3. 7. 78 
Official  Journal  of the European  Communities No C 156/1 
I 
(Information) 
COUNCIL  AND  COMMISSION 
NINETEENTH  REPORT 
ON THE  ACTIVITIES  OF THE  MONETARY  COMMITTEE 
FOREWORD 
The purpose  of this  report  is to give  a brief  account  of the activities  of the Monetary  Com-
mittee  in the course  of 1977. 
During  the year,  the Committee  held  11 sessions  and  the working  parties  drawn  from  its 
own members  or set up at its initiative  met  on many  occasions.  A list of members  as at 
31 December  1977  is annexed. 
The report  was  adopted  as at 31 December  1977. 
INTRODUCTION 
1. 1977  saw  a slowdown  in the expansion  of world 
economic  activity.  All the major  industrialized  countries 
were  affected,  although  to differing  degrees,  and  inter-
national  trade  suffered  as a result:  from  one  year  to 
another  their  rate  of growth  by volume  diminished  by 
almost  half.  Balance  of payments  disequilibria  persisted 
but unequally:  the deficit  of the non-oil-producing  de-
veloping  countries  diminished,  as did  the  OPEC  sur-
plus;  the  deficit  of the  Community  was  also  greatly 
reduced.  On  the  other  hand,  a new  disequilibrium, 
namely  a considerable  worsening  of the  US  deficit, 
made  itself  increasingly  felt in the course  of the year. 
2. The  economic  situation  in the Community  presented 
rather  a contrast  in 1977.  The  slowdown  of expansion was particularly  marked,  the rate  of growth  of output  in 
1977  scarcely  exceeding  half  that  of the preceding  year. 
Because  of this,  the employment  situation  did not im-
prove:  unemployment  at first  continued  to expand  be-
fore stabilizing  somewhat  at the end  of the year  under 
the effect  of specific  measures  adopted  in a majority  of 
countries.  On the other  hand,  considerable  progress  was 
achieved  on prices  and  external  payments:  a slowdown 
in the rate  of inflation  was  to be seen  in the Community 
as a whole,  and  was  particularly  marked  in those  coun-
tries where  it had  been  highest;  similarly,  there  was  a 
considerable  reduction  in the  current  deficit  of the 
Community,  and it is mainly  due to the improvement  in 
the current  balances  of countries  who  had  the largest 
deficits. 
COMMUNITY  ACTION  AND  THE  ACTIVITIES  OF THE  COMMITTEE 
3. In 1977,  as in previous  years,  the Committee  de- economic  situations  of Member  States,  to studying  ways 
voted  a major  part  of its time  to examining  the  of  reinforcing  monetary  and  financial  cooperation 
No C 156/2 Official  Journal  of the European  Communities 3. 7. 78 
within  the Community  and  finding  a common  position 
on international  monetary  problems  discussed  primarily 
in the International  Monetary  Fund. 
4. During  the  year,  all Community  countries  were 
examined  at least  once  and  some  of them  much  more 
frequently,  either  in accordance  with  procedures 
governing  the use of Community  credit  mechanisms,  or 
as a result  of developments  in the economic  situation  of 
those  countries. 
5. The  countries  whose  economies  were  examined 
most  often  therefore,  in 1977,  were  Italy,  the United 
Kingdom  and  the  Federal  Republic  of Germany.  As 
required  by the Council  Decision  granting  a Community 
loan to Italy,  the  Committee  was  consulted  by the 
Commission  on the economic  situation  in Italy  and  the 
economic  policy  conditions  to be observed  by Italy  in 
1977.  The  opinion  expressed  by the Committee,  based 
on the work  carried  out by the ad hoc group  chaired  by 
Mr de la Geniere,  were  taken  into  account  when  the 
Council  adopted  a Directive  on 17 May  1977  adapting 
the conditions  attached  to the granting  of medium-term 
financial  assistance  to Italy  in 1974  as well  as two  De-
cisions,  one  which  authorized  the Commission  to bor-
row $ 5.00  million  on the capital  markets  and  lend  this 
sum to Italy  and  the other  which  fixed  the economic 
policy  conditions  to be observed  by this  country  in re-
turp for the Community  loans  received  in 1976  and 
1977. 
The Committee  also  closely  followed  the situation  in the 
United  Kingdom,  as the measures  taken  to meet  the 
sterling  crisis  of autumn  1976  began  to take  effect.  At 
the beginning  of the  year,  the Committee  received  a 
report  from  its ad hoc  group  chaired  by Mr Andersen 
on the economic  situation  in the United  Kingdom,  and 
in the light  of this report,  the Committee  agreed  that  the 
continued  non-participation  of the UK in the provision 
of medium-term  financial  assistance  to Italy  was  jus-
tified  on the basis  of the balance  of payments  and  re-
serves  situation.  The  Committee  continued  to monitor 
developments  in the  British  economy  throughout  the 
year as the improvement  particularly  in the balance  of 
payments  and  on the financial  front,  was  maintained. 
The Committee  also  frequently  discussed  the monetary 
situation  in Germany  and  the way  in which  the German 
authorities  could  contribute  to better  equilibrium  in 
balances  of payments  within  the Community. 
6. In January  the Committee  also  adopted  the report 
prepared  by the Andersen  group  on the economic  situ-
ation  in Ireland  and  the respect  of the economic  policy 
conditions  in 1976,  in accordance  with  the requirements 
of the Decision  granting  a Community  loan  to Ireland. 
In December,  the  group  met  again  to consider  de-velopments  in 1977  and  to prepare  a report  which  will 
be submitted  to the Committee  early  in 1978. 
7. In the  framework  of the  move  to the  'own  re-
sources'  system  for financing  Community  expenditure 
in 1978,  the Committee  was  consulted  on the monetary 
problems  involved  in the Commission's  proposal  for the 
adoption  of the European  unit  of account  (EUA)  in the 
Community  budget.  It approved  the proposals  of the 
Commission  and recognized  that  the accounting  method 
envisaged  had  no monetary  implications  (Annex  I). 
8. In November  1976,  the Committee  had  presented  a 
report  to the Council  and the Commission  on a number 
of monetary  problems  faced  by the Community,  among 
which  was  the Community's  exchange  rate  system.  At 
their  meeting  of 8 November  1976,  the Council  took 
note of this  report  and  requested  both  the Committee 
and the Committee  of Governors  to see how  and  under 
what  circumstances  the proposals  to introduce  a coher-
ent exchange  rate  policy  system  for the Community  as a 
whole  could  be implemented.  (See  paragraph  8 (a) of 
the 18 th report  on the  activities  of the  Monetary 
Committee  (1). After  detailed  discussions,  the  Com-
mittee  approved  the text  of a declaration  which  it re-
quested  the chairman  to make  to Council  at its session 
of 14 March  (Annex  II). 
9. In this  declaration,  the  Committee  expressed  its 
reluctance  to propose  the introduction  of a target  zone 
system  to the Council  at that  time.  On the other  hand,  it 
suggested  that  the  strengthening  of economic  and 
financial  cohesion  of the  Community  could  be done 
without  delay  by initiating  'periodic  consultations  on 
the direction  and  intensity  of measures  taken  by the 
Member  States  in so far as they  affect  the development 
of exchange  rates'.  As a result,  the Committee  has held 
regular  consultations  on the development  of exchange 
rates,  and  on three  occasions  has devoted  a major  part 
of its sessions  to such  consultations.  These  consultations 
could  play  a useful  role  in contributing  to a better  un-
derstanding  of the exchange  rate  policies  of Member 
States  and  therefore  promoting  a closer  coordination  of 
these  policies. 
10. The  second  monetary  problem  which  the  Com-
mittee  discussed  in its report  of November  1976,  was 
the use of quantitative  monetary  policy  objectives.  This 
was also  to be the subject  of periodic  discussion  in the 
Committee,  and  in addition  to its regular  surveys  of 
national  monetary  policies,  the Committee  has held  one 
detailed  examination  of the  experience  of Member 
States  in using  such  quantitative  monetary  policy  objec-
OJ No C 195,  15. 8. 1977,  p. 2. 
3. 7. 78 Official  Journal  of the European  Communities No C 156/3 
tives,  of the  different  types  of objectives  used,  and 
Member  States'  assessment  of the  usefulness  of such 
objectives  in achieving  the goals  of overall  economic 
policy. 
11. Following  the decision  of the United  Kingdom  in 
November  1976  not to renew  the bilateral  three-month 
renewable  credit  it had  extended  to Italy  at the time 
when  that  country  was  granted  MTFA,  the Commission 
requested  the Council  for permission  to negotiate  a $ 
500 million  loan  under  the Communtiy  loan  mechanism 
set up in February  1975.  As required  by the provisions 
of the Regulation  governing  such  loans,  the Committee 
was consulted  on this  proposal,  and  at later  stages  of 
the procedure,  which  culminated  in the issue  of a $ 500 
million  Euro-bond  issue  in two  tranches,  one  of $ 200 
million  for five  years  at 7-5 % and  one  of $ 300  million 
seven  years  at 7-75  %. The  Committee  was  again  con-
sulted  on proposals  to change  the floating  rate  portion 
of the original  loan  operation  to fixed  rates.  (One  such 
operation  had  already  been  done  in October  1976  — 
see 18th  report,  paragraph  9). The  consolidation  was 
completed  by means  of a $ 100  million  fixed  interest 
bank  credit  provided  by a group  of Dutch  banks  in 
April  and  a $ 100  million  public  offer  of notes  on the 
New  York  market  in July. system  on conditionality  of loans,  supervision  of com-
pliance  with  policy  conditions  accompanying  the grant-
ing of loans,  conditions  for possible  exemption,  and 
mobilization  of claims  and the currency  in which  credits 
made  available  are to be denominated.  On the basis  of 
these  two  reports,  the  Commission  prepared  a draft 
proposal  and  at its meeting  of 19 December,  the Coun-
cil adopted  a Decision  amending  the MTFA  mechanism 
along  the lines  suggested  by the Committee. 
13. The  Committee,  along  with  the Economic  Policy 
Committee,  was  requested  to examine  the  proposal 
presented  by the Commission  to the European  Council 
on 29 and  30 June  on 'investment  and  borrowing  in the 
Community'.  This  communication  proposed  that  the 
Commission  be permitted  to raise  loans  up to an 
amount  of 1 000 million  EUA.  On the basis  of a report 
prepared  by the alternates,  the Committee  adopted  a 
preliminary  report  to the Council  and Commission  at its 
meeting  of 12 October  (Annex  V). In the light  of this 
report,  the  Council  then  invited  the  Monetary  Com-
mittee  to pursue  its examinations  in order  that  it could 
take a decision  at its November  meeting.  At its meeting 
of 15 November,  the Committee  adopted  a supplemen-
tary report  setting  out a possible  compromise  solution 
to the problems  described  in its first  report  (Annex  VI). 
This proposal  was  accepted  by the Council  and a formal 
decision  will  be taken  early  in 1978. 
12. At  the  Council  meeting  of 18 July,  the  Belgian 
President-in-office  had put forward  a series  of proposals 
for improving  the Community's  short-  and  medium-
term  credit  mechanisms  and  thereby  providing  for 
convergence  in the economies  of Member  States.  The 
Council  had  then  requested  the Monetary  Committee 
(along  with  the Committee  of Governors)  to examine 
these  proposals,  which  essentially  involved  an increase 
in the quotas  in the short-term  monetary  support  system 
and in the amounts  of the ceilings  in the medium-term 
financial  assistance,  and  increasing  the conditionality  of 
both.  Concentrating  mainly  on the  question  of the 
MTFA,  the  Committee  adopted  a preliminary  report 
which  was  submitted  to the  Council  on 17 October 
(Annex  III).  In response  to a further  request  from  the 
Council,  the Committee  continued  its examination  and 
presented  a supplementary  report  to Council  on 21 
November  (Annex  IV).  This  report  proposed  a doubling 
of member  countries'  commitment  ceilings  in the 
medium-term  financial  assistance  mechanism  provided 
satisfactory  adjustments  were  made  to the rules  of the 14. As  usual,  the  Committee  also  discussed  inter-
national  monetary  questions  on a number  of occasions, 
in preparation  for the meetings  of the Interim  Commit-
tee in April,  and  the annual  meetings  of the Interna-
tional  Monetary  Fund  and  World  Bank  in Washington 
in October.  This  year,  the main  questions  with  which 
the Committee  was  called  upon  to deal  were  interna-
tional  liquidity,  in the framework  of the seventh  review 
of quotas,  the liquidity  of the Fund  itself,  surveillance 
by the Fund  of exchange  rate  policies,  and  the role  of 
the SDR  in the international  monetary  system. 
15. The  Committee  also  examined  various  other  mat-
ters, including  consultations  under  Article  108  of the 
EEC Treaty,  and  proposals  to change  the conversion 
rates  for national  currencies  into  units  of account  for 
the purposes  of the common  agricultural  policy. 
WORKING  PARTIES  OF THE  MONETARY  COMMITTEE 
16. The  Working  Party  on Securities  Markets  met  velopments  in the capital  markets  of the Member  States 
three  times  in 1977,  and  continued  to examine  de-  and  in the international  bond  markets,  and  also  discus-
No C 156/4 Official  Journal  of the European  Communities 3. 7. 78 
sed capital  market  policies.  It further  pursued  the work 
begun  in 1976  on the implications  of the increasing  use 
of floating-rate  loans,  both  on the international  markets 
and on national  fixed-interest  bond  markets,  as a means 
of raising  long-term  capital. 17. The  Working  Party  'Harmonization  of Monetary 
Policy  Instruments',  a joint  group  of the Committee  and 
the Committee  of Governors,  met several  times  in 1977. 
It continued  its studies  of simulation  exercises  with 
monetary  policy  instruments,  and  analyses  of the 
transmission  process  of monetary  policy,  with  a view  to 
presenting  a new  report  to the Committee  in 1978. 
3.7%  78 Official  Journal  of the European  Communities No C 156/5 
LIST  OF MEMBERS  AND  ALTERNATES  OF THE  MONETARY  COMMITTEE 
Chairman 
Mr K-O.  Pohl 
Vice-Chairmen 
Mr S. Andersen 
Mr J-Y.  Haberer 
Dott.  S. Palumbo Vizeprasident  der Deutschen  Bundesbank 
(Frankfurt-am-Main) 
Governor  — Danmarks  Nationalbank  (Copenhagen) 
Chef  du service  des affaires  internationales  a la direction  du 
tresor  — ministere  de l'economie  et des finances  (Paris) 
Dirigente  generale  al ministero  del Tesoro  (Rome) 
Members 
Mr M. J. Balfour 
Mr F. Boyer  de la Giroday 
Mr R. de la Geniere 
Mr A. Dondelinger 
(until  25 January  1977) 
Dr O. Emminger 
(until  1 June  1977) 
Mr K. Hansen 
Mr M. Morgan 
Mr P. Jaans 
(since  25 January  1977) 
Mr G. Janson 
Mr N. Jordan-Moss 
Mr R. Kirsch 
Prof.  G. Magnifico 
Dott.  U. Mosca 
Mr T. O'Grady-Walshe 
Dr C. J. Oort 
Drs. A. Szasz 
Mr J. van Ypersele  de Strihou 
Dr H. H.Weber 
Dr A. H. E. M. Wellink Bank  of England  (London) 
Director  in the  Directorate-General  for  Economic  and 
Financial  Affairs  — Commission  of the European  Com-
munities  (Brussels) 
Premier  sous-gouverneur  de la Banque  de France  (Paris) 
Commissaire  au controle  des banques  (Luxembourg) 
Vizeprasident  der Deutschen  Bundesbank 
(Frankfurt-am-Main) 
Director-General 
(Copenhagen) Det Okonomiske  Sekretariat 
Department  of Finance  (Dublin) 
Commissaire  au controle  des banques  (Luxembourg) 
Directeur  de la Banque  nationale  de Belgique  (Brussels) 
H. M. Treasury  (London) 
Conseiller  de gouvernement  — ministere  des finances 
(Luxembourg) 
Banca  d'ltalia  (Rome) 
Director-General  for  Economic  and  Financial  Affairs 
— Commission  of the European  Communities  (Brussels) 
Central  Bank  of Ireland  (Dublin) 
Thesaurier-generaal  bij het Ministerie  van Financien 
(The Hague) 
Directeur  van de Nederlandsche  Bank  NV (Amsterdam) 
Conseiller  du ministre  des finances  (Brussels) 
Ministerialdirektor  — Bundesministerium  der  Finanzen 
(Bonn) 
Thesaurier-generaal  bij het Ministerie  van Financien 
(The Hague) 
Chairman  of the Alternates  of the Monetary  Committee 
Mr J. G. Littler 
(until  7 July  1977) 
Mr H. Baquiast 
(since  9 September  1977) H. M. Treasury  (London) 
Sous-directeur  a la direction  du tresor  ministere  de 
1'economic  et des finances  (Paris) 
No C 156/6 Official  Journal  of the European  Communities 3. 7. 78 
Alternates 
Dott.  V. Barattieri  di san Pietro 
(until  12 October  1977) 
Drs. D. H. Boot 
Mr P. J. Bull 
(since  17 May  1977) 
Mr H. Dalgaard 
Dr W. Flandorffer 
Mr R. H. Gilchrist 
(until  17 May  1977) 
Mrs M. Hedley-Miller 
(since  7 July  1977) 
Mr P. Jaans 
(until  25 January  1977) 
Mr G. Jennemann 
Mr G. Lefort 
Dott.  S. Masera 
(since  12 October  1977) 
Mr J. Mertens  de Wilmars 
Mr L. Meulemans 
(until  1 May  1977) 
Mr G. Reynolds 
Mr M. Schmit 
Mr B. Scully 
Mr N. Ussing 
Drs. R. van Boven 
Mr J. Vanormelingen 
(since  1 May  1977) 
Dr M.Wegner 
Mr P. Zimmer 
(since  25 January  1977) 
Dott.  A. Zodda 
Secretariat 
Mr G. Morelli 
Mr G. Lermen 
Mr A. Chapman Banca  d'ltalia  (Rome) 
Onderdirecteur  van de Nederlandsche  Bank  NV 
(Amsterdam) 
Bank  of England  (London) 
Kontorchef  — Danmarks  Nationalbank  (Copenhagen) 
Ministerialrat  — Bundesministerium  fur Wirtschaft  (Bonn) 
Bank  of England  (London) 
H.M.  Treasury  (London) 
Commissaire  au controle  des banques  (Luxembourg) 
Bankdirektor  — Deutsche  Bundesbank 
(Frankfurt-am-Main) 
Directeur  general  des services  etrangers  de la Banque  de 
France  (Paris) 
Banca  d'ltalia  (Rome) 
Conseiller  economique  de la Banque  nationale  de Belgique 
(Brussels) 
Inspecteur  general  a ^administration  de la tresorerie 
(Brussels) 
Central  Bank  of Ireland  (Dublin) 
Inspecteur  des finances  (Luxembourg) 
Department  of Finance  (Dublin) 
Kommiteret  — Det  ©konomiske  Sekretariat  (Copenhagen) 
Ministerie  van Financien  (The  Hague) 
Administration  de la Tresorerie  (Brussels) 
Director  in the  Directorate-General  for  Economic  and 
Financial  Affairs  — Commission  of the European  Com-
munities  (Brussels) 
Commissariat  au controle  des banques  (Luxembourg) 
Ministero  del tesoro  (Rome) 
3. 7. 78 Official  Journal  of the European  Communities No C 156/7 
ANNEX  I 
OPINION  TO THE  COUNCIL  AND  THE  COMMISSION 
1. At its meeting  of 30 March  1977  the Monetary  Committee 
examined  the monetary  problems  involved  in the adoption  of 
the European  unit  of account  (EUA)  in the Community  budget, 
on the  basis  of documents  presented  by  the  Com-
mission  departments  and  in the light  of the proposal  for a 
Regulation  of the Council  adopting  the EUA  in the budget. 
The Committee  considered  the other  possible  applications  of 
the unit  of account  which  include: 
(a) the European  monetary  cooperation  fund; 
(b) short-term  monetary  support  system; 
(c) medium-term  financial  assistance; 
(d) Community  loan. 
The Committee  noted  that  the Commission  did not propose 
the application  of the EUA  in respect  of the European  mone-
tary cooperation  fund  and  the short-term  monetary  support 
system,  for which  the EMUA  is used.  They  noted  also  that  the 
Commission  had  deferred  proposals  to apply  the  EUA  to 
medium-term  financial  assistance  and that  it was  not proposed 
to apply  the EUA  in respect  of Community  loans. 
2. Considering  the problem  of the application  of the EUA  to 
the budget,  the Committee  agreed  that  there  are no monetary 
consequences  of adopting  the EUA  for accounting  purposes  of 
the Community  and  examined  separately  the problems  arising 
in connection  with  expenditure  and  those  arising  on the 
revenue  side. 
3. The  Committee  felt it could  accept  the principle  of deter-
mining  budgetary  expenditure  in the EUA.  It noted  the Com-
mission's  intention  to implement  this  principle  gradually  and 
to achieve  it with  the necessary  flexibility. 
It recognized,  however,  that  by far the largest  proportion  of 
Community  expenditure  is presently  denominated  in national 
currencies,  and in the agricultural  unit  of account  (representa-
tive rates)  and  some  of them  were  sceptical  about  the likeli-
hood  of the proportion  of EUA-determined  expenditure  reach-
ing a significant  level  in the near  future.  Some  members  expres-
sed particular  concern  about  the application  of the EUA  to the 
Community's  contractual  relationships.  Moreover,  concern 
was expressed  that  the determination  of payments  to residents 
in units  of account  might  lead  to exchange  control  difficulties. 
It was  noted  in this connection  that  in the Commission's  view 
the determination  of payments  in units  of account  would  in all 
cases  be subject  to national  exchange  control  regulations.  The 
Committee  finally  felt that  the provisions  for a price  revision 
index  as laid  down  in Article  14 were  unacceptable  from  a 
monetary  point  of view. 
4. Most  members  of the Committee  were  not ready  to accept 
the development  of the EUA  as a means  of payment  or a sig-
nificant  expansion  of accounts  held  with  commercial  banks 
and denominated  in EUA  over  and above  those  already  in exis-
tence  for ECSC  use.  Such  an expansion  in the view  of some 
members  would  have  the consequence  of giving  rise to a paral-lel currency,  of provoking  undesirable  capital  movements,  and 
would  entail  costs  for banks  in covering  the foreign  exchange 
risks  in several  currencies. 
5. The  Committee  also  considered  the principle  proposed  by 
the Commission  that  the value  of the budget  receipts  should  be 
maintained  in EUA.  The  departments  of the Commission  jus-
tified  this principle  on the following  grounds:  although  only  a 
small  proportion  of expenditure  will  at first  be in EUA,  the 
currency  of payment  of the majority  of expenditure  is un-
known  at the time  of the budgetary  decision.  Therefore  the 
Committee  considered  that  it is correct  to maintain  the value 
of receipts  over  a spread  of national  currencies  and that  using 
the EUA  weighting  is the most  neutral  and  least  contestable 
solution  from  a Community  point  of view.  Two  methods  of 
ensuring  this maintenance  of value  were  examined: 
(a) Own  resources  collected  in national  currencies  would  be 
transformed  into  EUA  on the date  of payment.  This  can 
either  be done  by the Commission  holding  EUA  accounts 
with the central  banks,  or by the Member  States  giving  an 
EUA  guarantee.  The  national  authority  would  then  be free 
to choose  whether  to guard  against  the exchange  risk  by 
purchasing  the EUA  'basket'  to the amount  of its obligation 
or to carry  the exchange  risk itself. 
(b) Own  resources  are held  in an account  in national  currency 
in the  Commission's  name  with  the  national  monetary 
authorities.  The  Commission  would  then  administer  these 
funds  and  could  in particular  make  transfers  from  one 
currency  to another. 
6. The  Committee  felt that it might  be possible  and attractive 
to look  for ways  of matching  expenditure  and revenue  by cur-
rency:  to the extent  that  expenditure  and  revenue  could  be 
accurately  forecast  this would  have  the advantage  of reducing 
the amount  of net transfers  of funds  to the minimum  required 
to accommodate  net  flows  of financial  resources  between 
Member  States.  However,  the  Commission  departments 
pointed  out that  the prediction  of currency  requirements  both 
in the short-run  and  in the long-run  is uncertain,  since  Com-
munity  policy  may  be changed  in mid-year  in the face  of 
special  circumstances,  (such  as in 1976  when  the  basis  of 
payment  of monetary  compensatory  amounts  was  changed), 
and that  under  the own  resources  system,  forecasting  of re-
ceipts  by currency  is also  very  difficult.  To the extent  that  a 
large  margin  of error  would  exist,  currency  transfers  might 
well be substantial  and frequent,  thus  raising  difficulties  for the 
monetary  authorities  in their  management  of exchange  mar-
kets. 
7. To  the extent  that  offsetting  expenditure  and  revenue  by 
currency  is not feasible,  the Committee  felt that  an alternative 
fairly  well  defined  and administratively  defensible  criterion  for 
guiding  the  transfers  between  currencies  would  be for the 
Commission  to match  its currency  holdings  to the EUA  basket. 
8. While  applying  the principle  of keeping  currency  holdings 
in step  with  the EUA  weights  there  was  still  scope  for cancel-
ling out,  as far as possible,  receipts  and payments  in the same 
No C 156/8 Official  Journal  of the European  Communities 3. 7. 78 
national  currency  so as to reduce  to a minimum  the need  for 
currency  transfers.  It was  pointed  out  that  the Commission 
intended  to continue  its current  practice  of concentrating  its 
receipts  and  payments  in time,  thus  minimizing  the number  of 
transactions  needed  to maintain  the value  of receipts. 
9. Although  some  of them  found  the first  type  of solution 
paragraph  5 (a) as proposed  by the Commission  acceptable, 
the members  of the Committee  generally  felt that the option  in 
paragraph  5 (b) appeared  to be the system  which  is least  com-
plex,  most  easily  managed,  offers  most  opportunity  for cancel-
ling out payments  and  receipts  and does  not require  the open-ing of EUA-denominated  bank  accounts.  However,  it was 
recognized  that  in operating  such  an arrangement  the Com-
mission  would  still  have  to make  some  transfers.  These  trans-
fers should  be subject  to concertation  with  the monetary  au-
thorities  so as to minimize  their  impact  on exchange  markets 
and reserves  management. 
10. It was  felt  that  this  system  offered  significant  scope  for 
experimentation:  the Committee,  like  the Commission,  recog-
nized  the need  for a broad  guideline,  but it considered  that  a 
flexible  and pragmatic  approach  should  be adopted  at least  in 
the initial  stages  so as to allow  for eventual  reconsideration 
and adjustment. 
ANNEX  II 
ORAL  STATEMENT  TO COUNCIL  ON  THE  COMMUNITY  EXCHANGE  RATE  SYSTEM 
At the request  of the Council  (416th  session  of 8 November 
1976),  the Monetary  Committee  has again  examined  how  and 
under  what  circumstances  the  Dutch  proposals  on  the 
strengthening  of economic  and  financial  cohesion  of the 
Community  could  be made  operational.  The  Committee  has 
asked  its chairman  to make  an oral  report  to the Council  on 
this subject. 
The members  of the Monetary  Committee,  in their  discussions, 
supported  the objectives  of the Dutch  proposals.  They  unani-
mously  agreed  that  the main  point  of this initiative  is to initiate 
more  consultations  in order  not only  to reduce  the danger  of 
divergent  developments  in exchange  rates  between  members  of 
the European  exchange  arrangement  and other  members  of the 
Community,  but also  to foster  convergence  in economic  pol-
icy and  exchange  rates.  As was  emphasized  on several  oc-
casions  in the Committee,  these  consultations  should  cover  all 
areas  of economic  and  financial  policy  which  are relevant  to 
the development  of exchange  rates.  There  are,  even  nqw,  suf-
ficient  grounds  for this procedure,  certainly  at a time  when  the 
economic  policies  of the Member  States  and  their  exchange 
rates  obviously  do not show  a sufficient  degree  of convergence. 
I migth  add that  existing  Council  Decision  already  require  such 
consultations,  and  this  irrespective  of whether  and  when 
'target  zones'  can be established. 
As- indicated  in its report  to the Council  and  the Commission 
of 4 November  1976,  the Committee  considers  that,  for the 
foreseeable  future,  it would  not be feasible  to introduce  a co-
herent  exchange  rate  policy  system,  if such  a system  were  to go 
beyond  consultations  and  also  contain  binding  obligations 
whether  in respect  of general  economic  policy  or exchange  rate 
policy  in particular.  Such  obligations  can only  be undertaken 
when  appreciable  progress  has been  made  towards  the con-vergence  of economic  policies  and  when  there  is a sufficiently 
parallel  development  on the exchange  markets. 
It is mainly  on these  grounds  that  the Committee  is reluctant  to 
propose  the introduction  of a target  zone  system  to the Council 
at the present  moment.  There  is also  the fact  that  a number  of 
differences  of opinion  still  remain  in the Committee  on indi-
vidual  aspects  of the target  zone  concept  (method  of calcu-
lation  and  usefulness  of effective  rates,  uncertainty  as to the 
reaction  of the exchange  markets  to the establishment  of target 
zones).  Discussion  of these  questions  should  continue  in the 
Monetary  Committee. 
I believe  I am interpreting  correctly  the views  of all the mem-
bers of the Committee  when  I say that  it is more  a question  of 
practical  action  and  pragmatic  procedure  than  formal  de-
cisions.  Therefore  I suggest  that: 
— the  Monetary  Committee  initiate,  without  delay,  periodic 
consultations  on the direction  and  intensity  of measures 
taken  by the Member  States  in so far as they  affect  the 
development  of exchange  rates, 
— the  Commission  be requested  to make  available  all the 
necessary  data  to the Monetary  Committee  for this  pur-
pose, 
— the  Monetary  Committee  report  to the Council  and  the 
Commission  on the outcome  of its consultations, 
— Member  States  decide  in the Council  to what  extent  the 
recommendations  of the Monetary  Committee  can be put 
into effect. 
I am  convinced  that  such  consultations  in the  Monetary 
Committee  would  be an initial  realistic  step  towards  taking 
account  of the proposals  of the Dutch  and French  Ministers  of 
Finance  as well  as one of the aspects  of the Tindemans  Report. 
3. 7. 78 Official  Journal  of the European  Communities No C 156/9 
ANNEX  III 
REPORT  TO THE  COUNCIL  AND  THE  COMMISSION  ON THE  BELGIAN  PROPOSALS 
1. At the Council  meeting  of 18 July  1977,  the Belgian  Presi-
dency  submitted  a programme  for  action  in the  field  of 
economic  and  finance.  In particular,  this  programme  makes 
suggestions  for  amending  and  improving  the  short-  and 
medium-term  credit  mechanisms  which  exist  at present  within 
the Community.  The  Council  asked  the Monetary  Committee 
to examine  these  suggestions  and  report  back  in time  for the 
October  Council  meeting.  In response  to this  request,  the 
Monetary  Committee  is submitting  the present  report  which 
embodies  the conclusions  of its preliminary  discussions  on this 
matter. 
2. The  work  of the Monetary  Committee  at its meetings  of 9 
September  and 12 October  was  based  on a memorandum  from 
the Belgian  members  which  spells  out  in detail  their  ideas 
concerning  the Community  credit  mechanisms.  The  Belgian 
memorandum  suggests  that  the credit  mechanisms  be amended 
as follows: 
(a) Short-term  monetary  support 
— existing  debtor  quotas  for each  central  bank  would  be 
doubled  by adding  a second  debtor  tranche  of an equal 
amount, 
— creditor  quotas  would  be increased  by 50 %, 
— the  rallonge  would  be doubled, 
— barring  exceptional  circumstances,  no country  could  re-
ceive  more  than  half  the rallonge, 
— any  drawing  involving  utilization  of the second  tranche 
and any  or all of the rallonge  would  be open  only  to those 
countries  who  have  agreed  to announce  the adoption  of 
intermediary  monetary  objectives. 
(b) Medium-term  financial  assistance 
— the  credit  ceilings  would  be doubled, 
— access  to the facility  would  be subject  to stricter  conditions, 
in particular  in the field  of public  finance, 
— where  appropriate  the medium-term  financial  assistance 
could  be disbursed  in instalments,  the drawing  of each 
instalment  being  subject  to the  observation  of specific 
conditions. 
3. The  Committee  shares  and approves  the motivations  which 
have  guided  the Belgian  members  in making  their  proposals. 
Indeed  there  was  agreement  in the Committee  that  ways  of 
enlarging  and improving  the existing  credit  mechanisms  and at 
the same  time  of making  conditionality  more  effective  should 
be considered  in conjunction.  In addition,  the Committee  feels 
that present  credit  arrangements  should  be reviewed  so as to 
provide  accommodation  for more  than  one  member  country 
and to avoid  them  being  used  up almost  entirely  by a single 
beneficiary. 
4. On  the problem  of increasing  the amounts  available  within 
the two  Community  credit  arrangements,  the Committee  has 
not been  able  to reach  a unanimous  position.  It is generally 
recognized  that  given  the development  of balance  of payments 
and reserve  positions  there  is no urgent  demand  for financial 
assistance  within  the Community  at present.  Most  members 
argue  that  periods  of relative  calm  should  be put to good  use 
and consider  that  the  Belgian  suggestions  to increase  the amounts  within  the  two  credit  mechanisms  should  be 
examined  now  so that  they  are available  in the future  when 
new difficulties  might  arise.  Some  members  consider  that  the 
lack of urgency  at present  and in the foreseeable  future  argues 
in favour  of postponement.  They  also  see no need  to increase 
the amounts  of the short-term  mechanism  in advance  of the 
quinquennial  review  referred  to in Article  2 of the Agreement 
of central  banks  of 9 February  1970. 
5. The  resources  available  in the short-term  monetary  support 
system  were  already  substantially  increased  in March  1974. 
Even  so, the credit  facilities  currently  available  to individual 
countries  under  the short-term  system  are not notably  higher 
than those  available  under  the medium-term  financial  assist-
ance.  Members  agreed  that  it would  be difficult  under  the 
short-term  monetary  support  to impose  conditions  which 
could  not be fulfilled  or properly  monitored  in the short-term. 
While  taking  note  that  the Beligan  proposals  are not to be in-
terpreted  in this sense,  the Committee  felt that  these  proposals 
should  be worked  out in greater  detail. 
In any  case,  the Committee  noted  that  the Belgian  proposals 
concerning  the short-term  monetary  support  mechanism  were 
being  examined  by the Committee  of Governors  of Central 
Banks. 
6. A clear  majority  of the Committee  recognized  that  an in-
crease  in the resources  available  in the medium-term  financial 
assistance  mechanism  is warranted  on several  grounds:  these 
resources  have  remained  unchanged  ever  since  the mechanism 
was created  in March  1971;  almost  all funds  available  are 
presently  used  up by one single  borrower;  and there  is, finally, 
a good  case  to match  the medium-term  resources  to those 
available  in the short-term,  as in actual  practice  it is to be 
expected  that  the latter  would  often  precede  the former.  This 
last argument  is further  reinforced  by the fact  that  the majority 
of the Committee  thinks  that  the resources  in the short-term 
monetary  support  should  themselves  be increased.  Some  differ-
ences  of opinion  emerged  in the Committee  concerning  the 
extent  of the increase  that  would  be justified  in present  circum-
stances  and  the timing  of it in the light  of the parallel  dis-
cussion  on IMF  quota  increases. 
All members  supported  the idea  that  an increase  in resources 
should  be combined  with  more  effective  conditionality.  Dis-
bursements  of the medium-term  facility  in instalments  over  a 
period  of time  could  be an appropriate  way  of achieving  that 
result.  Doubts  were  however  expressed  on the possibility  of 
implementing  disbursements  by instalments  whenever  substan-
tial recourse  to the short-term  monetary  support  precedes  the 
granting  of medium-term  financial  assistance. 
In any event,  it was  felt that before  any decision  were  taken  on 
modifying  and enlarging  the medium-term  mechanism,  careful 
attention  should  be devoted  to such  important  aspects  as opt-
No C 156/10 Official  Journal  of the European  Communities 3. 7. 78 
ing-out  clauses  and mobilization  of claims  (Articles  4(1)  and  5 
(3) respectively  of Council  Decision  71/143/EEC  of 22 March 
1971).  Some  members  further  consider  that  before  a decision  is 
taken,  attention  should  be devoted  to the possibility  of a paral-
lel expansion  of the Community  loan  mechanism. 
They  also  suggested  that  the adoption  of the EUA  for Com-
munity  credit  mechanisms  should  be examined. 
7. The  Committee  emphasizes  that  the  conclusions  of the 
present  report  are preliminary  and that  it has not been  possible 
to agree  on all points.  It is hardly  possible  for the Committee 
to pursue  the matter  further  without  the Council's  endorse-ment  of the view  that  the convergence  of the economic  policies 
of member  countries  at this juncture  could  (and  hence  should) 
be promoted  through  an enlargement  of the Community  credit 
arrangements  combined  with  strengthened  procedures  for 
effectively  securing  the fulfilment  of conditions  attached  to 
borrowing  under  these  arrangements. 
However,  if Ministers  could  reach  agreement  in principle  on 
the above  point  of view,  the Committee  could  analyze  more 
closely  the technical  problems  and implications;  it points  out in 
this connection  that  it is for the Committee  of Governors  of 
Central  Banks  to take  and  implement  the decisions  regarding 
the short-term  support  mechanism. 
ANNEX  IV 
SECOND  REPORT  TO THE  COUNCIL  AND  THE  COMMISSION  ON  THE  BELGIAN 
PROPOSALS 
1. At the Council  meeting  on 18 July  1977,  the Belgian  Presi-
dent put  forward  an action  programme  on economic  and 
financial  matters  featuring,  among  other  things,  proposals  for 
adjusting  and improving  the Community's  existing  short  and 
medium-term  credit  mechanisms.  The  Council  instructed  the 
Monetary  Commitee  to examine  these  proposals.  The  Commit-
tee drew  up a preliminary  report  that  it submitted  to the 
Council  on 17 October.  The  Council  expressed  the view  that 
convergence  of Member  States'  economic  policies  must  go 
hand  in hand  with  moves  to adjust  the credit  mechanisms 
together  with  moves  to strengthen  the procedures  aimed  at 
ensuring  effective  compliance  with  the economic  policy  condi-
tions  attaching  to these  mechanisms.  It called  on the Monetary 
Committee  to present  its definitive  report  in sufficient  time  for 
it to take  a decision  on the matter  at its meeting  to be held  on 
21 November. 
A — Medium-term  financial  assistance 
2. The  Committee  takes  the  view  that  the  medium-term 
financial  assistance  arrangements  should  be improved,  starting 
from  the proposals  put  forward  by the Belgian  delegation. 
Doubling  member  countries'  commitment  ceilings  is feasible 
provided  satisfactory  adjustments  are made  to the medium-
term  financial  assistance  rules  on conditionally,  supervision  of 
compliance  with  policy  conditions  accepted,  conditions  for 
exemption  and  mobilization  of claims,  and  the currency  in 
which  credits  made  available  are to be denominated. 
3. In any  event,  it is essential  that  drawing  by a single 
Member  State  on the medium-term  financial  assistance  should 
not exhaust  the resouces  of the system.  It is therefore  assumed 
that no Member  State  could  in principle  draw  more  than  50 % 
of the total  of credit  ceilings,  having  due  regard  to the size  of 
the borrowing  country. 4. Where  a Member  State  applies  for  all medium-term 
financial  assistance,  the economic  policy  conditions  to be en-
tered  into  by the beneficiary  must  aim at restoring  internal  and 
external  economic  equilibria.  To ensure  compliance  with  these 
conditions,  resources  made  available  under  the medium-term 
financial  assistance  arrangements  would,  so far as possible,  be 
paid in successive  instalments,  the release  of each  instalment 
being  conditional  on a review  of economic  performance  based 
on targets  fixed  in advance. 
5. The  Committee  is of the view  that  the present  procedure, 
under  which  any  Member  State  can  be exempted  from  par-
ticipating  in an medium-term  financial  assistance  operation  by 
a simple  declaration  that  it is experiencing  balance  of payments 
difficulties,  should  be amended.  It is proposed  that  where  one 
or more  countries  represent  that  they  would  have  difficulty  in 
financing  the whole,  or any  part  of their  contribution,  they 
shall  be exempted  to the extent  necessary  only  if the Council, 
acting  on a recommendation  from  the Commission  and  on an 
opinion  delivered  by the Monetary  Committee,  has  taken  a 
decision  by a qualified  majority  that  the exemptions  in ques-
tion are justified  and on how,  in consequence  the shortfall  in 
contributions  shall  be financed. 
6. Member  States  that  experience  balance  of payments  dif-
ficulties  after  contributing  to the financing  of a medium-term 
financial  assistance  operation  and request  mobilization  of their 
claim  are  to be treated  on a similar  footing  as countries 
granted  an exemption.  With  this  in mind,  the Committee  is of 
the opinion  that  all the necessary  steps  should  be taken  to 
ensure  the effective  implementation  of the mobilization  pro-
cedure.  In this  connection,  several  members  suggested  that  an 
agreement  signed  with  the BIS  would  serve  as an effective 
guarantee  of mobilization,  and that  the possibility  of using  the 
Community  loan  mechanism  should  be considered. 
7. The  present  procedure  is that  exempted  countries  are sub-
ject to monitoring  by the Monetary  Committee.  A similar 
3. 7. 78 Official  Journal  of the European  Communities No C 156/11 
provision  should  also  apply  to any  country  granted  mobiliz-
ation  of its claim.  This  examination  should  cover  not only  the 
situation  with  regard  to its balance  of payments  and  reserves 
but also  to the general  economic  situation. Article  providing  for mutual  assistance  in the event  of balance 
of payments  difficulties  (Article  108  of the Treaty  of Rome). 
8. Claims  and  obligations  arising  in connection  with  appli-
cation  of the medium-term  financial  assistance  arrangements 
would  be denominated  in European  units  of account,  in 
accordance  with  methods  which  will  need  to be examined. 
9. The  majority  of the Comittee  supports  the principle  that 
the Community  loan  mechanism  should  be adjusted  as soon  as 
possible  along  the same  lines  as the medium-term  financial 
assistance  arrangements.  Some  members  think,  however,  that 
the Community  loan  mechanism  must  not be renewable  since 
it was  approved  as an exceptional  support  measure  designed  to 
remedy  balance  of payments  difficulties  stemming  from  the 
higher  oil prices.  The  members  in question  have  also  pointed 
out that,  unlike  the medium-term  financial  assistance  arrange-
ments,  the Community  loan  machinery  is not based  on the B — Short-term  monetary  support 
10. Noting  that  adjustment  of the  short-term  monetary 
support  arrangements  will  be dealt  with  by the Committee  of 
Governors  in a separate  report  to the Council,  the Monetary 
Committees  has only  examined  in detail  the question  of condi-
tionality.  In its view,  the special  consultation  procedure  pro-
vided  for in Article  4 of the Council  Decision  of 16 February 
1970  in connection  with  the granting  of support  but not incor-
porated  in the Council  Decision  of 18 February  1974,  should 
be reintroduced.  Such  consultation  could  cover  the economic 
situation  of the beneficiary  country,  its economic  policy  stance 
and also  the  latter's  compatibility  with  the  guidelines  laid 
down  by the Council.  At the same  time,  the different  consulta-
tion and  coordination  procedures  provided  for  within  the 
Community  would  need  to be observed  and  more  effectively 
applied. 
ANNEX  V 
REPORT  TO THE  COUNCIL  AND  THE  COMMISSION  ON  THE  COMMISSION  PROPOSALS 
1. As  instructed  by the Council,  the Monetary  Committee 
considered,  at its meetings  of 21 September,  7 and 12 October, 
the proposals  presented  by the Commission,  in its communi-
cation  of 15 June  1977  to the European  Council,  concerning 
the creation  of a new  Community  borrowing  instrument 
(Com(77)  300  fin.,  'Investment  and  borrowing  in the Com-
munity'). 
2. The  Committee  considers  that  the Commission's  ideas  need 
to be elaborated  in much  greater  detail  and  their  implications 
spelt  out before  the proposal  can be fully  evaluated.  In particu-
lar, it believes  that  the Commission  should  explain  more  pre-
cisely  how  their  proposals  would  relate  to existing  financing 
mechanisms  in the Community,  including  the European  In-
vestment  Bank  and Regional  Development  Fund;  and how  they 
would  attain  the desired  objective. 
A — General  considerations  1 
3. The  Commission  representatives  explained  that  the concep-
tual background  of their  proposal  was  on the one  hand,  the very low  level  of activity  and  employment  in the Community, 
and on the other  hand,  the slowdown  in the rate  of fixed  in-
vestment.  The  envisaged  action  has therefore  a double  objec-
tive: short-term  and structural.  Indeed  it aims  at sustaining  the 
level of economic  activity  and  employment,  and  at the same 
time at improving  Community  economic  structures  by en-
couraging  investment  in the priority  fields  of energy,  regional 
infrastructure  and redevelopment.  It must  be emphasized  that 
the projected  action  could  remain  within  modest  limits  — the 
ceiling  for outstanding  loans  could,  in a first  phase,  be limited 
to one billion  EUA  — since  the proposal  aimed  at producing  a 
sort of psychological  triggering  effect  on public  opinion  to 
facilitate  the development  of a general  climate  of recovery  in 
activity  and particularly  in investment. 
4. According  to the Commission,  although  the action  was 
designed  to adjust  the current  trend,  the projected  instrument 
was intended  to apply  to essentially  structural  operations;  it is 
in this  area  that  the low  level  of activity  in the Community 
seems  to present  dangers  for the future  and must  be tackled. 
With  this  in mind,  the Commission  foresees  the possibility  of 
carrying  out successive  operations  within  a lending  ceiling  so 
that amounts  reimbursed  by borrowers  could,  if necessary,  be 
used for  re-establishing  the  ceiling.  The  envisaged  action 
No C 156/12 Official  Journal  of the European  Communities 3. 7. 78 
should  be rapidly  undertaken  to satisfy  its cyclical  objective 
and continue  over  time  to satisfy  its structural  objective.  At 
all events,  the fixing  of priority  sectors  which  would  be done 
by Council  on a proposal  from  the Commission  should  be 
done  flexibly  to match  changing  circumstances. 
5. The  Commission  feels  that  the  Community's  present 
financial  intruments  are not adapted  to such  a scheme.  Two  of 
them  (ECSC  and Euratom)  have  a very  specific  purpose.  With 
regard  to the EIB,  the trend  of its operations  presupposes  an 
increase  in its capital  which  would  take  time  and,  until  now, 
the majority  of its operations  have  been  devoted  to regional 
development. 
6. The  Commission  considered  that  the creation  of an ad-
ditional  borrowing  instrument  for it to administer  would  allow 
extra  funds  to be collected  without  any  deterioration  in the 
excellent  standing  of the  Community  'name'.  The  Com-
mission's  experience  on capital  markets  led it to believe,  at a 
conservative  estimate,  that  it could  step  up total  funds  raised 
by all Community  agencies  by up to 1 500 million  to 2 000 
million  EUA  per year.  On this  basis,  it thought  that  its pro-
posal  for a limit  of 1 000 million  EUA  was  modest,  and could 
be achieved  without  difficulty. 9. To  assess  whether  a new  Community  mechanism  for 
financing  investments  was  needed,  the  Committee  briefly 
examined  Member  States'  judgements  on the functioning  of 
the present  Community  financing  instruments.  They  thought 
that existing  Community  credit  mechnisms  had  usually  been 
adequate  for  their  purpose  — that  of supplying  'top-up' 
financing  in the relevant  sectors  and institutional  domains.  The 
majority  felt  that  these  mechanisms  were  adequate  at the 
moment  for current  needs.  If an increase  in Community  financ-
ing was  necessary  however,  these  members  would  prefer  exist-
ing machinery  to be developed  possibly  by improving  their 
procedures  rather  than  the creation  of new  instruments.  They 
thought  that  the EIB  in particular  could  take  responsibility  for 
satisfying  the needs  that  had  led the Commission  to draw  up 
its proposals.  A step  in this  direction  had  already  been  made 
with the EIB  Governors'  decision  in principle  to increase  the 
bank's  capital  next  year,  thus  enabling  the bank  to increase  the 
volume  of its operations.  They  felt that  the banks'  operations, 
in particular  as defined  in Article  130  of the Treaty  of Rome, 
could  fully  cover  the projects  which  the Commission  intends  to 
finance  with  the new  instrument.  These  same  members  also 
remarked  that  in the field  of energy,  the Community  had  re-
cently  set up a new  credit  mechanism  under  Euratom,  where  at 
least some  assessment  of experience  was  necessary  to see if this 
action  would  suffice  for the energy  sector,  as was  recently  be-
lieved. 
7. To  see if there  is really  a need  which  the Commission's 
proposals  will satisfy,  the Committee  considered  it necessary  to 
look at the means  for financing  investment  which  currently 
exist  in Member  States,  both  internally  and  externally.  It ap-
peared  that,  in most  countries,  and  despite  differences  in their 
financial  structures,  existing  private  and  public  mechanisms 
were  largely  able  to satisfy  the demand  for investment  funds. 
In this  respect,  several  members  stressed  the basic  role  in the 
adjustment  process  played  by the free  operation  of the capital 
markets  in the economy  of their  country.  Other  members, 
moreover,  emphasized  the existence  in their  countries  of public 
intervention  and  correction  mechanisms  designed  specifically 
to ensure  the matching  of needs  and  financing  possibilities 
while  respecting  fundamental  economic  equilibria.  However,  it 
seems  that  for the majority  of Member  States  the functioning 
of these  internal  mechanisms  in no way  excludes  recourse  to 
external  financing,  even  for very  substantial  amounts.  But re-
course  to such  financing  was  for the most  part  motivated  by 
the need  to cover  the balance  of payments  of the borrowing 
countries.  In several  countries,  though  use of external  invest-
ment  financing  may  be not only  for such  balance  of payments 
needs  but may  mainly  arise  out of a desire  to match  all sources 
of credit  to needs  generated  within  the economy,  particularly 
in certain  sectors:  in these  countries  external  financing  is seen 
as the  best  method  of satisfying  some  essential  investment 
needs. 
8. Some  members  emphasized  that  the present  low  level  of 
investment  can,  in most  cases,  not be attributed  to a shortage 
of financial  resources.  They  held  the view  that  at least  in their 
countries,  investment  was  hindered  not only  by a lack  of prof-
itability  but  also  by political,  sociological  or ecological 
constraints.  They  doubted  therefore  whether  an additional 
financial  mechanism  which  in no way  contributed  to a solution 
of these  difficulties  could  be justified  or efficacious. Some  members  believed  that  the  objectives  pursued  by the 
Commission  could  also  be attained  by increased  use of other 
instruments  in the Community  budget,  such  as the Regional 
Development  Fund,  but the implications  of this proposal  could 
not be looked  at in the time  available. 
10. Some  members  thought  that  although  existing  mechanisms 
were  useful  and  effective,  they  were  unduly  restricted  as to 
sector  of intervention  or as to the criteria  for selecting  projects: 
according  to them,  the EIB  could  not consider  projects  with 
deferred  or low  profitability.  In addition,  it operated  case  by 
case,  using  banking  criteria,  without  any  overall  action  pro-
gramme  coordinated  with  national  development  plans. 
Finally,  it does  not  sufficiently  consider  social  projects  and 
favours  the  productive  sector.  For  these  members,  conse-
quently,  a new  mechanism  would  only  be attractive  if it al-
lowed  these  constraints  to be overcome  by assuring  the financ-
ing of projects  of a social  nature,  of weak,  uncertain  or defer-
red profitability  or highly  labour  intensive.  In addition,  some 
members  emphasized  two  limitations  of the EIB  financing:  the 
creation  of an exchange  risk for the borrower  and  the require-
ment  of a market  interest  rate.  Any  new  mechanism  should  not 
involve  these  two  aspects.  It would  be necessary  in particular 
to link  it with  an interest  subsidy  mechanism  within  the 
Community  budget:  in principle,  such  interest  subsidies  can 
already  be granted  by the Regional  Development  Fund  for EIB 
loans.  The  majority  of members  considered  that  the problem  of 
interest  subsidy  is of a different  nature,  and  does  not concern 
the present  proposals. 
3. 7. 78 Official  Journal  of the European  Communities No C 156/13 
11. The  Committee  emphasized  that,  in any case,  the purpose 
of the proposed  mechanism  was  not  to finance  balance  of 
payments  needs.  Several  members  expressed  the view  that  an 
agreed  common  regional,  sectoral  and  structural  policy  which 
would  help  to promote  integration  in the Community,  would 
provide  a particularly  appropriate  framework  in which  to 
create  any new  mechanism. 
12. Without  prejudice  to the final  answer  to the essential 
point  of the need  for the new  machinery,  and in the light  of the 
reservations  set out above,  the Committee  went  on to consider 
the main  technical  aspects  of the proposed  mechanism.  It did 
not try to reach  a consensus  on these  various  aspects,  but 
merely  drew  up a preliminary  inventory  of the reactions  and 
suggestions  put forward.  It emphasizes  that  this is only  an in-
itial outline  summary  which  could  not fully  reply  to the request 
from  the Council  and  merely  aimed  at providing  an interim 
report  for Council  on 17 October. 
B — Technical  observations 
13. Amount 
The amount  of 1 000 million  EUA,  suggested  by the Com-
mission,  had  no specific  technical  foundations;  it was  based 
both on the Commission's  estimate  of the amounts  likely  to be 
available  on the  capital  markets  and  the  approximate  sum 
necessary  to achieve  the psychological  'trigger'  effect  on in-
vestments  hoped  for. Several  members  thought  that  the volume 
of real  needs  should  be examined:  some  of them  doubted  that 
profitable  projects  requiring  such  sums  were  immediately 
available.  Many  members  felt that  the size  of the mechanisms 
also depended  on the reactions  of the market. 
14. Duration 
The Commission's  proposal  for a mechanism  with  no time 
limit  was  justified  by the fact  that  the stimulation  of invest-
ment  was  a long-term  task.  Many  members  felt that this aspect 
was incompatible  with  a counter-cyclical  action,  and  believed 
that an operation  with  a time  limit  and  excluding  the auto-
matic  re-establishment  of the ceiling  would  be more  justified. 
They  emphasized  that  a proposal  aiming  primarily  at structural 
objectives  of unlimited  duration  would  make  existing  problems 
more  difficult  and would  give  rise to new  ones  which  would 
require  further  serious  examination. 
15. Examination  of  projects,  financing  decisions  and 
management 
There  were  two  possible  procedures.  Under  the first  procedure, 
which  appears  to be that  favoured  by the Commission,  the 
Commission  would  recommend  that  the Council  should  take 
the basic  decision  and  adopt  general  guidelines  on a proposal 
from  the Commission  who  would  then  be responsible  for 
execution.  The  Commission  would  therfore  decide  on the eligibility  of projects,  i.e. their  compatibility  with  the Com-
munity's  overall  policies,  whilst  they  would  be examined  from 
a technical  point  of view  by the EIB.  Under  the second,  basic 
decisions  would  also  be taken  by the Council  on a Commission 
proposal;  but decisions  on the projects  and examination  would 
be the responsibility  of the EIB.  The  majority  of members 
thought  the second  procedure  had  the advantage  of drawing 
on the technical  expertise  and  experience  of the EIB  without 
introducing  an institutional  change  lying  outside  the Com-
mittee's  purview.  It goes  without  saying  that,  as for the EIB,  no 
project  would  be financed,  in whole  or in part,  which  would  be 
opposed  by the Member  State  in whose  territory  it is to be 
carried  out. 
16. Some  members  suggested  that  a straightforward  expan-
sion of the EIB's  operations  would  achieve  the same  end as the 
proposed  action  but without  altering  any present  procedures, 
so that  action  would  be quicker  and more  efficient.  Others  felt 
that this  solution  would  endanger  the emphasis  put on the 
originality  and specificity  of the operation,  while  that  proposed 
by the Commission  would  allow  a better  coordination  of pro-
jects under  the aegis  of the Commission. 
17. Guarantee 
The Commission  did not consider  that  there  was  any need  for 
a specific  guarantee  by the member  countries  to the Com-
munity,  like  that  granted  in connection  with  the Community 
loan.  It thought  there  would  be no difficulty  in borrowing  on 
the security  of the Community  budget  alone.  There  were  con-
siderable  advantages  in this solution,  from  the point  of view  of 
simplicity  and avoiding  the need  to involve  the credit  rating  of 
Member  States.  Some  members  doubted  however,  whether, 
without  specific  guarantees  by the Member  States,  the Com-
mission  would  indeed  be able  to borrow  an additional  1 000 
million  EUA  on the market. 
The Committee  did not pursue  the question  of accounting  for 
the operations  arising  from  this mechanism  at this stage. 
18. Lending  conditions 
The Commission  hoped  as far as possible  to carry  out 'blank 
transactions',  with  absolute  equality  between  the terms  for 
Community  borrowings  and  the terms  of the loans  granted. 
These  lending  conditions  would  be a function  of the borrowing 
terms,  so that  arrangements  for obtaining  and  using  funds 
would  be identical,  and  the Community  budget  would  not be 
affected.  However,  according  to some  members  if the principle 
of 'blank  transactions'  were  always  maintained,  this could  lead 
to lost  opportunities  when  circumstances  were  favourable  to 
borrowing,  and  thus  hinder  the smooth  running  of the pro-
posed  mechanism.  These  members  emphasize  the danger  to the 
Community  name  of too many  small  borrowing  operations. 
No C 156/14 Official  Journal  of the European  Communities 3. 7. 78 
19. Market  reactions 
The entry  on the market  of a new  name  might  be seen  as a way 
of increasing  total  borrowable  resources,  were  it only  because 
of investors'  desire  to diversify.  But it might  also  carry  a risk of 
the Community's  signature  being  devalued,  and  lead  to stiffer 
terms  not only  for Community  agencies  but also  for Member 
States  seeking  funds  on the international  market.  At all events, 
issue  time  tables  would  have  to be coordinated  by Community 
issuers  among  themselves.  Some  members  also  sought  coordi-
nation  between  Community  issuers  and  issuers  from  member 
countries,  to avoid  causing  problems  for the latter.  To solve 
this problem  it was  suggested  that  the Monetary  Committee 
would  be the most  suitable  body  to play  a coordinating  role. 
Other  members,  while  emphasizing  the risks  of competition, 
felt that the idea  of such  coordination  would  not be practicable 
under  present  circumstances. 
20. Community  loans  would  usually  be placed  on markets 
outside  the Community  but there  might  be a case  in certain 
circumstances  for using  the national  markets  of Member  States 
with the agreement  of the authorities  of the countries  con-cerned.  The  numerous  problems  of exchange  rate  risk,  which 
involve  both  the Community  and  beneficiaries  of loans,  must 
be studied  in further  detail. 
21. On-lending 
It seemed  that  the on-lending  of funds  obtained  by the new 
financial  instrument  could  not really  follow  any predetermined 
criterion;  any  idea  of quotas  by country,  or other  systems  of 
geographical  distribution,  was  to be ruled  out.  The  Council 
would  decide  on the sectors  to be granted  loans,  periodically, 
and in the light  of circumstances  and needs  in the Community. 
22. For  many  members,  the preceding  considerations  show 
that a number  of aspects  of the proposed  mechanism  must  be 
considered  in banking  terms  and  suggest  that  a banking-type 
solution  might  be the best  one,  both  for raising  funds  on the 
market,  and  for on-lending.  In this  light,  they  think  that  the 
EIB should  be responsible  for  implementing  the  proposed 
operation.  At any  rate,  a special  'window'  for this  purpose 
could  be set up within  the EIB. 
ANNEX  VI 
SECOND  REPORT  TO  THE  COUNCIL  AND  THE  COMMISSION  ON  THE  COMMISSION 
PROPOSALS 
1. The  Commission  recently  presented  a communication  to 
the Council  on investment  and  borrowing  in the Community. 
As requested  by the Council,  the Monetary  Committee  pre-
pared  a report  which  was  presented  to the Council  at its meet-
ing on 17 October  1977.  The  Council  invited  the Monetary 
Committee  to pursue  its examination  so as to enable  it to reach 
a decision  on the matter  at its meeting  on 21 November  1977. 
2. The  Committee  is of the opinion  that  the general  consider-
ations  and  the outline  of the divergences  in present  positions 
set out in Section  A of its report  of 12 October  cannot  usefully 
be taken  much  further.  Furthermore,  the  various  technical 
aspects  of the Commission  proposal  were  examined  in Section 
B of the report  and there  have  been  no new  elements  since  then 
to shed  light  on the uncertainties  which  persist. 
3. Consequently,  the Committee  considers  that  a basic  politi-
cal question  must  be settled  by the Council:  supposing  that 
there  is agreement  on boosting  investment  through  Community 
action,  is it necessary  and desirable  to have  recourse  to a new 
instrument  instead  of making  use of the EIB,  whose  capital,  the 
Board  of Governors  has decided,  is to be increased  substan-
tially  in 1978?  Assuming  the Council's  answer  to this question 
is in the affirmative,  the Committee  has discussed  the general lines of a possible  compromise  which,  while  departing  from  the 
Commission  proposal,  lies  mid-way  between  the  positions 
adopted  by the Member  States  on the proposal. 
4. This  compromise  solution  could  be based  on the following 
arrangements: 
(a) the Commission  would  borrow  up to a maximum  of EUA 
1 000  million,  preferably  on external  financial  markets; 
(b) borrowing  operations  would  be carried  out in such  a way 
as to satisfy  the following  objectives: 
— the  dates  and amounts  of issues  would  be fixed  so as to 
obtain  the best  terms  on the market, 
— other  issues  by the Community  and  member  countries 
would  not be disrupted, 
— issues  would  be made  only  for projects  which  had been 
sufficiently  examined; 
(c) a guarantee  would  be provided  by  the  Community 
budget  (i); 
(d) the funds  would  be handed  over  to the EIB  and,  if neces-
sary,  temporarily  invested; 
(') Some  members  doubt  whether  a budget  guarantee  would,  in all circumstances, 
be considered  sufficient  by the markets. 
3. 7. 78 Official  Journal  of the European  Communities No C 156/15 
(e) the EIB  would  examine  loan  requests  in sectors  and  for 
types  of operation  decided  on by the Council  on a pro-
posal  from  the Commission  (e.g.  energy,  infrastructure  and 
redevelopment).  The  EIB  would  apply  its usual  criteria  to 
these  operations  (*); 
(f) projects  would  be submitted  in accordance  with  the proce-
dures  laid  down  in the Statutes  of the EIB and loans  would 
be approved  by the Board  of Directors  of the EIB,  follow-
ing an opinion  from  the Commission  (2) (3).  Particular 
attention  would  have  to be given  to projects  which  would 
help to reduce  unemployment; 
(g) the exchange  risk would  be borne  entirely  by the borrower. 
There  would  be no interest  rate  subsidy  (4); (h) loan  terms  would  be fixed  at cost  price,  on the basis  of the 
borrowing  terms  obtained  by the Commission,  while  ensur-
ing that  all the costs  incurred  are covered.  The  terms  would 
not necessarily  be the same  for all the projects  approved; 
(i) the  funds  paid  back  to the EIB  (capital  and interest)  would 
allow  the Commission  to repay  the money  it borrowed. 
5. While  accepting  the compromise  solution  set out  above, 
some  members  consider  that  the setting  up of a new  Com-
munity  loan  instrument  could  be even  more  useful  if it formed 
part of a wider  context  based  on regional,  sectoral  and  struc-
tural  policies  drawn  up at Community  level  to promote  the 
integration  of the economies  of the Member  States. 
(') Some  members  feel  that  new  criteria  suited  to the structural  and  economic  situa-
tion in the Community  should  be adopted  by the Council  for these  operations. 
(2) Some  members  feel  that  Council  approval  of projects  should  be unanimous. 
Other  members  feel  that  it is the Commission  which  should  approve  the  pro-
jects. 
(3) Some  members  are  of the  opinion  that  the  funds  made  available  under  loans 
should  be paid  to governments  acting  as intermediaries. 
(4) Some  members  cannot  exclude  a priori  the  principle  of an interest  rate  subsidy 
or an exchange  guarantee.