  to 
neutralize  undesirable  effects  on domestic  liquidity. 
The working  party  looked  at the question  whether,  in the light 
of the dimension  and  fluidity  of the Euro-currency  market,  the 
national  measures  in force  in the Member  States  were  adequate 
to control  flows  of capital  considered  to be undesirable.  It 
found  that  in several  Member  States  the monetary  authorities 
appeared  to be fairly  satisfied  with  the effectiveness  of their 
own national  measures,  as far as the protection  of their  dom-
estic  markets  is concerned. 
It was,  however,  recognized  that  these  national  measures  might 
not prevent  undesirable  effects  on the monetary  policy  in other 
countries.  Monetary  authorities  in most  other  Member  States 
felt that  their  national  defences  against  massive  inflows  of 
foreign  capital  were  not effective  enough  but that  stricter  con-
trols  were  only  maintainable  with  difficulty  in the long  term for political  and/or  practical  reasons.  The  authorities  in this 
latter  category  stated  that  they  would  like  to see monetary  con-
trols  introduced  at Community  level  relating  to the  overall 
volume  of international  credit  generated  by or channelled 
through  the Euro-currency  market,  through  the means  of joint 
action  by the Member  States  of the Community  or a wider 
circle.  The  authorities  of other  countries  thought  that  such 
joint  action  was  not practicable  or had  doubts  on this  score. 
Thus,  the  working  party  was  not  in a position  to give  a 
uniform  opinion  on the opportuneness  of joint  action  by the 
Member  States  to control  the  Euro-currency  market,  since 
there  were  differences  of opinion  as to the actual  or potential 
effects  of this  market  on Member  States'  economies  and  as to 
the effectiveness  of the national  measures  at present  in force. 
However,  in order  fully  to fulfil  the task  remitted  to it, the 
working  party  has  examined  from  a technical  point  of view 
those  instruments  which  seemed  likely  to be most  suitable  for 
use in a programme  of joint  action,  were  circumstances  to arise 
in which  such  , a programme  would  be possible. 
3. Instruments  for  coordinated  action  on  Euro-currency 
activities  of banks 
The working  party  concentrated  on instruments  affecting 
Euro-currency  transactions  conducted  by banks,  but  did not 
ignore  the use  of instruments  for regulating  international  fi-
nancial  flows  transacted  by non-banks.  It was  guided  in its 
choice  by the following  particular  factors: 
— is  easier  for the authorities  to control  banks  than  non-
banks,  as the number  of banks  conducting  Euro-currency 
business  is relatively  limited  compared  to the number  of 
non-banks  active  on that  market; 
— most  transactions  on the  Euro-currency  market  pass 
through  banks  established  in the  Community's  financial 
centres  and  subject  to the  regulations  of its monetary 
authorities,  which  differ  from  country  to country; 
— in most  member  countries  instruments  used  by national 
monetary  authorities  to limit  directly  (credit  ceilings)  or 
indirectly  (minimum  reserves)  the supply  of credit  by the 
national  banking  systems  do not  generally  affect  trans-
actions  by hanks  on the Euro-currency  market.  This  has 
permitted  some  banks  to increase  the volume  of their  ex-
ternal  transactions,  with  possibly  undesirable  effects  on 
monetary  policies  within  other  countries 
The introduction  of measures  to control  the activities  of banks 
established  within  the  Community  and  dealing  with  Euro-
currencies  could  act as a brake  on the supply  of Euro-credit  by 
these  banks. 
The working  party  wishes  to emphasize,  however,  that  banks 
established  in the financial  centres  of the Member  States  do not 
have  a monopoly  on the Euro-currency  market  and  that  finan-
cial centres  in a number  of non-member  countries,  which  by 
definition  would  not be covered  by any  Community  rules  and 
regulations,  could  act as substitutes,  in part  at least,  for those 
within  the  Community.  If this  proved  to be the  case,  the 
desired  objective,  namely  control  of the  expansion  in total 
No C 195/22 Official  Journal  of the European  Communities 15. 8. 77 
volume  of the Euro-currency  market,  could  not be achieved  in 
full and the main  effect  could  be to shift  the centres  geographi-
cally  at the expense  of the Community's  financial  centres. 
The group  considers  that  joint  action  restricting  only  the 
supply  of Euro-credits  by banks  established  in the Community 
would  be likely  to result  in a shift  of demand  by non-bank  re-
sidents  of the Community  if they  were  free  to take  up Euro-
credits  with  banks  outside  the Community,  although  there  are 
different  opinions  about  the magnitude  of the shift.  In addi-
tion,  opinions  differ  among  experts  as to the necessity  and use-
fulness  of restrictions  on demand  as a complement  to restric-
tions  on supply  if the authorities  of Member  States  should  in-
itiate  joint  action  to slow  down  the growth  of the Euro-cur-
rency  market. 
Most  experts  feel  that  restrictions  on demand  by npn-bank 
residents,  either  by direct  controls  or market-oriented  instru-
ments,  would  constitute  a necessary  and  permanent  com-
plement  to joint  action  on supply.  These  restrictions  could  how-
ever,  in the opinion  of several  experts,  increase  the cost  of pub-
lic sector  borrowing  in the Euro-currency  market,  *at least  if 
such  borrowing  were  not  exempted  from  restrictions.  Other 
experts  feel  that  such  restrictions  should  not be permanent  and 
that they  should  not  disrupt  the frde  flow  of capital.  They 
point  out that  according  to German  experience  it hat been  very 
difficult  to influence  resident  non-bank  foreign  borrowing 
through  various  measures  of capital  controls.  Problems  did e.g. 
arise  in the administration  of the'Bardepot'owing  to the diffi-
culty  of distinguishing  between  financial  credits  and  normal 
commercial  credits,  the former  only  being  subject  to the'Bar-
depo'. 
(a) The  external  position  of banks 
The external  positions  of banks  comprise  liabilities  to and 
claims  on non-residents,  denominated  in national  currencies  or 
in foreign  currencies.  Regulations  governing  these  positions 
could  influence  the behaviour  of banks  on the Euro-currency 
market. 
In several  Member  States,  the regulations  governing  the exter-
nal positions  of banks  are concerned  only  with  the balance  of 
their  claims  on and  liabilities  to non-residents:  the control  of 
net external  positions  is an effective  way  of curbing  either  net 
inflows  or net outflows  of capital  via resident  banks. 
If the  introduction  or amendment  of regulations  governing 
their  net external  positions  induces  banks  to reduce  their  net 
debit  or credit  positions,  this  may,  it is true,  also  generate  an 
expansion  or contraction  in the Euro-currency  market,  on a 
scale  that  would  be difficult,  however,  to predict. 
But the restrictions  on their  net positions  leave  the banks  free 
to increase  or reduce  simultaneously  their  external  claims  and 
liabilities  by corresponding  amounts,  and  this  may  entail  ex-
pansion  or contraction  of the  volume  of the  Euro-currency market.  Consequently,  regulations  governing  the banks'  net 
positions  would  not  be an effective  way  of controlling  the 
growth  of the Euro-currency  market. 
The application  of rules  governing  the gross  external  credit 
position  of banks  established  in the Community  vis-a-vis  resi-
dents  in the Community,  whatever  the currency  in which  such 
lending  is denominated,  should  on the other  hand,  by imposing 
quantitative  ceilings,  allow  a certain  degree  of control  of the 
growth  of credit  granted  by Euro-banks  established  in the 
Community.  However,  the working  party  is of the opinion  that 
such restrictions  on external  credit  involve  constraints  of such 
severity  that  their  use can be justified  only  to cope  with  crises 
and only  as long  as such  crises  last. 
(b) Minimum  reserves 
The supply  of Euro-credit  by banks  established  within  the 
Community  could  be controlled,  indirectly,  to some  extent  if 
such banks  were  required,  under  a scheme  of joint  action,  to 
set up minimum  reserves  at harmonized,  or indeed  uniform, 
rates  on such  credit  or on their  foreign  currency  deposits, 
which  are the main  source  of such  credit.  Unlike  the control  of 
the external  position  of banks,  which  is an administrative 
measure,  the application  of minimum  reserve  requirements  is a 
v(neasure  in line  with  market  principles,  since  it would  affect  the 
liquidity  and  the profit  margin  of banks  doing  Euro-currency 
business.  The  profit  margin  effect  would  however  create  an in-
centive  to transfer  business  elsewhere.  . 
In order  to put  such  a system  into  effect,  the monetary 
authorities  in the  Member  States  would  need  to adopt 
harmonized  or uniform  provisions  relating  to the  following 
aspects  of implementation: 
— level  of rates; 
— basis  of rates;, 
— nature  of the reserves  to be set up. 
In addition,  arrangements  would  have  to be made  for  the 
institutional  management  of the system. 
The working  party  wishes  to stress  the importance  of taking 
the following  considerations  into  account  if such  a system  were 
to be implemented. 
If the supply  of Euro-credit  by banks  established  within  the 
Community  is made  subject  to minimum  reserve  requirements, 
it should  be decided  whether  these  requirements  apply  only  to 
Euro-credit  granted  to Community  residents  or also  to Euro-
credit  granted  to residents  of non-member  countries.  In the 
first case,  banks  established  within  the Community  would  con-
tinue  to supply  Euro-credit  to residents  of non-member  coun-
tries on the same  terms  as Euro-credit  supplied  by banks  estab-
lished  outside  the Community,  but the impact  of joint  action 
on the total  volume  of Euro-credit  would  probably  be more 
limited. 
If deposits  made  by non-residents  of the  Community  with 
banks  established  in the  Community  were  exempted  from 
minimum  reserve  requirements,  then  banks  established  in the 
15. 8. 77 Official  Journal  of the European  Communities No C 195/23 
Community  would  be in the  same  competitive  position  as 
banks  outside  the Community  when  bidding  for these  deposits. 
On the other  hand,  this  would  increase  the potential  of banks 
in the Community  to grant  Euro-credits  to residents  of the 
Community. 
4. Additional  instruments  affecting  transactions  by resident 
non-banks 
Although  the existence  of instruments  applying  to Euro-trans-
actions  by banks  established  within  the Community  can reduce 
the volume  of transactions  carried  out  by such  banks  with 
Community  resident  non-banks,  Community  non-banks  may,  if 
exchange  controls  permit,  still  be able  to resort  to banks  in 
non-member  countries  (1), which  by definition  are not covered 
by controls  on banks  within  the Community.  Consequently, 
situations  might  arise  in which  it might  be necessary  to sup-
plement  controls  relating  to the activities  of resident  banks  by 
restrictions  on Community  resident  non-banks'  deposits  Or 
credits  with  banks  established  outside  the Community. 
The working  party  does  not consider  that  any such  supplemen-
tary measures  would  from  a technical  point  of view  need  to be 
identical  as to the instruments  chosen,  provided  that  their  ef-
fect is more  or less  equivalent  from  one  Member  State  t'6 
another.  Transactions  by residents  with  banks  in non-member 
countries  could  be limited,  depending  on the Member  State  in 
question,  either  by applying  exchange  controls,  or by recource 
to measures  in line  with  market  principles  (cash  deposit  system 
of the Italian  type  on exports  of capital  or 'Bardepot'  (cash  de-
posit)  of the German  type  on imports  of capital). 
III. Differences  in national  experts'  attitudes  towards  the 
Euro-currency  market  and  towards  joint  action  aimed  at its 
control 
The written  or oral  contributions  of national  experts  concern-
ing problems  related  to the Euro-currency  market  as seen  from 
the capitals  reflect  divergent  opinions  between  national 
authorities  concerning  joint  action  aimed  at controlling  the 
Euro-currency  market.  Therefore  these  submissions  are sum-
marized  below. 
(a) The  role  of the Euro-currency  market  in creating  or trans-
mitting  world  inflation  and  undesirable  capital  flows 
The group  as a whole  recognizes  that  the Euro-currency  mar-
ket constitutes  a very  efficient  international  money  and  credit 
market.  The  market  has  contributed  significantly  to the inte-
gration  of national  markets,  to developing  world  trade,  to 
financing  balance  of payments  deficits  and projects  in develop-
(') The  working  party  is aware  of the fact  that  at present  the vast  majority  of banks 
transacting  Euro-currency  business  and  established  outside  the Community  are 
either  owned  or controlled  by banks  established  in Canada,  Japan,  Switzerland,, 
the United  States  or in the Community.  If these  non-member  states  would  join  I 
the Community  in initiating  action  to slow  down  the  growth  of the  Euro-
currency  market  the effectiveness  of Community  measures  would  be greatly  en-
hanced.  However,  not all experts  consider  participation  by non-member  coun-
tries a necessary  precondition  for initiating  Community  action. ing countries.  Particularly  since  the end of 1973  the market  has 
played  an important  role  in placing  and  recycling  part  of sur-
plus funds  of OPEC  countries. 
However,  the Belgian,  Dutch,  French,  German  and  Italian  ex-
perts  draw  attention  to the fact  that  the Euro-currency  market 
might  give  rise  to numerous  dangerous  developments.  They 
think  that  uncontrolled  expansion  of the Euro-currency  mar-
kets increases  international  capital  movements  and  inter-
national  liquidity  and  thus  contributes  to worldwide  inflation, 
to aggravation  of monetary  crises  and  to lesser  efficiency  of 
national  monetary  and  credit  policies. 
The Danish  experts  to a certain  extent  share  these  views, 
whereas  the  Irish  experts  are  not  highly  convinced  of the 
dangers  attributed  to the Euro-currency  markets. 
The British  and  Luxembourg  experts,  on the contrary,  main-
tain that  the Euro-currency  market  does  not lead  to substantial 
credit  creation  but only  to substitution  of national  credit  mar-
kets.  Worldwide  it does  not lead  to a net increase  in the credit 
volume,  which  implies  that  the market  is not an independent 
source  for inflation. 
(b) The  opportuneness  and  effectiveness  of joint  action  by the 
Member  States  aimed  at monetary  control  of the Euro-
currency  market 
The German,  Belgian,  French,  Italian  and  Dutch  experts  put 
forward  the following  considerations: 
— national  measures  taken  by one  member  country  alone 
cannot  in the long  run  neutralize  these  disruptive  effects. 
Consequently,  these  problems  can be solved  only  by joint 
action; 
— joint  action  by several  Member  States  could,  however, 
weaken  the competitive  position  of banks  in these  coun-
tries as against  banks  established  in financial  centres  in 
other  countries.  In order  to prevent  any  shifting  of the 
Euro-currency  market  centres,  joint  action  should  be envis-
aged  with  respect  to a larger  controlled  area  than  the 
Community. 
In this  context,  certain  experts  have  suggested  that  the intro-
duction  of the following  measures  be examined: 
— minimum  reserve  requirements  in respect  of European 
banks'  liabilities  to non-residents  in national  currency  and 
in foreign  currencies  and  to residents  in foreign  currencies 
(German  and  Italian  experts); 
— minimum  reserve  requirements  in respect  of loans  in 
national  currency  and  in foreign  currencies  granted  by 
European  banks  to foreign  non-banks  in the  controlled 
area (Dutch  experts); 
— minimum  reserve  requirements  in the  form  of cash 
deposits  with  the  central  bank  in respect  of borrowing 
by non-banks  established  within  the controlled  area  from 
banks  established  outside  that  area  (Italian  and  Dutch  ex-
perts); 
No C 195/24 Official  Journal  of the European  Communities 15. 8. 77' 
— joint  central  bank  action  in respect  of Euro-banks  using 
conventional  monetary  policy  instruments  (French  ex-
perts). 
The Belgian  experts  reserved  their  position  on the opportune-
ness and effectiveness  of these  specific  measures.  The  Irish  ex-
perts  doubted  whether  individual  or even  joint  action  by the 
Member  States  could  provide  a satisfactory  solution  to the 
problem  of controlling  die Euro-currency  market,  since  there 
was a danger  of market  centres  shifting  towards  non-member 
countries.  Furthermore,  in their  opinion,  the access  of non-
banks  to this highly  flexible  and competitive  market  should  not 
be restricted,  especially  at the present  time.  In addition,  they 
see a technical  problem  in the administration  of such  controls. 
The Danish  experts  share  to some  extent  the views  of the Irish 
experts,  especially  concerning  the point  that  the access  of 
non-banks  to the market  should  not be restricted  at the present 
time. 
The United  Kingdom  and  Luxembourg  experts  were  against 
any joint  action  with  regard  to the Euro-currency  market.  Their 
attitude  is based  on the following  arguments: 
— international  control  of the growth  of the Euro-currency 
market,  as distinct  from  international  cooperation  in mat-
ters of prudential  supervision  is neither  necessary  nor prac-
ticable; 
— attempts  to control  the growth  of the market,  whether 
taken  at Community  level  or within  a wider  area,  would 
lead to the booking  of Euro-currency  operations  outside 
the regulated  area  unless  restrictions  could  be imposed 
worldwide; 
— a ring  fence  would  be necessary  around  any regulated  area, 
and the larger  the area  the less effective  would  such  a ring 
be in practice; — attempts  to control  one  specific  channel  of international  i 
finance  would  lead  to the growth  of other  channels. 
In addition,  the Luxembourg  experts  are not in favour  of con-
trols which  might  increase  intermediation  costs  on the Euro-
currency  markets,  and thus  would  lessen  their  efficiency  with-
out strengthening  reserves  and solvency  of banks  dealing  on 
these  markets.  This  would  especially  be the case  if minimum 
reserve  requirements  were  introduced. 
Final  remarks 
In examining,  in conformity  with  its mandate,  instruments 
likely  to exert  influence  on the Euro-currency  markets,  the 
working  party  has focused  its attention  on the regulation  of the 
net foreign  position  of banks  and  on minimum  reserve  re-
quirements.  However,  several  experts  mentioned  other  courses 
of action,  (e.g.  open  market  operations  in Euro-currencies  by 
central  banks  or agreements  between  central  banks  aimed  at 
limiting  currency  diversification  in the investment  of official  re-
serves),  but these  were  not examined  by the working  party. 
These  and possibly  other  techniques  could  be examined  at a 
later stage  if and when  it were  considered  useful. 
As far as continuing  its work  on the Euro-currency  market  is 
concerned,  the working  party  feels  that,  given  the differences 
of view  among,  the national  experts,  it would  ~not  be appro-
priate  for it to pursue  the study  of possible  joint  action 
arrangements  in the absence  of further  specific  instructions 
from  the Monetary  Committee  and/or  the Committee  of Gov-
ernors  of the Central  Banks.