14. 10. 74 Official  Journal  of the  European  Communities No C 123/1 
I 
(Information) 
COUNCIL  AND  COMMISSION 
FIFTEENTH  REPORT 
ON THE  ACTIVITIES  OF  THE  MONETARY  COMMITTEE 
FOREWORD 
The purpose  of this  report  is to give  a brief  account  of the  activities  of the  Monetary 
Committee  during  1973. 
During  this  year,  the Committee  held  17 sessions  and  the  working  parties  drawn  from 
its own  members  or set up at its initiative  met  on occasions.  A list of members  as at 
31 December  1973  is annexed. 
As a result  of the  accession  of Denmark,  Ireland  and  the  United  Kingdom  to the 
European  Communities  on 1 January  1973,  the delegates  from  these  countries  became 
full members  of the  Monetary  Committee. 
INTRODUCTION 
In 1973  the  Community  encountered  serious 
difficulties  in its  efforts  to harmonize  economic 
policies  mainly  on account  of severe  disruptions  on 
the foreign  exchange  markets  and  the  consequences 
of persistent  inflation  in the  world,  particularly  in 
the Community. 
The pattern  of exchange  rate  relationships  between 
the majority  of the  industrialized  countries  changed 
drastically.  However,  developments  on  the  foreign 
exchange  markets  remained  subject  to many  factors 
of uncertainty,  due  to the oil crisis  at the end  of the 
year. 
In addition,  the pace  of inflation  accelerated  further 
throughout  the  Community,  despite  a significant 
improvement  in the terms  of trade  in some  member 
countries  resulting  from  modifications  of exchange 
rate relationships,  the spectacular  fall  in the external deficit  of the  United  States  and  the  restrictive 
measures  instituted  by  almost  all  the  national 
authorities.  Although  it was  possible  in 1973  to 
make  progress  towards  the  goal  of economic  and 
monetary  union,  existing  and  newly  created 
monetary  and  economic  machinery  worked  under 
increasingly  difficult  conditions. 
The first  chapter  reviews  events  on  the  foreign 
exchange  markets,  and  the  second  chapter  gives  an 
account  of the  institutional  progress  towards  the 
establishment  of economic  and  monetary  union,  and 
the policy  measures  introduced  to combat  inflation. 
The third  chapter  is devoted  to a review  of the 
economic  and  financial  trend  in the Community,  and 
the fourth  summarizes  the  Committee's  activities  in 
the monetary  field,  both  in a Community  and  an 
international  context. 
CHAPTER  I 
THE  FOREIGN  EXCHANGE  MARKETS  IN 1973 
1. In  1973  the  persistent  instability  of  the  movements  on  the  foreign  exchange  markets, 
international  monetary  system  led  to  erratic  Speculative,  monetary,  economic  and  even  political 
No C 123/2 Official  Journal  of the European  Communities 14.10.  74 
factors  forced  many  countries  to take  measures  of 
exchange  rate  policy,  so that  in the course  of the year 
a completely  new  pattern  of exchange  rates  evolved, 
as the dollar,  the pound,  the  lira,  the  yen  and  the 
Swiss  franc  were  allowed  to float  independently  and 
at the same  time  six Community  currencies  floated 
jointly  in relation  to all other  currencies.  In most 
countries  these  measures  were  accompanied  by new 
restrictions  on the international  movement  of capital. 
All these  measures,  together  with  the improvement  in 
the external  position  of the  United  States,  which 
became  apparent  from  the beginning  of the autumn 
and resulted  in a gradual  return  of confidence  in the 
dollar,  restored  some  quiet  to most  foreign  exchange 
markets  in the closing  months  of 1973. 
2. The  institution  of a two-tier  exchange  market 
in Italy  to put a brake  on the outflow  of capital  (22 
January  1973)  and  the  decision  by  the  Swiss 
authorities  to cease  intervening  on  the  foreign 
exchange  market  so as to discourage  the inflow  of 
foreign  capital  (23  January  1973)  marked  the 
beginning  of one  of the largest  waves  of speculation 
that the  international  monetary  system  has  ever 
known.  The  latent  lack  of  confidence  in 
international  monetary  relations,  particularly  in the 
dollar,  provoked  a flood  of capital  to most  of the 
Community  countries,  especially  Germany,  and 
Japan.  Administrative  measures  to control  capital 
movements,  such  as those  adopted  by Germany  on 5 
February,  proved  ineffective  against  the  highly 
speculative  nature  of these  flows,  the  result  being 
that between  1 and  9 February  over  $ 10  000 
million  were  converted  into  other  currencies.  This 
caused  most  industrialized  countries,  including  all 
Community  countries,  to  close  their  foreign 
exchange  markets.  After  a series  of consultations  and 
bilateral  and  multilateral  conferences,  of which  the 
main  result  was  a decision  to devalue  the dollar  by 
10 %>, taken  on 12 February  by the  United  States 
Government  (1), all the  foreign  exchange  markets 
reopened  on 14 February.  Earlier,  on 13 February, 
Italy  had  decided  to allow  the commercial  lira,  like 
the financial  lira,  to float  while  continuing  to 
operate  the  two-tier  exchange  market.  As with  the 
United  Kingdom  in June  1972,  Italy  thus  ceased  to 
participate  in the  agreement  on the  narrowing  of 
margins  between  EEC  currencies.  Finally,  on 14 
February  Japan  decided  to allow  its currency  to 
float.  These  last  two  measures  led  to a gradual 
depreciation  of  the  commercial  lira  and  an 
appreciation  of the  yen  on the  foreign  exchange 
markets. 3. But  the  foreign  exchange  markets  were  only 
granted  a brief  respite.  Lack  of confidence  in the 
new pattern  of exchange  rates  quickly  reappeared 
and again  gave  rise  to large-scale  movements  of 
capital.  As  a consequence,  on  1 March  several 
countries  which  had  continued  to maintain  their 
exchange  rates  within  fixed  limits  once  again 
experienced  an enormous  inflow  of capital.  Germany 
was the main  victim:  in one  day  alone  it absorbed 
the record  amount  of  I 2 800 million.  This 
situation  led to many  of the industrialized  countries 
closing  their  foreign  exchange  markets  on 1 or 2 
March. 
After  several  conferences  between  the  Community 
countries  at first,  and  then  between  a larger  number 
of countries  (the  enlarged  Group  of Ten),  this  crisis 
was resolved  by the  decision  of the  six  Member 
States  of  the  EEC  (2) to  adapt  the  existing 
Community  exchange  rate  scheme,  maintaining  the 
2-25 %> spread  between  the respective  currencies  (the 
'snake')  but  ceasing  to intervene  to maintain  fixed 
margins  against  the  dollar  (the  'tunnel').  These 
Council  Decisions  of 11 and  12 March,  with  which 
Norway  and  Sweden  associated  themselves  on 14 
March,  came  into  force  with  the  reopening  of the 
exchange  markets  on 19  March.  The  same  day 
Germany  revalued  the DM  by 3 °/o. Further,  several 
Community  countries  tightened  the  measures  they 
had taken  to ward  off inflows  of capital. 
4. The  joint  float  of  several  Community 
currencies  and  the accompanying  measures  taken  by 
certain  participating  countries  initially  brought  an 
easing  of the  international  situation.  Exchange  rate 
movements  within  the  Community  bloc  were  fairly 
orderly,  but  the snake  gradually  left  the old tunnel, 
in that  the  currencies  of the  participating  countries 
appreciated  against  the dollar. 
Towards  the  end  of June,  the  monetary  climate 
abruptly  deteriorated  again.  The  immediate  cause  of 
this crisis,  which  was  much  less  serious  than  that  of 
spring  1973,  was  again  the US dollar,  which  suffered 
a large  fall  in its rate,  resulting  from  massive  capital 
outflows.  Demand  centred  mainly  on the DM.  This 
situation  obliged  the  German  monetary  authorities 
and those  of other  countries  participating  in the 
joint  float  to intervene  massively  in German  marks 
and led  to an inflow  of unwanted  liquidity  into 
Germany.  For  this  reason  the German  Government, 
after  consulting  with  its EEC  partners,  decided  to 
(1) The  devaluation  of the  US  dollar,  which  raised  the 
official  price  of gold  from  $ 38 to $ 42-22  per  ounce 
of fine  gold,  was  officially  proposed  to the  IMF 
on 18 October  1973  and  was  approved  the  same  day. (2) Belgium,  Denmark,  Germany,  France,  the  Nether-
lands  and  Luxembourg.  The  United  Kingdom,  Ireland 
and Italy  continued  to allow  their  currencies  to float 
independently  (cf.  para.  9). 
14. 10. 74 Official  Journal  of the European  Communities No C 123/3 
revalue  the DM  by.  5*5 % with  effect  from  29 June, 
while  maintaining  the 2-25  % margin  of fluctuation 
in relation  to other  currencies  in the 'snake',  based 
on the  new  intra-Community  parities  deriving  from 
this revaluation. 
5. At  the beginning  of July,  the dollar  rate  fell to 
a level  about  15 °/o lower  than  its nominal  parity 
against  the currencies  within  the Community  snake. 
After  a meeting  of the  governors  of the  principal 
central  banks  at  the  Bank  for  International 
Settlements  on 8 July  1973,  concerted  action  by the 
US monetary  authorities  and  certain  central  banks 
helped  to halt  the  depreciation  of the  dollar  and 
even  to initiate  a reverse  movement.  The  action  took 
the form  of intervention  to support  the dollar  and  of 
improved  harmonization  of interest  rate  policies  at 
the international  level,  particularly  on the part  of the 
United  States. 
6. After  a 5 °/o revaluation  of the Dutch  florin  on 
17 September,  which  was  justified  by the strength  of 
the Dutch  balance  of payments,  and which  was  also 
part of a programme  intended  to control  domestic 
inflation,  a sense  of  uncertainty  once  again 
developed  in  the  foreign  exchange  markets. Speculation  was  particularly  directed  towards  the 
French  and  Belgian  currencies,  in the expectation  of 
a possible  revaluation  of the  Belgian  franc  and  a 
possible  devaluation  of the  French  franc.  However, 
the markets  quickly  returned  to normal  after  the 
monetary  authorities  concerned  had  intervened 
massively  and  had,  in particular,  adapted  their 
interest  rate  structure. 
7. The  beginning  of November  saw  a major 
reversal  in the situation  on the international  exchange 
markets.  News  of the extremely  favourable  US trade 
figures  for September  confirming  a trend  that  had 
already  been  discernible,  brought  about  a 
considerable  improvement  in the  position  of the 
dollar.  This  movement  received  additional  impetus 
from  the oil crisis,  since  the feeling  on the  markets 
was clearly  that  the  economic  and  monetary 
consequences  of the  new  energy  situation  would  be 
less serious  for the USA  than  for most  of the other 
industrialized  countries.  Thus  the  'third'  dollar 
devaluation  which  had  occurred  in the  exchange 
markets  between  February  and  July  was  completely 
reversed  in a few  weeks.  By the end  of the year,  the 
dollar  rate  was  back  at its nominal  parity  against  the 
group  of currencies  in the Community  snake. 
CHAPTER  II 
ECONOMIC  AND  MONETARY  UNION 
8. At  their  meeting  on 19 and  20 October  1972, 
the Heads  of State  or of Government  declared  that 
'the necessary  decisions  should  be taken  in the 
course  of 1973  so as to allow  the transition  to the 
second  stage  of economic  and  monetary  union  on 1 
January  1974'.  Although  the  successive  monetary 
crises  have  brought  about  unusual  difficulties,  it was 
possible  to take  some  decisions  in this  connection. 
9. On  11 March  1973,  the  Council  decided  to 
adapt  the Community  exchange  rate  system:  by this 
decision  the fluctuation  margin  between  the German 
mark,  the  Danish  krone,  the  Dutch  guilder,  the 
Belgian  franc,  the Luxembourg  franc  and  the French 
franc  was  maintained  at 2'25  °/o and  the  central 
banks  were  no longer  required  to intervene  vis-a-vis 
the United  States  dollar.  To protect  this  Community 
scheme,  which  is designed  to maintain  orderly 
exchange  rate  relations,  the  Council  further  agreed 
that the Directive  of 21 March  1972  would  be more 
effectively  enforced  by Member  States  in order  to 
prevent  disruptive  capital  movements. 10. Pursuant  to the  declaration  of the  summit 
conference  of 19  and  20  October  1972,  the 
Regulation  establishing  a European  Monetary 
Cooperation  Fund  (*) was  adopted  by the Council  on 
3 April  1973  after  prior  examination  by  the 
Committee  of Governors  of Central  Banks,  the 
Monetary  Committee  and  the  conference  of the 
Ministers  of Finance.  This  Fund,  which  commenced 
operation  on 1 June,  and  intended  to be integrated  at 
a later  stage  into  a Community  organization  of 
central  banks,  is, within  the limits  of its powers,  to 
promote: 
— the  proper  functioning  of  the  progressive 
narrowing  of the  margins  of fluctuation  of the 
Community  currencies  against  each  other; 
— interventions  in Community  currencies  on the 
exchange  markets; 
C1) OJ No L 89, 5. 4. 1973. 
No C 123/4 Official  Journal  of the  European  Communities 14.10.  74 
— settlements  between  central  banks  leading  to a 
concerted  policy  on reserves. 
In the first  stage  of its functions,  the Fund  is to be 
responsible  for: 
— the concerted  action  necessary  for  the  proper 
functioning  of the Community  exchange  system; 
— the multilateralization  of  positions  resulting 
from  interventions  by  central  banks  in 
Community  currencies  and  the multilateralization 
of intra-Community  settlements; 
— the  administration  of  the  very  short-term 
financing  provided  for by the Agreement  between 
the central  banks  of the enlarged  Community  of 
10 April  1972  and  of the  short-term  monetary 
support  provided  for in the Agreement  between 
the" central  banks  of the  Community  of 9 
February  1970,  to which  the  central  banks  of 
Denmark,  Ireland  and  the  United  Kingdom 
acceded  with  effect  from  8 January  1973,  with 
the regroupment  of these  mechanisms  in a 
renewed  mechanism. 
11. In  order  to prepare  the  transition  to the 
second  stage  of economic  and  monetary  union,  the 
Commission  took  several  steps  in the economic  and 
monetary  spheres  during  the period  under  review.  On 
19 April  1973,  it adopted  a communication  'on the 
progress  achieved  in the first  stage  of economic  and 
monetary  union,  on the  allocation  of powers  and 
responsibilities  among  the  Community  institutions 
and the  Member  States  essential  to the  proper 
functioning  of economic  and  monetary  union,  and 
on the measures  to be taken  in the second  stage  of 
economic  and  monetary  union'.  In this  report, 
drawn  Up in accordance  with  the Council  resolution 
of 22 March  1971  and  the communique  issued  at the 
Paris  summit  conference,  the Commission  reviewed 
the progress  achieved  in the first  stage  and  drew  the 
following  conclusions:  the  actions  included  in this 
first stage  should  be consolidated  and  rigorously 
applied,  particularly  those  concerning  economic 
policies;  structural  and  regional  problems  should 
receive  prior  attention;  in certain  important  fields 
effective  responsibility  must  be  exercised  at 
Community  level;  the Community  must  constitute  a 
single  monetary  zone  as soon  as possible;  the 
principle  economic  and  social  groups  should  be more 
and more  associated  with  the European  enterprise.  In 
addition,  this  communication  from  the Commission 
set out  a programme  of action  for a second  stage 
which  was  to start  on 1 January  1974. Further,  on 27 June  1973  the Commission  presented 
a 'report  on the adjustment  of short-term  monetary 
support  and  the  conditions  for  the  progressive 
pooling  of reserves'  as requested  by the Council  on 
4 February  1973.  In this  report,  the  Commission 
proposed  that  more  important  tasks  be entrusted  to 
the European  Monetary  Cooperation  Fund.  It 
believes  that  the reorganization  of the credit  system 
and the pooling  of reserves  should  go together  and 
be undertaken  without  delay.  According  to these 
proposals,  the Member  States  should  have  begun  to 
pool  their  reserves  and  to improve  Community  credit 
mechanisms  on 1 January  1974. 
12. In  the light  of the discussion  of these  reports 
on 14 and  15 May  and  on 28 June  1973  in the 
Council,  and  in view  of the  opinions  expressed  by 
the Committee  of Governors  of Central  Banks  and 
by the Monetary  Committee  on 14 November  1973, 
the Commission  adopted  a document  entitled  'work 
on economic  and  monetary  union  (*)',  which 
contained  a number  of legal  instruments  intended  to 
make  possible  the  transition  to a second  stage  of 
economic  and monetary  union. 
On the first  perusal  of these  proposals,  the Council 
decided  at its session  of 3 and  4 December  1973  to 
separate  the  adjustment  of short-term  monetary 
support  from  the progressive  pooling  of reserves.  It 
called  on the Monetary  Committee,  the Committee 
of Governors  of Central  Banks  and  the  Board  of 
Governors  of the  European  Monetary  Cooperation 
Fund  to submit,  by 31 March  1974  reports  on the 
still outstanding  technical  problems  inherent  in the 
pooling  of reserves,  and  invited  the Commission  to 
amend  its proposals  by 30 April  1974  in the light  of 
these  reports.  The  Council  stated  that  it intended  to 
examine  the  Commission's  revised  proposal  at the 
latest  by 30 June  1974.  The  Commission  was  further 
invited  to prepare  a new  proposal  for the adjustment 
of short-term  monetary  support  to be discussed  by 
the Council  before  the end of 1973. 
13. At  its session  of 17  December  1973,  the 
Council  and  the representatives  of the Governments 
of the  Member  States  agreed  in principle  on a 
resolution  on the implementation  of a second  stage 
of economic  and  monetary  union  in the Community. 
This  resolution  lists  the  objectives  to be achieved 
during  a second  stage,  from  1 January  1974  to 31 
December  1976,  as  a prerequisite  for  the 
establishment  of full  economic  and  monetary  union. 
(») OJ No C 114,  27. 12. 1973. 
14.10.  74 Official  Journal  of the  European  Communities No C 123/5 
However,  the  resolution  could  not  be  formally 
adopted,  pending  the  solution  of problems  with 
regard  to the  Regional  Development  Fund.  During 
the same  meeting  the Council  reached  an agreement 
in principle  with  regard  to a number  of important 
instruments  to strengthen  economic  and  monetary 
union. 
These  instruments  which  were  formally  adopted 
on 18 February  1974,  are as follows: 
— a Directive  (*) concerning  stability,  growth  and 
full employment  in the  Community,  whereby 
Member  States  undertake  to enlarge  the range  of 
their  economic  policy  instruments,  thus  fulfilling 
an essential  condition  for  more  effective 
coordination  of  their  economic  policies  at 
Community  level; 
— a Decision  (*) concerning  the  achievement  of a 
high degree  of convergence  of the  economic 
policies  pursued  by the  Member  States  of the 
EEC;  this  decision  aims  at  substantially 
strengthening  and  improving  consultation 
procedures  in the  economic  and  monetary  field 
within  all  competent  Community  bodies 
(Council,  Committee  of Governors  of Central 
Banks,  Monetary  Committee,  and  Coordination 
Group); 
— a Decision  (*) setting  up an Economic  Policy 
Committee;  by this  Decision  the Budgetary  Policy 
Committee,  the  Conjunctival  Policy  Committee 
and the  Medium-term  Economic  Policy 
Committee  are merged  to form  a single  Economic 
Policy  Committee,  thus  ensuring  greater 
effectiveness  when  it has to examine  Community 
problems  or, as a consultative  body,  to deliver 
technical  opinions  on specific  problems; 
— a resolution  on  short-term  monetary  support 
which  requests  the  Board  of Governors  of the 
European  Monetary  Cooperation  Fund  to 
amend  the  short-term  monetary  support 
mechanism  by  doubling  the  debtor  quotas, 
quadrupling  the  creditor  quotas  and  increasing 
the extensions  beyond  the  debtor  and  creditor 
quotas  to 1 500 million  units  of account  each. 
14. In  application  of the  Council  resolution  of 5 
December  1972,  the Member  States  took  a series  of 
anti-inflationary  measures  (cf.  paragraph  26).  How-
ever,  the efficacy  of these  measures  appears  to have 
been  limited:  in 1973  inflation  in the  Community 
continued  and  even  increased  at a faster  rate  than 
in previous  years.  Although  the  influences  from 
(») OJ No  L 63, 5. 3. 1974. outside  the  Community  should  not  be  under-
estimated,  the  inflationary  process  in  member 
countries  was  probably  largely  due  to factors  of 
internal  origin. 
It is clear  that  the persistence  of a high  rate  of infla-
tion in member  countries  constitutes  a grave  threat 
to the  maintenance  of a satisfactory  equilibrium 
growth  rate  and  the  achievement  of economic  and 
monetary  union.  Under  these  circumstances,  Member 
States  therefore  devoted  considerable  attention 
during  the year  to examining  measures  that  might  be 
taken  to combat  inflation  and  to coordinate  their 
policies  in this  field. 
15. On  22 March,  on the basis  of a Commission 
communication  concerning  the  adjustment  of the 
economic  policy  guidelines  for 1973,  the Council  un-
dertook,  in accordance  with  Article  2 of the Council 
Decision  of 22 March  1971  on the  strengthening  of 
coordination  of short-term  economic  policies  of the 
Member  States,  a first  examination  of the economic 
situation  for 1973.  After  studying  the results  of the 
anti-inflationary  action  programme  laid  down  in its 
resolution  of 5 December  1972,  the Council  invited 
the Coordination  Group  on Short-term  Economic 
and Financial  Policies,  the Monetary  Committee,  the 
Conjunctural  Policy  Committee  and  the  Budgetary 
Policy  Committee,  to submit  by 1 June  1973,  reports 
on methods  of supervising  trends  in prices  and  in-
comes,  the implementation  of national  budgets  and 
the trend  of the money  supply. 
16. In  the light  of these  reports,  the Commission 
drafted  a communication  as a preparation  for  the 
second  examination  of the economic  situation  in the 
Community,  which  the Council  carried  out at its ses-
sion on 28 June  1973.  In view  of the persistent  rise 
in prices,  the Council  adopted  at that  meeting,  on 
the proposal  of the Commission,  a resolution  (2) on 
further  measures  to be taken  against  inflation. 
17. Similarly,  at the third  examination  of the eco-
nomic  situation  of the  Community  by the  Council 
on 9 November  1973,  the problem  of inflation  was 
central  to the discussion.  At that  session,  the Council 
examined  the measures  taken  by Member  States  pur-
suant  to the resolution  of 14 September  1973  (3), and. 
on the  Commission's  proposal,  adopted  the  annual 
report  on the economic  situation  in the Community. 
It also  agreed  on the economic  policy  guidelines  for 
1974  set out  in the  report  and  decided,  mainly  on 
(2) This  resolution  was  only  formally  adopted  on 14 Sep-
tember  1973  (OJ  No C 75, 19. 9. 1973). 
(8) OJ No C 107,  8. 12. 1973. 
No C 123/6 Official  Journal  of the  European  Communities 14.10.74 
account  of the new  situation  arising  from  the energy 
crisis,  to lay down  at its meeting  of 3 and  4 Decem-
ber additional  measures  to combat  inflation  in the 
coming  months. 
18. On  a Commission  proposal,  the  Council  set 
out these  additional  measures  on 3 and  4 December in the 'resolution  (x) on measures  to be taken  against 
rising  prices  and  the maintenance  of a high  level  of 
employment  in the Community'.  The  programme  of 
action  which  is to be implemented  immediately  and 
in parallel  in the various  countries  of the Communi-
ty covers  measures  in the fields  of budgetary  policy, 
monetary  and  credit  policy,  prices  and  incomes  poli-
cy, agricultural  policy  and  commercial  policy. 
i1) This  resolution  is dated  17 December  1973  (OJ  No 
C 116,  29. 12. 1973). 
CHAPTER  III 
ECONOMIC  AND  MONETARY  DEVELOPMENTS  IN THE  COMMUNITY 
19. The  developments  on the  foreign  exchange 
markets  in 1973  did not have  any  perceptible  adverse 
effects  on international  trade.  There  was  in fact  a 
sharp  upswing  in international  trade,  stimulated  by 
an appreciable  acceleration  in economic  growth  in 
the industrialized  countries,  especially  during  the 
first half  of the  year.  Whereas  economic  growth  in 
the United  States  continued  at much  the same  rapid 
pace  as during  the preceding  year  (6 °/o),  Japan  and 
the other  OECD  countries  which  are not members  of 
the Community  achieved  growth  rates  which  were 
distinctly  higher  than  1972.  The  considerably 
increased  proceeds  from  the  sale  of raw  materials 
also helped  to boost  economic  expansion  in many 
developing  countries.  These  various  factors  gave  a 
strong  impetus  to international  trade  which  rose  by 
some  13 °/o in volume.  The  expansion  of world  trade 
was however  accompanied  by an upsurge  in prices 
which  reached  record  proportions  in almost  every 
country. 
20. All  the  Member  States  of the  Community 
experienced  boom  conditions  in 1973.  Economic 
activity  expanded  at a very  rapid  pace  especially 
during  the first  half  of the year;  it was  not until  the 
second  half  of the  year  that  certain  differences  in 
trend  between  countries  and  between  sectors  of 
activity  led to an overall  slowdown  in growth. 
The growth  rate  of the Community's  gross  product 
in real  terms  in 1973  was  nevertheless  higher  than  in 
1972  (plus  5 %> against  37  °/o).  Year  on  year, 
expansion  speeded  up in almost  all the  Member 
States:  in France,  Germany,  Ireland,  Luxembourg, 
Italy  and  the United  Kingdom. 
21. In general,  export  demand  was  a major  factor  in 
growth  throughout  the year;  in Denmark  and  Italy, 
however,  the  volume  of exports  rose  more  slowly 
than in 1972.  Domestic  demand  also  expanded  at a 
very rapid  pace  in  most  countries,  although 
indications  of deceleration  were  apparent  in the 
second  half  of the year. While  public  investment  showed  only  moderate 
growth  or no growth  at all,  the  pace  of private 
investment  quickened  appreciably  in  France, 
Belgium,  Denmark,  Ireland,  Italy  and  the  United 
Kingdom. 
The sharp  rise  in household  money  incomes,  the 
persistence  of inflationary  expectations  and,  in 
certain  countries,  the  effects  of a decline  in the 
propensity  to  save,  which  became  particularly 
noticeable  during  the  final  months  of the  year, 
stimulated  private  consumption  expenditure,  which 
climbed  particularly  steeply  in Ireland  and  Italy.  The 
rate of growth  of public  current  expenditure  in 
money  terms  slackened  a little  in France,  Belgium 
nnd Ireland,  but accelerated  in Germany  and  Italy.  In 
the Netherlands,  this  expenditure  stopped  falling  in 
real terms. 
Finally,  the  continued  upsurge  in the  prices  of a 
large  number  of raw  materials  and  the  expectation 
of further  increases  contributed  to a rise  in stocks 
which  was  sometimes  considerable. 
22. The  high  level  of economic  activity  led to a 
rise in employment  in all countries  until  the end  of 
the autumn.  The  improvement  was  particularly 
marked  in Italy  and  the United  Kingdom.  However, 
labour  market  trends  were  relatively  disappointing 
in Belgium  and  the  Netherlands,  where  the 
unemployment  rate  was  almost  as high  as during  the 
previous  year.  In these  countries,  as in some  others, 
in some  of which  a large  number  of foreign  workers 
are employed,  residual  unemployment  is due  in part 
to structural  causes.  Towards  the  end  of the  year 
unemployment  rose  again  in most  countries  and 
there  was  an increase  — quite  considerable  in some 
cases  — in the  number  of persons  on short  time, 
principally  because  of the repercussions  of the energy 
crisis. 
14.10.  74 Official  Journal  of the  European  Communities No C 123/7 
23. The  boom  in  the  Community  was 
accompanied  by  very  heavy  inflationary  pressures 
throughout  the  year.  While  in some  countries  the 
upward  movement  of prices  slackened  a little  at the 
beginning  of the  summer,  inflation  in all member 
countries  accelerated  again  during  the  final  months. 
Consumer  prices  in the  Community  as a whole 
showed  an increase  in December  1973  of more  than 
8 % on December  of the  previous  year.  In Denmark, 
Ireland,  Italy  and  the  United  Kingdom  the  rise  in the 
cost of living  even  exceeded  10 % over  this  period. 
This  trend  was  due  to the  particularly  sharp  rise  in 
the cost  of raw  materials  and  to an increase  in 
labour  costs  which  largely  exceeded  the  growth  of 
productivity.  The  vigorous  expansion  in domestic 
and export  demand  in most  countries  led  to a high 
degree  of capacity  utilization,  from  the  beginning  of 
the year.  Even  in countries  such  as Italy,  where  there 
still had  been  a certain  amount  of spare  capacity  at 
the beginning  of the  period,  the  speeding-up  of 
economic  activity  gave  rise  to bottlenecks  which 
soon  impeded  the  growth  of production  in some 
sectors.  Moreover,  towards  the  end  of the  year,  the 
situation  deteriorated  still  further  as a result  of the 
massive  increase  in the  price  of  oil  and  the 
strengthening  of the  dollar  on the  foreign  exchange 
markets. 
24. The  domestic  demand  boom  in the  Member 
States,  together  with  the  appreciable  increase  in the 
cost of imports,  entailed  a considerable  deterioration 
in the  Community's  balance  of payments  on current 
account,  the  surplus  falling  from  $ 6 700  million  in 
1972  to $ 700  million  in 1973. 
Within  this  overall  result  the  trends  differed  very 
sharply  from  one  member  country  to another.  There 
was a very  marked  deterioration  in the  balance  of 
payments  on current  account  in Italy  and  the  United 
Kingdom  — notably  as a result  of the adverse  swing 
in their  terms  of trade  — and  in Denmark.  In the 
United  Kingdom,  the 1973  trade  balance  closed  with 
a deficit  of £ 2 375  million  and  the  current  account 
showed  a deficit  of £ 1 468 million,  compared  with 
a surplus  of £ 69 million  in 1972;  in Italy  the trade 
deficit  totalled  Lit 3 366  000  million  in 1973  and  the 
current  account  deficit  Lit  2 352  000  million;  in 
Denmark  the  deficit  on current  account  also  rose 
sharply,  principally  because  of the  deterioration  in 
the trade  balance.  In Germany,  on the  other  hand, 
where  the  deterioration  in the  terms  of trade  was 
relatively  moderate  owing  to the  effects  on import 
prices  of the  revaluation  of the  German  mark,  the 
trade  surplus  reached  the  record  figure  of DM 
33 000  million,  while  the  balance  of payments  on 
current  account  closed  with  a surplus  of DM  12 400 
million  (compared  to DM  3 300  million  in 1972). 25. This  generally  poor  trend  in the  Community's 
balance  of payments  on current  account  contrasts 
with  a spectacular  improvement  in the United  States' 
foreign  trade  position.  After  very  heavy  deficits 
during  the  first  half  of 1973,  the  US  balance  of 
payments  on official  settlements  basis  (less  SDRs) 
showed  surpluses  of $ 2 100  million  and  $ 2 700 
million  in the  third  and  fourth  quarters  respectively 
(seasonally  adjusted),  bringing  the deficit  for 1973  as 
a whole  to $ 5 300  million,  compared  to $ 11 000 
million  in 1972.  This  turnaround  was  due  mainly  to 
the trend  in the  trade  balance  (fob),  which  after 
recording  a deficit  in 1972  of $ 6 400  million 
moved  into  a surplus  in 1973  of £ 1 700  million 
(fob).  The  basic  balance  closed  with  a surplus  of 
$ 1 200  million  following  a deficit  of $ 9 800  million 
in 1972.  This  development  enabled  the  US 
authorities  to relax  the  restrictions  on outflows  of 
capital  in November. 
26. Faced  with  alarming  price  increases,  all the 
Member  States  implemented  restrictive  economic 
policies  at the  beginning  of the  year,  although  Italy, 
which  had  suffered  from  a period  of stagnation 
during  the two  previous  years  did not  do so until  the 
end of the  second  quarter.  In order  to combat 
inflation  they  employed  a wide  range  of instruments, 
ranging  from  monetary  and  fiscal  policy  to prices 
and incomes  policies. 
The policy  of restricting  liquidity,  initiated  in 1972 
in most  Member  States,  was  tightened  repeatedly 
during  the  year  in order  to limit  supply  and  curb 
demand.  Implementation  of this  policy  was  helped 
by the  floating  of the  dollar  and  by increases  in 
interest  rates  on the principal  foreign  markets  and  on 
the international  market  generally,  which  afforded 
the monetary  authorities  more  room  to manoeuvre. 
Most  countries  restricted  access  to central  bank 
finance  and  implemented  general  or  selective 
increases  in compulsory  reserve  ratios,  relating  either 
to banks'  liabilities  or to their  assets  and  liabilities. 
Some  countries  also  introduced  or  strengthened 
arrangements  for  setting  quantitative  ceilings  on 
lending.  In order  to protect  their  domestic  economies 
from  external  influences  and  to lessen  the  impact  of 
such  influences  on the  Community's  exchange  rate 
system,  capital  movements  were  subjected  to 
restrictive  measures  bearing  on commercial  banks' 
net external  positions;  non-residents'  balances  or 
foreign  borrowing  by  non-bank  institutions.  The 
monetary  authorities  of all the Member  States  raised 
the cost  of rediscounting  with  the  central  bank  by 
putting  up  official  discount  rates  several  times. 
Discount  rates  in almost  all  the  Member  States 
therefore  reached  new  record  levels  at the end  of the 
year.  These  measures  led  to a considerable  increase 
No C 123/8 Official  Journal  of the European  Communities 14.10.  74 
in the rates  on the money  market,  and,  except  in 
Italy,  to an appreciable  rise  in long-term  interest 
rates. 
Except  in Italy  and  the  Netherlands,  the  use  of 
monetary  policy,  sometimes  intensively,  resulted  in a 
marked  slowdown  in the expansion  of the  money 
supply.  But,  with  regard  to a total  liquidity, 
including  short-term  saving,  the slowdown  was  more 
moderate;  in some  countries  there  was  even  an 
increase.  This  trend  is mainly  due  to  the 
continuation  of bank  lending  at a high  level. Moreover,  monetary  policy  in  countries  with 
demand  pressures  was  not  always  backed  up 
sufficiently  by fiscal  policy.  Only  three  countries 
(France,  Germany  and  Denmark)  had  large  budget 
surpluses,  as a result  of the  use  of budgetary 
measures  in the fight  against  inflation.  In the United 
Kingdom  measures  to restrict  public  expenditure 
were  taken  at the end  of the year,  but the effect  of 
these  will  not  be felt  until  1974.  The  budgetary 
policies  pursued  by the other  countries  were  neutral, 
but more  often  than  not stimulated  the expansion  of 
liquidity,  especially  in Italy  and,  to a lesser  extent,  in 
Belgium. 
CHAPTER  IV 
THE  ACTIVITIES  OF  THE  MONETARY  COMMITTEE 
27. The  Monetary  Committee  devoted  most  of its 
time to considering  problems  arising  from  events  in 
the monetary  field,  to examining  measures  connected 
with the progressive  establishment  of economic  and 
monetary  union  and  to preparing  the  work,  at 
Community  level,  on the reform  of the international 
monetary  system. 
28. When  the  monetary  crisis  broke  out  in 
February,  the committee  discussed  the consequences 
of the  United  States  Government's  decision  to 
devalue  the dollar  and  of the Italian  Government's 
decision  to let the  commercial  lira  float.  It also 
examined  the  measures  taken  by  Germany  on 
5 February  1973  to stem  the inflow  of foreign  capital. 
In this  connection  it was  noted  in particular  that  the 
derogations  from  the Directives  implementing  Article 
67 of the  EEC  Treaty,  which  such  measures 
involved,  could  be  justified  by  invoking  the 
safeguard  clause  provided  for in Article  109. 
29. The  monetary  events  in March  and  the 
resolution  of  the  ensuing  crisis  involved  the 
Monetary  Committee  on several  occasions.  To begin 
with,  in preparation  for  the Council  session  of 4 
March,  it discussed  in  particular  an  oral 
communication  from  the  Commission  concerning 
'the creation  of a Community  exchange  system'.  In 
accordance  with  the brief  it had  received  from  the 
Council,  it then  analysed  the  proposals  which  the 
Commission  had  put to the Council  on 4 March  and 
the various  suggestions  for  overcoming  the  crisis 
made  at that  session.  The  committee  recorded  the 
results  of this  discussion  in two  documents.  The first,  concerning  the  implementation  of  a 
Community  exchange  rate  scheme,  was  the basis  of 
the Council's  work  at its session  of 11 and 12 March, 
during  which  it decided  to introduce  a joint 
float  of certain  Community  currencies.  The  second, 
concerning  international  cooperation  measures  for 
the protection  of exchange  parities  on a world  level, 
formed  the basis  of the Community's  position  at the 
international  consultations  in the enlarged  Group  of 
Ten on 9 March. 
30. As  part  of the work  on the establishment  of 
economic  and  monetary  union,  the committee,  at its 
meeting  of 6 and  7 March,  adopted  an Opinion  (*) 
on a proposal  for a Decision  establishing  a European 
Monetary  Cooperation  Fund.  The  committee  further 
drew  up an Opinion  (2) on the monetary  aspects  of 
the Commission  communication  to the Council  of 
19 April  1973  on the 'progress  achieved  in the first 
stage  of economic  and  monetary  union,  and  on the 
measures  to be taken  in the second  stage'.  Finally,  in 
accordance  with  the brief  it had  received  from  the 
Council  on 18 June  1973.,  it examined,  at its 
meetings  of 10 and  19 October  1973,  the 'report 
from  the  Commission  to the  Council  on  the 
adjustment  of  short-term  monetary  support 
arrangements  and  the conditions  for the progressive 
pooling  of reserves',  and  adopted  an Opinion  (3) on 
it 
H See  Annex  I. 
(2) See  Annex  II. 
(3) See  Annex  III. 
14. 10. 74 Official  Journal  of the  European  Communities No C 123/9 
In preparation  for the move  to the  second  stage  of 
economic  and  monetary  union,  the  committee 
analysed  the monetary  aspects  of the proposal  for a 
Council  Decision  concerning  the  achievement  of a 
high degree  of convergence  of the economic  policies 
pursued  by the Member  States  of the  EEC,  and  on 
the Council  resolution  concerning  short-term 
monetary  support.  As a result  of this  preparatory 
work,  carried  out  jointly  with  the  Committee  of 
Central  Bank  Governors,  the  Council  reached  an 
agreement  in principle  on  these  proposals  on 
17 December  1973. 
31. On  account  of the continued  instability  of the 
international  monetary  situation  and  pursuant  to 
Council  Regulation  No  129,  the committee  had,  on 
several  occasions,  to  examine  the  problems 
concerning  the  unit  of account  and  its conversion 
into national  currencies  for  the  purpose  of the 
common  agricultural  policy  and  to prepare  oral  or 
written  opinions  on the  matter.  The  consultations 
principally  concerned  the  conversion  rates  of the 
British  pound,  the  Irish  pound,  the  Dutch  guilder 
and the  Italian  lira  to be used  in the  common 
agricultural  policy  and  the  establishment  of a new 
method  of  calculating  levies  and  monetary 
compensatory  amounts  by reference  to the joint  float 
rather  than  the dollar. 
32. The  Monetary  Committee  also  continued  to 
keep  the  monetary  and  financial  situation  in the 
Member  States  regularly  under  review.  Pursuant  to 
Article  III of the Agreement  between  the Community 
central  banks  on short-term  monetary  support,  it 
held special  consultations  at its meeting  on 19 and 
20 July  1973,  on the situation  in Italy,  following  the 
decision  to make  support  facilities  available  to that 
country  in  June.  The  conclusions  of  the 
consultations  were  set out  in a report  which  was 
transmitted  to the President  of the Commission,  the 
President-in-office  of the  Council,  the Chairman  of 
the Committee  of Governors  of Central  Banks  and  of 
the Board  of Governors  of the  European  Monetary 
Cooperation  Fund,  and  to the  Italian  Finance 
Minister.  When  the period  of support  was  extended, 
the committee  re-examined  the situation  in Italy  with 
particular  reference  to the  economic  measures 
adopted  by the Italian  authorities  in the meantime. 
Finally,  the  committee  discussed  in depth  the 
monetary  implications  of the  energy  crisis  for  the 
Community.  In this  context  the committee  stated  its 
intention  to  keep  developments  under  review, 
particularly  the  monetary  measures  which  the 
Member  States  might  adopt  to mitigate  the effects  of 
the crisis. 33. At  its meeting  on 6 and  7 February  the 
Monetary  Committee  broadened  the  terms  of 
reference  of the  Working  Party  on  Short-term 
Capital  Movements  (see  section  20 of the fourteenth 
report  on the activities  of the Monetary  Committee). 
It instructed  the  working  party  to examine  the 
possibility  of harmonizing  the existing  restrictions  on 
the free  movement  of capital  and  to find  out  what 
exceptions  could  be made  for transactions  between 
Member  States. 
On 9 October  1973  the working  party  presented  the 
committee  with  a report  on both  parts  of these  terms 
of reference.  With  regard  to the  second  part,  it 
pointed  out,  that  it would  not  be  possible  to 
harmonize  exchange  control  instruments  and  to 
introduce  a preferential  system  for  Community 
transactions  until  a political  stimulus  had  been  given 
to the  solution  of certain  problems  which  did  not 
fall within  its  competence.  It emphasized  in 
particular  that  technical  studies  concerning  the 
harmonization  of controls  and  exceptions  to be 
made  for  transactions  between  the  Member  States 
could  not  proceed  any  faster  than  economic  and 
monetary  union  itself.  The  working  party  suggested 
to the Monetary  Committee  a three-stage  procedure 
for any  further  work  on harmonization  beginning 
with  a first  stage  instituting  a forum  for centralizing 
and exchanging  technical  information  on various 
measures  on exchange  control. 
34. The  Working  Party  on  Securities  Markets 
continued  to examine  developments  in the  capital 
markets  of the  Member  States,  in the  international 
capital  market  and  in capital  marked  policies.  It 
presented  a report  (*) on its activities,  the conclusions 
of which  were  approved  by  the  Monetary 
Committee. 
35. The  Monetary  Committee  and  the Committee 
of Central  Bank  Governors  had  already  been  called 
upon  in the Council  resolution  and  the representatives 
of the  Governments  of the  Member  States  of 22 
March  1971  on  the  establishment  by  stages  of 
economic  and  monetary  union  (point  III.5),  to 
continue  'their  work  on the  harmonization  of the 
instruments  of  monetary  policy  in  close 
collaboration  with  each  other'.  In accordance  with 
this mandate,  the two  committees  had  set up a Joint 
Working  Party  on the  Harmonization  of Monetary 
Policy  Instruments,  which,  for technical  reasons,  had 
not been  able  to begin  its work.  In agreement  with 
the Committee  of Central  Bank  Governors,  the 
Monetary  Committee  decided  to entrust  a new 
H See  Annex  V. 
No C 123/10  Official  Journal  of the  European  Communities  14.10.  74 
mandate  . to this  working  party,  which  should 
commence  work  very  sooa. 
Finally,  in accordance  with  the Council  resolution  of 
14 September  1973  concerning  additional  measures 
to be taken  in the  fight  against  inflation,  the 
Monetary  Committee,  an the Committee  of Central 
Bank  Governors  requested  the  group  of experts 
'trends  in the  money  supply'  presided  by  Mr 
Bastiaanse  to prepare  a report  on  the  results 
obtained  in the field  of monetary  policy  under  the 
requirements  of this  resolution. 
36. The  work  of the Monetary  Committee  in the 
field  of international  monetary  reform  was  mainly 
concerned  with  the preparation  at Community  level 
of the meetings  of the Committee  of Twenty  and  of 
its deputies,  the latter  committee  having  been  set the 
task of preparing  proposals  for  the  reform  of the 
international  monetary  system.  This  enabled  the 
Community  to adopt  a common  position  on certain 
important  points  connected  with  reform  at the 
meetings  of the Committee  of Twenty  in March  and 
July and  at the  annual  meeting  of the  IMF  in 
September. 
After  adopting  a document  entitled  'process  of 
adjustment  — use  of quantitative  indicators'  (see 
section  25 of the  fourteenth  annual  report),  the 
Committee  was  able  to reach  a common  position,  at 
its meeting  of 1 May,  on the  problem  of 'reserve 
assets  and  convertibility',  and  to make  a statement 
before  the deputies  of the Committee  of Twenty  (1). 
Furthermore,  this  body  was  presented  with  a report on a 'system  of multiple  currency  intervention', 
drawn  up  by  the  group  of experts  under  the 
chairmanship  of Mr  Theron,  at the  request  of the 
Monetary  Committee  and  the Committee  of Central 
Bank  Governors. 
Other  problems,  such  as the future  structure  of the 
IMF,  the consolidation  of dollar  balances,  the choice 
of a 'numeraire',  the role  of gold,  the definition  of 
the SDRs  and  the question  of the special  interests  of 
the developing  countries  have  not  yet  been 
definitively  dealt  with  by the Monetary  Committee, 
although  opinions  on certain  points  have  moved 
appreciably  closer. 
Finally,  the  committee  had  to deal  on  several 
occasions  with  the question  of the value  of SDRs,  i.e. 
the problem  of converting  SDRs  into  national 
currencies.  The  application  of the  'equal  value 
principle'  and  of rule  0.3 to Special  Drawing  Rights 
resulted,  especially  when  the rate  of the  dollar  had 
depreciated  sharply  on the foreign  exchange  markets, 
in SDRs  being  less  and  less  suitable  for use in intra-
Community  settlements.  As a result  of the  work 
done  together  with  the Committee  of Central  Bank 
Governors,  a provisional  solution  was  found  and 
was approved  by  the  Executive  Board  of the 
International  Monetary  Fund  at the  beginning  of 
November.  It permits  the  settlement  of debts 
between  Members  of  the  European  Monetary 
Cooperation  Fund  at a rate  of one  SDR  for  one 
European  monetary  unit  of account  (EMUA).  The 
application  of the IMF  rules  on this  matter  has been 
suspended  until  31 October  1974  at the latest. 
(x) Document  given  in Annex  IV. 
14.10.  74 Official  Journal  of the  European  Communities No C 123/11 
LIST  OF  THE  MEMBERS  OF  THE  MONETARY  COMMITTEE 
Chairman 
B. Clappier 
(until  31.12.1973) 
Vice-chairmen 
Dr. O. Emminger 
Prof.  Dr. C. J. Oort 
Members 
S. Andersen 
F. Boyer  de la Giroday 
B. J. Breen 
M. D'Haeze 
C. de Strycker 
C. W. Fogarty 
J.-Y.  Haberer 
(from  19. 10. 1973) 
K. Hansen 
Dr. D. Hiss 
(until  31.12.1973) 
C. Lamboray 
A. W. R. Baron  Mackay 
(until  31.12.1972) 
C. W. McMahon 
Prof.  G. Miconi 
Dott.  U. Mosca 
S. F. Murray 
Dott.  R. Ossola 
C. Pierre-Brossolette 
(until  19. 10. 1973) Sous-gouverneur  de la Banque  de France 
(Paris) 
Vizeprasident  der  Deutschen  Bundesbank 
(Frankfurt/Main) 
Thesaurier-gencraal  bij het Ministcric  van  Financien 
(The  Hague) 
Gouverneur,  Danmarks  Nationalbank 
(Copenhagen) 
Director  in the  Directorate-General  for  Economic  and 
Financial  Affairs  — Commission  of the  European  Com-
munities  (Brussels) 
Central  Bank  of Ireland  (Dublin) 
Directeur  general  de l'administration  de la tresorerie  et 
de la dette  publique  — Ministere  des  finances  (Brussels) 
Vice-gouverneur  de la Banque  Nationale  de Belgique 
(Brussels) 
H. M. Treasury  (London) 
Chef  du service  des affaires  internationales  a la direction 
du tresor  — Ministere  de 1'economie  et des  finances 
(Paris) 
Director  general  — 
(Copenhagen) 
Ministerialdirektor 
(Bonn) Det 0konomiske  Sekre'tariat 
Bundesministerium  der Finanzen 
J. Schmitz 
Drs. A. Szasz Directeur  adjoint  de la Caisse  d'epargne  de l'Etat 
(Luxembourg) 
Directeur  van  de Nederlandsche  Bank  N.V. 
(Amsterdam) 
Director—  Bank  of England  (London) 
Direttore  generale  del Tesoro  — Ministero  del Tesoro 
(Rome) 
Director  General  for  Economic  and  Financial  Affairs  — 
Commission  of the  European  Communities  (Brussels) 
Department  of Finance  (Dublin) 
Vicedirettore  generale  della  Banca  d'ltalia  (Rome) 
Directeur  du tresor  au ministere  de 1'economie  et des 
finances  (Paris) 
Conseiller  de gouvernement  au ministere  des  finances 
(Luxemburg) 
Directeur  van  de Nederlandsche  Bank  N.V.  (Amsterdam) 
Chairman  of the alternate  members 
Prof.  Dr. J. Mertens  de Wilmars 
Alternate  members 
M. J. Balfour Conseiller  economique  de la Banque  Nationale  de Belgique 
(Brussels) 
Bank  of England  (London) 
No C 123/12 Official  Journal  of the  European  Communities 14.10.  74 
J.-M.  Bloch-Laine 
(from  19.10.1973) 
Drs. D. H. Boot 
(from  1.1.1973) 
H. Dalgaard 
J. de Larosiere 
(until  19. 10. 1973) 
Drs. G. de Man 
A. Dondelinger 
Dr. W. Flandorffer 
(from  1. 3. 1973) 
Dott.  L. Fronzoni 
(until  31.12.1973) 
Dott.  D. Gagliardi 
(until  1. 2.1973) 
G. Jennemann 
H. Koch 
J. G. Littler 
D. Lynch 
D. McCormack 
M. Meulemans 
(until  31. 12. 1973) 
Dr. B. Molitor 
J. E. Nash 
(from  15. 6.1973) 
Dott.  S. Palumbo 
(from  1. 2. 1973) 
M. Schmitt 
N. Ussing 
Dr. G. Willman 
(until  28. 2.1973) 
G. Wissels 
(until  31. 3.1973) Sous-directeur  a la direction  du tresor  — Ministere  de 
Peconomie  et des finances  (Paris) 
Onderdirecteur  van  de Nederlandsche  Bank  N.V. 
(Amsterdam) 
Head  of Division  — Danmarks  Nationalbank 
(Copenhagen) 
Chef  du service  des affaires  internationales  a la direction 
du tresor  — Ministere  de Peconomie  et des  finances 
(Paris) 
Ministerie  van  Financien  (The  Hague) 
Commissaire  au controle  des banques  (Luxemburg) 
Ministerialrat  — Bundesministerium  fur Wirtschaft 
(Bonn) 
S.A.D.I.B.A.  (Perugia) 
Ispettore  — Ministero  del commercio  estero 
(Rome) 
Bankdirektor  — Deutsche  Bundesbank 
(Frankfurt/Main) 
Directeur  general  des  etudes  a la Banque  de France 
(Paris) 
H. M. Treasury  (London) 
Department  of Finance  (Dublin) 
Central  Bank  of Ireland  (Dublin) 
Conseiller  a l'administration  de la tresorerie  et de la dette 
publique  — Ministere  des  finances  (Brussels) 
Director  in the  Directorate  General  for  Economic  and 
Financial  Affairs  — Commission  of the  European  Com-
munities  (Brussels) 
Director  in the  Directorate  General  for  Economic  and 
Financial  Affairs  — Commission  of the  European  Com-
munities  (Brussels) 
Dirigente  generate  al ministero  del tesoro  (Rome) 
Inspecteur  des  finances  (Luxembourg) 
Head  of Division  — Det  0konomiske  Sekretariat 
(Copenhagen) 
Regierungsdirektorin  — Bundesministerium  der  Finanzen 
(Bonn) 
Director  in the  Directorate  General  for  Economic  and 
Financial  Affairs  — Commission  of the  European  Com-
munities  (Brussels) 
14.10.  74 Official  Journal  of the  European  Communities No C123/13 
ANNEX  1 
OPINION  OF  THE  MONETARY  COMMITTEE  ON  THE  EUROPEAN  FUND  FOR 
MONETARY  COOPERATION 
The Commission  has  asked  for  the  Monetary 
Committee's  Opinion  on  the  proposed  Decision  to 
establish  a European  Monetary  Cooperation  Fund  which 
it must  present  to the Council.  At its meeting  of 6 and  7 
March  1973,  the committee  examined  this  proposal  and 
it was,  in general,  favourably  received,  subject  to the 
following  comments: 
It has  been  suggested  by  certain  members  that  the 
grounds  should  be shortened  and  simplified,  while  at the 
same  time  preserving  the  essential  elements,  in order  to 
emphasize  the  solemn  nature  of the  act establishing  the 
Fund  in accordance  with  the  Summit  communique. 
Articles  of the  Decision 
Article  4 
The members  draw  attention  to the fact  that  the wording 
at the  beginning  of this  Article  contains  a grammatical 
illogicality  (it  is hard  to  see  how  'the  provisions 
contained  in the  Agreements....  shall  replace  those 
Agreements')  and  offers  certain  other  ambiguities.  A 
wording  to make  the  text  clearer  could  be arranged  by 
replacing  'and'  in the  second  line  by 'which'.  Certain 
members  advocate  the  following  wording:  'The  Fund 
shall  apply,  in  its  administration,  the  provisions 
appearing  in the Agreements  mentioned  in Article  3, third 
indent  (the  rest  unchanged). 
On the other  hand,  the members  wonder  what  procedure 
will be adopted  for  making  possible  amendments  to the 
decision  and  statutes  as a result  of the evolutive  nature  of 
the Fund. 
Statutes 
Article  1 
One member  suggests  that  it would  be desirable  to grant 
a right  of veto  to the Commission  member  taking  part  in 
the deliberations  of the  Board  of Directors  with  a view-
to ensuring  respect  for the Community  interest. 
Article  2 
Various  amendments  to  the  wording  in  the  first 
paragraph  of this  Article  are  suggested:  one  group  of 
members  feels  that  it would  be sufficient  to reproduce 
the terms  of the  Summit  communique.  The  following 
wording  would  be equally  acceptable  to these  and  certain 
other  members:  'The  Board  of Directors,  with  a view  to 
achieving  the  Fund's  objectives,  shall  act  within  the 
framework  of general  economic  policy  guidelines  drawn 
up under  the  terms  of the  Treaty  by the  Council  (of 
Ministers)  and  in  accordance  with  the  guidelines 
concerning  the  Fund's  principles  of  administration 
recommended  by  it'. Another  group  of members  recommends  the  wording: 
'The  Board  of Directors,  with  a view  to achieving  the 
Fund's  objectives,  shall  act  ....  by  the  Council  (of 
Ministers)  and  in accordance  with  the  Directives  the 
latter  may  issue  whenever  it considers  necessary'. 
Members  in favour  of one  or other  of the  above 
versions  also  consider  that  it would  be advisable,  under 
these  conditions,  to lay  down  the  procedure  to be 
followed  by the Council  of Ministers  in this  matter. 
Lastly,  a third  group  of members  recommends  the 
retention  of the text  drawn  up by the Commission,  with 
the exception  of the following  words:  .  in accordance 
with  the  procedures  laid  down  under  Article  103  of the 
Treaty'. 
Article  3 
The members  suggest  that  the words  'and  represent  it in 
law' be added  to this  first  paragraph. 
Article  4, second  paragraph 
The members  consider  that  it is premature  to introduce 
provisions  into  the statutes  concerning  allocations  of any 
profits  that  may  accrue. 
Article  5 
Certain  members  consider  that  the  wording  of this 
Article  satisfies  the requirements  in respect  of the Fund's 
tasks  for  the  first  stage.  It could  therefore  be retained 
provisionally  on the  understanding  that,  as provided  for 
in the  last  paragraph,  the  political  authorities  would 
reserve  the  right  to redefine  the unit  of account  at any 
time. 
Other  members  feel  that  it would  be preferable,  in the 
prevailing  circumstances,  if the  definition  of the  unit  of 
account  and  of the procedures  to be adopted  in the event 
of a redefinition  were  to appear  in the  annex  and  were 
to be adopted  provisionally. 
Then  again,  there  are other  members  who  emphasize  that 
they are not yet in a position  to express  an opinion,  since 
the committee  has  not  had  the  opportunity  to examine 
the problem  in sufficient  depth.  As  far  as they  are 
concerned,  it would  be perfectly  feasible  to set up the 
Fund  prior  to a settlement  of the problem  of the unit  of 
account,  while  embarking  as soon  as possible  on a study 
based  mainly  on the  technical  report  just  completed  by 
an expert  group. 
In addition,  the majority  of the members  drew  attention 
to the  desirability  of including  in the  last  paragraph  a 
reference  to the Board  of Directors  of the Fund. 
No C 123/14 Official  Journal  of the  European  Communities 14.10.  74 
Article  6 
The members  suggest  that  this  Article  be supplemented  in 
so far  as the  Fund's  legal  capacity  is concerned.  They 
would  insert  after  the words  'immoveable  or moveable', 
'to open  accounts  with  the  Community  central  banks 
and conclude  agreements  with  the latter'. 
Articles  7, 8 and 9 
The Committee  has  not  examined  in depth  the  legal 
problems  raised  by these  Articles  nor  the question  of the 
financial  supervision  of the Fund. 
Finally,  some  proposals  for  amendments  to the  wording 
are set out below: 
— One  member  considers  that  the beginning  of the third 
ground  should  read  as follows:  'Whereas  the  report 
"on the  organization,  functions  and  statutes  of an 
EFMC"  of the  Monetary  Council  and  the Council  of Governors  of the  Central  Banks  as well  as their 
Opinions  of 5 and  11 September  1972  have  been 
referred  to the  Council  and  whereas  the  meeting  of 
the Heads  of Government...'  (the  rest  unchanged). 
— The  Agreement  between  the  Community  central 
banks  on short-term  currency  support  bears  the date 
9 February  1970  (fourth  ground  and  Article  3 of the 
Decision). 
— The  second  indent  in Article  2 of the Decision  should 
read as follows:  '—  interventions  in Community 
currencies  on the exchange  markets'. 
— In the German  text  of Article  1 (3) of the Statutes,  the 
words  'of the  Grand  Duchy  of Luxembourg'  should 
be replaced  with  'of  the  Luxembourg  monetary 
authorities',  in accordance  with  the  French  text. 
— The  figure  1 to be deleted  each  time  it appears  after 
the word  'Annex'. 
— In order  to avoid  any  confusion,  the word  'Council' 
should,  if necessary,  be clarified  to show  whether  it is 
the 'Council  of Ministers'  or the  'Board  of Directors 
of the Fund'  that  is meant. 
ANNEX  II 
OPINION  ON  THE  COMMUNICATION  FROM  THE  COMMISSION 
TO THE  COUNCIL  OF  19 APRIL  1973 
The Monetary  Committee,  at its meeting  on 21 and  22 
June  1973  examined  the  communication  from  the 
Commission  to the  Council  of 19  April  1973  which 
related  to the  progress  made  during  the  first  stage  of 
Economic  and  Monetary  Union;  to the  distribution  of 
powers  and  responsibility  between  the institutions  of the 
Community  and  the  Member  States,  which  is necessary 
for the  proper  functioning  of economic  and  monetary 
union,  and  to the  measures  to be adopted  during  the 
second  stage  of this  union. 
In accordance  with  the powers  rested  in it, the committee 
reviewed  all  the  monetary  questions  raised  by  this 
document.  The  committee,  without  defining  its position 
on all of the  individual  suggestions  which  appear  in the 
Commission's  document,  wishes  to formulate  a number 
of observations,  in the  same  order  as the  Commission's 
proposals.  They  can  be summarized  as follows. successive  crisis  in the  international  monetary  system.  In 
spite  of the difficulties  during  this  delicate  period,  it had 
been  possible  to make  some  definite  progress,  in 
particular: 
— intervention  in Community  currencies  as part  of the 
system  of reduced  margins  of fluctuation; 
— common  position  towards  the dollar; 
— creation  of a European  Monetary  Cooperation  Fund. 
The Committee  would  like  all the  Member  States  to 
become  involved  in all these  matters  as soon  as possible, 
since  they  constitute  an  important  advance  for  the 
Community,  in accordance  with  the resolutions  regarding 
the first  stage  and  with  the  Council  Decisions  of 11 
March  1973. 
I. REVIEW  OF  THE  FIRST  STAGE  OF  EMU 
On the  whole,  the  Committee  agreed  with  the  analysis 
made  in the  document  regarding  the  results  obtained 
during  the  first  stage.  Some  members,  however,  would 
like the causes  for failures  in various  fields  to be analysed 
in greater  depth.  Finally  other  members  pointed  out  that 
while  reviewing  the first  stage,  it was  advisable  to keep 
in mind  the exceptional  nature  of this  period,  due  to the II. THE  ACTION  PROGRAMME  FOR  THE  SECOND 
STAGE 
1. General  remarks 
The committee  was  also  in agreement  with  the  basic 
concept  of the proposals  made  by the Commission.  These 
aimed  towards  a sufficiently  balanced  group  of actions 
covering  both  the monetary  and  economic  fields. 
14. 10. 74 Official  Journal  of the  European  Communities No C 123/15 
However  the  committee  reiterated  the  need,  in carrying 
out this  action  programme,  to bear  in mind  the principle 
of parallel  progress  both  in monetary  policy,  and  in 
principle  economic  policy  in  general,  which  was 
recognized  by the Council  resolution  of 22 March  1971. 
Taking  into  account  the limited  progress  made  during  the 
first stage  regarding  the effective  coordination  of internal 
economic  and  monetary  policies,  this  principle  of 
parallelism  implies  that  the  Community  should  pay  full 
attention  to the effort  which  remains  to be made  in this 
field,  while  at the same  time  continuing  with  its progress 
in the field  of external  monetary  policy. establish  norms  for  this  purpose  which  make  allowance 
for the various  situations  in the Member  States. 
The Committee  realized  that  the  Community  must  pay 
particular  attention  to reaching  a common  position  on 
international  monetary  relations,  to be expressed  where 
appropriate  by  a single  spokesman.  Some  members 
pointed  in this  connection  that  it was  agreed  at the Paris 
summit  conference,  that  the Member  States  would  aim  to 
contribute  to the  reform  of the  international  monetary 
system,  by adopting  a common  position,  and  that  they 
should  be in a position  to put forward  modified  opinions 
where  necessary. 
2. Specific  proposals  in the  monetary  field 
(a) Financing  of budget  deficits 
The Committee  considered  it to be very  important  to 
coordinate  the policies  relating  to the financing  of budget 
deficits. 
It suggested  that  coordination  in this  field  should  be 
concerned  with  the  size  of the  budget  deficits,  and  on 
the means  by which  they  are  financed,  rather  than  with 
prior  consultation  on each  loan. 
In fact  the committee  considered  that  prior  consultation 
on the issuing  of any  national  loan  would  not  be easy  to 
achieve,  since  it was  very  difficult  to ensure  the necessary 
secrecy  regarding  the  date  and  the  terms  of such  loans. 
This  was  especially  true  in some  countries,  where  the 
system  of financing  budget  deficits  prevented  any  prior 
consultation  from  taking  place.  Moreover,  the committee 
expressed  a reservation  regarding  the  Commission's 
suggestion  of  fixing  'ceilings'  for  the  short-term 
financing  of budget  deficits.  Since  cash  requirements  vary 
so greatly  from  time  to time,  since  it is so difficult  to 
make  rigorous  provisions  for these  variations,  and  since 
the monetary  consequences  of the  different  types  of 
short-term  indebtedness  are  so diverse,  it appears  to be 
more  realistic  to submit  the  problem  of financing 
budgetary  balances  to  periodic  and  concerted 
examination. 
(b) Coordination  of monetary  policies 
In the  committee's  opinion,  the  coordination  of 
monetary  and  credit  policy  within  the  Community,  and 
the stepping-up  of  the  efforts  made  towards  a 
harmonization  of the  machinery  for  implementing  this 
policy,  were  extremely  important.  This  harmonization 
should  enable  a whole  range  of machinery  to be defined, 
from  which  the  monetary  authorities  in the  Member 
States  would  be able  to choose  that  best  corresponding  to 
the circumstances  at the time. 
At the present  stage  in the development  of the EMU,  the 
committee  considered  that  it would  be neither  useful  nor 
advisable  to  establish  uniform  rules  for  national 
monetary  policy.  They  believed  that  the  right  procedure 
to take  would  be to determine,  by common  agreement, 
the monetary  factors  to be taken  into  account  and  to (c) The  exchange  system  and  the  European  Monetary 
Cooperation  Fund 
The Commission  rightly  stressed  how  important  it was 
for the currencies  of all Member  States  to participate  in 
the Community  exchange  system.  However,  in order  to 
ensure  that  this  system  had  a stable  basis  and  avoid  the 
changes  of new  failures,  it was  vital  that  economic 
conditions  should  be favourable  to it and  that  there 
should  be effective  policy  coordination  at Community 
level.  The  same  considerations  would  apply  also  to any 
narrowing  of the margins  of fluctuation  at a later  date.  A 
European  Monetary  Cooperation  Fund  working 
efficiently  would  help  solve  the problems  which  are likely 
to arise  in this  field. 
The committee  reserved  the  right  to decide  on  the 
appropriation  for  the  European  Monetary  Cooperation 
Fund  and  on the  possibility  of creating  a European  unit 
of account  when  the  Commission  submits  the report  on 
the adjustment  of short-term  monetary  support  and  the 
progressive  pooling  of reserves. 
The Council  resolution  of 22 March  1971  lays  down  that 
the Fund  will  eventually  have  to be integrated  in the 
Community  system  of central  banks.  The  Fund  should  be 
equipped  with  the  functions  of a central  bank  only 
gradually,  and  these  would  be extended  subsequently. 
The need  for  effective  control  of unsettling  capital 
movements  had  been  amply  demonstrated  by the  recent 
monetary  crises.  The  committee  therefore  endorsed  the 
Commission's  proposal  on  this  matter.  However,  it 
would  stress  that  the  harmonization  of national  control 
mechanism  and  their  variants  in intra-  and  extra-
Community  relations  should  take  account  of  the 
structural  conditions  in the various  Member  States  and  of 
differing  opinions  on economic  policy. 
The committee  approved  the  principle  advanced  by the 
Commission  whereby  the  Community  would  have  the 
right  to  supervise  adjustments  in exchange  ratios. 
However,  it noted  that  the Commission  proposal  raised  a 
number  of delicate  institutional  and  practical  problems. 
In any  event,  the committee  considered  that  the proposal 
did not  in any  way  change  the  existing  situation  where 
the final  decision  on parity  continued  to rest  with  the 
Member  States  concerned,  since  any  other  solution  could 
only  be considered  at a later  stage  in the development  of 
economic  and  monetary  union. 
No C 123/16 Official  Journal  of the  European  Communities 14.10.  74 
(d) The  capital  market 
If a common  market  presupposed  a common  external 
strategy,  the latter  did  not  necessarily  involve  restricting 
capital  movements  from  and  to third  countries.  Certain 
committee  members  felt  that  the Community's  obligation 
under  the EEC  Treaty  to adopt  as liberal  a policy  on the 
matter  as circumstances  allowed  was  not  given  sufficient 
weight  in the observations  on the document. 
Moreover,  the  retention  of controls  for certain  types  of 
capital  movement,  even  within  the  Community,  could 
prove  necessary  under  the international  monetary  system 
in its existing  form.  The  committee  was  aware,  however, 
that such  exceptional  cases  should  be restricted  to a 
minimum. (e) The  Community  budget 
The Commission  proposed  that  under  the coming  system 
for the  Community's  own  resources,  the  Community 
could  well  be  authorized  to  finance  short-term 
Community  budget  deficits  by drawing  on the  money 
market.  Rules  and  procedures  would  have  to drawn  up 
to prevent  excessive  relaxation  of the  restraints  on the 
Community's  budgetary  policies  and  to ensure  that 
monetary  equilibrium  in general  and  money  market 
stability  in particular  were  not  disturbed.  Indeed,  certain 
members  considered  that  the raising  of Community  loans 
was neither  necessary  nor progress. 
ANNEX  111 
OPINION  ON  THE  REPORT  FROM  THE 
COMMISSION  TO  THE  COUNCIL  OF  27 JUNE  1973 
At its meetings  of 10 and  19 October  1973,  the Monetary 
Committee  as requested  on 28 June  1973  by the Council 
of the European  Communities  examined  the 'report  from 
the Commission  to the  Council  on the  adjustment  of 
short-term  monetary  support  arrangements  and  the 
conditions  for the progressive  pooling  of reserves'. 
I. General  remarks 
The report  of the  Commission  includes  proposals  aimed 
at establishing  important  elements  of the  basic  structure 
for economic  and  monetary  union.  It answers  the request 
made  by the  heads  of State  or Government  meeting  in 
Paris  on 19 and  20 October  1972  that  two  reports  be 
prepared:  before  30  September  1973  on  the 
reorganization  of  the  short-term  monetary  support 
scheme  and  before  31 December  1973  on the  conditions 
for a progressive  pooling  of reserves.  At its meeting  of 
14 February  1973  the Council  asked  the  Commission  to 
submit  only  one  report  on both  questions  before  30 June 
1973.  A single  report  permits  a global  view  of the  two 
problems,  which,  although  quite  distinct,  are interrelated. 
Thus  the  report  submitted  by the  Commission  is within 
the framework  of the three  objectives  stated  under  Point 
I of the resolution  of 22 March  1971. 
Despite  the  unfavourable  circumstances  within  the 
Community  and  outside,  it has  been  possible  to create  a 
Community  foreign  exchange  system  and  establish  the 
European  Monetary  Cooperation  Fund.  The  Community 
must  pursue  and  direct  its efforts  towards  improvement 
in the  coordination  of economic  and  monetary  policies, 
amongst  others,  interest-rate  policies  and  the  control  of 
destabilizing  capital  movements.  In this  field,  special 
emphasis  should  be placed  on faster  and  more  substantial 
progress.  Community  efforts  must  equally  be directed 
towards  the  maintenance  and  reinforcement  of the Community  exchange  rate  system,  so that  new  progress 
can be achieved  in keeping  stable  the ratios  between  the 
exchange  rates  of the  Member  States'  currencies.  The 
Commission  is  endeavouring  to  meet  both  these 
objectives  in the  report  which  is the  subject  of this 
opinion. 
In this  present  opinion,  the Committee  has  not  examined 
in detail  the  technical  problems  raised  in  the 
Commission's  report;  they  have  already  been  dealt  with 
in the Opinion  of the Committee  of the Governors  of the 
Central  Banks  of the  Member  States  of the  Community 
and the Council  of Administration  of the EMCF. 
II. Reorganization  of credit  facilities 
The system  envisaged  by the  Commission  (cf.  Annex), 
would  substantially  increase  the  potential  amount  of 
credit  that  could  be given  simultaneously  as of right  to 
all Member  States  because  the  amount  that  could  be 
drawn,  as of right,  by any  Member  State,  would  be 
unaffected  by the  granting  of support  to other  member 
countries,  in contrast  to the present  system  where  a single 
country  can  exhaust  most  of the  available  resources. 
Within  the framework  of the actions  to be carried  out  in 
order  to safeguard  and  strengthen  the Community  foreign 
exchange  system,  it is essential  that  existing  credit 
mechanisms  should  be improved.  The  Committee  thinks 
that an increase  in available  credit  facilities  is justified  in 
appropriate  circumstances.  Opinions  verge,  however,  on 
the importance  of changes  to be made  in the volume  of 
available  credits,  their  maturity  and  the  degree  to which 
they are automatically  available; 
Certain  members  think  that  the increase  in debtor  quotas 
suggested  by the Commission  should  be less,  due  to the 
risks  of inflation  inherent  in a substantial  increase  in 
credit  facilities,  and  the need  for a better  control  over  the 
14.10.  74 Official  Journal  of the  European  Communities No C 123/17 
creation  of liquidity  in any  future  international  monetary 
system.  Furthermore,  an increase  in automatic  facilities 
might  weaken  the  element  of integration  inherent  in the 
Community  exchange  rate  system.  According  to these 
members  it is also  necessary  to avoid  the risk  of a single 
country  having  to carry  the  whole  burden  of financing. 
The other  members  accept  the  increase  in facilities 
proposed  by the  Commission,  taking  into  account  the 
importance  of  destabilizing  capital  flows  between 
member  countries  and  of the  financing  requirements 
which  stem  from  them.  They  point  out  that  if the  close 
link between  the  adaptation  of the  credit  arrangements 
and reserve  pooling  which  the  Commission  suggest  were 
accepted,  the result  would  be that  the financing  of credits 
would  be undertaken  by the  EMCF  itself  and  therefore, 
in effect,  spread  amongst  all the  Member  States  holding 
claims  on the  Fund. 
The extension  of credit  maturities  within  the  short-term 
monetary  support  scheme  from  a maximum  of six 
months  to 12 months  as proposed  by the  Commission  is 
equally  considered  by certain  members  as desirable,  while 
others  think  that  the present  maturities  are satisfactory. 
Finally,  the  Committee's  members  are  divided  as to the 
extent  to which  automatic  availability  is acceptable  for 
the granting  of credits.  Certain  members  can  accept  the 
suggestions  of the  Commission  such  as they  stand  and 
believe  that  the  proposed  consultation  procedure  is 
satisfactory.  Furthermore,  they  consider  that  it would  be 
useful  to study  the means  and  conditions  under  which  the 
short-term  facility  could,  in appropriate  circumstances,  be 
extended  into  medium-term  support.  The  others  consider 
that any  reorganization  of the  system  ought  to be based 
primarily  on  an  assumption  that  credits  would  be 
conditional,  in  order  to  contribute  better  to  the 
coordination  of economic  policies. 
III. Pooling  of reserves 
The pooling  of reserves  is an important  element  of 
economic  and  monetary  union.  It cannot,  however,  be 
conceived  in isolation,  because  parallel  progress  must  be 
achieved  in other  fields. 
Three  important  issues  arise:  the  nature  of the  pooling 
operation,  the  moment  at which  it should  begin  and  the 
rhythm  it should  follow. 
In the  Commission's  view  the  reorganization  of the 
credit  system  and  the  pooling  of reserves  are  clearly 
linked  and  should  be undertaken  to start  without  delay. 
The pooling  of reserves,  they  say,  does  not  mean  that 
each  Member  State  makes  over  to the  Community 
without  compensation,  such  part  of it's  reserves  that  it 
pools,  but  that  it exchanges  it's  pooled  reserves  for  a European  reserve  asset  created  by  the  EMCF.  The 
Community  system  which  the  Commission  advocates 
would  make  it possible  in their  view,  to overcome 
present  settlements  difficulties,  to  strengthen  the 
multilateral  character  of the  system  and  to develop  the 
role of the fund  as the tool  for monetary  cooperation,  as 
well as the  role  of the  European  monetary  unit  of 
account. 
Certain  members  do not  share  the  Commission's  view. 
They  consider  that  the pooling  of reserves  is not justified 
given  the  present  position  in  the  coordination  of 
economic  policies;  indeed  it is not  necessarily  an 
instrument  capable  of reinforcing  coordination,  but  might 
even  weaken  it;  moreover,  they  consider  that  the 
reorganization  of the  credit  facilities  does  not  imply 
pooling  of reserves.  They  point  out,  on the  other  hand, 
that certain  technical  factors  make  it difficult  at present 
to transfer  certain  reserve  assets  to the Fund  (cf.  Opinion 
of the Committee  of Governors  of the  Central  Banks  and 
of the  Council  of Administration  of the  Fund,  section 
II §1). 
The majority  of members,  not  all of whom  think  that  the 
reorganization  of  credit  facilities  is necessarily  a 
precondition  for  starting  to pool  reserves,  agree  in 
principle  with  the  Opinion  of the  Commission  and 
consider  that,  particularly  for  psychological  and  political 
reasons,  a start,  albeit  modest,  should  be made  in pooling 
reserves  as quickly  as possible.  These  members  consider 
that the method  of pooling  suggested  by the Com'mission 
marks  a useful  step  towards  the  end  objective,  and  does 
not run  ahead  of the  principles  of parallelism  between 
economic  and  monetary  progress  to which  they  too 
subscribe.  They  think,  moreover,  that  solutions  could  be 
worked  out  to the  abovementioned  technical  difficulties, 
provided  that  a decision  in principle  is taken  at the 
political  level.  Finally,  the  establishment  of common 
reserves  could  further  the  objective  of giving  the 
Community  an autonomous  monetary  personality. 
IV. Capital  of the  fund 
The committee  recognizes  the usefulness  of endowing  the 
fund  with  capital.  The  Commission  suggests  that  it 
should  be underwritten  in national  currencies  by the 
Member  States  through  a budgetary  allocation.  If certain 
members  could  bring  themselves  to  agree  to  the 
suggestion,  however,  the  great  majority  think  that  the 
capital  should  be underwritten  by  the  central  banks. 
Taking  account  of the  fact  that  any  returns  on  the 
capital  are  intended  to cover  the  fund's  operating  costs, 
the committee  thinks  that  to begin  with,  only  a small 
part of the  capital  will  be  required.  Thereafter,  the 
capital  could  be  paid  in  simultaneously  with  the 
development  of the  fund's  activities. 
No C 123/18 Official  Journal  of the  European  Communities 14.10.74 
Annex 
The comparison  shown  below  between  present  and  proposed  credit  arrangements  is only 
provided  for the sake  of illustration  and  does  not  purport  to cover  all situations. 
1. Amounts  available,  in millions  of units  of account: 
Short-term  monetary 
support  arrangements 
(a) 
Automatic 
quotas Total 
non-automatic 
extensions 
(ii) Commission 
proposals 
(b) 
Deutsche  Bundesbank 300 1 800 
Banque  de France 300 1 800 
Bank  of England 300 1 800 
Banca  d'ltalia 200 1200 
Banque  Nationale  de Belgique 1 362-5 
Banque  Nationale  de Belgique 100 1 362-5 600 
Nederlandsche  Bank 100 600 
Danmarks  National  Bank 45 270 
Central  Bank  of Ireland 17-5 105 
Under  the present  system  of short-term  monetary  support  arrangements  the amount  shown 
in column  (a) (ii) is the; maximum  extension  available  for a single  country;  the sum  total  of 
extensions  outstanding  at one  time  cannot  exceed  this  amount.  Creditor  countries  are not 
obliged  to extend  credit  beyond  the  amount  of their  creditor  quota. 
Under  the proposed  system,  this  limitation  would  no longer  apply. 
2. Duration  of credit. 
— Present  system: 
(i) under  Basle  arrangements:  automatic  credit,  one  and  a half  months  plus  three  months 
extension  under  bilateral  agreement; 
(ii) short-term  monetary  support  arrangements:  three  plus  three  months  (consultation 
on first  drawing). 
— Proposed  system: 
(i) under  Basle  arrangements:  automatic  credit  one  and  a half  months; 
(ii) short-term  credit:  six plus  six months  (consultation  on renewal). 
ANNEX  IV 
RESERVE  ASSETS  AND  CONVERTIBILITY 
1. Introduction 
The countries  of the  European  Economic  Community 
consider  the future  system  of international  reserves  to be 
one of the  major  aspects  of international  monetary 
reform.  The  monetary  crises  that  have  repeatedly 
plagued  the  world  in the  recent  past  have  in no small 
measure  been  due  to the uncontrolled  growth  of currency 
reserves.  This  has  added  significantly  to inflationary pressures  in the world,  and  has  built  up tensions  in the 
system  that  have  tended  to explode  whenever  doubts 
began  to arise  on the sustainibility  of the  exchange  rates 
of reserve  centres. 
We have  stated  at various  occasions  that  in our  view  the 
role of reserve  currencies  should  be reduced  and  that  of 
the SDR  should  be enhanced.  In the  final  stage,  reserve 
14.10.  74 Official  Journal  of the  European  Communities No C 123/19 
currencies  should  be completely  phased  out  except  in 
their  function  of normal  working  balances. 
Because  we consider  these  matters  central  to the reform 
of the  international  monetary  system,  representatives  of 
our countries  have  made  various  suggestions  with  regard 
to the problems  of reserve  assets  and  convertibility.  In an 
attempt  to make  a further  contribution  to progress  in this 
area,  we have  agreed  on a common  proposal  which  we 
hereby  submit  to the Committee  of Twenty. 
The memorandum  does  not  go  into  problems  of 
transition.  In particular,  it does  not  deal  with  the 
consolidation  of  existing  reserve  currency  balances 
through  bilateral  funding  and/or  through  a substitution 
facility  in the  IMF.  We  realize,  however,  that  this 
question  is intimately  related  with  convertibility  and  that 
it is, indeed,  an essential  precondition  for  the  proper 
function  of the  reformed  system.  We  intend  to make 
proposals  on this  important  matter  in a separate  note. 
2. Objectives 
We suggest  that  the  proposals  for  a future  system  of 
reserve  assets  and  convertibility  should  be judged  with 
reference  to the following  primary  objectives,  which  are 
largely  inspired  by what  we believe  to be the major  faults 
of the present  system. 
In addition  to these  primary  objectives,  there  are  a 
number  of other  considerations  which  we  shall  not 
mention  explicitly.  An example  is the desire  of countries 
to remain  free  in the  composition  of their  official 
reserves.  Since  we believe  that  this  freedom  must  be 
limited  in the interest  of stability,  we have  not  entered 
this as one  of our objectives.  We recognize,  however,  that 
it is a valid  goal  to minimize  the constraints  on national 
freedom  of action  to the  extent  that  this  is compatible 
with the primary  objectives  of the  reform. 
(a) Balance  of payments  deficits  and  surpluses  should  be 
reflected  in reserve  movements 
Unlike  other  countries,  reserve  centres  are able  to finance 
their  deficits  by incurring  liquid  liabilities  in their  own 
currency.  To the extent  that  foreign  holders  cannot  or do 
not convert  additional  reserve  currency  balances  either 
into their  own  currency  or into  primary  assets,  the system 
operates  in an asymmetrical  manner  and  tends  to mask 
the need  for  fundamental  balance  of  payments 
adjustment  in certain  cases.  In order  to eliminate  the 
asymmetry  and  to prevent  the  instability,  caused  by 
delayed  adjustment  action  and  by an excessive  build-up 
of currency  reserves,  reserve  centres  should  not  finance 
their  balance  of payments  deficits  by incurring  liquid 
liabilities  in their  own  currency.  Conversely  the system 
should  ensure  that  reserve  centres  earn  reserve  assets  when 
in surplus. (b) International  control  over  the global  volume  of world 
reserves 
In the past,  world  liquidity  has increased  in a completely 
uncontrolled  manner  as a result  of payments  deficits  of 
the reserve  centres.  This  has  provided  an additional  and 
very unwelcome  stimulus  to world  inflation;  it has 
enlarged  the quantity  of potentially  volatile  international 
capital;  and  it has  left  a legacy  of excessive  official 
liquidity  in the  world.  Reserve  creation  in the  future 
system  should  take  place  only  on  the  basis  of 
international  decisions,  based  on the  criterion  of global 
need  for additional  reserves.  As stated  in the introduction, 
the manner  in which  excess  international  liquidity  can be 
eliminated  will  not be considered  at this  point. 
(c) The instability  due  to shifts  in the  composition  of 
official  reserves  should  be eliminated 
Shifts  in the  composition  of official  reserves  between 
primary  reserves  and  reserve  currencies  as well  as 
between  different  reserve  currencies  (including  various 
new reserve  currencies)  have  compounded  the problem  of 
excessive  international  liquidity  creation  and  have 
produced  large  flows  of capital  that  have  tended  to 
interfere  with  an orderly  system  of exchange  rates. 
As we mentioned  in the  introduction,  we believe  that 
these  problems  should  be mainly  solved  by reducing  the 
role of reserve  currencies  and  by enhancing  that  of the 
SDR.  The  ultimate  goal  should  be to reduce  the amounts 
of reserve  currencies  held  by the non-reserve  countries  to 
normal  working  balances. 
3. Multilateral  asset  settlement 
Even  before  the  convertibility  of the  US  dollar  was 
suspended,  the  existing  system  was  clearly  deficient  in 
various  respects.  The  primary  reserves  of reserve  centres 
did not  systematically  change  in response  to balance  of 
payments  deficits  or surpluses,  since  other  countries  could 
and did  settle  their  collective  surpluses  or deficits 
viz-a-viz  the reserve  centre  by adding  to or drawing  upon 
their  holdings  of currency  reserves.  For  the same  reason, 
global  reserves  could  increase  or decrease,  not as a result 
of an  international  decision,  but  as the  unplanned 
consequence  of deficits  or surpluses  of the reserve  centres 
and of the uncoordinated  decisions  by other  countries  to 
accumulate  surpluses  in the form  of reserve  currencies  or 
to change  the composition  of their  reserves  in favour  of 
currency  reserves. 
Asset  settlement  aims  to correct  these  shortcomings  of the 
existing  system  by requiring  that  reserve  centres  settle 
their  balance  of payments  deficits  in primary  reserve 
assets,  while  it should  also  ensure  that  reserve  centres 
receive  primary  assets  when  they  are  in surplus. 
Interpreted  in this  sense,  asset  settlement  clearly  satisfy 
the objectives  (a) and (b) of the reformed  system. 
No C 123/20 Official  Journal  of the  European  Communities 14.10.  74 
There  are  two  possible  ways  in which  asset  settlement 
could  be  organized.  One  would  be  to impose  the 
obligation  on all members  of the  system  to bilaterally 
convert  any  newly  received  currency  reserves  into 
primary  assets  at the  country  of issue.  The  other 
possibility  is a system  of multilateral  asset  settlement  via 
a special  settlement  account  in the  Fund,  its major 
feature  being  that  reserve  centres  would  undertake  to sell 
primary  assets  to the Fund,  or to buy  primary  assets  from 
the Fund  whenever  they  are  in deficit  or in surplus. 
Under  the  latter  system,  settlement  is no  longer  a 
bilateral  transaction,  but is defined  in terms  of rights  and 
obligations  of reserve  centres  viz-a-viz  the  Fund  on the 
one hand,  and  of rights  and  obligations  of non-reserve 
centres  viz-a-viz  the  Fund  on the  other  hand.  These  two 
aspects  of multilateral  asset  settlement  will  be taken  up 
separately  in the next  sections. 
We support  the  idea  of multilateral  asset  settlement.  It 
avoids  the political  and  economic  tensions  inherent  in the 
alternative  system,  that  of obligatory  bilateral  conversion. 
Multilateral  asset  settlement  also  circumvents  the difficult 
problem  of  distinguishing  between  'old'  and  'new' 
reserve  currency  balances,  a problem  that  does  arise 
under  a system  of obligatory  bilateral  conversion.  If it is 
correctly  defined  and  applied,  multilateral  asset 
settlement  would  indeed  (a)  cause  the  balance  of 
payments  position  of the reserve  centres  to be reflected  in 
changes  of their  primary  assets  and  (b)  prevent  any 
unplanned  increase  in global  reserves  due  to deficits  of 
reserve  centres. 
Multilateral  asset  settlement  would  not,  in itself,  satisfy 
objective  (c).  It is necessary,  therefore,  to take  special 
precautions  against  destabilizing  shifts  in the composition 
of reserves  in particular  by preventing  the emergence  of 
new reserve  currencies. 
4. Rights  and  obligations  of reserve  centres 
Under  multilateral  asset  settlement,  a reserve  centre 
would  have  the  right  to buy  primary  assets  from  the 
Fund  when  it has  a balance  of payments  surplus,  but 
only to the extent  that  the surplus  is not already  reflected 
in a rise  in its primary  reserves  (resulting  from  other 
countries  having  settled  their  deficits  with  the  reserve 
centre  in primary  assets). 
Conversely,  a reserve  centre  would  have  the obligation  to 
sell primary  assets  to the Fund  when  it has  a balance  of 
payments  deficit,  but  again  only  to the  extent  that  the 
deficit  is not  already  reflected  in a fall  of its primary 
reserves  (1). In both  cases,  the indicated  restriction  must 
be made  in order  to allow  for  voluntary  bilateral 
settlement  in primary  reserve  assets,  which  cannot  and 
need  not  be prohibited  under  a system  of multilateral 
asset  settlement.  The  major  advantage  of multilateral 
(') These  rules  could,  of course,  be modified  so as to deal  with  the 
special  problems  of the  interim-period.  In particular,  the  obligations 
of the  reserve  centres  could  be  temporarily  reduced  during  the 
interim-period.  Since  this  paper  concentrates  on the  reform  of the 
system  we  shall  not  work  out  these  ideas  concerning  the  interim-
period  at this  point. asset  settlement  to the reserve  centre  is, however,  that  it 
cannot  be  confronted  with  demands  for  conversion 
resulting  from  past  deficits:  bilateral  asset  settlement  by 
the reserve  centre  would  be purely  voluntary. 
The choice  of the  specific  settlement  criterion  (i.e.  the 
definition  of a reserve  centre's  balance  of payment 
surplus  or deficit)  is of considerable  importance.  It is far 
more  than  a simple  matter  of definition,  since  it 
determines  the  essential  characteristics  of the  whole 
system. 
In the  context  of reserve  creation,  the  logical  definition 
of a reserve  centre's  deficit  of surplus  is that  based  on 
the official  settlements  balance.  Multilateral  asset 
settlement  based  on  this  definition  implies  that  any 
increase  of a reserve  centre's  liquid  liabilities  to foreign 
monetary  authorities  is to be settled  in primary  assets  via 
the Fund.  This  rule  would  satisfy  our second  objective  as 
well as the  first,  since  global  reserves  could  no longer 
grow  as the  result  of countries  accumulating  currency 
reserves:  any  such  accumulation  of currency  reserves 
would  be fully  offset  by a loss  of primary  reserves  on the 
part of  the  reserve  centre  via  the  mechanism  of 
multilateral  asset  settlement  (2). 
Although  multilateral  asset  settlement  based  on  the 
official  settlements  balance  provides  a  logically 
acceptable  system,  it has  certain  economic  and  practical 
drawbacks.  Its  economic  drawbacks  are  that  asset 
settlement  by  the  reserve  centre  may  be  delayed 
whenever  it incurs  liquid  liabilities,  not  to  foreign 
monetary  authorities  but  to non-official  foreign  holders 
(in practice:  to foreign  private  banks). 
As a result,  a reserve  centre  may  be forced  to yield 
primary  assets  to the  Fund  at a later  stage,  not  because 
of any  fundamental  factor  relevant  to the  economic 
situation  then  prevailing,  but  because  previously  incurred 
liquid  liabilities  to non-official  holders  are converted  into 
official  reserves. 
In order  to eliminate  this  potential  instability  in the 
system,  multilateral  asset  settlement  could  conceivably  be 
based  on the  liquidity  balance  of the  reserve  centres, 
which  includes  changes  in liquid  liabilities  not  only  to 
foreign  monetary  authorities,  but  to all foreign  holders. 
However,  it is difficult  to see how  such  a system  could 
work  in practice,  since  non-official  holdings  of reserve 
currencies  are not  reserves,  cannot  be used  in balance  of 
payments  settlement,  and  cannot  be  subject  to 
designation  by the Fund. 
Whereas  we cannot  in practice  utilize  the  economically 
more  relevant  concept  of the  liquidity  balance  in the 
system  of multilateral  asset  settlement  it, rather  than  the 
official  settlements  balance,  should  play  a role  in the 
adjustment  process.  Since  they  are  relieved  of asset 
(2) Except  for  placements  in the  Eurocurrency  market.  On  this  point 
see section  5. 
14.10.  74 Official  Journal  of the  European  Communities No C 123/21 
settlement  for  their  non-official  liquid  liabilities,  the 
reserve  centres  have  a special  responsibility  in this  area, 
particularly  in determining  their  internal  policy  mix  such 
as to  gear  monetary  policy  more  to  external 
considerations.  It is clear  that  other  countries  will  also 
have  to make  a contribution  in coordinating  monetary 
policies  with  a view  to preventing  interest  rate  differentials 
from  producing  an  excessive  growth  of non-official 
holdings  of reserve  currencies. 
5. Rights  and  obligations  of other  countries 
We believe  that  the  proposals  made  in the  previous 
section,  dealing  with  the relationship  between  the reserve 
centres  and  the  Fund,  satisfy  the first  two  objectives  of 
the reform  except  in one  important  respect,  namely  the 
transformation  of liabilities  to official  holders  into 
private  claims  on the reserve  centres  via the Eurocurrency 
market.  Official  placements  in the  Eurocurrency  market 
lead to an unplanned  increase  in global  reserves  to the 
extent  that  the  claims  on the  reserve  centres  that  are 
placed  in the Eurocurrency  market  are acquired  by other 
official  holders.  This  loophole  in the  system  should  be 
closed  by appropriate  measures  to contain  the placement 
of official  reserves  in the Eurocurrency  market. 
Apart  from  this  last  problem,  the first  two  objectives  of 
the reform  are satisfied  by the proposals  contained  in the 
previous  section.  They  do  not,  however,  contribute 
necessarily  to the  attainment  of the  third  objective,  that 
of reducing  the  role  of reserve  currencies  in the  interest 
of stability.  Obviously,  this  should  apply  to all reserve 
currencies,  the traditional  ones  as well  as others. 
Currency  reserves  increase  when  reserve  centres  run  a 
balance  of payments  deficit  to the  extent  that  it is 
financed  by increasing  liquid  liabilities.  Under  the system 
of multilateral  asset  settlement,  the  additional  reserve 
currency  holdings  are  not  converted  bilaterally  into 
primary  reserve  assets  except  to the  extent  that  the 
reserve  centre  is willing  to do so on a voluntary  basis.  In 
general,  asset  settlement  will  take  place  via the Fund,  the 
reserve  centre  selling  primary  reserve  to the Fund  in the 
amount  of its deficit. 
In order  to obtain  the  reserve  currencies  which  the Fund 
requires  to pay  for  the  primary  assets,  one  possible 
method  is the designation  procedure.  This  would  lead  to 
a substitution  of SDRs  for  the  newly  created  reserve 
currency  balances  and  would  fully  serve  the objective  of 
preventing  a renewed  build-up  of currency  reserves  C1). 
The designation  procedure  could  obviously  be frustrated 
if countries  could  freely  rebuild  their  reserve  currency 
balances  by  using  SDR.  Consequently,  balance  of 
payments  need  should  in principle  be maintained  as a 
criterion  for  the  use  of SDR,  unless  other  means  are 
found  to make  countries  accept  a limitation  on reserve 
currency  holdings. 
(') Since  not  all  countries  participate  in the  SDR  system,  problems 
could  arise  with  the  designation  procedure  when  important  sur-
pluses  accrue  to non-participating  countries.  This  problem  will 
have  to be seriously  examined. The rules  of designation  in a system  of multilateral  asset 
settlement  would  have  to be worked  out.  A possible  rule 
would  be either  to harmonize  the composition  of reserves 
or to designate  in relation  to newly  acquired  reserve 
currency  holdings.  It would  also  be possible  to use  the 
designation  procedure  only  to the  extent  that  voluntary 
transactions  are not sufficient. 
In order  to be acceptable,  designation  should  be made  as 
little  a burden  as possible  on the  participating  countries 
by making  SDR  holdings  attractive  relatively  to reserve 
currency  holdings.  This  would  also  serve  to reduce  the 
effective  infringement  on  national  freedom  in the 
composition  of official  reserves.  The  position  of the SDR 
should  in any  case  be strengthened  by raising  the rate  of 
interest  on SDR,  but it would  obviously  be impracticable 
as well  as undesirable  to make  the rate  at all times  fully 
competitive  Math  money  market  rates  in the major  reserve 
centres.  The  appropriate  rate  of interest  on SDR  holdings 
should  be  considered  in relation  to the  provisions 
concerning  its value  and  any  possible  disincentives  to be 
introduced  for holdings  of reserve  currencies. 
While  designation  is entirely  appropriate  in the  case  of 
reserve  centre  deficits,  the  same  does  not  hold  for 
surpluses,  at least  until  reserve  currency  holdings  have 
been  reduced  to the  level  of normal  working  balances. 
When  a reserve  centre  runs  a surplus,  it is entitled  to buy 
SDR  from  the Fund.  Given  the  objective  to reduce  the 
amount  of reserve  currency  holdings  in the  system,  it 
would  be  quite  inappropriate  to force  the  reserve 
currency  which  the  Fund  acquires  onto  the  other 
participants  of the  system  by  a process  of 'reverse 
designation'. 
Instead,  the  Fund  should  fund  these  balances  with  the 
reserve  centre.  The  debt  thus  incurred  by the  reserve 
centre  should  carry  a SDR-exchange  guarantee,  since  the 
asset  settlement  transaction  implies  that  the  reserve 
centre  receives  SDR-denominated  liabilities. 
6. Mobile  capital  flows 
To the extent  that  mobile  capitals  flows  are destabilizing, 
they are  undesirable  as such  and  should  be prevented. 
The methods  to achieve  this  are the  subject  of separate 
deliberations  and  will  therefore  not be considered  in this 
paper.  We  shall  deal  only  with  the consequences  of such 
flows,  given  that  they  occur,  on the system  of multilateral 
asset  settlement. 
It has been  suggested  that  the system  of multilateral  asset 
settlement  should  be relaxed  in the  case  of destabilizing 
capital  outflows  from  a reserve  centre,  since  full 
settlement  would  impose  too  much  of a burden  on the 
reserve  centre  and  too  much  of a stress  on the system  as 
a whole.  There  is no doubt  that  the  system  should 
provide  sufficient  elasticity  to deal  with  such  cases.  Such 
provisions  already  exist  in the  form  of the  'General 
Agreement  to  Borrow',  swap  arrangements  between 
central  banks,  etc.  If necessary,  these  arrangements  could 
be expanded.  But  it is not  desirable  that  the  general 
obligation  to settle  deficits  in primary  assets  should  be 
No C 123/22 Official  Journal  of the  European  Communities 14. 10. 74 
relaxed  (except  in so far as this  is implied  by the swap 
arrangements),  or that  this  should  be done  exclusively  for 
the benefit  of reserve  centres.  It could  easily  become  an important  loophole  in the  system,  since  destabilizing 
capital  flows  are  notoriously  difficult  to indentify  with 
any degree  of objective  precision. 
ANNEX  V 
REPORT  OF  THE  WORKING  PARTY  ON  SECURITIES  MARKETS 
During  the  period  under  review  (fourth  quarter  1972  to 
end 1973),  the capital  market  trends  in most  Community 
countries  were  affected  by a monetary  policy  which, 
because  of the  persistent  inflationary  tendencies,  was 
given  an increasingly  restrictive  bias,  although  there  were 
notable  exceptions.  Action  on interest  rates  played  an 
important  part  among  the  means  employed.  This  was 
facilitated  by the attenuation  of external  constraints,  due 
particularly  to  the  joint  floating  of the  principal 
Community  currencies.  The  successive  raising  of official 
discount  rates,  which  in most  countries  were  standing  at 
record  levels  at the  end  of the  year,  together  with  the 
measures  to- restrict  bank  liquidity  led to a sharp  rise  in 
short-term  interest  rates,  with  money  market  rates  — 
except  in Luxembourg  and  Italy  — following  suit  with  a 
certain  time  lag  to differing  degrees.  From  October 
1972  to the  end  of 1973  interest  rates,  measured  by the 
stock  market  yield  on public  bonds,  rose  by less  than 
0-5 °/o in Italy  and  less  than  1 °/o in Luxembourg  and 
Belgium;  in Germany,  France  and  the  Netherlands,  the 
yield  increased  by  between  1-4  and  1-9  %>, while  in 
Denmark,  Ireland  and  the United  Kingdom  it rose  by as 
much  as 2-3 to 3 °/o. In virtually  all the countries,  however*  this  overall  trend 
masks  sharp  variations  in new  issue  activity  during  the 
year.  In Denmark  and  the United  Kingdom,  for instance, 
the amount  of capital  raised  in the first  half  of the  year 
was so large  that  it more  than  offset  the poor  result  for 
the subsequent  period  (Denmark)  or limited  the negative 
results  for  the  year  as a whole.  In France,  Italy  and 
Germany  highly  productive  periods  alternated  with  times 
of market  saturation.  Towards  the  end  of 1973  the 
German,  French,  United  Kingdom  and  Danish  markets  in 
particular  were  proving  to be insufficiently  absorptive. 
Borrowers  and  the  monetary  authorities  reacted  in 
different  ways  to market  strains.  Some  countries  insured 
market  equilibrium  in such  situations  by interrupting 
issues  or spreading  them  over  a longer  period  and/or 
adjusting  interest  rates.  In Italy,  on the other  hand,  where 
for economic  policy  reasons  an increase  in long-term 
interest  rates  was  regarded  as undesirable,  the  Banca 
d'ltalia  at times  purchased  large  quantities  of securities. 
The securities  portfolio  of the  Issue  Department  of the 
Bank  of England  also  increased  appreciably  at times. 
The rise  in interest  rates  was,  generally  speaking, 
continuous,  the peaks  being  reached  at the  end  of 1973. 
A notable  exception  was  Germany,  where  the high  point 
for the period  was  reached  in July.  As a result  of these 
rises,  interest  rate  differentials  between  the  Community 
countries  widened  considerably.  The  gap  between  the 
highest  rate  and  the lowest  rate  in the Community,  which 
had been  less  than  3 % at the  beginning  of the  period, 
reached  5-5  % at the  end  of the  year.  This  was  possible 
only because  the majority  of the  member  countries  kept 
their  markets  isolated  from  each  other  and,  in order  to 
ensure  sufficient  room  for manoeuvre  for their  monetary 
policy,  even  accentuated  the  division.  In February  1973, 
for instance,  the  German  authorities  instituted  an 
authorization  procedure  for  the  acquisition  of domestic 
bonds  by non-residents  which  was  strictly  enforced. 
The trend  in the  volume  of issues  differed  quite  sharply 
from  one  member  country  to another.  In France,  Italy 
and Denmark  the performance  was  distinctly  better  than 
in 1972.  In Belgium  the volume  of issues  was  slightly  up 
on the  previous  year,  while  the  German  capital  market 
proved  somewhat  less  receptive  than  in 1972  when 
admittedly  the result  had  been  exceptionally  good.  On the 
other  hand  the  volume  of issues  was  well  down  on the 
previous  year's  results  in the  United  Kingdom  and  the 
Netherlands. Coordination  of capital  market  policies  was  not  achieved 
during  this  period;  dissimilarities  in  the  economic 
situations  of member  countries  caused  different  objectives 
to be  attributed  to  national  economic  policies.  In 
addition,  different  views  continue  to be held  on the  role 
of interest  rate  policy. 
The balance  of payments  position  of  the  various 
members  exhibited  very  different  trends  throughout  the 
period:  sharp  deterioration  for  some,  distinct  or even 
significant  improvement  for  others.  Because  of this, 
deficit  countries  were  forced  to take  measures  to control 
capital  exports  to avoid  an eventual  reduction  in their 
external  balance,  while  the surplus  countries  took  various 
measures  restricting  capital  imports  and/or  encouraging 
capital  exports  to prevent  inflows  of capital  which  would 
counteract  their  monetary  policy.  Together,  these 
measures  constitute  a set-back  to  progress  in the 
liberalization  of capital  movements. 
The share  markets  in all the  countries  were  affected  — 
especially  in the  second  half  of the  year  — by anti-
inflation  measures,  and  at the  end  of the  period,  by 
uncertainty  as to the  effects  of the  energy  crisis  on the 
pattern  of firms'  costs  and  on future  economic  growth. 
At the  end  of the  year  share  prices  on  all  stock 
14.10.  74 Official  Journal  of the  European  Communities No C 123/23 
exchanges  without  exception  were  down,  and  in some 
cases  considerably  so, on the level  at the beginning  of the 
period  under  review. 
In Germany  the  major  feature  has  been  the effect  on the 
capital  markets  of the credit  policy  of the central  bank. 
Over  the year  as a whole,  the volume  of issues  was  fairly 
high,  although  there  was  a slight  fall from  the volume  of 
1972  which  had,  however,  been  an exceptional  year.  As 
in previous  years,  purchases  by the non-bank  sector,  and 
especially  households,  contributed  much  to  this 
satisfactory  result  concerning  the volume. 
The fall  in the volume  of issues  in the fourth  quarter  of 
1972  was  attributed  to the effectiveness  of the  restrictive 
monetary  policy,  and  expectations  of a further  rise  in 
interest  rates. 
There  was  a further  decline  in issues  in the  second 
quarter  of 1973  after  a very  high  volume  in the  first 
quarter,  and  this  was  accompanied  by a steady  rise  in 
yields  until  July,  as  issuers  made  concessions  to 
subscribers  in order  to ensure  placing.  At the same  time, 
further  conjunctural  measures  taken  by the authorities  in 
the second  quarter  of 1973  to restrain  inflation  pushed 
nominal  interest  rates  up to the record  level  of 10 °/o, and 
yields  to more  than  10 %. As this  high  level  of interest 
again  attracted  investors  to the  bond  market,  and  in 
order  to keep  the  rates  high  as a measure  to counter 
inflation,  the  authorities  encouraged  a high  volume  of 
issues.  Towards  the  end  of the  third  quarter,  however, 
the cyclical  demand  for capital  had  fallen  sufficiently  to 
permit  interest  rates  and  yields  to decline  slightly  to 
about  9-5 °/o. 
There  was  a distinct  decline  in the  volume  of foreign 
issues  in DM  after  the  second  quarter,  and  the  total 
volume  was  some  20 to 25 %> inferior  to that  of the 
previous  year  (DM  2 200 million  in 1973  compared  to DM 
2 716 million  in 1972). 
As in previous  years,  the  totality  of foreign  issues  was 
•ubscribed  to by  non-residents,  there  being  no  net 
exports  of long-term  capital.  In addition,  the government 
reinforced  and  extended  existing  measures  preventing 
foreigners  from  buying  German  securities.  Yields  on 
international  DM  bonds  issued  by non-residents  were 
stable  at around  7%  until  mid-year  when  they  were 
about  3 % below  the level  of internal  issues.  Subsequently 
they moved  gradually  and,  by  the  end  of the  year, 
sharply,  upwards  to attain  a level  superior  to the yield  of 
domestic  bonds. 
The share  market  had  a bad  year.  Weakened  at the end 
of 1972  after  Bundestag  elections,  it recovered  at the 
beginning  of the  year  to resist  the monetary  disturbances 
of March  1973  only  to become  pessimistic  again  in July. 
The volume  of issues  over  the year  as a whole  did  not show  a very  large  fall,  being  about  DM  2 000 million  in 
1973  compared  to DM  2 400 million  in 1972.  But  the 
share  price  index  (end  1965  = 100)  which  had  been  149 
at the end  of 1972  and  rose  to 168  in March,  had  fallen 
to 123  by December  1973. 
On the  French  securities  markets,  the  volume  of gross 
issues  was  greater  in 1973  than  in 1972  by 35 %>, private 
enterprises  and  financial  institutions  again  being  the 
principal  borrowers  on  this  market.  During  the  first 
quarter  the market  was  uneven,  due  to the issue  of a State 
loan and  a certain  saturation  of the  market.  Measures 
were  taken  by the authorities  to combat  this,  however,  by 
making  smaller  issues  less  often  and  increasing  interest 
rates  and  yields,  and  the  volume  of issues  reached  a 
record  level  in the  first  six months.  Later  in the  year, 
there  was  a certain  slowdown  in the volume  of issues,  in 
the third  quarter,  compared  with  the  corresponding 
quarter  of 1972,  followed  by  a strong  recovery  in 
October  and  November  before  the  market  once  again 
showed  signs  of saturation  in December. 
Much  of the  evolution  in the  bond  market  can  be 
illustrated  by the movement  of yields.  At the beginning  of 
1973  yields  of around  8-35  %> had  appeared  sufficiently 
attractive,  particularly  to institutional  investors.  There 
was a large  increase  to about  9 % in mid-year  which  was 
the price  of an increase  in issues.  In the  third  quarter, 
however,  there  was  a further  rise  in yields,  despite  the 
slow-down  in the  volume  of issues.  In December,  yields 
rose even  further  to end  the year  at over  9-75  °/o. 
In addition  to the  bond  market,  private  enterprises  also 
increased  their  use  of the  share  market  as a source  of 
funds  this  year.  Share  issues  increased  in every  quarter, 
producing  a global  expansion  of 20 % over  1972.  The 
share  price  index  rose  steadily  up to April  1973  but  by 
the end  of the  year  had  declined  to about  five  points 
below  the  level  at the beginning  of the  year.  Fears  of a 
sharp  slowdown  in the  growth  rate  and  difficulties  in 
financing  due  to the  oil  crisis  were  apparently  the 
strongest  factors  in this  evolution,  as was  the  case  in 
most  other  countries. 
The combination  of a large  balance  of payments  deficit,  a 
rapid  rise  in consumer  prices  and  a recovery  of industrial 
production  caused  the Italian  authorities  to take  a series 
of restrictive  measures  in mid-1973,  in contrast  to the 
previous  expansionist  policy.  These  aimed  to establish 
selective  credit  controls,  make  short-term  credits  more 
expensive,  to reduce  capital  inflows  notably  by means  of 
introducing  a non-interest  bearing  deposit  of 50%  on 
purchases  of foreign  securities  by residents,  and  to oblige 
the banks  to invest  more  and  more  on the bond  markets, 
thus providing  direct  and  indirect  influence  on the capital 
markets. 
Issues  were  distinctly  greater  in 1973  than  in the previous 
year.  In the first  and  second  quarters  of 1973,  issues  of 
domestic  bonds  were  slightly  lower  than  in 1972  due  to 
reluctance  by investors,  but  issues  on the  international 
market  over-compensated  for this  after  encouragement  by 
No C 123/24 Official  Journal  of the  European  Communities 14.10.  74 
the Banca  d'ltalia.  In the  third  and  fourth  quarters  of 
1973  there  was  a sharp  increase  both  in domestic  issues 
and Euro-issues.  Gross  domestic  issues  were  Lit 8 874 000 
million  in 1973  compared  with  Lit 5 879 000 million  in 
1972,  and  Euro-issues  were  Lit 1 900 000 million  in 1973 
compared  with  Lit 448  000 million  in 1972. (138 million  in 1973  compared  with  680  million  in 1972), 
and the  share  price  index  fell  by over  30 °/o during  the 
course  of the year,  from  505  to 344,  touching  306  in mid-
December,  just  before  the  announcement  of  new 
deflationary  measures. 
Interest  rates  remained  stable  at around  7%  and  yields 
at 7-5  %> as a result  of government  policy  to encourage 
investment  and  to increase  industrial  production.  The 
authorities,  relying  on measures  against  capital  outflows 
(see above),  succeeded  in keeping  interest  rates  at such  a 
low level  compared  with  conditions  abroad,  thus  virtually 
separating  the  Italian  bond  market  from  the rest  of the 
world. The particular  characteristic  of the Irish  capital  market  is 
its close  dependence  on the  United  Kingdom  capital 
market,  especially  in terms  of interest  rates.  This  is due 
to the fact  that  there  is freedom  of movement  of capital 
between  the  two  countries,  the  difference  in the  size  of 
the two  markets,  and  (recently)  the merging  of the United 
Kingdom  and  Irish  Stock  Exchanges. 
At the end  of 1972  and  the beginning  of 1973  there  was 
an increase  in the volume  of share  issues,  and  this  level 
was maintained  in the  rest  of the  period,  an increasing 
part of the  capital  going  to companies  quoted  on the 
official  market. 
Share  prices  steadily  increased  until  mid-1973  as 
industrial  production  and  business  profits  recovered.  It 
was also  felt  that  equities  would  provide  a hedge  against 
inflation.  However,  in the  third  and  fourth  quarters  of 
1973,  these  hopes  were  disappointed  and  stock  market 
quotations  dropped  as a result  of a shrinking  in the 
volume  of  available  credit  and  government  anti-
inflationary  policy. 
At the  end  of 1972,  the  United  Kingdom  markets  were 
quiet,  with  over  half  the  activity  involving  British 
Government  securities.  At  the  beginning  of  1973, 
however,  the  authorities  made  large  net  sales  of stock 
and sold  even  higher  amounts  in the second  quarter.  In 
the following  quarter  the market  was  generally  quiet  and 
official  sales  of stock  were  small.  As a result  of the 
economic  situation,  the market  was  generally  weak  in the 
fourth  quarter,  although  sizeable  amounts  of Government 
Stock  were  sold  in October  and  around  mid-December. 
Activity  in most  other  fixed-interest  securities  was  more 
consistent,  until  December  when  the  amount  of 
transactions  was  substantially  smaller. Interest  rates  followed  closely  those  in the  United 
Kingdom,  partly  through  market  forces  and  partly 
through  action  by the  authorities  to avoid  large  capital 
outflows.  There  was  a sharp  rise  at the  beginning  of 
1973,  and  short-term  money  rates  reached  a peak  under 
the influence  of the parallel  money  markets  in the United 
Kingdom  towards  the  end  of  the  year.  Yields  on 
government  securities  followed  the same  pattern,  reaching 
an historical  high  level  of 10%  in February  1973,  easing 
off in mid-year  to reach  a new  high  of 12-5  °/o in 
December. 
There  was  a rise  in issues  in the second  quarter  of 1973, 
so that  banks  could  maintain  their  secondary  liquidity 
reserve  ratios,  and  despite  a fall  in issues  in the  third 
quarter,  when  the  volume  of redemptions  exceeded  the 
volume  of issues,  there  was  a renewed  demand  in the 
fourth  quarter  when  nominal  sales  were  £ 24 million 
compared  with  £ 12 million  for the fourth  quarter  1972; 
although  again  this  demand  was  mainly  from  the banks 
and confined  to shorter  maturities. 
A structural  feature  of the  Danish  capital  market  is that 
90 % of bond  issues  are  made  by the  mortgage  credit 
institutions.  This  means  that  the markets  are most  heavily 
influenced  by, and  government  measures  concentrated  on, 
developments  in the housing  sector. 
Yields  on British  Government  securities,  like  those  in the 
parallel  money  markets,  increased  sharply  in the second  half 
of the year  from  just  around  10%  in June  to rather  more 
than 11 % in October  and  about  12-5  % in December. 
This  was  mainly  in response  to a tightening  of monetary 
policy  in July  (when  the  minimum  lending  rate  rose  to 
11-5%)  and  again  during  November  (when  the minimum 
lending  rate  rose  to 13 % and  there  was  a call  for  a 
further  2 % of special  deposits).  The  yields  on other 
fixed-interest  securities  also  rose  sharply. 
The equity  market  was  also  unsettled  during  the  year, 
with domestic  capital  issues  well  below  those  in 1972 The absorptive  capacity  of the market  proved  to be very 
strong  at the  beginning  of the  period  (fourth  quarter 
1972)  with  issues  remaining  at a high  level  of around 
30%  over  the  corresponding  period  of 1971.  At the 
beginning  of 1973,  however,  bond  prices  came  under 
heavy  pressure  as a result  of a large  issue  of mortgage 
bonds,  despite  some  support  by the national  bank.  In the 
face of this  situation,  the  mortgage  institutions  after 
consultation  with  the  authorities,  imposed  ceilings  on 
mortgage  borrowings  in order  to restrain  the  rise  in 
demand  for  capital  and  alleviate  the  disparity  between 
investment  in the  housing  market  and  investment  for 
industrial  development.  The  volume  of issues  which  had 
been  very  high  in early  1973  declined  in the  third  and 
fourth  quarters  of 1973  to a level  some  15 % above  1972, 
producing  a total  for 1973  of 25 % above  that  for 1972. 
14.10.  74 Official  Journal  of the  European  Communities No C 123/25 
The distinct  increase  in bond  prices  which  occurred  after 
the referendum  of 2 October  1972  on the accession  to the 
EEC  was  followed  in November  by a decline  which 
continued  until  mid-March:  due  to this,  the average  yield 
increased  by at least  1 %. Following  a recovery  in April 
which  compensated  for  a small  part  of the  previous 
losses,  there  was  a further  sudden  fall  in prices  in July 
and August;  it was  only  in December  that  a certain 
stabilization  manifested  itself,  given  that  prices  only 
decreased  slightly.  The  average  bond  yield  at the end  of 
the year  reached  around  13-5  °/o, exceeding  therefore  the 
level  of 2-5  %> at the  end  of 1972  and  that  of 3-5  %> 
at the  end  of November  1972.  The  increase  in yields 
was,  however,  smaller  for certain  high-interest  bonds. 
The share  market,  traditionally  an unimportant  source  of 
funds,  experienced  a new  lease  of life  after  Denmark's 
entry  into  the  Community.  In the  first  half  of 1973 
foreign  demand  for Danish  shares,  although  restricted  by 
quotas,  was  at a high  level,  and  both  issues  and  prices 
increased,  although  demand  and  issues  fell  back  to a 
more  'normal'  level  in the second  half  of the year,  when 
foreign  net purchases  of Danish  shares  fell  to zero,  and 
later  suffered  net  repatriations.  The  share  price  index 
rose up to the end  of August  1973,  but  later  fell,  in line 
with  activity  on the  market,  to end  the  year  at 177 
compared  with  217  in August. 
On the  Dutch  capital  market,  after  a continuous  decline 
in the  first  six  months,  the  volume  of new  issues 
stabilized  during  the second  half  of the  year  at the level 
of the previous  year. 
At the end  of 1972,  the increase  in short-term  rates  had 
caused  a contraction  of the  capital  market  due  to the 
withdrawal  of certain  funds  from  this  market,  notably  by 
the banks.  Furthermore,  the  institutional  investors, 
expecting  a rise  in long-term  rates,  preferred  to wait. 
During  the first  part  of 1973,  due  to the development  of 
the exchange  markets,  which  produced  an easy  money 
market,  borrowers  preferred  to have  recourse  to this 
market  and  obtain  their  financing  by short-term  capital. 
During  the  second  half  of the  year,  the  high  level  of 
short-term  interest  rates  and  the continuing  preference  of 
investors  for liquidity,  necessitated  an upwards  adjustment 
in the  long-term  interest  rate:  only  when  yields  on 
privately  contracted  loans  reached  9 % (at the beginning 
of September)  did  the institutional  investors  return  to the 
capital  market. 
But this  recovery  was  only  temporary;  the  market 
suffered  a further  setback  as a result  of the oil crisis  and 
by the  end  of the  year  yields  were  at around  the  level 
already  achieved  (9-5  to 9-75  %). On  the  whole,  activity-
was quiet  and  the  drying-up  of issues  which  occurred 
during  the  year  clearly  reflected  the  reluctance  of 
investors. 
The authorities  took  a number  of monetary  policy 
measures  to combat  inflation;  they  were  led to increase 
the rate  of discount  on several  occasions  in order  to 
avoid  too  large  discrepancies  in relation  to the  rate  in 
other  countries.  Monetary  policy  during  the  year  was 
moderately  restrictive,  principally  aiming  to prevent  a large  increase  in the  liquidity  of both  banks  and 
individuals;  the  trend  in unemployment  and  the  relative 
weakness  of industrial  investment  prevented  a more 
severe  policy  from  being  implemented. 
Despite  liberalizing  measures  taken  in January,  (now 
permitting  residents  to purchase  by subscription  'guilder 
notes'  issued,  by residents),  the  market  for  these  notes 
was quiet  throughout  the period.  During  the Second  half 
of 1973,  issues  almost  completely  ceased,  while  yields 
exceeded  10 % on the secondary  market. 
There  were  traditionally  few  issues  of shares  over  the 
period.  The  share  price  index  rose  at first  from  130  at 
the end  of 1972  to 144  in April,  then  falling  back  to 101 
in December  1973. 
The volume  of gross  issues  on the  Belgian  securities 
market  was  slightly  higher  for the whole  of 1973  than  for 
1972  (Bfrs  267  000 million  in 1973  compared  with  Bfrs 
238 000 million  in 1972).  Borrowers  had  no  great 
difficulty  in placing  issues  laid  down  in the  schedule, 
although  during  the course  of the  year  two  public  issues 
were  delayed  in order  to ensure  an even  flow  of new 
issues  on the market. 
This  ease  of placing  was  especially  useful  in permitting 
the authorities  to consolidate  a part  of its floating  debt 
and to continue  the  redemption  of the  foreign  currency 
debt to an amount  of Bfrs  3-4 000 million. 
The major  characteristic  of the  capital  market  has  been 
the stability  of the  rate  of interest  and  yields,  both  only 
rising  from  7%  to just  below  8 % over  the course  of the 
year,  despite  the exceptionally  high  level  in neighbouring 
countries. 
The share  market  has  been  quiet;  the  volume  of issues 
was not  as high  as in 1972,  although  a record  number  of 
new companies  have  requested  quotations.  There  was  a 
slight  increase  in the share  price  index  up to the middle 
of the year,  but  a fall  in the second  half  of the year  to 
about  the level  at the beginning  of the year. 
In the Grand  Duchy  of Luxembourg,  although  the level  of 
domestic  issues  was  quite  high  at the end  of 1972,  it was 
reduced  at the  beginning  of 1973  and  later  even 
suspended  in order  to avoid  an influx  of speculative 
capital. 
During  the two  last  quarters,  the authorities  reopened  the 
market  to borrowers  willing  to quickly  convert  and 
export  the product  of their  borrowing. 
Towards  the  end  of the  year,  a certain  shrinking  of the 
market  occurred,  partly  due  to a desire  to maintain  a 
relatively  stable  interest  rate  in relation  to the  very  high 
rates  prevailing  on the money  market. 
The total  volume  of issues  was  Lfrs  2 700 million 
compared  with  Lfrs  3 300 million  in 1972. 
No C 123/26 Official  Journal  of the  European  Communities 14.10.  74 
The characteristics  of the Lfrs  300  million  State  loan  are 
interesting:  it was  available  only  for  physical  persons, 
bore  no interest  coupon  and  was  redeemable  at premium 
free from  income  tax. Privately  placed  loans  recorded  in the  statistics  were 
again  in 1973  of little  significance  (37  million  EUR 
compared  to 48 million  EUR  in 1972). 
Bond  yields  have  remained  fairly  stable  over  the  whole 
period,  the  maximum  increase  being  of the  order  of 
0-77 %. 
In contrast  to  previous  years,  continuing  monetary 
uncertainty  in the past  year  had  strong  repercussions  on 
the international  markets,  where  the size  and  composition 
of the  volume  of issues,  the  distribution  of issues  by 
borrowing  countries  and  the  interest  rate  trend  were  all 
affected. 
After  reaching  the record  figure  of 1 980 million  EUR  in 
the fourth  quarter  of 1972,  the  volume  of issues  fell 
appreciably  in the first  and  second  quarters  of 1973  as a 
result  of the monetary  events  in February  and  March  and 
the drop  in the dollar  rate.  After  a further  sharp  dip  in 
the third  quarter  to 616  million  EUR  there  was  a strong 
recovery  in the  final  quarter,  but  even  this  quarterly 
result  — as all the others  in 1973  — was  distinctly  lower 
than the  figures  for  the  corresponding  quarter  of the 
previous  year.  This  meant  that  between  1972  and  1973 
the total  volume  of international  issues  dropped  by 35 % 
to 4 556 million  EUR.  This  decline  affected  issues  in all 
currencies  with  the exception  of the Swiss  franc.  Issues  in 
this currency  last  year  did in fact  slightly  exceed  the high 
1972  figure. 
A breakdown  by currencies  of issue  shows  a slight  fall  in 
dollar  issues  (from  51 to 45 °/o of the  total  volume)  and 
an appreciable  increase  in the  share  of DM  and  SwF 
issues  (25  and  15 °/o in 1973  as against  20 and  10 °/o in 
1972).  The  proportion  of foreign  DM  issues  in total 
issues  denominated  in currencies  other  than  the  dollar 
increased  from  42 to 46  %, while  the  corresponding 
figure  for SwF  issues  rose  from  19 to a good  28 %. On 
the other  hand  there  was  a marked  fall  in international 
issues  denominated  in guilders  and  French  francs;  issues 
of these  securities  practically  dried  up in the second  half 
of the year. 
The share  of issues  denominated  in units  of account, 
insignificant  in 1972,  considerably  increased  in 1973, 
particularly  due  to the  new  'Eurco'  formula.  The  Eurco 
is a unit  of account  based  on a basket  of the  nine 
Community  currencies  in fixed  proportions.  The  value 
expressed  in one  of these  nine  currencies  (or in any  other 
currency)  varies  every  day  according  to fluctuations  in 
exchange  rates  and  is the sum  of the amounts  obtained  by 
converting  the  various  currencies  making  up the  whole 
into the  desired  currency.  Two  Community  borrowers 
used this  formula  in autumn  1973  for an amount  of 50 
million  Eurco. In contrast  to the  downward  trend  in the  volume  of 
issues,  Eurodollar  bank  loans  shot  up:  in 1973  they 
probably  amounted  to at least  24000  million,  an almost 
fourfold  increase  over  1972.  This  suggests  that  the sharp 
drop  in the volume  of issues  was  not  due  to a shortage 
of funds  on the markets,  but to the reluctance  of issuers 
and investors  to contract  long-term  debts  in the  present 
circumstances.  Therefore,  Euro-loans,  which  enable  more 
capital  to be raised  at a time  than  bond  issues,  were 
favoured  by borrowers. 
There  were  also  considerable  shifts  last  year  in the 
pattern  of countries  floating  loans:  while  the EEC  share 
jumped  from  27 to 45 °/o (increase  of 1973  on 1972),  the 
US share  dropped  appreciably,  from  some  25 % in 1972 
to less  than  19 %. 
Interest  rates  on the  international  capital  market  were 
particularly  affected  by  the  events  on  the  foreign 
exchange  markets.  A slight  drop  in interest  rates  on 
dollar  issues  in the  closing  months  of 1972  could  be 
taken  as a sign  of renewed  confidence  in the dollar.  One 
main  consequence  was  that  the gap  between  interest  rates 
on the  dollar  issues  market  and  some  Euro-currency 
markets  narrowed.  But  bouts  of speculation  in February 
and March  and  the  heavy  pressure  on the  dollar  in the 
following  months  then  led to a sharp  increase  in interest 
rates  on dollar  issues,  although  the volume  of these  issues 
was constantly  declining;  the  peak  was  reached  in July 
when  the  stock  market  yield  was  9-25  %. Although  the 
yield  had  fallen  back  to 8-75  °/o by the  end  of 1973, 
compared  to the  beginning  of the  period  under  review 
this represented  an increase  of more  than  1-5  % in the 
real interest  rate. 
There  was  an even  more  substantial  advance  in the 
interest  rates  on foreign  DM  issues.  After  yields  had 
fallen  from  7-25  °/o in the final  quarter  of 1972  to 6-75  °/o 
at the  beginning  of March,  a steady  upward  movement 
set in. With  the German  mark  weakening  on the  foreign 
exchange  markets  the  prices  of foreign  DM  issues  came 
under  increasing  pressure  from  October  onwards,  with 
the result  that  yields  on these  issues  caught  up with  the 
yields  on domestic  issues  by the end  of November  and  a 
month  later  were  almost  0-5  °/o higher.  Over  the  entire 
period  under  review  the  yield  on foreign  DM  issues 
increased  by some  3 °/o. 
The Swiss  franc  was  the only  major  currency  of issue  to 
remain  relatively  unaffected  by the  rise  in international 
interest  rates.  The  yield  at issue  was  mainly  between  6 
and 6-5  % throughout  the  period.  As the yields  on SwF 
bonds  were  already  the lowest  of all international  issues, 
the gap  between  them  and  yields  on issues  in other 
currencies  widened  distinctly. 
14.10.  74 Official  Journal  of the  European  Communities No C 123/27 
There  were  no major  changes  last  year  in the  policies 
pursued  by  the  monetary  authorities  of the  member 
countries.  The  German  authorities  did,  however,  get the 
issuing  banks  to limit  the  volume  of international  DM 
loans  —  not  counting  the  issues  of international 
organizations  — to DM  400  million  to DM  500  million  per 
month.  In addition  agreements  were  concluded  on a time 
limit  for the conversion  and  transfer  of the  proceeds  of 
issues.  The  banks  further  entered  into  a gentleman's 
agreement  not  to sell  foreign  DM  issues  from  their 
holdings  to non-residents. 
In the  Netherlands,  residents  were  authorized  to 
subscribe  to international  guilder  issues  where  the issuer 
was also  a resident. 
A kind  of  'cash  deposit'  on  exports  of  capital 
introduced  by the  Italian  authorities  in July  1973  meant 
that Italian  subscribers  withdrew  almost  completely  from 
the international  markets,  except  for  loans  floated  by 
European  institutions  which  could  still  be purchased  on 
both  the  primary  market  and  the  secondary  market 
without  the cash  deposit  having  to be made.  At the same 
time,  for  balance  of  payments  reasons,  greater 
encouragement  was  given  for importing  capital,  especially 
in the  form  of borrowing  on  international  capital 
markets,  by enterprises  and  financial  institutions.  The 
resulting  net inflow  of capital  amounted  to some  $ 4 000 
million  in 1973. 
In addition  to the  regular  examination  of trends  on the 
national  and  international  capital  markets  the  working 
party  began  to look  into  how  cooperation  between  the 
capital  market  authorities  of the Member  States  could  be 
stepped  up.  The  working  party  takes  the view  that  this 
work  is in line  with  the  provision  of the  Council resolution  of 22 March  1971  requiring  a procedure  to be 
laid down  for  the  progressive  coordination  of the 
Member  States'  policies  with  regard  to capital  markets. 
The discussions,  which  are  still  continuing,  are  on the 
possibilities  of identifying  the  short-term  objectives  of 
capital  market  policy  and  the  plans  for structural  reform 
essential  to the capital  market.  From  now  on the working 
party  has  agreed  in principle  to exchange  information  on 
all measures  which  affect  the capital  market. 
In addition,  the  working  party  started  to look  at the 
problems  connected  with  protecting  holders  of fixed-
interest  securities  from  the  fall  in the  value  of money. 
The starting  point  for  the  discussions  is the  sharp  and 
persistent  rise  in prices  in virtually  all member  countries. 
Erosion  of the  value  of money  on such  a scale  could 
discourage  saving  through  investment  in bonds  and  be 
prejudicial  to the  efficiency  of the  bond  market.  The 
working  party  has  studied  several  solutions,  among 
others,  which  would  compensate  for losses  sustained  by 
savers  and  preserve  the  important  source  of finance  for 
the private  and  public  sectors,  which  the  bond  market 
represents:  index-linking,  higher  interest  rates,  shorter 
periods  of maturity  and  tax  measures.  This  analysis  gave 
special  consideration  to the fact  that  applying  them  in an 
uncoordinated  manner  could  hamper  efforts  to merge  the 
national  markets  into  a European  capital  market.  The 
working  party  hopes  to conclude  the  study  in the  near 
future  and  to put  the  results  before  the  Monetary 
Committee. 
In conclusion,  it may  be noted  that  at a special  meeting 
the working  party  examined  the  structure  of the  British 
capital  market.  Its studies  of capital  market  structures 
will shortly  be completed  with  an examination  of the 
Irish and  Danish  markets. 
Annex 
LIST  OF  THE  MEMBERS  OF  THE  WORKING  PARTY  ON  SECURITIES  MARKETS 
Chairman: 
GERMANY 
BELGIUM M. F. De Voghel,  vice-gouverneur  honoraire  de la Banque  nationale 
de Belgique,  president  de l'lnstitut  de reescompte  et de garantie, 
Brussels  (until  15 February  1973). 
M. D'Haeze,  Directeur  general  de l'administration  de la tresorerie 
et de la dette  publique,  Brussels  (from  15 May  1973). 
Dr. K. Andreas,  Leiter  der  Hauptabteilung  Kredit,  Deutsche  Bun-
desbank,  Frankfurt/Main. 
Ministerialrat  Borgbohmer,  Bundesministerium  der  Finanzen,  Bonn. 
Ministerialrat  G. Wetzler,  Bundesministerium  der  Finanzen,  Bonn 
(until  30 March  1973). 
Regierungsdirektor  D. Thorand,  Bundesministerium  der  Finanzen, 
Bonn  (from  1 April  1973). 
M. D'Haeze,  directeur  general  de l'administration  de la tresorerie 
et de la dette  publique,  Brussels  (until  15 May  1973). 
F. Junius,  Banque  nationale  de Belgique,  Brussels. 
No C 123/28 Official  Journal  of the  European  Communities 14.10.  74 
BELGIUM 
(cont'd) 
DENMARK 
FRANCE 
IRELAND 
ITALY 
LUXEMBOURG 
NETHERLANDS 
UNITED  KINGDOM 
COMMISSION  OF  THE 
EUROPEAN 
COMMUNITIES 
SECRETARIAT E. Kestens.  Inspecteur  general  au ministere  des  finances,  Brussels. 
M. Esselens,  Inspecteur  general  a Padministration  de la tresorerie, 
Brussels  (from  15 May  1973). 
J. Kjaer,  Kontorchef,  Danmarks  Nationalbank,  Copenhagen. 
H. Olsen,  Fuldaegtig,  Handelsministeriet,  Copenhagen. 
Y. Berger,  conseiller  aupres  du gouverneur  de la Banque  de France, 
Paris. 
J. M.  Block-Laine,  Sous-directeur  des  affaires  multilaterales  a la 
direction  du tresor,  ministere  de l'economie  et des  finances,  Paris 
(from  1 November  1973). 
Ph. Cosserat,  Direction  du tresor,  ministere  de l'economie  et des 
finances,  Paris  (until  31 August  1973). 
J. de  La  motte  de  Broons,  Direction  du  tresor,  ministere  de 
l'economie  et des  finances,  Paris  (from  1 September  1973). 
P. de Larosiere,  Sous-directeur  des  affaires  internationales  a la 
direction  du tresor,  ministere  de l'economie  et des  finances,  Paris 
(until  31 October  1973). 
Mrs.  L. Beauvais,  Banque  de France,  Paris. 
C. O'Carra,  Department  of Finance,  Dublin. 
M. Coffey,  Central  Bank  of Ireland,  Dublin. 
Dott.  B. Bianchi,  Servizio  studi,  Banca  d'ltalia,  Rome. 
Dott.  G. Monterastelli,  Condirettore  centrale,  Banca  d'ltalia,  Rome. 
Dott.  M.  Napolitano,  Ispettore  generale,  direzione  generale  del 
Tesoro,  Ministero  del  Tesoro,  Rome  (until  31 March  1973). 
Dott.  V. Platino,  Ispettore  capo  del  Tesoro,  direzione  generale  del 
Tesoro,  Ministero  del  Tesoro,  Rome  (from  1 April  1973). 
A. Dondelinger,  Commissaire  au controle  des banques,  Luxembourg. 
E. Israel,  Directeur  k la Banque  internationale,  Luxembourg. 
Mrs.  P. Weides,  Conseiller  adjoint  au Commissariat  au controle  des 
banques,  Luxembourg. 
Drs. M. M. Keyzer,  Nederlandsche  Bank  N.V.,  Amsterdam. 
Drs. P. C. Timmerman,  Onderdirecteur  van  de Nederlandsche  Bank 
N.V.,  Amsterdam. 
Drs. J. Grooters,  Directeur  binnenlands  geldwezen,  Ministerie  van 
Financien,  The  Hague. 
Miss  J. Kelley,  Treasury  Chambers,  London. 
D. A. C. Nendick,  Cashiers  Department,  Bank  of England,  London. 
F. Boyer  de la Giroday,  Director  for  Monetary  Matters  in the 
Directorate  General  for  Economic  and  Financial  Affairs  of the 
Commission  of the  European  Communities,  Brussels  (until  30 June 
1973). 
J. E. Nash,  Director  for  Monetary  Matters  in the  Directorate 
General  for Economic  and  Financial  Affairs  of the  Commission  of 
the European  Communities,  Brussels  (from  1 July  1973). 
M. Sarmet,  Head  of Division,  Directorate  General  for  Economic 
and Financial  Affairs,  Commission  of the  European  Communities, 
Brussels  (until  30 June  1973). 
A. Kees,  Head  of Division,  Directorate  General  for  Economic  and 
Financial  Affairs,  Commission  of  the  European  Communities, 
Brussels  (from  1 July  1973). 
M. Zucker,  Directorate  General  for  Economic  and  Financial 
Affairs,  Commission  of the  European  Communities,  Brussels. 
G. Morelli,  Secretary  of the  Monetary  Committee,  Brussels. 
G. Lermen,  Brussels.