9. 11. 73 Official  Journal  of the European  Communities No C 94/1 
I 
(Information) 
COUNCIL  AND  COMMISSION 
FOURTEENTH  REPORT  ON  THE  ACTIVITIES  OF  THE 
MONETARY  COMMITTEE 
Brussels,  12 April  1973 
INTRODUCTION 
The purpose  of this  report  is to give  a brief  account  of the  activities  of the  Monetary 
Committee  during  the period  from  1 January  1972  to the end  of 1972. 
During  this  year,  the Committee  held  15 sessions  and  the  working  parties  drawn  from 
its own  members  or set up at its initiative  met  on many  occasions. 
In view  of the Council's  decision  of 13 October  1972  harmonizing  the dates  of renewal 
of the  terms  of office  of the  officers  and  ordinary  members  of the  various  committees 
as from  1 January  1974  onwards,  the  Monetary  Committee  extended  the  terms  of 
office  of its present  officers  until  31 December  1973.  A list of members  as at 31 December 
1972  is annexed. 
Delegates  from  the  countries  joining  the  Community  on 1 January  1973  (United 
Kingdom,  Ireland,  Denmark)  were  involved  in the  work  of the  Monetary  Committee 
throughout  the period  under  review,  particularly  in discussions  of international  monetary 
problems.  These  countries  also  joined  the mutual  information  arrangements  operating 
within  the Committee. 
The report  was  adopted  as at 31 December  1972. 
1. Disturbances  in monetary  relations  in 1971 
delayed  the  implementation  of  the  monetary 
measures  provided  for in the Council's  resolution  of 
22 March  1971  on the establishment  by stages  of an 
economic  and  monetary  union.  The  new  pattern  of 
exchange  rates  agreed  in  December  1971  in 
Washington  (the  'Smithsonian'  agreement)  opened 
the way  to renewed  action  in this  field.  A resolution 
adopted  by the Council  on 21 March  1972  gave  new 
force  to some  of the measures  contemplated,  and  one of the results  of this  was  that  a start  could  be made 
on the  work  of giving  the  Community  its  own 
monetary  personality.  The  first  chapter  of this  report 
summarizes  the sequence  of events. 
However,  further  waves  of speculation  again  created 
difficulties  in 1972.  At the  end  of the  year,  the 
situation  on the  exchange  markets  was  still  unstable, 
since  the payments  balances  of a number  of the main 
industrialized  countries  had  failed  to revert  promptly 
No C 94/2 Official  Journal  of the European  Communities 9. 11.73 
to a more  satisfactory  state  of equilibrium;  it was 
thus still  not certain  that  the new  pattern  of exchange 
rates  was  the right  one.  Nor  was  any  overall  solution 
in sight  to the  difficulties  caused  by the  steady 
increase  in international  liquidity,  the non-convertibi-
lity of the  main  intervention  currency  (which  had 
accumulated  in large  quantities  in the  countries' 
reserves),  or to the  erratic  movements  of funds, 
which  tended  to continue  despite  the  severe  but 
uneven  restrictions  imposed  on capital  movements  by 
many  countries. 
But the  dominating  factor  in economic  life  in the 
Community  was  almost  certainly  the strengthening  of inflationary  pressure  in all the member  countries.  The 
scale  of this  problem  is shown  in the brief  account  of 
economic  developments  given  in the second  chapter 
of this  report.  The  persistence  of inflation  is making 
the achievement  of the economic  and  social  objectives 
of the  Community  member  countries  increasingly 
difficult,  and inflation  control  has therefore  become  a 
major  policy  goal  at both  national  and  Community 
level. 
A third  chapter  is devoted  to the Committee's  work 
on the  establishment  of an economic  and  monetary 
union  and  on  the  reform  of the  international 
monetary  system. 
CHAPTER  I 
ECONOMIC  AND  MONETARY  UNION 
2. In  1971,  the  international  monetary  crisis  had 
hampered  progress  in the  first  stage  towards  the 
economic  and  monetary  union.  In particular,  it had 
prevented  the  Member  States'  central  banks  from 
complying  with  the'  Council's  request  that  they 
should  maintain  exchange  rate  fluctuations  between 
Community  currencies  within  narrower  limits  than 
those  imposed  by the margins  in force  for relations 
with  the US dollar  ('the  Snake  in the Tunnel').  The 
leading  industrialized  countries  met  in Washington  in 
December  1971  and  agreed  to widen  to 2lA  % the 
fluctuation  margins  of the  currencies  around  their 
parities  or central  rates.  The  Committee  therefore 
drew  attention,  in its last  report,  to the  serious 
disadvantages  this  measure,  when  applied  to the 
Community  currencies,  would  entail  for the smooth 
working  of the Common  Market.  The  Committee  felt 
that the  decision  'not  only  made  possible  but  also 
necessitated  the  revival  of efforts  to give  the 
Community  its  own  monetary  personality  while 
ensuring  effective  coordination  of the  short-term 
economic  policies'. 
The Commission's  work  from  January  onwards 
enabled  the Council  to adopt,  on 21 March  1972  (*), 
a resolution  amplifying  certain  aspects  of the 
resolution  of 22 March  1971  (2). This  was  the  first 
step towards  the  formation  of a separate  and 
individual  monetary  area.  The  prospective  member 
countries  endorsed  this  Community  measure,  the 
monetary  aspects  of which  are summarized  below. 
(!) OJ  No C 38, 18. 4. 1972,  p. 3. 
(2) OJ  No C 28, 27. 3. 1971,  p. 1. 3. The  Council  and  the  representatives  of the 
Member  States'  Governments  decided  to introduce  an 
arrangement  for the gradual  narrowing  down  of the 
exchange  margins,  intervention  to take  place  in 
Community  currencies.  For  this  purpose,  they  called 
on the central  banks  to intervene  on their  respective 
exchange  markets  so as to scale  down  to 2-25  %, by 
1 July  1972  at latest,  the maximum  discrepancy  that 
can occur,  at any  one  time  between  the  Member 
States'  currencies,  while  still  complying  with  the 
fluctuation  margins  allowed  by the  IMF  in world 
monetary  relations  (3). As early  as 24 April  1972,  the 
governors  of the  Member  States'  central  banks 
implemented  the  reduction  in  intra-Community 
fluctuation  margins.  They  had  previously  agreed  on 
the arrangements  for  financing  the interventions  in 
Community  currencies  and  for settling  the debit  and 
credit  balances  generated  by these  operations.  These 
arrangements  include  very  short-term  credit  facilities 
between  central  banks,  settlement  of which  is based 
on a transfer  of assets  matching  the composition  of 
the debtor  central  bank's  reserves.  The  central  banks 
of three  prospective  Member  States  acceded  to this 
agreement  in May. 
4. After  a short  period  during  which  it worked  as 
planned,  the  intra-Community  exchange  system  ran 
into difficulties  in June  as a result  of very  heavy 
speculation  against  sterling.  After  very  large-scale 
support  of sterling,  in which  the  member  countries 
(3) Technical  details  of this  arrangement  are  described  in 
the July/August  1972  Bulletin  of the Ban  que Nationale 
de Belgique. 
9. 11.73 Official  Journal  of the European  Communities No C 94/3 
participated  and  which  involved  the United  Kingdom 
in substantial  losses  of  reserves,  the  British 
Government  decided  on 23 June  1972  to suspend 
intervention  at the  exchange  rate  limits  — 2-25  % 
either  side  of parity  —  and  to  suspend  its 
participation  in the arrangement  designed  to narrow 
the fluctuation  margins  of the  currencies  of the 
Community  countries.  Because  of the close  monetary 
ties between  the  United  Kingdom  and  Ireland,  the 
Irish  authorities  followed  suit.  At the end  of 1972,  the 
effective  devaluation  of sterling  — now  floating  — 
was roughly  10 % in comparison  with  the  former 
official  parity. 
On 28 June,  Denmark  suspended  implementation  of 
the agreement  (the  'snake'),  but continued  to hold  its 
currency  within  the  margins  set vis-a-vis  the  dollar 
(the 'tunnel').  However,  from  10  October  1972 
onwards,  Denmark  reverted  to the new  Community 
system,  while  reserving  the  right,  at the  time,  to 
choose  what  means  it would  use  for implementing 
the necessary  intervention  measures. 
To enable  it to cope  with  any  repercussions  of the 
sterling  crisis  on the  Italian  exchanges,  the  Banca 
d'ltalia  was  authorized  on 26 June  1972  to intervene 
temporarily  in dollars  as well  as in Community 
currencies,  with  a view  to ensuring  the maintenance 
of the  narrower  intra-Community  fluctuation 
margins:  in view  of the losses  of reserves  incurred  by 
the Banca  d'ltalia,  this  waiver,  which  was  originally 
intended  to last  only  until  30  September,  was 
extended  until  31 December  1972. 
Speculation  against  sterling  was  followed  by pressure 
on the  dollar,  strengthened  by the  sharp  upward 
trend  in gold  prices  from  January  onwards.  The 
countries  affected  most  by the  renewed  surge  of 
dollar  inflows  —  mainly  Germany,  Japan  and 
Switzerland  — adopted  measures  which  probably 
helped  to stem  the flow  for a time. 
5. On  21 March  1972,  the Council  also  adopted 
the directive  on regulating  international  capital  flows 
and neutralizing  their  undesirable  effects  on domestic 
liquidity  which  had  been  proposed  by  the 
Commission  on 23 June  1971  (1). The  directive  calls 
on the  Member  States  to strengthen  machinery 
already  available  to them  by creating  certain  specified 
instruments.  These  instruments  are to be used  by the 
national  authorities,  but the latter  must  bear  in mind 
the interests  of their  Community  partners. 
The monetary  events  in June  again  highlighted  the 
need  for effective  shielding  against  disruptive  capital 
movements,  and  a number  of  Member  States 
therefore  adopted,  strengthened  or began  studying 
(!) OJ No L 91, 18. 4. 1972,  p. 13. various  measures  in line  with  the  objectives  of the 
directive. 
6. With  a view  to more  effective  coordination  of 
the short-term  economic  policies,  a working  party 
was set up and  attached  to the Council,  comprising 
one representative  of the  responsible  Minister  or 
Ministers  in each  Member  State  and  one  Commission 
representative.  The  working  party's  purpose  is to 
ensure  a permanent  flow  of information  between  the 
Member  States  on their  short-term  economic  and 
financial  policies  and  the  coordination  of these 
policies  within  the guidelines  defined  by the Council. 
In addition,  the Commission  was  instructed  to table 
in the  Council  as soon  as possible  a proposed 
directive  designed  to promote  stability,  growth  and 
full employment  in the Community. 
7. Lastly,  the  resolution  of  21  March  1972 
confirmed  the instruction  set out in the resolution  of 
22 March  1971  calling  on the Monetary  Committee 
and the  Committee  of Governors  to submit  by 30 
June  1972  at latest  a report  on the organization,  the 
functions  and  the  statute  of a European  monetary 
cooperation  fund  which  would  later  tak&  its place  as 
part of a Community  organization  of the  central 
banks. 
Having  read  the  report  and  the  relevant  Opinions 
(see sec.  19),  the  finance  ministers  of the  enlarged 
Community  agreed,  on 12 September  1972  in Rome, 
to set  up the  fund  during  the  first  stage  of the 
economic  and  monetary  union,  and  to entrust  its 
management  to the  Committee  of Governors  of the 
central  banks,  under  general  economic  policy 
guidelines  adopted  by the Council. 
The ministers  agreed  that  the  European  monetary 
cooperation  fund  should  at the  outset,  have  the 
following  tasks: 
— concerted  action  between  central  banks  for  the 
purpose  of  narrowing  down  exchange  rate 
margins; 
— multilateralization  of  claims  and  liabilities, 
resulting  from  financing  in  Community 
currencies,  and  multilateralization  of intra-Com-
munity  settlements; 
— use  for this  purpose  of a European  monetary  unit 
of account; 
— management  of short-term  monetary  support 
between  the central  banks. 
In view  of the new  requirements,  it was  decided  that 
the very  short-term  facilities  deriving  from  the 
agreement  on narrower  margins  and  the  short-term 
monetary  support  would  be linked  up in the  fund 
through  new  machinery.  For  this  purpose,  there  is to 
No C 94/4 Official  Journal  of the European  Communities 9. 11.73 
be a technical  adjustment  of the short-term  support, 
but there  will  be no change  in the main  features:  in 
particular  the  consultation  procedures  will  not  be 
affected. 
8. The  ministerial  agreement  was  approved  in the 
declaration  adopted  at the  end  of the  Conference, 
held in Paris  on 19 and  20 October  1972,  by the 
heads  of state  or government  of the  member 
countries  of the enlarged  Community.  By confirming 
all parts  of the measures  adopted  by the Council  and 
by the  representatives  of the  Member  States  on 
22 March  1971  and  21 March  1972,  including  the 
principle  of parallel  progress  in the various  fields  of 
economic  and  monetary  union,  the heads  of state  or 
government  again  made  clear  on this  occasion  that 
the Member  States  are  determined  to build  up a 
definitive  economic  and  monetary  union.  The 
necessary  decisions  are  to be taken  during  1973  to 
enable  the  Community  to move  on to the  second 
stage  of the  economic  and  monetary  union  on 1 
January  1974,  with  a view  to its completion  by 31 
December  1980  at latest. The heads  of state  or government  also  stated  that 
fixed  but adjustable  parities  between  their  currencies 
were  indispensible  if the  union  was  to be achieved, 
and expressed  their  intention  to establish  within  the 
Community  defence  and  mutual  support  machinery 
enabling  the  Member  States  to ensure  compliance 
with  this  principle.  For  this  purpose,  they  decided 
that the European  monetary  cooperation  fund  must 
be set up before  1 April  1973  (1). In addition,  the 
Community  bodies  involved,  including  the Monetary 
Committee,  were  instructed  to  report  on  the 
adjustment  of the  short-term  monetary  support 
system  by 30 September  1973  and  on the  gradual 
pooling  of reserves  by 31 December  1973  (2). 
(') On  3 April  1973  the  Council  adopted  a regulation 
establishing  the  European  monetary  cooperation  fund 
(OJ No L 89, 5. 4. 1973,  p. 2). 
(2) The  two  dates  were  brought  forward  to 30 June  in 
connection  with  the  events  which  led  the  Council  to 
decide  early  in 1973  to speed  up the  implementation 
of the monetary  union. 
CHAPTER  II 
ECONOMIC  AND  MONETARY  DEVELOPMENTS  IN THE  ENLARGED  COMMUNITY 
9. This  chapter  is devoted  to an  outline  of 
short-term  economic  trends  and  of the  inflation 
problem,  covered  first  in the six countries  of the old 
Community  and  then  in the  three  prospective 
member  countries  (x). 
Although  only  a temporary  respite  was  achieved  as a 
result  of the general  realignment  of exchange  rates  in 
December  1971,  the decisions  taken  helped  to create 
better  conditions  for the expansion  of trade,  which 
was also  spurred  on by faster  growth  in a number  of 
leading  industrialized  countries.  Business  was 
booming  in the United  States  in particular,  where  the 
upsurge  was  associated  with  a slower  rate  of 
inflation.  Real  GNP  growth  was  more  than  6 % in 
1972,  compared  with  2-7  % in 1971,  while  the 
implicit  GNP  price  index  increased  by only  3-5  %, 
compared  with  4-7 %. 
10. In  the Community,  the rate  of growth  rose  a 
little  in the first  months  of the year  in almost  all the 
countries,  partly  as a result  of fortuitous  factors 
(*) These  trends  are  illustrated  by statistical  tables  given 
in Annex  II. (notably  the exceptionally  warm  weather),  but  then 
grew  more  moderate.  However,  there  was  evidence  in 
the later  months  of the  year  that  growth  was 
gathering  momentum  once  again.  None  the less,  the 
increase  in volume  in the gross  Community  product 
was scarcely  higher  than  the  rate  achieved  in 
1971  (3-7%,  compared  with  3-4%)  (see  Table  1). 
The figure  is the  composite  measure  of virtually 
unchanged  growth  in the  Netherlands,  a slight 
increase  in Germany,  Belgium  and  France,  and,  in 
Italy  and  Luxembourg,  a substantial  increase  over  the 
low rates  recorded  in 1971. 
In most  of the countries,  export  demand  was  the key 
to overall  demand  trends  in the  early  months:  in 
Italy  and  in Luxembourg,  indeed,  this  was  the  case 
throughout  the year. 
However,  domestic  demand  played  a steadily  more 
important  role  as a growth  factor:  stimulated  mainly 
by the  sharp  increase  in available  incomes  of 
households,  private  consumers'  expenditure 
expanded  vigorously.  On the other  hand,  the trend  of 
investment  by firms  lacked  vigour  in almost  all the 
countries  for  most  of the  year:  in Italy  and  the 
Netherlands,  there  was  an actual  decline. 
9. 11.73 Official  Journal  of the European  Communities No C 94/5 
11. The  strains  on the  employment  markets  which 
were  still  discernible  at the  beginning  of the  year  in 
most  of the  member  countries  gradually  eased.  None 
the less,  in Germany,  and,  to a lesser  extent,  in 
France,  the increase  in the number  of foreign  workers 
did not  suffice  to eliminate  the  manpower  shortage. 
Despite  the  revival  of  economic  activity,  the 
unemployment  rate  was  higher,  at the  end  of 1972, 
than  in the  previous  year,  in most  of the  countries. 
The change  in the  pattern  is probably  largely  due  to 
structural  factors,  such  as unemployment  among 
school-leavers,  insufficient  labour  mobility  from  area 
to area,  and  the  shortage  of skilled  workers,  which  is 
partly  a result  of the  difficulty  of adapting  worker 
skills  to technical  progress. 
12. Despite  the  moderate  expansion  of economic 
activity,  the  rate  of  inflation  remained  high 
throughout  the  year:  early  in the  autumn,  it actually 
gathered  momentum  in all the countries. 
In previous  years,  economic  relations  with  other 
countries  had  helped  to aggravate  inflationary  pres-
sure in the  member  countries:  the  increase  in the 
prices  of imported  raw  materials  had  this  effect  in 
1972.  For  some  time,  however,  internal  causes  have 
been  steadily  gaining  in importance  in the  group  of 
factors  forcing  prices  up within  the  Community.  In 
this connection,  the  shortage  of certain  agricultural 
items  and  the  persisting  upward  pressure  of wage 
costs,  the  increase  in which  was  running  well  ahead 
of productivity  gains  in all  the  countries,  were 
particularly  important.  All  in all,  the  increase  in the 
Community's  consumer  prices  was  even  sharper  than 
in 1971  (see  Table  No 2). 
13. Economic  trends  in the  prospective  member 
countries  shared  common  features  with  those  in the 
Community:  heavy  inflationary  strain  and  moderate 
growth,  except  in Denmark,  where  neither  technical 
capacities  nor  labour  resources  were  fully  utilized. 
However,  unemployment  declined  in the  second  half 
of the  year  in the  United  Kingdom  and  in Denmark 
(in Ireland,  it showed  a slight  further  increase). 
14. After  lively  expansion  in the  first  part  of the 
year,  the  member  countries'  exports  to non-member 
countries  slowed  down.  There  was  another  spurt  in 
the later  months  of the  year  to give  a total  rate  of 
growth  for  1972  of 11-9  %, the  increase  of imports 
being  6-9 %. Given  these  trends  and  the improvement 
in the  terms  of trade  for  the  member  countries 
resulting  from  the  exchange  rate  realignment,  the 
Community's  merchandize  trade  balance  showed  a 
surplus  of about  $ 4 700  million  compared  with $ 1 500 million  in 1971  (cif-fob,  on the  basis  of 
customs  returns). 
The external  payments  situations  of  the  three 
prospective  members  developed  along  divergent  lines. 
For Ireland  and  particularly  for Denmark,  the current 
accounts  closed  with  smaller  deficits  than  for  1971, 
but there  was  a sharp  deterioration  in the  United 
Kingdom's  current  account  because  of poor  external 
trading  results:  the  current  account  surplus  of 
£ 1 051  million  for  1971  dwindled  to practically 
nothing  in 1972. 
15. Despite  the  increase  in  the  deficit  on 
unrequited  transfers,  the  surplus  on  the  'old' 
Community's  current  account  showed  a further 
increase.  However,  because  of  relatively  calm 
conditions  on the  exchanges,  net  imports  of long-
and short-term  capital  were  appreciably  lower  than 
in 1971,  so that  the surplus  on the  overall  balance  of 
payments  declined  from  $ 8 000  million  to $ 5 500 
million.  The  surplus  was  reflected  in an increase  in 
the monetary  authorities'  exchange  assets  (gold  and 
foreign  exchange  reserves,  IMF  position,  SDRs)  of 
$ 6 700  million  and  a deterioration  in the  banks'  net 
short-term  external  position  of $ 1 200  million  (see 
Table  No 3 for the trend  in the external  situation  by 
country). 
Capital  movement  trends  played  a key  role  in 1972  in 
the external  situation  of the  United  States  as well: 
this country's  deficit  (official  settlements  was  cut 
from  $ 30  400  million  for  1971  to  $ 10  300 
million.  What  happened  was  that  a very  heavy 
outflow  of short-term  capital  in 1971  gave  way  to a 
modest  movement  in the  other  direction  in 1972. 
There  was  also  a decline  in the  deficit  on long-term 
capital,  this  being  the  result  of a decline  in direct 
American  investment  abroad  and  of an increase  in 
foreign  portfolio  investment  in the United  States.  On 
the other  hand,  with  imports,  particularly  from  Japan 
and Canada,  soaring,  the  merchandize  trade  balance 
closed  with  a record  deficit  of $ 6 800  million 
(against  $ 2 700  million  in 1971):  the  composite 
result  was  that  the  deficit  on the  basic  balance  came 
very  close  to that  recorded  for 1971. 
16. In  the  early  part  of the  year,  the authorities  in 
all the  member  countries  felt  that  there  was  little 
cause  to change  the  economic  policies  (which  were 
expansionary,  though  not  to the  same  extent  in each 
country)  which  they  had  been  conducting  since  the 
second  half  of 1971,  the  aim  being  to forestall  any 
appreciable  decline  in economic  activity.  However,  as 
the recovery  steadily  gained  strength  and  the  upward 
price  movement  gathered  momentum,  official 
No C 94/6 Official  Journal  of the European  Communities 9.11.73 
measures  gradually  became  more  restrictive  in those 
countries  nearest  full  employment.  "Where  public 
finance  policy  failed  to help  curb  inflation,  monetary 
and credit  policy  was  the  main  weapon  used. 
Measures  were  taken  to curtail  the rapid  growth  of 
the money  supply  — usually  due  to the  excessive 
expansion  of bank  credit  — which  had  accompanied 
the increase  in inflationary  strain  (see  Tables  4 and 5). 
A number  of countries  also  strengthened  policy  by 
direct  price  and  income  controls. 
17. The  Community  authorities  were  well  aware 
of the  close  links  of independence  which  have  now 
developed  between  economic  trends  in  the 
Community  countries  and  of the  threat  which 
continuing  inflationary  pressure  represents  for  the 
harmonious  working  of the  Community.  They 
therefore  decided  to support  national  measures  by 
concerted  action. 
Thus,  on 5 December  1972,  the Council  adopted  a 
resolution,  based  on a Commission  draft,  on inflation 
control  (1), under  which  the  Member  States  are  to 
endeavour  to reduce  the rate  of increase  in consumer 
prices  to 4 % between  December  1972  and  the end  of 
1973.  The  new  Member  States  accepted  this  target 
and declared  themselves  willing  to implement  the 
measures  required,  subject  to adjustments  necessary 
to their  respective  situations. 
The Council  still  regards  monetary  policy  as having  a 
key role  to play  in the overall  measures  taken  in the 
various  fields  of economic  policy  to achieve  the 
inflation  control  objective.  The  resolution  includes  a 
commitment  for  the  Member  States  to slow  down 
gradually  the  rate  of growth  of the  money  supply 
(money  and  near-money)  until  it matches  that  of real 
GNP  plus  a 'normative  rate  of increase  as regards 
prices'  determined  in relation  to overall  economic 
policy  goals,  account  being  also  taken  of the 
structural  development  of the  relationship  between 
money  supply  and  national  product.  This  objective  is 
to be achieved  by the  end  of 1974.  The  resolution 
also designates  the  range  of instruments  which 
should  be available  to the Member  States  if they  are 
to be able  to take  prompt  action  on interest  rates, liquidity,  and,  as necessary,  the  volume  of credit. 
Lastly,  to prevent  the expected  impact  of the use  of 
these  instruments  being  offset  by unwanted  inflows 
of capital  from  outside,  the  Member  States  were 
invited  to strengthen  their  control  machinery  in this 
area,  as appropriate.  This  was  done  early  in 1973. 
18. Since  the  adoption  of this  resolution,  many 
measures  have  been  taken  or strengthened  in the 
countries  of the enlarged  Community,  particularly  in 
the area  of monetary  policy.  In all the countries,  the 
refinancing  rates  charged  by the  central  banks  have 
been  raised.  For example,  by the end  of the year,  the 
discount  rate  — usually  rising  — was  9 % in the 
United  Kingdom,  8 % in Ireland,  7-5  % in France, 
7 % in Denmark,  5 % in Belgium,  4-5  % in the 
Republic  of Germany  and  4 % in Italy  and  in the 
Netherlands  (see  Table  No  6).  The  upward 
movement  in interest  rates  was  also  lively  on the 
money  markets  and  substantial  (though  not  to the 
same  degree  in each  country)  on the capital  markets 
of almost  all the nine  countries. 
Action  to slow  down  the growth  in the money  supply 
was taken  and  measures  already  in force  were 
tightened  up by the  countries  which  had  already 
introduced  restrictive  machinery:  in Germany,  the 
discount  ceilings  for  the  credit  institutions  were 
lowered  several  times.  In France,  the  compulsory 
reserve  requirements  were  made  more  stringent,  partly 
by an increase  from  15 to 33 % in the reserve  ratio 
applying  to incremental  credit,  and  the  terms  for 
personal  loans  and  the  financing  of housing  were 
made  more  severe.  In Belgium,  the  gentlemen's 
agreement  between  the  Banque  Nationale  and  the 
banks  on the  'sterilization'  of funds  was  extended 
and its  scope  widened.  In  Luxembourg,  the 
authorities  introduced  quantitative  restriction  of 
consumer  credit.  The  Bank  of England  used  the 
'special  deposits'  technique.  The  central  bank 
authorities  in  Ireland  introduced  a liquidity 
coefficients  system  to facilitate  credit  control,  and  the 
central  bank  of Denmark  extended  credit  ceiling 
restrictions  and  increased  the various  ratios  in force 
governing  the  commercial  banks'  indebtedness  with 
the central  bank. 
(») OJ No C 133,  23. 12. 1972,  p. 12. 
9.11.73 Official  Journal  of the European  Communities No C 94/7 
CHAPTER  III 
THE  ACTIVITIES  OF  THE  MONETARY  COMMITTEE 
19. As  stated  in the  Introduction,  the Committee 
was mainly  concerned  with  work  towards  the 
economic  and  monetary  union  and  with  the reform 
of the international  monetary  system. 
From  the  beginning  of the  year,  the  Commitiee 
assisted  the  Commission  in the  drafting  of the 
proposed  resolution  which  was  adopted  by  the 
Council  on 21 March  1972.  As already  reported,  the 
resolution  invited  the  Committee  to draft  a report 
with  the  Committee  of  Governors  on  the 
organization,  the  functions  and  the  statute  of the 
European  monetary  cooperation  fund.  On the  basis 
of a report  drafted  by a joint  working  party  of the 
two Committees,  the latter  submitted  Opinions  to the 
Council  and  the Commission  on 5 September  and  11 
September  1972  respectively  (*), and  the  finance 
ministers  drew  heavily  on  these  Opinions  in 
establishing  the main  features  of the fund  when  they 
met in Rome  (see  sec.  7). 
20. The  Committee  had  been  asked  in 1971  to 
advise  on the drafting  of the directive  for the control 
of international  financial  flows,  a directive  which  was 
also adopted  by the  Council  on 21 March  1972.  It 
provides  that  the  Committee  will  assist  the 
Commission  in the maintenance  of close  coordination 
between  the  policies  pursued  in this  area  by the 
relevant  authorities  of the  Member  States.  For  this 
purpose,  the  Committee  set up an ad hoc  working 
party  in March  to list  all the  instruments,  whether 
provided  for or not  by the directive,  available  to the 
Member  States.  Subsequently,  in  October,  the 
Committee  set up a new  working  party  to carry  out a 
collective  scrutiny  of the use  of the instruments  and 
of those  instruments  which  the Member  States  might 
establish  in the future. 
21. As  part  of its  preparatory  work  on  the 
Commission's  inflation  control  proposals  (see  sec. 
17), the  Committee  examined,  on the  basis  of a 
report  drafted  by its alternates,  monetary  measures 
suitable  for inclusion  in a comprehensive  programme. 
However,  it ascertained  that  the  appreciable 
differences  between  the  current  economic  situations 
in the various  member  countries  and  in the degree  of importance  attached  to the  correlation  between  the 
money  supply  changes  and  price  trends  meant  that 
the achievement  of such  an objective  would  involve 
differing  degrees  of restraint  and  differing  timings  in 
the various  countries.  Moreover,  the  instruments 
were  not the same  in the various  countries  and  were 
not used  in the same  ways,  so that  the Committee  felt 
that the  countries  should  be free  in their  choice  of 
measures,  though  it recognized  that  it would  be in 
the interests  of the Community  countries  as a whole 
to supplement  and  harmonize  these  instruments  at 
some  time  in the future. 
22. The  Committee  kept  the  monetary  and 
financial  situations  of the  Member  States  under 
review:  it held  several  consultation  meetings  — for 
example,  further  to the decision  taken  by the British 
government  in June. 
It also  adopted  two  Opinions  (2) for submission  to 
the Council  and  to the  Commission:  the  first 
concerned  the rate  of conversion  of sterling  and  the 
Irish  pound  into  units  of account  or into  any  other 
currency  for transactions  to be carried  out under  the 
common  agricultural  policy;  the  second  concerned 
problems  deriving  from  the Commission's  proposed 
Council  directive  for the  elimination  of restrictions 
on freedom  of establishment  and  freedom  to supply 
services  in  connection  with  'self-employment' 
activities  of banks  and  other  financial  establishments. 
The second  Opinion,  drafted  on the  basis  of the 
work  of an ad hoc  group,  led to the establishment  of 
a list of banking  services  in the directive  now  being 
adopted  by the Council.  Lastly,  in accordance  with 
the Council  resolution  of 21  March  1972,  the 
Committee  was  consulted  by the  Commission  on a 
draft  directive  designed  to promote  stability,  growth 
and full  employment  in the Community. 
23. The  working  party  on  securities  markets 
carried  out its regular  examinations  of trends  on the 
capital  markets  in the member  countries  and  on the 
international  markets.  It also  endeavoured  to 
ascertain  what  facilities  would  enable  the 
coordination  of the Member  States'  policies  on their 
(x) The  Monetary  Committee's  Opinion  is given  in 
Annex  III. (2) These  Opinions  are annexed  (Annex  III). 
No C 94/8 Official  Journal  of the  European  Communities 9.11.  73 
capital  markets  to be strengthened.  It reported  on its 
work  to  the  Committee,  which  approved  the 
findings  (1). 
24. As  in previous  years,  the  Committee  spent  a 
large  proportion  of  its  time  on  international 
monetary  problems.  It  discussed  methods  of 
establishing  a  common  standpoint  on  the 
fundamental  objectives  of  the  reform  of  the 
international  monetary  system,  the  establishment  of 
the Committee  of the  Twenty  as a new  forum  for 
negotiations,  and  the  possible  activation  of special 
drawing  rights  for the second  period.  Its findings  as 
to the fundamental  objectives  were  used  as a basis  for 
the agreement  reached  at the  conference  which  the 
finance  ministers  of the  future  Community  held  in 
London  on 17 and  18 July  1972.  The  agreement, 
confirmed  at the Summit  Conference  held  in Paris  on 
19 and  20  October,  is based  on  the  following 
principles:  fixed  but  adjustable  parities;  general 
convertibility  of currencies;  effective  international 
regulation  of the  world  supply  of liquidity;  a 
reduction  in the role  of national  currencies  as reserve 
instruments;  effective  and  equitable  functioning  of 
the adjustment  process;  equal  rights  and  duties  for all 
participants  in the  system;  the  need  to lessen  the 
unstabilizing  effects  of short-term  capital  movements; 
the taking  into  account  of the  interests  of the 
developing  countries. 
These  objectives  were  recalled  by the Member  States 
at the annual  meeting  of the  International  Monetary 
Fund  held  in Washington  from  25 to 29 September 
(*) This  report  is given  in Annex  V. 1972.  Though  not  necessarily  endorsing  all of them, 
all the  participants  at this  meeting  recognized  the 
need  for  a reform  of the  international  monetary 
system  and  declared  their  readiness  to open  effective 
negotiations. 
25. In  view  of the  value  of establishing  a single 
viewpoint,  as among  the  nine  countries,  for  the 
negotiations,  the  Committee  decided  to  hold 
systematic  concertation  meetings  concerning  the 
agenda  items  for the  meetings  of the  alternates  and 
the members  of the  Committee  of Twenty,  which  is 
studying  all aspects  of the reform  problem. 
For this  reason  and  in implementation  of the  study 
tasks  entrusted  to it by the  London  conference  of 
finance  ministers,  the  Committee  devoted  a large 
number  of meetings  in the latter  months  of 1972  and 
the early  months  of 1973  to examining  problems 
connected  with  the  choice  of the  'numeraire'  for  che 
new system  and  with  the  unfreezing  of gold,  with 
settlement  in reserve  assets  and  the  consolidation  of 
dollar  balances,  with  the control  of short-term  capital 
movements,  with  the adjustment  process  and  with  the 
utilization  in this  context  of quantitative  indicators. 
On this  last  problem,  the  Committee  succeeded  in 
defining  the outline  of a single  position  which  was 
recorded  in a memorandum  transmitted  to the 
alternates  of the  Committee  of Twenty  (2). This 
position  was  also  explained  by the  current  chairman 
of the  Council  of the  European  Communities  at the 
ministerial  meeting  of the Committee  of Twenty  held 
in Washington  on 26 and  27 March  1973. 
(2) Attached  as Annex  IV. 
ANNEX  I 
THE  COMMITTEE:  MEMBERS  AND  ALTERNATES 
Chairman: 
B. Clappier  Sous-gouverneur  de la Banque  de France  (Paris) 
Vice-Chairman: 
Dr O. Emminger  Vizeprasident  der Deutschen  Bundesbank  (Frankfurt) 
Prof Dr C. J. Oort  Thesaurier-generaal  bij  het  Ministerie  van  Financien  (The 
Hague) 
9.11.73 Official  Journal  of the European  Communities No C 94/9 
Other  Members: 
F. Boyer  de la Giroday 
M. D'Haeze 
C. de Strycker 
Dr W. Hankel 
until  14 May  1972 
Dr D. Hiss 
since  17 May  1972 
C. Lamboray 
Mr A. W. R. Baron  Mackay 
Prof G. Miconi 
Dott  U. Mosca 
Dott  R. Ossola 
C. Pierre-Brossolette 
J. Schmitz 
Chairman  of the alternates: 
Prof Dr J. Mertens  de Wilmars 
Other  alternates: 
J. de Larosiere 
Drs G. de Man 
A. Dondelinger 
Dott  L. Fronzoni 
Dott  D. Gagliardi 
G. Jennemann 
H. Koch 
M. Meulemans 
Dr B. Molitor 
M. Schmit 
Drs A. Szasz 
Dr G. Willmann 
G. Wissels 
Secretariat: 
G. Morelli 
G. Lermen Director  in the  Directorate-General  for  Economic  and 
Financial  Affairs,  Commission  of the  European  Communities 
(Brussels) 
Directeur  general  de l'administration  de la tresorerie  et de la 
dette  publique  — Ministere  de finances  (Brussels) 
Vice-gouverneur  de  la  Banque  nationale  de  Belgique 
(Brussels) 
Ministerialdirektor  — Bundesministerium  fur  Wirtschaft  und 
Finanzen  (Bonn) 
Ministerialdirektor  —  Bundesministerium  der  Finanzen 
(Bonn) 
Directeur  adjoint  de  la  Caisse  d'epargne  de  l'Etat 
(Luxembourg) 
Directeur  der Nederlandsche  Bank  NV.  (Amsterdam) 
Direttore  generale  del tesoro  — Ministero  del Tesoro  (Rome) 
Director-General  for  Economic  and  Financial  Affairs, 
Commission  of the European  Communities  (Brussels) 
Yicedirettore  generale  della  Banca  d'ltalia  (Rome) 
Directeur  du tresor  au ministere  de l'economie  et des finances 
(Paris) 
Conseiller  de  gouvernement  au  ministere  des  finances 
(Luxembourg) 
Conseiller  economique  de la Banque  nationale  de Belgique 
(Brussels) 
Chef  du service  des  affaires  internationales  a la direction  du 
tresor  — Ministere  de l'economie  et des finances  (Paris) 
Ministerie  van  Financien  (The  Hague) 
Commissaire  au controle  des banques  (Luxembourg) 
SADIBA  (Perugia) 
Ispettore  — Ministero  del commercio  estero  (Rome) 
Bankdirektor  — Deutsche  Bundesbank  (Frankfurt) 
Directeur  general  des etudes  a la Banque  de France  (Paris) 
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  Communities 
(Brussels) 
Inspecteur  des finances  (Luxembourg) 
Onderdirecteur  van  de  Nederlandsche  Bank  NV 
(Amsterdam) 
Regierungsdirektorin  —  Bundesministerium  der  Finanzen 
(Bonn) 
Director  in  the  Directorate-General  for  Economic  and 
Financial  Affairs,  Commission  of the  European  Communities 
(Brussels) 
No C 94/10 Official  Journal  of the European  Communities 9.11.  73 
ANNEX  II 
TABLE  1 
EXPANSION  OF GROSS  NATIONAL  PRODUCT  (VOLUME) 
(in %) 
1971/1970 1972/1971 
Federal  Republic  of Germany 2-7 2-9 
Belgium 3-7 3-8 
France 5-0 5-3 
Italy 1-4 2-9 
Luxembourg 0-7 3-5 
Netherlands 4-3 4-2 
Community  of the Six 3-4 3-7 
Denmark 4-3 51 
Ireland 3-0 3-0 
United  Kingdom 1-2 2-4 
TABLE  2 
CONSUMER  PRICE  INCREASES 
(in %) 
December  1971 
December  1970 December  1972 
December  1971 
Federal  Republic  of Germany 5-8 65 
Belgium 5-6 6-4 
France 6-0 6-9 
Italy 4-7 7-4 
Luxembourg 5-4 59 
Netherlands 8-4 7-9 
Denmark 51 7-3 
Ireland 8-6 (*) 8-2 f) 
United  Kingdom 90 7-7 
(l) November/November. 
9.11.73 Official  Journal  of the European  Communities No C 94/11 
TABLE  3 
BALANCE  OF PAYMENTS (in millions  of European  u. a.) 
Current 
payments 
i1) Long-term 
capital Short-term 
capital 
<2) Allocation 
of SDRs Total 
Federal  Republic 
of Germany 
1971 310 1786 2 053 171 + 4 320 
1972 378 3 719 507 170 + 4 774 
BLEU 
1971 830 — 226 — 96 72 + 580 
1972 1023 — 454 — 179 71 + 461 
France 
1971 525 3 1334 161 + 2 023 
1972 525 — 725 530 160 + 490 
Italy 
1971 789 128 — 60 107 + 964 
1972  (3) — 22 — 929 10 106 — 835 
Netherlands 
1971 128 336 61 75 + 600 
1972 1 205 — 718 355 74 + 916 
Denmark 
1971 — 420 + 400 + 103 28 + ill 
1972 — 92 + 380 — 165 28 + 151 
Ireland 
1971 — 168 + 374 12 + 268 
1972 — 144 + 254 12 + 122 
United  Kingdom 
1971 2 523 5 224 300 + 8 047 
1972 43 3 078 297 — 2 738 
f1) On  a transactions  basis  for FRG,  France,  Denmark,  Ireland  and  the  United  Kingdom;  settlements  for  BLEU,  Italy 
and the Netherlands. 
(a) Including  residual  items;  not  including  bank  operations  in the case  of the countries  of the old Community. 
(3) December  1971  until  November  1972. 
TABLE  4 
EXPANSION  OF MONEY  SUPPLY (in %) 
December  1971 
December  1970 December  1972 
December  1971  (*) 
M 1 M 2 M 1 M 2 
Federal  Republic  of Germany 12-3 14-5 14-6 17-0 
BLEU 10-1 12-3 14-0 161 
France 111 17-6 15-4 (2) 18-5 (2) 
Italy 18-8 17-3 19-1 18-9 
Netherlands 15-0 8-1 17-6 11-8 
Denmark 10-0 9-6 17-1 15-1 
Ireland (3) (3) 16-0 14-2 
United  Kingdom 10-9 13-0 (4) 13-6 25-8 (*) 
M 1 = Money  supply. 
M 2 = Money  supply  plus  near-money  or secondary  liquidity. 
(x) November  1972/November  1971,  Italy. 
(3) Provisional  figures. 
(3) Figures  not available  owing  to a strike  in the banking  sector. 
(4) M 3. 
No C 94/12 Official  Journal  of the European  Communities 9.11.73 
TABLE  5 
EXPANSION  OF BANK  LENDING  TO FIRMS  AND  INDIVIDUALS 
(in %) 
December  1971 
December  1970 December  1972 
December  1971 
Federal  Republic  of Germany + 13-8 + 15-9  -
France + 20-2 + 22-5 
Italy (2) + 12-6 + 16-1 
Netherlands + 14-4 + 16-1 
Belgium  (x) + 15-4 + 18-6 
Luxembourg  (*) + 31-8 + 36-6 
Denmark + 4-4 + 12-3 
Ireland (2) + 33-6 
United  Kingdom + 17-3 + 51-11 
(x) September  1972. 
(2) Bank  employees'  strike. 
TABLE  6 
BANK  RATE 
(in %j 
31 December 
1971 31 March 
1972 30 June 
1972 30 September 
1972 31 December 
1972 
Federal  Republic 
of Germany 4 3 3 3 4Vz 
BLEU 5Vi 4 4 4 5 
France 6Vz 6 5% 53/4 7Vi 
Italy 4Vi 4 4 4 4 
Netherlands 5 4 4 3 4 
Denmark 7Vi 7 8 8 7 
Ireland 413/16 413/16 73/16 8 
United  Kingdom 5 5 6 6 9 
9.11.  73 Official  Journal  of the European  Communities No C 94/13 
ANNEX  111 
Brussels,  17 January  1972 
OPINION  OF  THE  MONETARY  COMMITTEE 
In accordance  with  instructions  given  by the  Council  at its session  of 8 and  9 June  1970,  the 
Committee  has  examined  certain  problems  connected  with  the  Commission's  proposed  Council 
directive  on the  elimination  of restrictions  on freedom  of establishment  and  freedom  to supply 
services  in respect  of the 'self-employment'  activities  of banks  and  other  financial  establishments. 
As a result  of this  discussion,  the Committee  has  ascertained  that  freedom  of establishment  and 
freedom  to supply  services  not  connected  with  capital  movements  raise  no  credit-policy 
problems  for the Member  States. 
With  regard  to services  connected  with  capital  movements,  the Committee  feels  that  the Council 
directive  should  apply  at this  stage  solely  to the services  connected  with  the transactions  in lists 
A and  B annexed  to the  first  and  second  directives  on the  liberalization  of capital  movements. 
The Committee  believes  that  the  draft  directive  should  be accompanied  by the  attached  list  of 
services  connected  with  the transactions. 
Canvassing  also  raises  a problem,  which  is not  a monetary  policy  problem,  but  is connected 
with  the  protection  of the  saver.  In so far as canvassing  has  monetary  implications,  a technical 
solution  should  be found  establishing  conditions  for non-residents  matching  those  for residents. 
Lastly,  the  need  to prevent  the  monetary  policy  of one  country  being  neutralized  by heavy 
capital  counter-movements  has  led  the  Committee  to propose  that  a clause  be included 
stipulating  that  the  directive  cannot  be used  in such  a way  as to hamper  cooperation  between 
monetary  authorities  of the  Member  States. 
ANNEX 
Table  of banking  services  corresponding  to the capital  movements  mentioned  in lists  A and  B of 
Annex  I of the  first  Directive  of 11 May  1960,  amplified  and  amended  by the  second  Directive 
of 18 December  1962  (*) 
LIST  A 
Direct  investments 
— Commercial  and  financial  information  (commercial  prospecting,  information  on  the 
customer's  solvency,  statistics,  forwarding  of accounting  information), 
— Assistance  and  representation  in relations  with  the  authorities  (administrative  and  legal)  and 
other  agencies, 
— Consultancy  and  assistance  to firms  with  a view  to mergers  (search  for  possible  partners 
abroad,  expert  advice,  etc), 
(1) The  headings  underligned  correspond  to those  in lists  A and  B of the  Directives  on  capital  movements 
mentioned. 
No C 94/14 Official  Journal  of the European  Communities 9.11.73 
— Assistance  in large  acquisitions  of shareholdings  (eg for takeover  bids)  with  a view  to 
acquiring  control  of a firm  (stock  exchange  formalities,  assessments  of asset  values  and 
financial  assessments,  etc), 
— Physical  exchange  of securities  (x), 
— Custody  of securities, 
— Issue  of securities  assigned  to shareholders. 
Liquidation  of direct  investments 
— Commercial  and financial  information  (commercial  prospecting,  etc), 
— Assistance  and representation  in relations  with  the authorities  (administrative  and legal)  and 
other  agencies, 
— Consultancy  and assistance  to firms  with  a view  to facilitating  liquidation  operations, 
— Assistance  in large  sales  of shares, 
— Physical  exchange  of securities, 
— Custody  of securities. 
Real estate  investments  and  their  liquidation 
— Commercial  and financial  information, 
— Assistance  and representation  in relations  with  the authorities  (administrative  and legal)  and 
other  agencies, 
— Consultancy  and assistance  to firms  with  a view  to facilitating  liquidation  operations, 
— Asset  management  (assistance  and  representation  for the maintenance  of the asset,  letting, 
etc), 
— Assistance  for  the  constitution  and  the  mobilization  (if appropriate)  of sureties  and 
guarantees  of all kinds  not granted  by a bank. 
Personal  capital  movements 
— Management  of bequeathed  assets  (payment  of taxes,  search  for missing  persons,  etc). 
Granting  and  repayment  of short-  and  medium-term  credits  related  to commercial  transactions 
or to the supply  of services  in which  a resident  is participating 
— Assistance  and representation  in relations  with  the authorities  (administrative  and legal)  and 
other  agencies, 
— Consultancy  and assistance  to firms  with  a view  to facilitating  liquidation  operations, 
— Consultancy  in matters  of financing  of undertakings, 
— Debt  recovery, 
— Cashing  of securities, 
— Domiciliation  of securities. 
— Management  of documentary  credits, 
— Assistance  for  the  constitution  and  the  mobilization  (if appropriate)  of sureties  and 
guarantees  of all kinds  not granted  by a bank, 
(i) The  securities  are  defined  in the  explanatory  notes  annexed  to the  first  Directive  for  the  implementation  of 
Article  67. The  definition  has  been  followed  in this  table. 
9.11.73 Official  Journal  of the European  Communities No C 94/15 
— Blocking  of types  of security  belonging  to a customer  and  guaranteeing  an obligation  of this 
customer  with  regard  to a third  party, 
— Canvassing  for third  parties, 
— Services  connected  with  a factoring  operation. 
Guarantees  of existing  debts,  other  guarantees  and  pledges  and  transfers  connected  with  them 
(sureties  and guarantees  granted  by a bank) 
Estate  duties 
— Tax  information, 
— Fiscal  guarantees. 
Other  list A capital  transactions 
The corresponding  bank  transactions  are in fact  transfer  payments  only. 
LIST  B 
Operations  in securities  dealt  in on a stock  exchange,  excluding  units  of unit  trusts 
— Assistance  for the issue  of bearer  certificates  representing  securities  previously  issued  and 
dealt  in on a stock  exchange, 
— Formalities  for  securities  (stamping,  renewal  of coupon  sheets,  exchanges,  renewal, 
regrouping,  division,  destruction), 
— Financial  service  (payment  of coupons,  reimbursement  of securities,  assistance  for  the 
exercise  of drawing  and subscription  rights,  etc), 
— Financial  information  (current  information,  analysis,  etc), 
— Advice  for investment  in stock  exchange  securities  (*), 
— Management  of a portfolio  of stock  exchange  securities  (1), 
— Acceptance  and  execution  of instructions  for the exercise  of the rights  of bearers  of stock 
exchange  securities  (eg representation  at shareholders'  meetings  and before  the courts), 
— Custody  of securities, 
— Conversion  of securities, 
— Assistance  for operations  connected  with  the stock  exchange  quotation  of securities  assigned 
to the holders  of stock  exchange  securities, 
— Canvassing  for third  parties  in respect  of stock  exchange  securities,  search  for a party 
contracting  in his own  name  for the acquisition  or sale  of stock  exchange  securities, 
— Operation  as offsetting  fund. 
(i) These  services  concern  both  individuals  and  institutional  investors. 
No C 94/16 Official  Journal  of the European  Communities 9. 11. 73 
Brussels,  12 July  1972 
OPINION  TO  THE  COUNCIL  AND  THE  COMMISSION 
Article  2 of Regulation  No  129  of 23 October  1962  provides  that,  for  the  conversion  of any 
currency  into  another  currency  for operations  to be carried  out  under  the common  agricultural 
policy,  the  exchange  rate  to be applied  will  be that  which  corresponds  to the  par  value 
communicated  to the IMF. 
Further  to the  decision  taken  by the  British  and  Irish  authorities  to discontinue  for the  time 
being  compliance  with  the  fluctuation  limits  provided  for in current  international  agreements, 
the Committee  is of the opinion  that,  pursuant  to Article  3 of the same  Regulation,  the value  of 
sums  denominated  in sterling  or in Irish  pounds,  should  in future,  for  the  purposes  of 
conversion  into  units  of account  or into  any  other  currency,  be calculated  by reference  to their 
market  rates  in terms  of dollars. 
Brussels,  5 September  1972 
OPINION  DELIVERED  TO  THE  COUNCIL  AND  TO  THE  COMMISSION 
In the Resolutions  of the  Council  and  the  representatives 
of the  Governments  of the  Member  States  on 22 March 
1971  and  21 March  1972,  the  Monetary  Committee  and 
the Committee  of Governors  of Central  Banks  were  asked 
to present  a report  on the  organization,  functions  and 
articles  of a European  Monetary  Cooperation  Fund. 
Acting  on these  terms  of reference,  the two  Committees 
set up a joint  group  of experts  which,  on 1 June  1972, 
presented  a report,  enclosed  with  the  present  Opinion  as 
an annex,  on the basic  technical  aspects  of the problem. 
At its sessions  of 11 July  and  5 September  1972,  the 
Monetary  Committee  examined  this  report  and 
concentrated  its discussions  on the  fundamental  options 
open  in the matter. 
I. Questions  of principle 
The Committee  feels  that  the  creation  of a Fund  is just 
one of the  measures  envisaged  in the Council  Resolution 
of 21 March  1972  on the  establishment  by stages  of 
economic  and  monetary  union,  the  others  being: 
coordination  of monetary  policies,  increased  convergence 
of economic  policies,  adoption  of appropriate  measures  in 
the fields  of  regional  and  structural  policy,  tax 
harmonization  gradual  development  of a capital  market, 
narrowing  of margins,  regulation  of capital  movements. 
The Committee  takes  the  view  that  it will  be absolutely 
necessary  in an ultimate  stage  to establish  a European 
system  of central  banks  and  to pool  monetary  reserves  if 
economic  and  monetary  union  is to be achieved.  The 
creation  of a Fund  may  be considered  as an initial 
contribution  towards  this  objective,  and  any  assessment  of 
its value  should  be made  in the light  of the contribution  it 
represents. One purpose  of such  a Fund,  at all events,  would  be to 
facilitate  the  settlement  between  partners  of positions 
resulting  from  interventions  in Community  currencies  in 
connection  with  the narrowing  of margins. 
Over  and  above  this  objective,  some  members  of the 
Committee  feel  that  the  Fund  should  organize  mutual 
support  of the  member  countries'  currencies,  and  ensure 
that their  reserves  are  better  used,  by supplying  the 
member  countries  with  a  sufficient  volume  of 
unconditional  credits  to  finance  reversible  capital 
movements,  without,  however,  slackening  balance-of-pay-
ments  discipline.  This  approach  would  also  highlight  the 
will of the  EEC  monetary  authorities  to defend  their 
currencies  jointly  and  severally  against  monetary 
disruptions  caused  by factors  outside  the  fundamental 
economic  trends  in one  or more  member  countries. 
Some  members  consider  that  the functions  of such  a Fund 
should  develop  in line  with  the evolution  of economic  and 
monetary  integration  in the Community.  Finding  that  the 
convergence  of the member  countries'  economic  policies  is 
still insufficient,  they  feel  that  the  creation  of a Fund 
should  not  give  rise  to an extension  of the credit  facilities 
already  available.  In any  case,  conditions  would  have  to 
be attached  to any  additional  credits  and  they  would  thus 
fall outside  the  competence  of the  central  banks  and  the 
authority  of the  Fund.  It should  be borne  in mind  here 
that,  in addition  to the  credit  machinery  planned  in 
connection  with  the  narrowing  of margins,  and  the 
machinery  of short-term  monetary  support,  means  for 
providing  conditional  credit  already  exist  in  the 
Community  in  the  shape  of  the  machinery  for 
medium-term  financial  assistance  approved  by the Council 
on 22  March  1971.  This  machinery  should  not  be 
incorporated  in the  Fund,  as the  Fund  will  have  to be 
9. 11.73 Official  Journal  of the European  Communities No C 94/17 
administered  by the  Committee  of Governors  of Central 
Banks,  whereas  the  Government  authorities  are 
responsible  for the medium-term  machinery. 
II. Functions  of a fund 
The report  by the group  of exports  gives  a detailed  survey 
of the  tasks  which  might  be entrusted  to a Fund  at the 
various  stages  of its development  and  which  are analysed 
under  A, B, C and  D below.  The  Committee  examined 
the functions  which  the Fund  could  be given  in the initial 
stage.  However,  the  Committee  did  not  consider  it 
advisable  to fix  a timetable  for  the  follow-up  to these 
initial  functions,  as this  is largely  dependent,  firstly  on the 
experience  gained  in the  early  stages  of the  Fund's 
operation,  and  secondly  on  progress  achieved  in 
establishing  economic  and  monetary  union. 
A. Concertation 
Although  the  Committee  acknowledged  that  a Fund 
should  be  created  for  more  purposes  than  simple 
concertation  between  central  banks  as  part  of  the 
machinery  for  narrowing  the  margins  of fluctuation 
between  the  currencies  of the  Community  countries,  the 
Committee  nevertheless  feels  that  the  Fund  should  be 
responsible  for  this  concertation  task.  The  methods  of 
concertation  could  be those  set out in paragraphs  21-26  of 
the report  by the group  of experts. 
B. Multilateralization 
The Committee  reviewed  the  various  procedures  of 
multilateralization  of  the  positions  resulting  from 
interventions  in  Community  currencies  and  of 
intra-Community  settlements  connected  with  these 
interventions,  i.e.  transformation  of bilateral  claims  and 
debts  into  claims  on and  debts  with  the  Fund  and  their 
expression  in units  of account  (paragraphs  27-43  of die 
report).  All  the  members  of the  Committee  are,  in 
principle,  in favour  of multilateralization  of this  kind. 
In this  section  of their  report,  the experts  also  dealt  with 
the question  of the  Fund's  management  of short-term 
monetary  support,  in particular  as a link-up  between  the 
credit  facilities  envisaged  in  the  agreement  on  the 
narrowing  of margins.  For  the longer  the period  fixed  for 
the settlement  of positions,  the greater  are the possibilities 
of multilateralization. 
At all events,  the  Committee  feels  that  the  Fund  should 
also be responsible  for  the  management  of short-term 
monetary  support.  It further  considers  that  certain 
technical  adjustments  should  be made  to this  support 
mechanism,  to enable  it to be incorporated  in the Fund. 
Some  members  feel  that  if the  two  short-term  credit 
instruments  are to be linked  within  the Fund,  they  should not be modified  as regards  the amount,  the period  and  the 
conditions  of financing.  Other  members  take  the view  that 
recourse  to the  credit  facilities  available  in the  system 
should  be made  more  automatic.  A third  current  of 
opinion  advocates  the  establishment  of  'revised 
machinery',  which  would  include  the  two  earlier 
instruments  in a more  flexible  and  more  effective 
framework  and  would  be equipped  with  more  extensive 
credit  facilities  that  would  be made  available  to the Fund 
either  on its creation  or gradually  thereafter. 
C. Pooling  of reserves 
The Committee  examined  the  different  lines  of thought 
on the  pooling  of reserves  (paragraphs  44-55  of the 
report). 
The majority  of the members  feel  that  at the present  time 
it would  be premature  to pool  reserves,  even  partially, 
because  the  necessary  economic  conditions  have  not  yet 
been  fulfilled.  On the  other  hand,  some  members  are  of 
the opinion  that  the pooling  of at least  a small  fraction  of 
the reserves  would,  as the report  states  (paragraph  44),  'be 
justified  by the fact  that  the interventions  of each  central 
bank  on the  foreign  exchange  markets  result  not  only 
from  the  external  payment  situation  of the  country 
concerned  but  also  from  the application  of the agreement 
on the  narrowing  of margins'.  In addition,  a progressive 
pooling  of reserves  would  enable  all the Fund's  functions 
to develop  regularly  and  would  prepare  the  way  for  its 
later  absorption  into  the  Community  system  of central 
banks,  as planned  in the  Council  Resolutions.  These 
members  also  felt  that  if a start  was  not  made  on pooling 
reserves,  the creation  of a Fund  would  lose  a great  part  of 
its importance. 
Finally,  the Committee  stresses  that  the  list of techniques 
described  in the  report  by the  group  of experts  is not 
exhaustive  and  that  the  whole  problem  needs  to be 
studied  more  deeply. 
A member  of the  Committee  proposed  a plan  for  the 
beginning  of a pooling  of reserves:  under  this  plan  each 
country  would  deposit  with  the  Fund  the  equivalent  in 
dollars  of its share  in short-term  monetary  support  and 
the equivalent  of twice  this  share  (*) in its  national 
currency.  The  Fund  would  credit  the  member  countries 
with  the  corresponding  amount  in units  of account  and 
this could  be used  for the settlement  of positions  resulting 
from  interventions  by the central  banks.  Furthermore,  the 
(i) The  shares  of the  central  banks  of the  member  countries  of the 
enlarged  Community  in  short-term  monetary  support  are  (in 
millions  of units  of account): 
Deutsche  Bundesbank 300 
Banque  Nationale  de Belgique 100 
Banque  de France 300 
Banca  d'ltalia 200 
Nederlandsche  Bank 100 
Denmarks  Nationalbank 45 
Central  Bank  of Ireland 17-5 
Norges  Bank 37-5 
Bank  of England 300 
No C 94/18 Official  Journal  of the European  Communities 9.11.  73 
Fund  could  buy  back  for  national  currencies,  from 
countries  so desiring,  dollar  assets  which  those  countries 
were  forced  to accumulate  following  the  inflow  of 
speculative  capital.  This  technique  would  make  it possible 
to introduce  a guarantee  in European  units  of account, 
which  would  be granted  jointly  by the Member  States  in 
proportion  to their  shares.  The  Committee  has  not  been 
able to judge  this  plan  and  its technical  and  financial 
implications,  but  considers  that  a thorough  study  should 
be made  of it 
D. Unit  of account 
The multilateralization  of positions,  whatever  form  it may 
take,  implies  recourse  to a unit  of account  (paragraphs 
56-60).  To begin  with,  it would  be possible  to adopt  the 
unit of account  which  is currently  used  in the Community 
(i.e. 0-88867088  grams  of fine  gold). 
III. Organization  and  articles 
The Committee  was,  generally  speaking,  in agreement 
with  the  section  in the  experts'  report  devoted  to the organization  and  articles  of the Fund  (paragraphs  61-67). 
The question  of the  division  of responsibilities  between 
the various  competent  authorities  was  raised. 
IV. Conclusions 
Despite  the diversity  of views  expressed  on certain  aspects 
of the functions  which  might  be assigned  to the Fund,  the 
members  agreed  unanimously  that,  if the  Fund  were  set 
up, it could  assume  on  its  creation  not  only  the 
management  of short-term  monetary  support  but  also  the 
tasks  described  in the  experts'  report  under  IV A, 'The 
organization  of concertation  between  the  central  banks', 
IV B (ii) (a) 'The  multilateralization  of positions  resulting 
from  financing  at very  short  term',  IV B (ii) (b)  'The 
link-up  between  the  two  types  of financing'  and  IV D 
'Unit  of account'.  The  Committee  is aware  that  many 
questions,  in particular  some  of those  listed  above,  must 
be examined  in further  detail  before  the Fund  can  be set 
up and  also  with  a view  to the  later  development  of its 
tasks. 
ANNEX  IV 
THE  ADJUSTMENT  PROCESS  — USE  OF  QUANTITATIVE  INDICATORS 
A. General  considerations 
1. Deputies  representing  member  countries  of the  EEC 
share  the  view  expressed  in  the  US  paper 
(C/XX/Dep/Doc/72/10)  that  'a reformed  international 
monetary  system  should  promote  prompter  and  more 
effective  adjustment  of balance  of payments  disequilibria'; 
indeed,  this  view  has  been  reinforced  by the events  of the 
first half  of February  which  have  also  demonstrated  the 
validity  of the  Canadian  Deputies'  observation  that  'the 
principal  failure  of the system  is that  it has not been  able 
to accomodate  the  large  secular  shift  in the  economic 
growth  of  continental  Europe  and  Japan' 
(C/XX/Dep/Doc/73/15). 
2. At  the same  time,  we believe  that  it is important  to 
preserve  as much  of the  Bretton  Woods'  system  as 
possible  to serve  as a foundation  for a reformed  system. 
In particular,  it seems  to us vital  to retain  the concept  of 
'fundamental  disequilibrium'  because  this  implies  that 
both  internal  and  external  factors  have  to be taken  into 
account  when  reaching  a judgment  about  the  need  for 
adjustment.  This  is not  to deny  the  usefulness  of 
quantitative  indicators  — but  to see  them  rather  as a 
means  of  making  the  concept  of  fundamental 
diesequilibrium  operationally  effective. 3. The  need  which  we see to retain  this  concept  is also 
founded  on our  belief  that  while  — as the  US  paper 
recognizes  — no automatic  rule  prescribing  the choice  of 
adjustment  policy  is possible,  any  choice  by a major 
country  is a matter  of concern  to the  international 
community;  this  is true  whether  the  choice  falls  on 
domestic  policy  measures,  on  the  exchange  rate,  on 
controls  on the  capital  account  or on some  combination 
of the three.  In the final  analysis  the choice  must  be one 
for the Government  of the country  concerned  in the light 
of the  structural  circumstances  of that  country;  but  the 
rest of  the  international  community  must,  if the 
adjustment  process  is to work  more  effectively,  be in a 
position  to have  their  views  taken  into  account.  Further 
discussion  is needed  about  the  implementation  of this 
principle. 
4. Some  further  general  observations  should  be made 
here about  the  concept  of symmetry.  There  are  obvious 
asymmetries  inherent  in the  size  of the  US,  and  in the 
relation  between  the  internal  and  external  sectors  of its 
economy,  as compared  with  the size  and  economies  of the 
individual  members  of the  EEC.  Such  differences  will 
diminish  as European  integration  proceeds  but  in the 
meantime  it is essential  to take  proper  account  of their 
9. 11.73 Official  Journal  of the European  Communities No C 94/19 
existence.  Nevertheless  we accept  that,  so far as possible, 
there  should  be equivalent  treatment  of the  dollar  and 
other  major  currencies.  Similarly,  the  burden  of 
adjustment  should  — again  as far  as possible  — be 
symmetrically  shared  between  surplus  and  deficit 
countries.  Recent  decisions  on exchange  rates  were  in 
accordance  with  these  principles. 
5. As  far  as symmetry  between  surplus  and  deficit 
countries  is concerned,  however,  there  are  conflicting 
considerations  which  need  to  be  borne  in  mind. 
Guidelines  for  the  consultation  process  might  usefully 
draw  attention  to these,  in particular: 
(a) There  is some  need  to stress  the  value  of symmetry 
and to encourage  the  consultation  process  to bear 
upon  surplus  as well  as deficit  countries  because  of 
the heavy  bias  of natural  pressures  against  deficit 
countries. 
(b) The  belief  that  the  present  degree  of inflationary 
pressures  in the  world  economy  — which  may  well 
persist  — makes  it appropriate  for deficit  countries  to 
be required  to bear  somewhat  more  of the  burden  of 
adjustment.  This  is relevant  to the  value  of the 
numeraire  in terms  of which  currency  values  may 
change  and  in this  context  the  conditions  for  the 
future  agreed  creation  of international  liquidity  will 
be a major  significance. 
(c) In many  given  situations  of  international 
disequilibrium  it is likely  that  the  positions  of most 
individual  countries  will  be felt  to be in mutual 
harmony,  whilst  one  or more  others  are  diverging 
relatively.  It would  seem  right  as a general  principle 
to seek  the  minimum  number  of adjustments  and  to 
this end  the international  community  should  press  for 
adjustment  by those  diverging  from  the main  group  at 
the time,  irrespective  of whether  they  are in surplus  or 
in deficit. 
6. It  seems  to us important  to recognize  that  the 
available  evidence  (vide  C/XX/Dep/Doc/73/3  and  7) 
points  to  a real  distinction  to  be  made  between 
quantitative  indicators  which  may  be useful: 
(a) as signals  for the start  of a consultation  procedure; 
(b) as creating  a presumption  that  adjustment  action  is 
required. 
We accordingly  propose  to discuss  the use  of quantitative 
indicators  in the  adjustment  process  under  two  headings 
— signals  for  consultation  and  presumptions  for 
adjustment  action. 
B. Signals  for consultation 
7. The  Chairman's  summing-up  at  the  January 
Deputies'  meeting  reflects  very  fairly  the discussions  which 
had taken  place  about  consultation.  In particular,  we 
should  like  to express  our  agreement  with  his formulation 
that,  whatever  is done  to improve  the  machinery  of consultation,  it should  'supplement  rather  than  supersede 
existing  procedures.'  While  there  will  be a need  for 
institutional  changes  in the IMF,  discussion  of which  will 
come  at a later  stage,  the  existing  procedures  for 
consultation  between  the Fund  and  its members  have  built 
up a corpus  of knowledge  and  experience  which  can  help 
to make  more  effective  a more  regular  multilateral 
framework  for consultations. 
8. While  the  existing  Fund  consultation  arrangements 
will continue  to allow  adequate  surveillance  of the  need 
for adjustment  by the  majority  of its members,  such 
consultations  now  takte  place  — unless  the member  has  a 
floating  exchange  rate  or has  drawn  in the  higher  credit 
tranches  — only  at fairly  long  intervals.  This  means  that 
the detection  of incipient  disequilibria  is necessarily 
imperfect  — in particular  as regards  surplus  countries  and, 
more  generally,  as regards  imbalances  which  may  arise 
from  adjustment  actions  taken  by other  countries. 
9. We  believe  that  these  deficiencies  can  be overcome 
by giving  the management  of the IMF  a specific  mandate: 
(a) to keep  the  balance  of payments  positions  of at least 
the major  countries  under  continuous  review; 
(b) to call  the attention  of the Fund  Board  at any  time  to 
situations  which  appear  to merit  further  examination 
— in  other  words,  to  initiate  the  process  of 
consultation. 
In this  connection  guidelines  might  be offered  to the 
management  to ensure  that  special  attention  was  given  to 
evidence  of any  structural  changes  emerging  in the 
balance  of payments,  even  where  offsetting  tendencies 
within  the  overall  balance  were  leaving  official  reserves 
unaffected.  Members  of the  Fund  would  also  have  the 
obligation  to  call  for  examination  of  payments 
developments  both  in their  own  and  in other  countries 
which  the  Fund  management  appeared  to be ignoring. 
This  provision  would  go a long  way  towards  overcoming 
one of the difficulties  which  we foresee  in the US proposal 
to use  one  single  indicator  to trigger  the  consultation 
process. 
10. The  comprehensive  procedure  suggested  above, 
which  is quite  similar  to that  put  forward  by  the 
Canadian  Deputies,  might  be thought  sufficient  on its 
own to provide  signals  that  examination  was  appropriate 
and that  the  consultation  procedure  should  be set  in 
motion.  However,  it would  be a helpful  safeguard  to 
provide  also  for  the  use  of a quantitative  indicator  or 
indicators. 
11. Two  approaches  are  possible  —  to  use  one 
indicator  or several;  there  are  difficulties  in constructing 
any useful  composite  indicator  for this  purpose,  although 
this problem  might  be further  explored.  In favour  of using 
several  indicators  is that  this  would  reduce  the risk  both 
of wrong  signals  leading  to unnecessary  consultations  and, 
more  importantly,  of a necessary  consultation  not  being 
signalled;  however,  this  latter  risk  can  perhaps  be averted 
by use  of our  suggestions  in paragraph  8 above.  Against 
the use of several  indicators  is the prospect  that  one  might 
No C 94/20 Official  Journal  of the European  Communities 9. 11.73 
be faced  with  conflicting  signals  and  that  in general  their 
use might  militate  against  the  need  for  promptness  in 
consulting  with  countries  which  may  be  in incipient 
disequilibrium.  On balance,  therefore,  we are in favour  of 
selecting  one  single  indicator  of the  need  to set  the 
consultation  process  in motion. (i) reserve  movements,  while  leading  to consultation,  do 
not always  lead  to  adjustment  action  and,  in 
particular,  to exchange  rate  changes; 
(ii) adjustment  action  may  sometimes  be taken  in the 
absence  of reserve  movements. 
12. The  choice  seems  to us to lie  between  reserve 
movements  and  basic  balances,  while  recognizing  that  the 
historical  evidence  suggests  that  neither  would  be entirely 
satisfactory  on  its  own  (vide  C/XX/Dep/Doc/73/3). 
However,  we  accept  that  there  are  good  reasons  for 
preferring  reserve  movements  as an indicator  of the  need 
for consultation,  notably: 
(i) their  conceptual  advantage,  expounded  by the  US 
Deputies  both  orally  and  in writing,  in relation  to a 
regime  of convertibility; 
(ii) the  speed  at which  they  become  available  is in accord 
with  the  need  for  promptness  in  initiating 
examination  and  consultation;  and 
(iii) the  relative  ease  with  which  common  standards  for 
composition  can  be achieved  and  the  absence  of any 
need  for extended  analysis. 
13. However,  before  adopting  reserve  movements  as the 
sole indicator  of  a need  for  consultation,  further 
exploration  is needed  of three  aspects: 
(a) to what  extent  should  movements  in actual  reserves  be 
used,  as opposed  to movements  from  adjusted  levels 
which  would  take  account  of individual  countries' 
reserve  needs? 
(b) should  movements  in gross  or net  reserves  be used 
and what  common  definition  of the  components  of 
either  can  be found? 
Should  special  account  be taken  of movements  in the 
liabilities  of  a  reserve  currency  country  in 
circumstances  where  full  asset  settlement  is not  in 
force? 
(c) should  a consultation  be  triggered  by  a reserve 
movement  to a defined  level  above  or below  the base 
figure,  and,  if so, how  large  a movement  would  be 
appropriate?  Or should  one  seek  to apply  the concept 
of a maximum  percentage  movement  over  time  for 
each  major  country  — perhaps  by  establishing  a 
proportionate  relationship  between  sizes  of reserve 
movements  and  some  outside  criterion  such  as IMF 
quotas? 
The choices  made  under  (a),  (b) and  (c) above  must  take 
account  of the  problem  of existing  market  sensitivity  to 
movements  in reserves.  This  may  be no more  than  a 
transitional  problem,  as markets  learn  that: However,  given  that  the  ways  in which  the  questions  in 
(a), (b)  and  (c)  above  are  answered  are  not  likely  to 
remain  secret,  this  will  be an important  problem  in the 
early  stages  of a reformed  system. 
14. To  summarize  this  section,  our  preference  — 
indicated  in paragraph  9 above  — for  a continuing 
process  of examination  and  consultation  is strengthened 
by the difficulties  which  we foresee  in using  even  the most 
attractive  single  indicator  of the  need  for consultation.  It 
seems  reasonable,  therefore,  to expect  that  a procedure 
like the one  which  we have  outlined  — which  would  no 
doubt  be improved  in the  light  of experience  — would 
work  well  enough  to allow  the  use  of a quantitative 
indicator  as a signal  for  consultation  eventually  to be 
dispensed  with.  It might  also  happen  that  a quantitative 
indicator  different  from  the one  originally  selected  would 
be shown  by experience  to work  more  effectively.  For 
these  reasons  we would  be opposed  to including  in the 
revised  Article  of the  IMF  any  code  of procedure  for the 
initiation  of consultations. 
C. Quantitative  indicators  as presumptions  for adjustment 
action 
15. As  has already  been  clearly  stated,  we do not  accept 
that any  quantitative  indicators  should  be  used  as 
automatic  signals  for action  — whether  to compel  action, 
or to permit  action  of a sort  that  might  otherwise  be 
subject  to international  scrutiny.  We  therefore  do not 
agree  with  the  proposal  in the  US  paper  that  small 
devaluations  should  be freely  permitted,  without  the need 
for IMF  approval,  whenever  a country's  reserves  are 
below  a base  level. 
16. On  the  other  hand,  we  support  the  view  that  it 
should  be possible,  through  the  processes  of consultation, 
to create  the presumption  that  measures  of adjustment  are 
desirable.  These  presumptions  could  become  stronger  as 
successive  stages  in the  consultations  procedure  are 
completed.  If the  failure  of one  country  (or  a few 
countries)  to take  adjustment  action  — whether  domestic 
or external  — that  has  been  generally  judged  to be 
desirable  were  to lead  to significant  difficulties  for the 
international  system  as a whole,  we accept  that  it should 
be permissible  in the  last  resort  for  other  countries  to 
adopt  compensating  measures.  We  therefore  endorse  the 
general  approach  of  'graduated  response'  which  is 
illustrated  in Part  I of C/XX/Dep/Doc/73/2. 
9. 11.73 Official  Journal  of the European  Communities No C 94/21 
17. An  example  of the  type  of situation  in which 
compensating  measures  would  be justifiable  is where  one 
country  persistently  accumulates  reserves  on a scale  that  is 
out of all proportion  to the  rate  of creation  of primary 
reserves  in the system. 
18. A  key  question  is how  far  the judgments  that  are 
arrived  at in the  course  of consultation,  and  particularly 
the identification  of fundamental  disequilibrium,  are to be 
guided  by  the  use  of  quantitative  indicators.  The 
simplicity  of movements  in reserves  was  a leading  reason 
why we  were  prepared  to accept  them  as a trigger  for 
consultation,  but  it is that  same  simplicity  that  demands 
great  caution  in accepting  reserve  movements  as  a 
presumptive  signal  for adjustment  action.  It is necessary  to 
identify  the  separate  components  of any  movement  in 
reserves  before  any  judgment  can  be reached  on the need 
for action  or on  the  type  of action  that  would  be 
appropriate.  The  first  distinction  to be made  is between 
the basic  balance  and  movements  of mobile  capital. 
Among  the possible  responses  to reserve  changes  brought 
about  by short-term  capital  flows,  one  that  might  be 
appropriate  in certain  circumstances  is simply  to finance 
them  until  they  are  reversed.  It is envisaged  that  the 
normal  rules  of asset  settlement  might  be modified  at 
times  of heavy  flows  of mobile  capital,  perhaps  through 
the provision  of a special  short-term  financing  facility 
under  the surveillance  of the IMF.  The  persistence  of such 
flows,  or their  resistance  to attempts  to control  or reverse 
them,  might  call  for  a more  positive  response,  as is 
pointed  out  in the  US  paper.  In particular,  it would  be 
sensible  to explore  the  possibility  of treating  continuing 
flows  of capital,  even  though  they  took  the  form  of 
purchase  or sale  of short-term  assets  and  liabilities,  as 
structural  flows  and  therefore  as forming  part  of the basic 
balance.  Another  structural  problem  to be resolved,  would 
be how  to cover  situations  in which  a deficit  was  being 
financed  by increases  in private  foreign  holdings  of a 
particular  currency. system  is to be upheld,  consistent  with  each  other  and 
with  the rate  of reserve  creation. 
20. It  will,  moreover,  often  be important  to have  regard 
to the  composition  of the  basic  balance  in expressing 
balance  of payments  objectives.  It has  to be recognized 
that countries  do in practice  have  separate  objectives  for 
the balances  of  current  or  of  long-term  capital 
transactions.  It might  perhaps  be possible  to develop  a 
code  of conduct  for capital  transactions  whose  universal 
observance  amongst  developed  countries'  would  enable 
the basic  balance  to be adopted  as a single  indicator.  Such 
a code  might  provide,  for  example,  that  developed 
countries  should  be expected  to ensure  that  their  net 
outflow  of long-term  capital  to other  developed  countries 
should  not  be large  or persistent. 
21. In  many  cases,  this  condition  might  be satisfied 
without  any  need  to operate  specific  controls  over  capital 
flows  — as US representatives  argued  would  be so of their 
country,  in the  discussions  preceding  the  Smithsonian 
agreement.  But  the  suggested  code  would  require  that 
effective  controls  should  be available  for use  if necessary, 
should  the  condition  not  be met.  A code  on these  lines 
would  conform  with  the principle  that  there  should  be no 
restriction  on  the  flow  of  long-term  resources  to 
developing  countries,  or on  the  earning  of current 
surpluses,  to finance  such  flows.  Failing  agreement  on a 
code  for capital  transactions,  the use  of the  basic  balance 
as the leading  indicator  of the need  for adjustment  action 
would  need  to be supplemented  by consideration  of cur-
rent account  balances,  particularly  in arriving  at a jud-
gment  on the nature  of the  adjustment  action  required.  It 
would  also  be relevant  to consider  information  on cost 
and price  trends,  including  the probable  future  effects  of 
past and  present  changes  in competitiveness  which  have 
not fully  worked  themselves  out,  before  coming  to a 
final  judgment. 
19. With  this  qualification,  the state  of and  prospects 
for the  basic  balance  is believed  to be a better  leading 
guide  to the  general  need  for  adjustment  than  is the 
movement  in reserve  levels.  With  both  indicators,  there  is 
the problem  that  has  been  recognized  in Part  V of the US 
paper,  that  the  present  distribution  of reserves  does  not 
correspond  with  any  reasonably  defined  equilibrium 
position.  It is to be expected  that  countries  will  aim  at 
basic  balances,  and  corresponding  movements  in reserves, 
which  will  help  to adjust  their  reserve  stock  to a more 
desired  level.  There  can  therefore  be no  simple  and 
universal  measure  of the reserve  movement  or of the basic 
balance  that  can  be regarded  as representing  a position  of 
'equilibrium'  for  every  country.  Measurement  must 
necessarily  be against  some  notional  set  of balance  of 
payments  aims,  which  must  be both  realistic  for individual 
countries  and,  if the  principle  of symmetry  within  the 22. Even  if evalifttion  of the  basic  balance  and  other 
indicators  should  lead  to the conclusion  that  the required 
adjustment  includes  changes  in the current  account,  there 
need  still  be no presumption  that  a change  in exchange 
rates  is called  for.  It has  to be asked,  first,  to what  extent 
the observed  current  balance  has  been  affected  by cyclical 
factors  which  may  be expected,  over  a period  of time,  to 
cancel  themselves  out.  Imbalances  attributable  to different 
countries  being  at different  stages  in the  economic  cycle 
call for purely  domestic  action  on demand  management. 
Domestic  action,  seeking  to influence  cost  and  price 
trends,  may  well  be the  appropriate  response  where  an 
incipient  imbalance  is detected  in  the  underlying 
(cyclically  adjusted)  current  balance.  Those  departures 
from  balance  that  would  not  be eliminated  by domestic 
action  alone  would  be  indicative  of  fundamental 
disequilibrium,  and  under  such  circumstances  an exchange 
rate change  would  normally  be  both  justifiable  and 
desirable. 
No C 94/22 Official  Journal  of the  European  Communities 9. 11.73 
23. To  summarize  the conclusions  of this  section,  while 
we accept  quantitative  indicators  as an integral  part  of the 
consultations  process,  we do not  believe  that  any  single 
indicator,  or any  group  of indicators,  can  be used  in a 
general  and  uniform  manner  to establish  an automatic 
presumption  that  adjustment  action  is needed.  We believe 
that the  basic  balance  is the  most  satisfactory  leading 
indicator  for  adjustment  action,  but  argue  against  too 
ready  a presumption  that  exchange  rate  adjustment  is the 
appropriate  action.  A number  of other  factors  need  to be taken  into  account,  most  notably  the composition  of the 
basic  balance.  We see a place  in certain  circumstances  for 
specific  action  to regulate  capital  flows,  including  flows  of 
long-term  or  structural  capital.  Above  all,  we  are 
convinced  that  the  successful  working  of the  adjustment 
process,  through  consultation  among  countries,  depends 
on the willingness  of all participants  to make  it work:  this 
cannot  be assured  by the  adoption  of automatic  signals 
for adjustment  action,  which  might  well  damage  rather 
than  contribute  to the spirit  of international  cooperation. 
ANNEX  V 
REPORT  ON  THE  ACTIVITIES  OF THE  WORKING  PARTY  ON  SECURITIES  MARKETS 
During  the period  covered  by this  report  (October  1971  to 
October  1972),  trends  on the Community's  bond  markets 
were,  generally  speaking  fairly  favourable.  The  volume  of 
issues  increased  on all the  markets,  while  interest  rates 
tended,  in the  main,  to ease  down  in most  of the 
countries,  at least  until  September  1972. 
These  developments  are  the reflection  of a trend  in the 
formation  — new  saving  which,  despite  the persistence  — 
and indeed  the strengthening  — of inflation,  was  high,  of 
the growing  interest  of private  investors  in fixed-income 
securities,  and  of an exceptional  abundance  of liquidity. 
Nevertheless,  borrowers  were  apparently  somewhat 
hesitant  to contract  loans,  mainly  because  of uncertainty 
as to interest  rate  trends,  and  in several  countries  potential 
subscribers  were  increasingly  sensitive  to interest  rate 
levels. 
However,  trends  were  not  uniform  in all the  countries. 
For example,  in the Netherlands,  and,  to a lesser  extent, 
in Belgium,  the downward  interest  rate  trend  levelled  out 
for a time  in the spring  of 1972;  in Germany,  the situation 
actually  grew  tighter  on the  market  at this  time,  and 
interest  rate  levels  have  risen  by more  than  1 % since 
then,  despite  an appreciable  decline  in the  volume  of 
issues.  In Italy,  the  interest  rates  have  been  stable  since 
June  after  a long  period  of decline.  In France,  where 
interest  rates  had  not  declined  in 1971  as they  had  in the 
other  countries,  there  was  a more  definite  downward 
trend.  In addition,  towards  the  end  of the  period  under 
review  interest  rates  tended  to fall,  in all the  countries 
except  Italy,  mainly  as a result  of more  restrictive 
monetary  policies.  So that  the mutual  relationships  of the 
different  countries  underwent  a change,  although  all the 
rates  are  still  within  a range  fairly  similar  to that 
obtaining  at the beginning  of the period,  except  that  the span  between  lowest  and  highest  rates  has become  a little 
wider,  growing  from  1-25  to 1-5 %. 
The highest  rates  were  in Germany,  and  not  in France  as 
in the  previous  year.  Germany  was  also  the  country  in 
which  the interest  rate  decline  was  smallest,  and  Italy  was 
the country  in which  rates  declined  most. 
Official  policies  in the  member  countries  with  regard  to 
their  capital  markets  were  broadly  similar  — there  was 
little  attempt  to oppose  market  tendencies.  The  factors, 
which,  operating  freely,  tended  to widen  the  markets, 
increase  the  volume  of issues  and  bring  down  interest 
rates  were  allowed  to work  unopposed:  nor  was  any 
attempt  made  to curb  increases  where  the adjustment  of 
capital  supply  and  demand  made  such  increases  necessary 
or where  the  authorities  felt  that  in view  of the  loss  of 
purchasing  power  of money,  there  was  a case  for 
maintaining  the  rewards  accruing  to savers.  Indeed, 
certain  countries  take  the  view  that  there  are  structural 
reasons  for maintaining  interest  rates  at a sufficiently  high 
level. 
In almost  all the member  countries,  the equities  markets, 
somewhat  depressed  in the fourth  quarter  of 1971,  gained 
strength  from  the beginning  of the  new  year,  the  stock 
exchanges  having  anticipated  the business  revival. 
Prices  rose  particularly  sharply  in the Netherlands  and  in 
France.  However,  Italy,  where  the  economic  outlook 
showed  little  improvement,  was  left  completely  outside 
this trend.  At the end  of the third  quarter  of 1972,  prices 
began  to fall  again  in several  countries.  All in all, issuers 
took  little  advantage  of the  favourable  trend  which 
prevailed  during  most  of the  period  to increase  the 
9. 11.73 Official  Journal  of the European  Communities No C 94/23 
volume  of issue:  the  figure  for  this  variable  remained 
relatively  modest. 
In Germany,  the  capital  market  was  fairly  receptive.  For 
one thing,  household  saving  continued  to expand  sharply 
and savers  showed  a particular  interest  in fixed-income 
securities;  secondly,  there  was  a heavy  inflow  of foreign 
capital,  the bulk  of which,  in the period  up to the end  of 
June,  was  being  invested  in  German  securities.  In 
addition,  the  banks  increased  their  securities  portfolios, 
particularly  in January  and  February  1972.  Interest  rates 
declined  early  in 1972,  though  from  March  onwards  there 
was a steady  upward  movement.  The  trend  changed 
direction  because  private  investors  and  the  banks, 
expecting  an increase  in interest  rates  on the  capital 
market  due  to the  heavy  and  persistent  demand  for 
capital,  were  holding  off the market. 
To facilitate  market  stabilization,  'one-time'  issuers 
stopped  borrowing  at the  end  of March:  the  pause  was 
maintained  until  the  end  of May.  Only  after  this  date 
were  issues  resumed,  with  a German  State  Railway  loan. 
The nominal  interest  rate,  which  had  fallen  to 7 % at the 
end of February  had  to be raised,  after  a period  of strain, 
in two  steps  to 8 % during  March.  It was  once  again 
possible  to place  'one-time'  issues  at this  rate  from  June 
onwards  without  difficulty  on the capital  market. 
Although  there  was  a fairly  large  number  of foreign  loans 
denominated  in DM,  they  had  no decisive  influence  on 
the German  capital  market,  since  they  were  virtually  all 
subscribed  by foreign  investors.  As domestic  issues  also 
remained  very  attractive  for non-residents,  capital  imports 
again  increased  appreciably  because  of transactions  in 
internal  DM  loans,  many  of them  generated  by official 
Swiss  action  to stem  capital  imports.  So that  the  Federal 
German  Government  was  compelled  to impose  an import 
licence,  at the end  of June,  for purchases  by non-residents 
of bearer  and  registered  bonds  issued  on the  domestic 
market. 
In view  of the  important  role  which  foreign  capital  had 
played  in the placing  of German  fixed-income  securities  in 
the first  half  of the  year,  there  was  some  reason  to fear  a 
fall in market  prices;  this,  however,  did not  occur,  partly 
because  private  domestic  investors  took  over  from  the 
non-residents.  Since  the  beginning  of September,  the 
Bundesbank  has  relaxed  the import  authorization  scheme 
and authorized  credit  establishments  —  in the  first 
instance,  for  six  months  only  — to sell  to foreigners 
domestic  fixed-income  securities  in amounts  not exceeding 
those  of the  securities  of this  kind  previously  sold  by 
non-residents  in the  Federal  Republic  of Germany  or 
maturing  in the portfolios  they  hold. 
Since  a recovery  in business  activity  and  an improvement 
in profits  were  foreseen  in 1972,  the equities  market  was 
lively  from  November  1971  onwards.  The  increase  in 
prices,  further  strengthened  by  the  interest  of 
non-residents  in German  equities,  continued  until  the end 
of August  with  a few  short  interruptions.  Subsequently,  as 
the business  recovery  proved  only  modest,  the market  lost 
tone  and  prices  fell. In the  last  weeks,  the upward  movement  in interest  rates 
already  mentioned  gathered  momentum,  entailing  an 
appreciable  increase  in the cost  of long-term  capital.  This 
should  curb  the demand  for capital  goods,  particularly  in 
the building  and  construction  industry. 
In France,  ample  funds  were  available  on  the  bond 
market,  as that  in the  fourth  quarter  of 1971  and  in the 
first quarter  of 1972  the volume  of issues  was  appreciably 
higher'  than  in the  same  quarters  of the  preceding  years. 
However,  the  rate  of issues  slowed  down  in the  second 
quarter  of 1972  because  private  borrowers  and  the public 
authorities  had  adopted  a 'wait-and-see'  attitude,  the 
former  having  preferred  less  expensive  bank  credit,  the 
latter  having  accounted  for  a considerable  proportion  of 
their  borrowing  requirements  during  the first  quarter.  The 
exceptional  results  achieved  during  the  period  under 
review  as a whole  owed  a good  deal  to the  maintenance 
of nominal  rates  at a high  level:  with  the value  of money 
still declining,  it would  not  have  been  desirable  to reduce 
the remuneration  earned  by household  saving,  and  the 
high  rates  did  not,  in fact  impair  industrial  investment  or 
hamper  the efforts  of companies  to improve  their  financial 
structure.  However,  the  declining  rates  on the  secondary 
market,  which  gathered  momentum  from  January 
onwards,  and  the  relaxation  of conditions  on markets 
abroad  led the  banks  to reduce  nominal  rates  by 0-25  % 
on two  occasions,  in agreement  with  the authorities.  This 
brought  them  down  to 8-25  % and  then  to 8 % by the 
end of April. 
The depressed  trends  on the equities  market  in the fourth 
quarter  of 1971  gave  way  to exceptionally  favourable 
stock  exchange  conditions  from  the  beginning  of 1972 
onwards.  This  was  partly  due  to buying  by non-residents. 
On the other  hand,  the amount  of equities  issues  dropped 
during  the  fourth  quarter  of 1971  and  again  in the  first 
quarter  of 1972.  The  situation  showed  some  improvement 
thereafter,  but  figures  recorded  in the  first  half  of 1972 
still fell short  of those  reached  in the first  half  of 1971. 
In Italy,  the  bond  market  continued  to  develop 
favourably.  The  appreciable  increase  in the  volume  of 
issues  on the  domestic  market  in the last  quarter  of 1971 
continued  in the first  half  of 1972;  supply,  both  from  the 
public,  which  subscribed  60 % of the  new  issues,  and 
from  financial  intermediaries  in a position  to provide 
ample  funds,  responded  to the  high  level  of net  demand 
for funds.  So that  the Banca  d'ltalia  was  able  to sell  bonds 
in an amount  of Lit.  187  000 million  in the  first  eight 
months  of 1972,  although  it had  been  a net purchaser  of 
Lit. 312  000 million  in the  corresponding  period  of 1971. 
The Treasury  and  the  nationalized  undertakings  were  the 
main  beneficiaries  of the increase  in bond  issues,  followed 
by international  institutions.  Personal-property  credit 
establishments  later  became  important  among  the  chief 
borrowers. 
The fall  in yields  which  began  in the  middle  of 1971 
continued  in the  last  quarter  of the  year.  This  trend  was 
tending  to mark  time  in the first  two  months  of 1972,  but 
a substantial  decline  occurred  in April  and  May,  followed 
in the  most  recent  period  by stable  yields  at a slightly 
No C 94/24 Official  Journal  of the European  Communities 9.11.73 
higher  level  (about  7V2%).  The  downward  trend  was 
encouraged  by the monetary  authorities,  which  pursued  a 
policy  designed  to promote  a recovery  in industrial 
investment  and  at the  same  time  to align  domestic  rates 
on those  obtaining  on foreign  markets. 
Italian  borrowers  were  using  foreign  markets  much  less  in 
1971  than  in 1970.  This  was  mainly  due  to a trend  in the 
last quarter,  during  which,  in the absence  of new  issues  on 
the international  market,  redemptions  of loans  contracted 
abroad  entailed  net capital  outflows  of the  order  of $500 
million.  The  movement  continued  during  the first  part  of 
1972,  during  which  $600  million  were  reimbursed  in this 
way.  During  the  summer,  this  attitude  changed,  and 
financial  institutions  again  turned  to the  international 
market. 
There  was  no steady  trend  on the  equities  market.  The 
definite  expansion  in the  volume  of issues  in the  last  of 
1971,  as compared  with  the  corresponding  quarter  of 
1970,  gave  way,  in the  first  quarter  of 1972,  to a sharp 
decline,  which  was  then  in its turn  followed  by a recovery 
of issues  in the second  quarter,  mainly  in favour  of small-
and medium-sized  firms.  The  stock  exchange  market,  on 
which  the  number  of transactions  was  relatively  low 
throughout  the  period  under  review,  showed  few 
important  changes  during  the last  months  of 1971  and  the 
first quarter  of 1972;  the  upward  movement  in prices 
which  then  began  more  than  offset  the fall  in the  first 
quarter. 
In the Netherlands,  interest  rates  fell  in the latter  months 
of 1971.  Business  activity  was  losing  momentum  at the 
end of the  year,  and  the decline  in interest  rates  gathered 
pace  early  in 1972,  so that  the  trend  then  matched  those 
recorded  on  foreign  markets.  The  movement  changed 
direction  in the spring  of 1972,  mainly  because  the supply 
situation  was  weak,  but  early  in the  second  half  of the 
year interest  rates  one  again  declined  slightly. 
Throughout  the  period  under  review,  the  bond  market 
was sufficiently  flexible.  The  demand  for  funds  was 
exceptionally  high  in the  last  quarter  of 1971,  and  the 
volume  of issues  in the  first  three  quarters  of 1972 
remained  heavy.  Virtually  all of these  issues  were  placed 
with  residents,  the supply  of funds  from  abroad  making 
only  a marginal  contribution  to the  placing  of domestic 
securities  since  the introduction  of the 'bond-florin'. 
Initially,  the  aim  of the  Nederlandsche  Bank  was  to 
forestall  any  unduly  rapid  decline  in interest  rates.  From 
the spring-time  onwards,  official  attitudes  moved  to a 
more  neutral  position,  the  intention  being  to allow  the 
market  equilibrium  to be  established  by  independent 
forces.  In April,  certain  official  measures  were  taken  to 
promote  the  liberalization  of capital  movements  and  to 
provide  incentives  to capital  exports.  For  this  purpose,  the 
Nederlandsche  Bank  declared  its willingness  to authorize 
non-residents  to issue  private  loans  denominated  in florins 
on the  market.  However,  not  many  borrowers  availed 
themselves  of this  facility. Prices  on  the  equities  market  fell  in October  and 
November  1971  but  then  rose  steadily  and  continuously 
almost  throughout  the  period  under  review,  the  main 
reason  being  the  sustained  interest  of foreign  subscribers 
in this  market.  Share  issues,  which  are traditionally  weak 
in the Netherlands,  totalled  Fl. 38 million  in the first  three 
quarters  of 1972,  compared  with  Fl. 58 million  in the 
corresponding  quarters  of 1971. 
The Belgian  capital  market  expanded  sharply  during  the 
period  under  review.  The  volume  of issues  reached  a very 
high,  perhaps  exceptional  level,  in the  periods  up to the 
end of the  first  quarter  of 1972.  The  trend  lost  a little 
momentum  in the second  quarter,  but  there  was  a further 
recovery  in the third  quarter.  This  trend  was  accompanied 
by a slow  but steady  decline  in interest  rates,  which  began 
at the  beginning  of 1971  and  which  was  interrupted  for 
only  a short  period  in the  spring  of 1972:  in the  third 
quarter,  interest  rates  were  again  running  at  an 
exceptionally  low  level. 
There  was  no difficulty  as to the  subscribing  of issues, 
since  capital  saving  was  still  being  formed  in large 
amounts.  Apart  from  a convertible  bond  issue  in the 
second  quarter,  only  the  public  sector  was  using  the 
market.  Faced  with  a heavy  inflow  of foreign  capital,  the 
central  Government  increased  the  volume  of domestic 
issues  for a short  time  beyond  its borrowing  requirement, 
and this  enabled  a large  proportion  of its external  debt 
to be redeemed. 
On the  equities  market,  prices  fell  during  the 
August-November  1971  period,  but thereafter  made  steady 
progress.  On the  Luxembourg  capital  market,  the  market 
for loans  denominated  in Luxembourg  francs  was  opened 
to non-resident  borrowers. 
With  a view  to forestalling  any  disequilibrium  that  might 
result  from  this  measure,  the  Luxembourg  authorities 
introduced  an issue  schedule  for 1972  based,  normally,  on 
a quarterly  volume  of issue  of about  Lfrs.  300  to 400 
million.  The  market  accounted  very  easily  for  the  sums 
foreseen  in the  schedule  for  the  first  half  of the  year, 
whilst  yields  continued  to decline.  On the other  hand,  the 
public  supply  in Luxembourg  of (Euro-loan  securities 
slowed  down  a little  from  the  fourth  quarter  of 1971 
onwards,  because  of the  perceptible  decline  in issues 
denominated  in units  of account. 
Trends  on  the  countries'  individual  markets  were 
generally  favourable  and  this  was  also  true  for  the 
international  markets,  where,  indeed,  trends  were  even 
more  favourable  in certain  respects.  In the period  from  the 
fourth  quarter  of 1971  to the  third  quarter  of 1972,  the 
volume  of issues  totalled  $5 300  million,  compared  with 
$4 800  million  in the  preceding  twelve  months.  Out  of 
this total,  issues  denominated  in $ US  accounted  for 
$2 600 million,  i.e. 49-6  % (J), international  loans  in DM, 
$1 200 million,  i.e. almost  a quarter  of the  issues,  issues 
in Swiss  francs,  $576  million,  i.e. 10-9  %. 
(1) The  percentage  for  conventional  bond  issues,  not  including  con-
vertible  bonds,  is substantially  lower. 
9. 11.73 Official  Journal  of the European  Communities No C 94/25 
As in the  past,  currencies  of issue  were  chosen  on the 
basis  of an assessment  of the  exchange  risk  and  of interest 
conditions  prevailing  on  the  various  markets.  In this 
connection,  it is noteworthy  that  disparities  between  the 
interest  or yield  rates  on the  markets  of the  individual 
issue  currencies  widened  in  periods  of  increased 
instability  and,  in  their  turn,  narrowed  down  when 
confidence  in the  stability  of the  current  relationships  of 
the principal  currencies  was  restored.  The  respective 
trends  of rates  of yield  on  DM  and  dollar  issues  in 
particularly  illuminating  in this  respect. 
The rapid  adjustments  of rates  of yield  also  had  the  effect 
of keeping  the  distribution  of the  issued  amounts  by 
currency  relatively  stable.  Issues  denominated  in  US 
dollars  still  account  for  more  than  half  of the  total;  those 
denominated  in DM  and  in Swiss  francs  also  showed  little 
variation.  Only  the  French  franc  made  noteworthy  gains 
as an  international  issue  currency,  while  issues  in 
Luxembourg  francs  constitute  a recent  development  the 
future  of which  it is too  early  to foresee.  Moreover,  the 
volume  of international  private-treaty  loans  denominated 
in florins  (not  included  in  the  figures  given  above) 
increased  sharply. 
Interest  rates  generally  tended  to fall  during  the  greater 
part  of the  period  under  review.  Yields  on issues  in US 
dollars  fell  back  relatively  fast  from  the  very  high  level 
reached  in  the  autumn  of  1971,  even  before  the 
Washington  agreements  terminated  the  period  of 
insecurity  caused  by the  adoption  of floating  exchange 
rates;  during  the  first  three  quarters  of  1972,  they 
fluctuated  within  a narrow  range;  at the  end  of the  period 
they  were  tending  to  ease  downwards.  Under  the 
influence  of  very  heavy  purchases  by  non-resident 
investors,  a sharp  fall  in interest  rates  on international 
bonds  denominated  in  DM  was  recorded,  occurring 
mainly  during  the first  half  of 1972. 
Having  fallen  to about  53Ai  % in August,  following  the 
ban on purchases  of bonds  issued  by German  borrowers, 
the rates  recovered  by almost  1 % because  of arbitrage 
operations  in favour  of bonds  denominated  in currencies 
providing  better  yields  and  because  of the  heavy  volume 
of new  issues.  As a result  of a policy  of cautious  official 
authorization,  interest  rates  on  the  international  Swiss 
franc  loan  market  dropped  by  about  half  a percentage 
point  — from  6 to 5Va  % — at the  beginning  of the 
period  under  review.  Since  then,  however,  interest  rates 
have  staged  a recovery  because  of the  restoration  of 
confidence  in the  dollar,  which  made  the  Swiss  currency 
relatively  less  attractive  and  brought  home  more  strongly 
to investors  how  relatively  low  are  yields  on  these 
securities.  On  the  international  market  in private-treaty 
loans  denominated  in florins,  trends  were  much  like 
those  on the  market  for  international  loans  denominated 
in DM.  International  issues  in French  francs  were  fairly 
successful  in the  early  part  of the  period,  and  this  enabled 
borrowers  to cut  interest  rates;  however,  in the  third 
quarter  of 1972,  conditions  deteriorated  as a result  of a 
plethora  of new  issues  on the  market  and  the  revival  of 
interest  in  issues  denominated  in  other  currencies, 
particularly  in US dollars. 
The policy  of the  Member  States'  monetary  authorities 
with  regard  to the  international  bond  markets  consisted  in allowing  participation,  within  certain  limits,  in these 
markets,  while  endeavouring  to cushion  the  impact  of 
such  participation  on their  economies,  by various  means. 
The measures  used  were  carefully  selected  and  applied, 
and the  policies  took  account  —  to  extents  varying 
according  to  country  and  period  —  of 
balance-of-payments  considerations  and  of considerations 
arising  from  current  business  trends  or structural  needs. 
For example,  the  authorities  made  access  for  resident 
borrowers  to  international  markets  more  difficult  in 
Germany  and  in France,  while  the  Italian  authorities 
encouraged  such  access  in Italy,  the  aim  in the  first  case 
being  to avoid  capital  inflows,  and  in the  second  case  to 
facilitate  such  inflows. 
Again,  the  authorities,  while  favouring  capital  exports, 
offered  an uneven  range  of facilities  for  the  placing  of 
Euro-issues  with  their  residents.  Placing  by public  offer 
remained  limited  in Belgium  and  France,  while  it was 
authorized  very  freely  in Germany.  In  addition,  the 
contribution  of Belgian  and  Luxembourg  subscribers  to 
the Euro-issues  market  expanded,  although  certain  limits 
were  set to the  placing  with  residents  of these  countries  of 
loans  denominated  in Luxembourg  francs,  the  volume  of 
which  increased  appreciably. 
Indeed,  on some  occasions  the  authorities  intervened  to 
control  both  inflows  and  outflows  of capital,  for example, 
in the  Netherlands,  by  forbidding  the  use  within  the 
country  of the  yield  from  Euro-issues  on the  one  hand, 
and by  reducing  the  scope  for  issues  in florins  for 
non-resident  borrowers,  on the  other.  In France,  exchange 
controls  were  maintained,  although  they  were  used  mainly 
to curb  capital  inflows. 
Moreover,  by authorizing,  under  certain  conditions,  the 
development  of Euro-issues  in Community  currencies, 
several  Member  States  made  it possible  to meet  the 
non-resident  investors'  need  for  diversification  in their 
investments.  At the  same  time  they  avoided  capital  flows 
deemed  undesirable  and  endeavoured  to  shield  the 
domestic  national  markets  from  the  influence  of external 
factors.  Here,  it was  felt  that  the  financial  institutions  of 
the countries  concerned  should  assume  control  of the 
guarantee  and  placing  consortia  for  these  issues,  so as to 
ensure  fuller  implementation  of official  policy.  Thus,  the 
authorities  also  improved  the  position  of the  financial 
institutions  of their  own  countries  in the  guarantee  and 
placing  consortia  for  international  loans,  at their  request. 
This  was  a contribution  to  the  development  of  the 
international  status  of their  capital  markets. 
Another  constructive  aspect  of the  use  of certain  European 
currencies  as media  for  Euro-issues  is the  fact  that  it 
facilitates  the  participation  in the  international  market  of 
Community  issuers  and  investors  and  that  it strengthens 
the role  of Community  currencies  alongside  the  dollar  in 
international  financial  transactions. 
In the  last  analysis,  this  development  reflects  an increased 
participation  of European  transactions  in the  Euro-issues 
market,  the  gradual  scaling-down  of conventional  foreign 
issues  on each  of the  national  markets  and  continuing  an 
even  severer  market  fragmentation.  The  result  has  been  a 
considerable  build-up  in  Euro-issues,  particularly  in 
No C 94/26 Official  Journal  of the European  Communities 9.11.73 
Community  currencies,  instead  of the  integration  of the 
national  markets  into  a common  capital  market. 
Nonetheless,  there  is no escaping  the  fact  that  at the 
present  time  the development  of Euro-markets  in DM,  FF, 
Fl., and  Lfrs.  separated  from  the  national  markets  is 
leading  to the juxtaposition  of isolated  markets,  of narrow 
resources  and  weaker  than  an integrated  European  market 
would  be. While  an increase  in conventional  foreign  issues 
would  help  to widen  the  range  of securities  available  on 
each  of the  national  markets,  and  more  intra-Community 
placings  would  have  the  effect  of broadening  the  supply 
of capital  on  these  markets,  the  development  of 
Euro-issues,  even  in Community  currencies,  does  not bring 
with  it the  important  advantage  which  an integration  of 
the national  markets  should  provide  —  that  of 
overcoming  their  narrowness.  It is true  that,  for 
balance-of-payments  reasons,  several  member  countries 
are opposed  to an increase  on their  markets  of the supply 
of capital  from  abroad. 
Another  point  is that  as the  Euro-issues  market  has  no 
withholding  tax,  even  the  Member  States  wishing  to 
maintain  this  tax  on their  domestic  markets  have  been 
virtually  unable  to apply  it to their  residents  where  they 
are issuing  on the  international  market,  nor  to all the 
Euro-issues  in their  own  currencies,  and  the  effect  of this 
has been  to give  the Euro-issue  market  an advantage  over 
the national  markets.  This  development  may  well  be 
connected  with  the  fact  that  interest  rates  for Euro-issues 
in the  Community  currencies  have  been  running  below 
those  for  domestic  issues,  at least  for  French  francs  and 
the DM  (1). It is probably  also  connected  with  the 
tendency  towards  specialization  of the  markets  which 
seems  to be gathering  momentum  in certain  countries, 
since  the  main  borrowers  on  the  Euro-issues  market 
belong  rather  to the  private  sector  than  to the  public 
sector,  whereas  public  borrowers  account  for most  of the 
business  on  the  national  markets.  In the  long  run, distortions  of this  nature  could  have  disadvantages  of 
which  a common  capital  market  based  on harmonized 
taxation  would  be free.  Suggestions  in this  connection 
were  made  in the Working  Party's  last  annual  report. 
It goes  without  saying  that  the  integration  of the 
Community  markets  will  necessitate  coordination  of 
economic  and  monetary  policies  and  elimination  of risks 
deriving  from  possible  parity  changes,  i.e.  in effect,  a 
single  currency.  However,  even  before  progress  on such  a 
large  scale  is made  on the monetary  level,  interpenetration 
of the  national  capital  markets  by the  gradual  mutual 
concession  of facilities  for floating  issues  by an increase  in 
security  quotations  from  other  member  countries  and  by 
an increase  in the  scope  for  mutual  placing  by member 
countries'  residents  on the  domestic  markets  would  yield 
some  of the  advantages  to  be  expected  from  the 
development  of a European  capital  market  which  the 
Euro-issue  market  cannot  provide. 
The Working  Party  regrets  that  developments  in the 
course  of the  year  brought  the  Community  no nearer 
these  objectives.  Balance-of-payments  considerations  in 
certain  countries  and  differing  trends  in business  activity 
delayed  monetary  integration  and  actually  led  to the 
creation  of additional  barriers  between  the countries. 
In this  context,  the Working  Party  believes  that  there  can 
be no  complete  and  lasting  integration  of  the 
Community's  securities  markets  before  disparities  in 
business  trends  in the member  countries,  and  therefore  in 
the economic  and  monetary  policies,  have  been  narrowed 
down.  Consequently,  it believes  that  progress  in monetary 
integration  must  be made  if capital  market  policies  are to 
be harmonized;  this  finding  does  not  mean  that  efforts 
should  not  be  continued  in this  field  or that  any 
opportunity  should  be neglected  to eliminate  institutional 
and technical  obstacles  to the  reciprocal  opening  of the 
capital  markets. 
(1) There  is a 25  % withholding  tax  for  non-residents  drawing 
interest  on domestic  DM  and  FF  issues,  but  Euro-issues  in these 
currencies  are  exempt. 
9. 11.73 Official  Journal  of the European  Communities No C 94/27 
No C 94/28 Official  Journal  of the  European  Communities 9.11.  73 
Note  on stock  market  yields  graph 
For the Member  States  the reference  is to the rates  considered  as the most  representative  on 
the market.  In the absence  of series  for the entire  market,  the rates  referred  to are those  of the 
issuers  operating  most  frequently  on the relevant  market. 
Germany:  stock  market  yield  of all fixed-income  securities. 
France:  stock  market  yield  of bonds  issued  or guaranteed  by the central  government 
and bonds  having  the same  status. 
Belgium:  stock  market  yield  on state  loans  maturing  in more  than  five  years. 
Italy:  stock  market  yields  on bonds  issued  by credit  institutions  (personal  prop-
erty credit  establishments). 
Netherlands:  for  1970,  stock  market  yield  of the  4-5  % loan  of the  Bank  voor  Neder-
landsche  Gemeenten:  for  1971  and  1972,  average  of the  last  three  State 
loans  maturing  in 20 years. 
Luxembourg:  stock  market  yield  of thirteen  Luxembourg  State  loans  issued  from  1955 
onwards  (14  loans  from  October  1971  onwards,  15 loans  from  January 
1972  onwards). 
Euro  $: average  yield  on ordinary  bonds  calculated  over  the  average  life  of the 
loan (source:  OECD-BONDTRADE). 
Euro  DM:  stock  market  yield  from  bonds  of foreign  issuers  denominated  in DM 
(source:  Deutsche  Bundesbank). 
9. 11.73 Official  Journal  of the European  Communities No C 94/29 
u IE W///Z//A 
sr 
sL W7777< 
$2. 
WZ 
IC 
3 « 
c 3 o rt -Q O ® t/5 
<u c 
S -3 J3 *o 5 > e 
it W/S///}//////?. 
ii \////////A 
WW7Z, 
'£ 
WZ/ZMZ/ZMA 
m WZzzzZzzZzzz, 
m 
ic 
spi - Q 
ts> 
i § 
Si .E T3 
S ® 
I i 8 S 
No C 94/30 Official  Journal  of the  European  Communities 9. 11.73 
ANNEX  VI 
LIST  OF  MEMBERS  OF  THE  WORKING  PARTY  ON  SECURITIES  MARKETS 
Chairman: 
GERMANY 
BELGIUM 
FRANCE 
ITALY 
LUXEMBOURG 
NETHERLANDS 
COMMISSION 
OF THE  EUROPEAN 
COMMUNITIES 
SECRETARIAT F. De Voghel,  vice-gouverneur  honoraire  de la Banque  nationale  de 
Belgique,  president  de  l'lnstitut  de reescompte  et de garantie, 
Brussels 
Dr K. Andreas,  Leiter  der Hauptabteilung  Kredit,  Deutsche  Bundes-
bank,  Frankfurt 
Ministerialrat  Borgbohmer,  Bundesministerium  der Finanzen,  Bonn 
Ministerialrat  G. Wetzler,  Bundesministerium  der Finanzen,  Bonn 
M. D'Haeze,  directeur  general  de l'administration  de la tresorerie 
et de la dette  publique,  Brussels 
F. Junius,  Banque  nationale  de Belgique,  Brussels 
E. Kestens,  inspecteur  general  au ministere  des  finances,  Brussels 
Y. Berger,  conseiller  aupres  du gouverneur  de la Banque  de France, 
Paris 
Ph. Cosserat,  direction  du tresor,  ministere  de Peconomie  et des 
finances,  Paris 
P. de Larosiere,  sous-directeur  des affaires  internationales  a la direc-
tion du tresor,  ministere  de Peconomie  et des finances,  Paris 
Mme.  L. Beauvais,  Banque  de France,  Paris 
Dott.  P. Battaglia,  condirettore  centrale,  Banca  d'ltalia,  Rome 
Dott.  G. Monterastelli,  condirettore  centrale,  Banca  d'ltalia,  Rome 
Dott.  M. Napolitano,  ispettore  generale,  direzione  generale  del Te-
soro,  ministero  del Tesoro,  Rome 
A. Dondelinger,  commissaire  au controle  des  banques,  Luxembourg 
E. Israel,  directeur  a la Banque  internationale,  Luxembourg 
Drs. M. M. Keyzer,  Nederlandsche  Bank  NV,  Amsterdam 
Drs. P. C. Timmerman,  Onderdirecteur  van  de Nederlandsche  Bank 
NV, Amsterdam 
Drs. J. Grooters,  directeur  binnenlands  geldwezen,  Ministerie  van 
Financien,  The  Hague 
F. Boyer  de la Giroday,  Director  for Monetary  Affairs,  Directorate 
General  for Economic  and  Financial  Affairs,  Brussels 
M. Sarmet,  Chief  of Division  for Financial  Institutions  and  Capital 
Markets,  Directorate  General  for  Economic  and  Financial  Affairs, 
Brussels 
M. Zucker,  Directorate  General  for Economic  and  Financial  Affairs, 
Brussels 
G. Morelli,  secretary  of the Monetary  Committee,  Brussels 
G. Lermen,  Brussels