14.6.76 Official  Journal  of the European  Communities No C 132/1 
I 
(Information) 
COUNCIL  AND  COMMISSION 
SEVENTEENTH  REPORT 
ON THE  ACTIVITIES  OF  THE  MONETARY  COMMITTEE 
FOREWORD 
The purpose  of this  report  is to give  a brief  account  of the  activities  of the  Monetary 
Committee  during  1975. 
During  the year,  the Committee  held  13 sessions  and  the  working  parties  drawn  from 
its own  members  or set up at its initiative  met  on many  occasions.  A list  of members 
as at 31 December  1975  is annexed  hereto. 
The report  was  adopted  as at 31 December  1975. 
INTRODUCTION 
1. 1975  was  marked  by an economic  recession 
such  as has  not  occurred  since  the 1930s.  It affected 
all the  industrialized  countries  and  the  non-oil-
producing  developing  countries;  its  repercussions 
were  reflected  in international  trade,  which  declined 
sharply  in  volume.  The  balance  of  payments 
situation  in 1975  was  characterized  by a substantial 
reduction  in the  OPEC  surplus,  a considerable 
improvement  for the major  industrial  countries  as a 
group,  and  a deterioration  for  other  groups  of 
countries,  the  non-oil-producing  developing 
countries,  the  smaller  OECD  members  and  the 
centrally  planned  economies. 2. Although  the  economic  recession  led  to the 
restoration  of a better  balance  on external  accounts 
in all Community  countries,  it caused  considerable 
unemployment  in each  of them  and  brought  only 
partial  relief  from  inflation.  In these  circumstances 
the Community  authorities,  as in the  previous  year, 
sought  to help  Member  States  in difficulty  and,  as a 
matter  of priority,  to safeguard  the  gains  which  the 
Community  had  made  thus  far  and  which  might 
have  been  threatened  in the  difficult  economic 
situation. 
COMMUNITY  ACTION  AND  THE  ACTIVITIES  OF THE  COMMITTEE 
3. At  the  beginning  of 1975,  five  Community 
Member  States  were  applying  the  Community 
arrangements  of 10 April  1972  on the  narrowing  of 
intra-Community  exchange  rate  margins  (the  snake). On 10  July,  however,  France,  which  had  left  the 
snake  on  21  January  1974,  announced  that  the 
French  franc  was  officially  rejoining  the snake  at its 
old central  rate.  At this  time,  the  workings  of the 
No C 132/2 Official  Journal  of the European  Communities 14. 6. 76 
system  were  modified:  while  the  three-month 
extension  under  the  very  short-term  financing 
mechanism  had,  until  then,  only  been  possible 
through  agreement  between  the  debtors  and  the 
creditors,  henceforth  it  became  automatically 
available  to the debtor  on request,  subject  to certain 
limits.  With  regard  to settlement,  the  rules  were 
adapted  by excluding  gold  from  the  calculation  of 
reserves  and  formally  confirming  its exclusion  from 
the actual  settlements  themselves. 
4. During  the year,  a solution  was  found,  initially 
in the  context  of the  European  Development  Fund, 
to the  important  problem  of the  European  unit  of 
account.  At the  Council  session  of 16 September 
1974,  the Monetary  Committee  had  been  instructed 
to start  work  on the problem  of the units  of account 
operating  in  various  sectors  and  had  already 
submitted  two  opinions  before  the end  of 1974  (see 
paragraph  30 of the sixteenth  annual  report). 
5. On  the  basis  of a report  prepared  by  the 
alternates,  the  Monetary  Committee  adopted  a 
further  opinion  on this  matter  at its meeting  of 
4 March  (Annex  I), and  on 18 March  the  Council 
adopted  a new  unit  of account  for  the  Lome 
Convention  transactions  where  the  need  was 
particularly  urgent.  This  unit  of account  was  a 
'basket'  type,  equivalent  in value  to 1 SDR  on 28 June 
1974  and  composed  of the following  amounts  in the 
currencies  of the Member  States: 
DM 0-828 (27-3  %) 
£ sterling 0-0885 (17-5  °/o) 
FF 1-15 (19-5  %>) 
Lit 109 (14-0  °/o) 
Fl 0-286 (9-0 %>) 
Bfrs 3-66 (7-9 %>) 
Lfr 0-14 (0-3 %>) 
Dkr 0-217 (3-0 °/o) 
Irish  £ 0-00759 (1-5 %>) 
The value  of the  unit  of account  in various 
currencies  is calculated  and  published  daily  by the 
Commission  departments.  The  same  unit  of account 
was subsequently  applied  by  the  European 
Investment  Bank  and  also  adopted  by the European 
Coal  and  Steel  Community.  Moreover,  at its meeting 
in Rome  on 2 December,  the  European  Council 
noted  the  Commission's  intention  to  present 
proposals  to the Council  with  regard  to the applica-
tion of the European  unit  of account  to the Commu-
nity budget  as a further  step. 6. International  monetary  matters,  particularly  the 
reform  of  the  international  monetary  system, 
occupied  much  of the  time  of the  Monetary 
Committee  during  the  year.  This  arose  from  the 
quinquennial  review  of quotas  in the  International 
Monetary  Fund,  the  need  to make  further  progress 
in reform  of the  international  monetary  system  and 
to amend  the  articles  of agreement  to reflect  the 
reforms  agreed. 
7. The  Monetary  Committee  played  an important 
role in the  process  of arriving  at a common 
Community  position  on  these  problems.  Three 
aspects  in  particular  were  at  the  centre  of 
negotiations:  the distribution  of the increases  in IMF 
quotas,  the problem  of gold,  and  the question  of the 
exchange  rate  system. 
8. On  quotas,  against  the  background  of 
agreement  already  reached  in the  IMF  on  the 
doubling  of quota  shares  of OPEC  countries  and  the 
maintenance  of quota  shares  of developing  countries, 
the essential  features  of the  Committee's  position 
were: 
(a) agreement  to generalize  qualified  majorities  for 
voting  on important  issues  in the  IMF  at 85 % 
instead  of 80 %; 
(b) agreement  on a distribution  of the quotas  among 
industrialized  countries  on  the  basis  of  a 
modified  application  of  the  Bretton  Woods 
formula. 
9. In  its report  of 27 June  (Annex  II),  the 
Committee  endorsed  proposals  concerning  the  gold 
holdings  of the  IMF  and  worked  out  arrangements 
on gold  transactions  by  monetary  authorities 
reflecting  the  consensus  reached  between  EEC 
finance  ministers  at Zeist  on 22 and  23 April  1974 
(see paragraph  27 of the sixteenth  annual  report),  all 
of which  were  the basis  for subsequent  agreement  at 
the IMF  Interim  Committee  in August. 
10. Later,  the Committee  agreed  to press  the need 
to maintain  symmetry  in the  implementation  of 
certain  elements  of the  gold  package,  namely  gold 
sales  for  the  benefit  of developing  countries,  gold 
restitution  to member  countries  and  freedom  for 
monetary  authorities  to undertake  transactions  in 
gold. 
11. In  discussion  of a clause  on collaboration 
with  the  IMF  in relation  to gold  policy,  the 
Committee  agreed  that  the  IMF  articles  should 
promote  the SDR  as the principal  reserve  asset  in the 
international  monetary  system  and  that  any  references 
to the  reduction  of the  role  of gold  should  be 
accompanied  by references  to the  reduction  in the 
role of reserve  currencies. 
14. 6. 76 Official  Journal  of the European  Communities No C 132/3 
12. Throughout  the  discussion,  the  Monetary 
Committee  maintained  the importance  of a balanced 
package  of new  arrangements  in the IMF,  even  when 
at the 31 August  meeting  of the  Interim  Committee 
no immediate  progress  proved  possible  on exchange 
rate arrangements.  On  the  latter  point,  the 
Committee  reached  agreement  on the  framework  of 
ultimate  objectives  as recorded  in its report  of 27 
June.  Later  the Committee  supported  the  agreement 
reached  by the  French  and  American  authorities, 
which,  in turn,  provided  the  basis  for  the  overall 
agreement  at Jamaica  in January  1976. 
13. In  accordance  with  the  arrangements 
determined  by the Council,  particularly  with  regard 
to the economic  policy  conditions,  on the granting  of 
medium-term  financial  assistance  of 1 159-2  million 
units  of account  to Italy  in December  1974,  the 
Committee  kept  under  review  the  Italian  economic 
and financial  situation.  For  this  purpose,  a special 
working  party  was  set up under  the chairmanship  of 
Mr de la Geniere.  Acting  on a recommendation 
from  the Commission  and  on the basis  of an opinion 
of the  Monetary  Committee,  the  Council  on 
18 December  1975  adapted  the  economic  policy 
conditions  attached  to the  medium-term  financial 
assistance  to Italy  for the following  year. 
14. In  accordance  with  Article  4 of the  Council 
Decision  of 22 March  1971  on the  medium-term 
financial  assistance  mechanism,  a  Monetary 
Committee  working  party  under  the chairmanship  of 
Mr Andersen  twice  examined  the  balance  of 
payments  situation  and  reserves  position  of the United  Kingdom  which,  though  continuing  to supply 
short-term  assistance  on a bilateral  basis,  had  not 
participated  in the medium-term  financial  assistance 
to Italy.  At  its  meetings  of 15  April  and  28 
November,  the  Monetary  Committee  approved  the 
conclusions  of its working  party's  reports,  which,  on 
both  occasions,  were  that  the  United  Kingdom's 
non-participation  in  the  medium-term  financing 
continued  to be admissible. 
15. In  connection  with  possible  borrowing  by 
Italy  and  Ireland  under  the  Community  loan 
scheme,  the  Monetary  Committee  began 
examinations  of the economic  situation  of both  these 
countries. 
16. The  Committee  gave  special  attention  to its 
regular  examinations  of monetary  and  financial 
developments  in Member  States  with  particular 
emphasis  on the monetary  policy  pursued,  as well  as 
on the  problems  of financing  the budget  deficits  of 
the Member  States. 
17. The  Committee  also  examined  various  other 
matters,  including  proposals  for Community  action, 
such  as strengthening  the  role  of the  European 
monetary  cooperation  fund,  and  the  issue  of loans 
by Euratom  for financing  nuclear  power  stations,  as 
well as arrangements  for the preparation  of Council 
sessions  on economic  and  financial  questions  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 
18. The  Working  Party  on  Securities  Markets 
continued  to examine  developments  in the  capital 
markets  of the Member  States  and in the international 
capital  markets  and  discussed  capital  market  policies. 
It examined  various  aspects  of the effect  of inflation 
on financial  assets  and  the possibilities  of indexation. 
In particular  it completed  its report  begun  in 1974  on 
'Methods  of protecting  the  holder  of bonds  against 
inflation  and  their  effects  on  intra-Community 
capital  movements'  (Annex  III).  The  working  party 
also continued  its work  on the  regulation  of issue 
conditions  on  the  bond  markets  of the  Member 
States.  This  is a continual  process  of up-dating  and 
correction  and  is intended  to supplement  its 1970 
report  on  'Policy  on  the  bond  markets  of the 
countries  of the EEC'. 
19. Following  the request  from  the Council  at its 
meeting  of 16 September  1974  for  the  Monetary 
Committee  and  the  Committee  of Governors  of the Central  Banks  to begin  work  as soon  as possible  on 
coordinated  action  on  the  euromarkets  (see  the 
sixteenth  annual  report),  the Committees  decided  to 
entrust  this  task  to the  Working  Party  on Short-
Term  Capital  Movements,  which  for  this  purpose 
was to become  a joint  working  party  of the 
Monetary  Committee  and  the  Committee  of 
Governors.  At  its  meeting  of 12  February,  the 
Monetary  Committee  accordingly  amended  the terms 
of reference  of this  working  party.  The  working 
party  began  work  on the  Eurocurrency  market  and 
the regulation  of international  financial  flows. 
2,0. The  Working  Party  on  Harmonization  of 
Monetary  Policy  Instruments  set up jointly  with  the 
Committee  of Governors  in 1974  met  several  times 
during  the  year,  in execution  of its  terms  of 
reference.  The  working  party  intends  to submit  an 
interim  report  in early  1976. 
No C 132/4 Official  Journal  of the European  Communities 14. 6. 76 
LIST  OF MEMBERS  AND  ALTERNATES  OF THE  MONETARY  COMMITTEE 
Chairman 
Dr C. J. Oort Thesaurier-generaal  bij het Ministerie  van  Financien 
(The  Hague) 
Vice-Chairman 
Dr O. Emminger 
Mr C. de Strycker 
(until  24 March  1975) Vizeprasident  der Deutschen  Bundesbank  (Frankfurt-am-Main) 
Vice-gouverneur  de la Banque  nationale  de Belgique 
(Brussels) 
Members 
Mr S. Andersen 
Mr M. J. Balfour 
Mr F. Boyer  de la Giroday 
Mr B. J. Breen 
Mr R. de la Geniere 
Mr M. D'Haeze 
(until  23 May  1975) 
Mr A. Dondelinger 
(since  1 January  1975) 
Mr C. W. Fogarty 
(until  31 December  1975) 
Mr J.-Y.  Haberer 
Mr K. Hansen 
Mr G. Janson 
(since  23 May  1975) 
Mr R. Kirsch 
(from  1 January  1975) 
Prof.  G. Magnifico 
(since  2 September  1975) 
Prof.  G. Miconi 
(until  2 September  1975) 
Dott.  U. Mosca 
Mr T. O'Cofaigh 
Dott.  R. Ossola 
(until  2 September  1975) 
Dott.  S. Palumbo 
(since  2 September  1975) 
Drs. A. Szasz 
Mr J. van Ypersele  de Strihou 
(since  23 May  1975) 
Dr H. H. Weber Nationalbankdirekt0r  (Copenhagen) 
Bank  of England  (London) 
Director  in the Directorate-General  for Economic  and 
Financial  Affairs  — Commission  of the European 
Communities  (Brussels) 
Central  Bank  of Ireland  (Dublin) 
Sous-gouverneur  de la Banque  de France  (Paris) 
Directeur  general  de l'administration  de la tresorerie  et de la 
dette  publique  — Ministere  des finances  (Brussels) 
Commissaire  au controle  des banques  (Luxembourg) 
H.M.  Treasury  (London) 
Chef  du service  des affaires  internationales  a la direction  du 
tresor  — Ministere  de l'economie  et des finances  (Paris) 
Departementschef  — Det  0konomiske  Sekretariat 
(Copenhagen) 
Directeur  de la Banque  nationale  de Belgique  (Brussels) 
Conseiller  de gouvernement  — Ministere  des finances 
(Luxembourg) 
Banca  d'ltalia  (Rome) 
Direttore  generale  del tesoro  — Ministero  del tesoro  (Rome) 
Director-General  for Economic  and  Financial  Affairs  — 
Commission  of the European  Communities  (Brussels) 
Department  of Finance  (Dublin) 
Vicedirettore  generale  della  Banca  d'ltalia  (Rome) 
Dirigente  generale  al Ministero  del Tesoro  (Rome) 
Directeur  van  de Nederlandsche  Bank  NV  (Amsterdam) 
Conseiller  du ministre  des finances  (Brussels) 
Ministerialdirektor  — Bundesministerium  der Finanzen  (Bonn) 
14. 6. 76 Official  Journal  of the  European  Communities No C 132/5 
Chairman  of the alternates  of 
the Monetary  Committee 
Mr J. G. Littler  H.M.  Treasury  (London) 
Alternates 
Dott.  V. Barattieri  di san Pietro 
(since  2 September  1975) 
Mr J.-M.  Bloch-Laine 
Drs. D. H. Boot 
Mr C. F. Cavanagh 
(since  4 October  1975) 
Mr H. Dalgaard 
Dr W. Flandorffer 
Mr F. L. Hall 
Mr P. Jaans 
(since  1 January  1975) 
Mr G. Jennemann 
Mr G. Lefort 
Mr D. Lynch 
(until  3 October  1975) 
Mr D. McCormack 
Prof.  G. Magnifico 
(until  2 September  1975) 
Mr J. Mertens  de Wilmars 
Mr L. Meulemans 
(since  23 May  1975) 
Dr B. Molitor 
(until  1 April  1975) 
Mr J. E. Nash 
Dott.  S. Palumbo 
(until  2 September  1975) 
Mr M. Schmit 
Mr N. Ussing 
Drs. R. Van  Boven 
Mr J. van  Ypersele  de Strihou 
(until  23 May  1975) 
Dr M. Wegner 
(since  1 April  1975) 
Dott.  A Zodda 
(since  2 September  1975) Banca  d'ltalia  (Rome) 
Sous-directeur  a la direction  du tr^sor  — Ministere  de 
l'economie  et des finances  (Paris) 
Onderdirecteur  van  de Nederlandsche  Bank  NV  (Amsterdam) 
Department  of Finance  (Dublin) 
Kontorchef  — Danmarks  Nationalbank  (Copenhagen) 
Ministerialrat  — Bundesministerium  fiir Wirtschaft  (Bonn) 
Bank  of England  (London) 
Secretaire  general  au commissariat  au controle  des banques 
(Luxembourg) 
Bankdirektor  — Deutsche  Bundesbank  (Frankfurt-am-Main) 
Directeur  general  des services  etrangers  de la Banque  de 
France  (Paris) 
Department  of Finance  (Dublin) 
Central  Bank  of Ireland  (Dublin) 
Banca  d'ltalia  (Rome) 
Conseiller  economiques  de la Banque  nationale  de Belgique 
(Brussels) 
Inspecteur  general  k l'administration  de la tresorerie 
(Brussels) 
Director  in the Directorate-General  for Economic  and 
Financial  Affairs  — Commission  of the European 
Communities  (Brussels) 
Director  in the Directorate-General  for Economic  and 
Financial  Affairs  — Commission  of the European 
Communities  (Brussels) 
Dirigente  generale  al Ministero  del Tesoro  (Rome) 
Inspecteur  des finances  (Luxembourg) 
Kommitteret  — Det  0konomiske  Sekretariat  (Copenhagen) 
Ministerie  van  Financien  (The  Hague) 
Conseiller  du ministre  des finances  (Brussels) 
Director  in the Directorate-General  for Economic  and 
Financial  Affairs  — Commission  of the European 
Communities  (Brussels) 
Ministero  del Tesoro  (Rome) 
Secretariat 
Mr G. Morelli 
Mr G. Lermen 
Mr A. Chapman 
No C 132/6 Official  Journal  of the European  Communities 14. 6. 76 
ANNEX  I 
REPORT  OF  THE  MONETARY  COMMITTEE  TO  THE  COUNCIL  AND  THE 
COMMISSION  ON  THE  UNIT  OF ACCOUNT 
1. The  Committee  examined  the  problem  of  the 
definition  of a new  unit  of account  in the  light  of the 
report  submitted  by the  alternates  (text  annexed)  and  of 
a simulation  exercise  submitted  by the  Commission. 
2. Recent  monetary  events  which  have  led  to 
generalized  floating  of currencies  are  responsible  for 
difficulties  in the  use  of the  unit  of account  in the  EEC, 
based  as they  were  on the  concept  of par  values  and 
defined  by a weight  of gold.  The  Committee  recognized 
the need  for  the  definition  of a new  unit  of account 
better  suited  to the  present  circumstances  and  capable  of 
being  applied  progressively  in different  sectors  with  the 
necessary  adaptations  in respect  of conversion  rules.  In 
the case  of the  EMCF,  however,  where  transactions  are 
only  between  countries  whose  currencies  maintain  fixed 
relationships  between  themselves,  the existing  parity  grid 
unit is the most  satisfactory. 
3. Apart  from  this  the  Committee  felt  that  a unit  of 
account  based  on  a 'standard'  basket  of European 
currencies  would  be the most  appropriate  for Community 
purposes  in general. 4. The  Committee,  having  closely  examined  the 
arguments  developed  in the  report  of the  alternates 
concerning  the  weights  of component  currencies  in the 
basket,  noted  that  even  appreciable  differences  in the 
weights  attributed  to each  currency  would  only  make  for 
minor  differences  in the  behaviour  of the unit  of account 
as a whole.  The  Committee  examined  in detail  the range 
of criteria  which  should  be taken  into  account  for  the 
definition  of an EEC  basket;  it feels  that  it has  thus 
prepared  the ground  for the decisions  to be taken. 
5. The  Committee  felt  that  the  new  unit  of account  as 
defined  under  3 above  could  be immediately  adopted  for 
use by the  EDF.  It suggested  that  this  might  provide  a 
basis  on which  the  authorities  of the  EIB  could  reach  an 
interim  decision  on  arrangements  for  conversions  of 
currencies  to be used  in its accounts.  It considered  that 
further  studies  would  be necessary  before  the unit  could 
be adopted,  with  the  necessary  adaptations  in respect  of 
conversion  rules,  in other  sectors  of Community  activity. 
6. It  took  note  of the  intention  of the  Commission  to 
submit  proposals  to the Council  in this  connection. 
Appendix 
Report  of monetary  committee  alternates  on European  units  of account 
1. The  Committee  has  studied,  in collaboration  with 
appropriate  experts  whose  assistance  is  gratefully 
acknowledged,  some  of  the  practical  problems  in 
applying  different  types  of units  of account  to a range  of 
Community  activities.  The  Committee  has  not  had  time 
to study  the  unit  of account  problems  in all Community 
sectors,  but  has  chosen  for  examination  four  important 
sectors  involving  a wide  range  of different  operations. 
2. This  report: 
— reviews  the possible  choices  of units  of account  which 
have  been  considered; 
— examines  the  appropriateness  of different  units  of 
account  to each  of the  activities  which  have  been 
studied; 
— sets  out a number  of general  considerations;  and — indicates  the points  for political  decision  on the  basis 
of technically  acceptable  ranges  of choices. 
Possible  units  of account 
3. The  existing  Community  units  of account  which  are 
based  on  fixed  par  values  and  stable  exchange  rate 
relationships  were  all established  in the  context  of the 
maintenance  of par  values  of currencies  in relation  to a 
central  numeraire  of  gold  or gold-based  dollars  in the 
market.  The  fact  that  this  context  no longer  exists  has 
not only  made  the  basis  of the  Community  units  of 
account  out-of-date  but  has  in  many  cases  also 
introduced  difficulties  in their  day-to-day  operation  or 
widespread  dissatisfaction  with  the  results.  Provision  was 
made  in the  case  of all units  to take  account  of changes 
14. 6. 76 Official  Journal  of the  European  Communities No C 132/7 
in par  values  but  the  present  situation  where  par  values 
formally  remain  unchanged  but  no  longer  correspond 
with  market  rates  was  not  foreseen.  Ad hoc  solutions 
have  therefore  been  necessary  in many  cases. 
4. In  current  circumstances  it is still  possible  within  the 
Community  to retain  the  concept  of a fixed  value 
relationship  in the  unit  of account,  but  only  among  the 
'snake'  group  of  currencies  which  maintain  fixed 
relationships  between  themselves.  The  unit  of account 
which  embodies  this  concept  is the parity  grid  unit.  The 
main  feature  of this  unit  as it is currently  used  in the 
European  Monetary  Cooperation  Fund  for  intervention 
and settlement  arrangements  is that  all 'snake'  currencies 
have  a stable  value  in it, subject  to minor  fluctuations 
within  defined  margins  and  to any  deliberate  central  rate 
changes;  in  order  to  achieve  a parallel  realistic 
relationship  between  this  unit  and  other  currencies,  these 
would  have  to be  converted  by  reference  to their 
fluctuating  market  relationship  with  the  average  of 
'snake'  currencies,  as is done  in the  case  of the  present 
ECSC  unit. 
5. The  alternative  to the 'parity  grid'  approach  is some 
composite  unit  based  on  a basket  of currencies  and 
reflecting  the  combined  market  values  from  moment  to 
moment  of all the  constituent  currencies.  There  is an 
important  choice  for the Community  between  a basket  of 
world  currencies  and  a basket  of EEC  currencies. Conversion  arrangements 
9. It  is important  to recognize  that  in certain  sectors 
some  of the  most  serious  problems  in operating  units  of 
account  at the present  time  arise  over  rates  of conversion 
into national  currencies  which  do  not  automatically 
follow,  and  have  in practice  diverged  substantially  from 
market  rates.  The  definition  of any  new  unit  of account 
will not  automatically  resolve  these  problems,  but  in the 
interest  of moving  to more  realistic  conversion  rates,  it 
would  be desirable  to select  a definition  which  would  be 
well adapted  to this  process.  Even  so, special  arrangements 
might  be  needed  in some  cases  to maintain  these 
conversion  rates  frozen  for certain  periods  of time.  Such 
special  arrangements,  however,  need  not  detract  from  the 
objective  of choosing  a new  and  more  appropriate 
definition  of the unit  of account. 
The Main  Activities  Examined 
10. The  Committee  has  studied  with  the  help  of 
experts  the implications  of trying  to operate  the units  of 
account  discussed  above  in relation  to four  important 
activities  of the  Community:  the  European  Monetary 
Cooperation  Fund,  the European  Development  Fund,  the 
common  agricultural  policy,  and  the Community  budget. 
The following  paragraphs  highlight  points  of particular 
interest  and  importance. 
6. The  feature  of a world-wide  basket  of currencies  is 
that it would  be a measure  of some  average  of values  of 
all world  currencies.  The  SDR  basket  adopted  by the 
International  Monetary  Fund  with  effect  from  1 July 
1974  is the  internationally  accepted  version  of this 
concept  and  the  only  one  worth  consideration.  The  US 
dollar  has a weight  of nearly  one-third  in the SDR  basket 
and those  EEC  currencies  included  in it have  a weight  of 
nearly  one-half. 
7. An  EEC  basket  would  represent  similarly  the 
concept  of some  average  of values  of all EEC  currencies. 
The total  number  of EEC  currencies  is a manageable 
number  for inclusion  in a basket,  and  it seems  desirable 
that all should  be included.  Since  some  have  floating 
relationships  with-  each  other,  the  principles  of 
construction  and  operation  of the  basket  would  have  to 
be the  same  as those  of the  SDR:  a standard  basket  in 
which  the amount  of each  component  currency  would  be 
maintained  unchanged.  A major  problem  is the choice  of 
weightings  of the  nine  currencies  to achieve  the  desired 
average  result,  and  this  is discussed  later. 
8. The  choices  discussed  below  therefore  are: 
— the parity  grid  unit; 
— the  SDR; 
— one  or more  versions  of an EEC  basket. 11. The  fundamental  need  for  some  unit  of account 
for each  of these  activities  rests  generally  on the technical 
requirement  of a single  denominator  in each  of them  for 
accounting  purposes;  an  additional  reason  in several 
cases  is  that  aspects  of  the  operations  involve 
determination  of values,  claims  and  obligations  according 
to a system  of sharing  among  participating  countries 
and the  maintenance  of equal  shares  and  claims  over 
time,  when  currencies  move  in relation  to each  other. 
Finally,  the unit  of account  may  be useful  as a measure 
of the  desired  rates  of increase  in different  sectors  of 
activity. 
12. There  is only  one  case  in the  whole  range  of 
operations  forming  part  of the four  activities  which  have 
been  studied  in which  it can  be said  that  the choice  of a 
particular  unit  of  account  automatically  solves  or 
eliminates  technical  problems,  whereas  any  other  unit  of 
account  would  create  such  problems.  This  is the case  of 
the European  Monetary  Cooperation  Fund,  where  the 
unit currently  in use  — the  parity  grid  unit  — is the 
satisfactory  one,  exactly  appropriate  to the  needs  of the 
operations  for which  it is used.  It is no accident  that  this 
operation  is  distinct  from  all  other  Community 
operations  for which  units  of account  are required  in the 
important  respect  that  it is by definition  confined  to 
dealings  among  'snake'  countries,  i.e.  those  maintaining 
fixed  exchange  rate  relationships  between  themselves. 
The Committee  has  not  considered  the  quite  different 
situation  which  would  arise  in the  European  Monetary 
Cooperation  Fund  if new  arrangements  (still  not  capable 
of being  defined)  were  introduced  to  cover  some 
intervention  and  settlement  arrangements  involving  all 
No C 132/8 Official  Journal  of the  European  Communities 14. 6. 76 
EEC  currencies,  not  only  those  in the  'snake'.  As far as 
the existing  basis  of operation  is concerned,  however, 
there  seems  to be  strong  technical  justification  for 
treating  it as exceptional  and,  whatever  might  be decided 
elsewhere,  confirming  the use  of the  parity  grid  unit  for 
this purpose. market  fluctuations  or parity  changes,  at least  in the 
short  term.  Discrepancies  with  market  rates  are  made 
up by  extra  payments  or deductions  of monetary 
compensation  amounts.  There  would  be difficulty  in 
abolishing  these  monetary  compensation  amounts, 
particularly  on  an  automatic  basis,  due  to their 
implications  for  price  levels  in different  countries.  In 
this connection  it can be noted  that: 
13. In  all the other  Community  operations  which  have 
been  examined,  there  is need  to cover  all members  of the 
Community,  and  therefore  to accommodate  currencies 
with  floating  value  relationships.  Here  it is clear  that  the 
fundamental  difficulties  do not  stem  from  the  choice  of 
unit of account  and  cannot  be automatically  solved  by 
any particular  choice.  There  is no sleight  of hand  by 
which  the  reconciliation  of value  relationships  between 
all EEC  currencies  at the  present  time  can  be achieved 
simply  through  the  definition  of the  unit  of account. 
One unit  of account  may  be more  apt  than  another 
because  the  foreseeable  trend  of its  value  is more 
appropriately  suited  to maintenance  of the  desired  value 
of particular  operations;  different  units  will  tend  to make 
for a larger  or smaller  need  for  adjustment  to match 
market  rate  changes  with  particular  different  EEC 
currencies.  Throughout,  however,  there  are  advantages 
and disadvantages  to be noted  and  a judgment  has  to be 
made. 
14. Many  of the  problems  present  themselves  in very 
similar  ways  in relation  to all activities  which  involve  all 
EEC  currencies.  But  before  entering  on  general 
considerations,  a few  points  which  arise  on particular 
activities  are worth  noting: 
(a) European  Development  Fund:  The  choice  of unit  of 
account  is a determinant  of the  trend  of purchasing 
power  and  cost  of the  fund  as a whole  to both 
recipients  and  donors.  The  Committee  considers  that 
the value  of  'snake'  currencies  is  the  least 
appropriate  measure  for  this  purpose.  The  world 
value  measure  of the  SDR  could  be presented  as a 
rational  choice  for  an  operation  directly  affecting 
many  countries  outside  the Community,  and  would  be 
familiar  and  readily  comprehensible  to them.  From 
the viewpoint  of the  EEC  countries  it is more 
reasonable  to guarantee  the  amount  in an average  of 
EEC  currencies,  and  the  fact  that  expenditure  of the 
fund  is entirely  linked  to supplies  from  EEC  countries 
should  make  this  acceptable  also  to the  recipient 
countries. 
(b) Common  agricultural  policy  (CAP):  Experts  do not 
see any  systematic  relationship  between  prices  of CAP 
products  and  any  currency  or group  of currencies 
which  would  point  to  selection  of a particular 
unit of  account.  Because  of  the  effects  on 
consumer  prices  and  the  incomes  of farmers,  no 
member  country  wishes  to allow  intervention  prices 
and levy  thresholds  to follow  changes  in the  value  of 
its currency.  To this  end,  rates  of conversion  between 
units  of account  and  EEC  currencies  are only  adjusted 
by deliberate  decision  and  do not  automatically  follow (i) an average  EEC  basket  would  spread  necessary 
adjustments  among  EEC  currencies  and  minimize 
the risk  of very  large  adustment  being  needed  for 
one or two  currencies.  It would  however  also 
create  a need  for  more  adjustments  or the 
application  of monetary  compensation  amounts 
among  all currencies  in the  case  of changes  of 
value  of any  currency.  For  'stronger'  currencies 
this would  mean  — because  a reduction  of farm 
prices  would  probably  not  be  possible  — a 
build-up  of higher  positive  monetary  compensation 
amounts,  the  abolition  of which  later  on may 
create  major  difficulties; 
(ii) the  parity  grid  unit  — assuming  it would  tend  to 
be stronger  than  the  average  of EEC  currencies 
—• would  involve  for weaker  currencies  more  and 
larger  adjustments  or  negative  monetary 
compensation  amounts,  additional  to the  general 
farm  price  increases  to bring  conversion  rates 
into line  with  market  rates;  the  larger,  perhaps 
inflationary  increases  demanded  of countries  with 
weaker  currencies  in such  a system  would  be a 
disadvantage; 
(iii) the  SDR  basket  involves  a risk  of the  unit  of 
account  diverging  significantly  from  all  EEC 
currencies,  which  would  be unwelcome. 
(c) Community  budget:  here,  as  elsewhere,  there  is 
considerable  advantage  of convenience  to any  EEC 
country  to maintain  a fixed  relationship  between  its 
own currency  and  the  accounting  unit,  because  of the 
automatic  matching  of provisions  in its own  currency 
in its domestic  budget  and  payments  and  receipts 
denominated  in units  of account.  This  advantage 
might  however  mean  — as is the  case  today  — that 
this fixed  relationship  between  currencies  becomes 
completely  unrealistic  from  the  point  of view  of 
market  relations.  It seems  nevertheless  appropriate 
that the  definition  of the  unit  of account  should  in 
general  facilitate  a realistic  relationship  between 
currencies.  Apart  from  this  consideration  the 
Committee  could  find  no  operational  reason  for 
preferring  or rejecting  any  particular  choice  of unit, 
although  it was  generally  felt  that  the  SDR,  inevitably 
introducing  non-Community  currencies  into  an 
essentially  domestic  Community  operation,  would  be 
inappropriate.  Two  things  are  in any  case  evident: 
first,  the problem  of conversion  — whether  and  with 
what  degree  of up-to-date  accuracy  and  frequency  of 
change  market  rate  conversion  should  be used  — has 
14. 6. 76 Official  Journal  of the  European  Communities No C 132/9 
much  more  importance  in practical  effect  than  the 
choice  of unit  of account;  secondly,  the  extent  to 
which  transactions  through  the  budget  are  at values 
determined  in  units  of account  is expected  to 
diminish,  as the  present  member-share  contributions 
give way  to reliance  on 'own  resources'  determined 
in domestic  currencies,  without  a corresponding 
change  in the pattern  of valuation  of expenditures. 
15. Briefly  summarizing  the  main  implications  of this 
examination  of particular  activities,  therefore,  we have 
the following  pointers  to choices  of units  of account: 
(a) the European  Monetary  Cooperation  Fund  is a 
special  case,  in which  there  are  particularly  strong 
technical  reasons  for  choosing  the  parity  grid  unit, 
and rejecting  alternatives; 
(b) there  are  no similarly  strong  technical  arguments  in 
relation  to other  activities; 
(c) the  parity  grid  unit  is judged  the  least  appropriate 
for the European  Development  Fund; 
(d) the  SDR  is judged  least  appropriate  for  the 
Community  budget  and  for the CAP. 
16. The  Committee  has  not  discussed  in detail  the 
technical  arrangements  which  may  be necessary  in the 
transition  from  the  present  system  to a new  unit  of 
account  in every  sector.  It will  be particularly  necessary 
to watch,  in such  future  work,  that  technical  arrangements 
are devised  for the transition  to a new  unit  of account,  in 
such  a way  as not  to give  rise  to serious  economic  and 
political  problems  for  some  member  countries,  for 
example  in the agricultural  sector. 
General  considerations 
17. There  are several  considerations  which  apply,  with 
varying  importance,  to all or most  of the uses  of units  of 
account  apart  from  the  special  case  of the  European 
Monetary  Cooperation  Fund. 
18. The  first  is the relative  trend  of value  of different 
units  of account. 
The Commission  simulation  exercise  (text  available  if 
required)  reveals  several  points  of interest  in the relative 
values  of the different  units: 
(a) although  the  values  diverge  and  converge  at various 
points  in time,  the  overall  divergence  is perhaps  less 
than the  background  of very  wide  fluctuations  in 
relative  values  of individual  currencies  would  have 
suggested.  This  is because  all the  units  represent  in 
some  sense  average  or middle  positions,  rather  than 
extremes; (b) there  is nevertheless  some  systematic  divergence,  with 
the SDR  weakening  and  the  parity  grid  unit 
strengthening  throughout,  with  the  EEC  basket 
generally  falling  between  these  two; 
(c) the recent  weakness  of the  SDR  is a direct  reflection 
of its large  US dollar  component.  The  experience  of 
March  1973  to December  1974  cannot,  of course,  be 
assumed  for the future.  A future  relative  appreciation 
of the value  of the US dollar  would  reverse  the recent 
pattern; 
(d) the relative  strength  which  has  in practice  generally 
been  experienced  by  the  parity  grid,  at least  in 
comparison  with  baskets  of all EEC  currencies. 
19. A  second  aspect  of the question  of relative  value  is 
the relationship  between  each  possible  unit  and  each 
individual  EEC  currency.  The  main  point  at issue  here  is 
the convenience  to any  one  EEC  country  of a relatively 
stable  relationship  between  its currency  and  the  unit  of 
account.  Where  relationships  between  currencies  are 
fluctuating,  it is plainly  impossible  for  all to enjoy  a 
stable  relationship  with  a common  unit.  In this  respect, 
the parity  grid  unit  confers  great  convenience  on 
countries  with  fixed  exchange  rate  relationships. 
Inevitably,  however,  this  places  the  whole  burden  of 
adjustments  which  may  be necessary  on other  currencies 
in the  system,  and  the  currencies  which  diverge  most 
from  the  'snake'  group  may  have  to  undertake 
substantial  adjustments.  By comparison  a basket  which 
averages  EEC  currency  values  will  call  for adjustments  in 
respect  of  all  constituent  currencies  (inevitably  a 
movement  by any  one  currency  will  affect  the value  of the 
unit and  hence  its relationship  with  all other  currencies), 
but the  extremes  of  adjustment  will  tend  to  be 
moderated:  the  burden  will  be in some  sense  shared 
more  widely  and  be less  marked  at the extremes. 
20. The  third  general  consideration  is  that  of 
conversion  arrangements.  As already  indicated,  conversion 
problems  do not arise  on the parity  grid  unit  in respect  of 
snake  currencies,  except  at any  point  of deliberate  central 
rate change  (it is assumed  that  the  relatively  minor 
fluctuations  within  margins  in  the  EEC  currency 
arrangements  are so small  that  they  could  reasonably  be 
ignored).  In all other  cases,  problems  arise  over  the 
extent  to which  arrangements  should  reflect  day-to-day 
market  rate  changes.  As indicated  above,  the 'averaging' 
effect  of EEC  baskets  may  moderate  the  extent  of 
changes  needed  at the  maximum  for  any  one  currency, 
but there  is otherwise  no particular  technical  advantage 
or disadvantage  from  this  point  of view  in the choice  of 
the unit  of account.  The  extent  of recourse  to accurate 
market  conversion  will  be a matter  for  decision  in 
relation  to the  needs  and  conditions  of each  particular 
activity  (e.g.  the special  considerations  relating  to the CAP, 
possibly  the  desirability  of operating  within  an annual 
framework,  or some  other  defined  period,  in relation  to 
the Community  budget  etc.). 
No C 132/10 Official  Journal  of the European  Communities 14. 6. 76 
21. A  fourth  general  consideration  is the  frequency  of 
adjustment  of units  of account.  In the  case  of the  parity 
grid unit,  there  may  be no need  for  adjustment  at any 
time  (but  see  paragraph  22).  Any  adjustment  of the  SDR 
basket  will  be a matter  for  decision  in the  International 
Monetary  Fund,  outside  the  Community  framework.  It is 
a matter  for  consideration  — possibly  in the  light  of 
future  developments  — whether  any  EEC  basket  would 
need  adjustment  from  time  to time  or not. 
22. A  fifth  consideration,  linked  with  the  foregoing 
comments,  is the  durability  of different  units  of account. 
There  can  be no question  about  the  durability  of any 
EEC  basket,  subject  to the  possible  need  for  adjustment 
of its  construction  which  would  be  a matter  for 
Community  decision.  Two  reservations  must  be noted, 
however,  in relation  to the  other  two  possible  units: 
(a) Parity  grid  unit:  As  was  indicated  at the  outset,  this 
unit depends  upon  the  existence  of a set of currencies 
within  the  Community  maintaining  fixed  exchange 
rate relationships  with  each  other.  The  group  is 
unfortunately  less  representative  than  all would  desire. 
Any further  diminution  in its  size  would  not  only 
diminish  the  importance  of any  arguments  in favour 
of its continued  use,  but  might  reach  a point  at which 
the definition  itself  came  under  suspicion. 
(b) SDR:  When  instituting  the  new  definition  of the  SDR, 
the International  Monetary  Fund  decided  to review  it 
in mid-1976.  It can  reasonably  be assumed  that  an 
international  decision  on this  matter  will  be designed 
to maintain  the  usability  of the  new  SDR,  but  the  fact 
that the  decision  will  necessarily  be taken  outside  the 
Community  framework  may  give  grounds  for caution. 
23. The  final  general  consideration  is political,  rather 
than  technical.  Alongside  their  function  on the  technical 
level  as common  denominators  for  accounting  and  in 
some  cases  for  valuation  purposes,  European  units  of 
account  have  some  presentational  importance  as  an 
indicator  of the  Community  nature  of  activities.  An 
extension  of the  same  thought  suggests  that  the  chosen 
units  should  represent  the  Community  as far as technical 
considerations  permit.  The  parity  grid  unit  is certainly 
the concept  of definition  which  corresponds  most  to the 
long-term  objective  of stable  exchange  rate  relationships 
between  all  EEC  countries.  In  present  conditions, 
however,  technical  considerations  tend  to point:  first,  in 
the direction  of an EEC  basket;  secondly,  in favour  of 
the choice  of a single  EEC  basket,  rather  than  any  variety 
of baskets  with  different  weightings.  The  last  point  has 
particular  force  in  the  absence  of  any  very  great 
divergence  in the  performance  of different  EEC  baskets 
(the two  tested  in the  Commission  simulation  exercise 
were,  within  the  range  of any  versions  with  reasonable 
justification,  quite  widely  different  from  each  other),  and 
in the  absence  of  specific  operational  reasons  for 
choosing  particular  weightings  in relation  to any  specific 
operation.  It is also  worth  noting  that,  if an EEC  basket 
were  adopted,  and  fixed  relationships  between  all  EEC 
currencies  were  subsequently  re-established,  the  EEC 
basket  unit  would  at that  stage  itself  attain  a relatively 
stable  relationship  with  all  EEC  currencies;  it would then  be  a matter  for  decision  whether  to continue  to 
define  the  unit  as a basket,  or to take  the  opportunity  of 
redefining  it on a parity  grid  basis. 
Conclusions  and  recommendations 
24. This  is essentially  a technical  report,  and  the 
Committee  recognizes  that  -—  particularly  where  the 
technical  considerations  do not  point  strongly  to any  one 
solution  —  formal  recommendations  would  be 
inappropriate. 
25. Nevertheless,  it may  assist  the  Council  in reaching 
decisions  to  consider  the  following  framework  and 
sequence. 
26. It  is important  to recognize  that  in certain  sectors 
some  of the  most  serious  problems  in operating  units  of 
account  at the  present  time  arise  over  rates  of conversion 
into national  currencies  which  do  not  automatically 
follow,  and  have  in practice  diverged  substantially  from 
market  rates.  The  definition  of any  new  unit  of account 
will not  automatically  resolve  these  problems,  but  in the 
interest  of moving  to more  realistic  conversion  rates,  it 
would  be desirable  to select  a definition  which  would  be 
well adapted  to  this  process.  Even  so  special 
arrangements  might  be needed  in some  cases  to maintain 
these  conversion  rates  frozen  for  certain  periods  of time. 
Such  special  arrangements,  however,  need  not  detract 
from  the  objective  of  choosing  a new  and  more 
appropriate  definition  of the  unit  of account. 
27. First  question:  Is  it essential,  or desirable,  that  a 
single  definition  of the  unit  of account  should  be adopted 
throughout  the  Community?  Setting  aside  presentational 
advantages,  the  Committee  feels  obliged  to point  out  that 
there  is at least  one  current  Community  activity  of 
importance  — the  present  intervention  and  settlement 
system  of the  European  Monetary  Cooperation  Fund  — 
where  strong  technical  reasons  exist  for  the  choice  of the 
existing  parity  grid  unit;  whereas  the  choice  of that 
particular  unit  would  seem  to be  less  appropriate  in 
other  cases,  and  perhaps  not  the  most  attractive  choice  on 
general  grounds. 
28. Second  question:  Is  it necessary  to introduce  a new 
unit simultaneously  for  all activities  to which  it can  be 
applied?  As far as technical  considerations  are  concerned, 
there  is  certainly  no  necessity  for  simultaneous 
introduction  —  there  are  of  course  some  inter-
relationships  and  overlaps  in the  accounts  of different 
operations,  but  these  are  not  such  as to make  the  use  of 
the same  unit  imperative.  Moreover,  it appears  that  there 
is considerably  more  urgency  in some  cases  than  in 
others  in settling  a new  definition. 
29. Third  question:  If  the  immediate  answer  to the 
first two  questions  is negative,  is it nevertheless  desirable 
to try  to establish  a new  unit  of account  which  could 
14. 6. 76 Official  Journal  of the European  Communities No C 132/11 
operate  widely,  even  if not  immediately  or indeed  ever 
applied  to all Community  activities?  If the  answer  to this 
question  is in the  affirmative,  it would  seem  from  the 
technical  point  of view  that  the  unit  which  would  be 
capable  of being  applied  with  the  least  inconvenience 
over  the  widest  range  of activities  would  be a satisfactory 
EEC  basket. 
30. Fourth  question:  If it is thought  desirable  to adopt 
an EEC  basket,  what  should  its construction  be? 
31. Fifth  question:  Should  any  immediate  decisions  on 
units  of account  for  particular  operations  be adopted? 
The Committee  offers  three  suggestions: 
(a) European  Monetary  Cooperation  Fund:  No  decision  is 
necessary,  but  the  Council  might  wish  to consider 
whether  to confirm  that,  at least  for  the  time  being, 
the parity  grid  unit  should  continue  to be  used, 
without  prejudice  to decisions  in relation  to other 
activities. (b) European  Development  Fund:  The  Committee 
understands  that  it is essential  to settle  a new  unit  of 
account  for  this  fund  before  it commences  operations 
in 1976,  and  that  it is desirable  for  the  assurance  of 
all concerned  to settle  the matter  as early  as possible. 
(c) European  Investment  Bank:  There  is  particular 
urgency  for  the  bank  to adopt  an interim  measure 
that will  enable  it to apply  realistic  exchange  rates  in 
the presentation  of its annual  accounts  for  1974.  This 
need  not  prejudice  subsequent  decisions.  If a decision 
on the  European  Development  Fund  was  taken, 
however,  this  might  assist  the authorities  of the  EIB  in 
deciding  on a satisfactory  interim  measure. 
(d) In relation  to all other  activities,  the  services  of the 
Commission  should  be  invited,  in  the  light  of 
convenience  of timing  and  any  special  considerations 
of urgency,  to continue  its studies  and  make  proposals 
as appropriate  in  conformity  with  the  general 
direction  of the  Council  decision  in principle  in reply 
to the third  question  above. 
ANNEX  II 
REPORT  TO  THE  COUNCIL  AND  THE  COMMISSION  ON  THE  REFORM  OF  THE 
INTERNATIONAL  MONETARY  SYSTEM 
1. In  accordance  with  the  request  made  by the  Council 
at its meeting  of 16 June  1975,  the  Monetary  Committee 
has reviewed  the  outcome  of the  Paris  meeting  of the 
IMF  Interim  Committee  on 10 and  11 June  1975  and  the 
prospects  for future  progress. 
2. The  Committee  considers  that  agreement  should  be 
sought  over  the  whole  range  of problems  discussed  at the 
Paris  meeting  of the  Interim  Committee  and  recorded  in 
the press  communique,  as a package  including  the  review 
of quotas.  The  following  sections  of this  report  consider 
the elements  of a possible  agreement,  in a constructive 
spirit,  and  identify  the  outstanding  points  of contention 
and possible  Community  positions  on them. 
IMF  gold 
3. The  Committee  recommends  endorsement  of the 
proposals,  which  received  wide  acceptance  in Paris,  under 
which  the  stock  of approximately  150  million  ounces  of 
gold  held  by the  fund  should  be dealt  with  broadly  as 
follows: 
— two-thirds  (100  million  ounces)  to be left  with  the 
fund,  its future  disposal  would  be decided  by an 85 °/o 
majority  of the  executive  board/governors;  the  articles 
of the  fund  should  include  enabling  powers  to permit 
a wide  range  of decisions,  within  the  framework  of the general  purposes  of the  IMF  and  not  excluding 
either  further  restitution  or further  sales; 
— one-sixth  (25  million  ounces)  to be refunded  to existing 
members  in proportion  to quotas  on (1 July  1975); 
recipients  would  be required  to reimburse  the  IMF,  in 
their  own  currencies,  which  they  would  not  be 
obliged  to repurchase,  to an amount  corresponding  to 
the official  SDR  value  of the  refunded  gold  (*); no 
other  conditions  would  be attached  by the fund; 
— one-sixth  (25  million  ounces)  to be sold  by the  fund, 
in a manner  that  could  maximize  the  yield,  either  in 
the market,  or to members  at prices  that  take  into 
account  the  current  situation  in gold  markets;  the 
equivalent  of the  official  SDR  value  of gold  sold 
would  be retained  in the  IMF  general  account,  and 
any surplus  would  be used  in accordance  with  future 
decisions  on expenditure  in the  interests  of developing 
countries,  particularly  those  with  low  income. 
Although  the  proportions  specified  above  are  acceptable 
to all members  of the  Committee,  there  could  be some 
room  for  negotiation;  but  the  relative  percentage  under 
the last  two  categories  should  remain  equal. 
(') The  problem  of  maintenance  of value  in respect  of currencies 
paid  to the  fund  in exchange  for  gold  was  recognized  by  the 
Committee.  It was  felt  however,  that  this  problem  would  most 
appropriately  be studied  by the  executive  directors. 
No C 132/12 Official  Journal  of the European  Communities 14. 6. 76 
Gold  transactions  by monetary  authorities 
4. All  Community  countries  are  prepared  to enter  into 
arrangements  on  gold  transactions  by  monetary 
authorities  outside  the  articles  of the  fund  provided  such 
arrangements  are  faithful  to the  Zeist  consensus  and  do 
not include  any  limitation  on transactions  by individual 
countries  in addition  to those  indicated  in Annex  I, 
which  sets  out the text  proposed  by the Committee. 
5. As  agreed  by  the  Interim  Committee,  the 
arrangements  would  be  outside  the  articles  but  there 
would  be  scope  for  reference  in IMF  articles  in two 
forms: 
[(a) maintenance  in Article  VIII  of obligations  to report 
gold  holdings  by monetary  authorities;] 
(b) a clause  on policy  on gold  generally,  linked  with 
and explained  further  in the  following  section. 
Reserve  currencies 
6. During  earlier  discussions  of international  monetary 
reform,  the  Community  adopted  an  agreed  position  in 
favour  of arrangements  for  settlement  and  convertibility 
which  would  have  involved  the  phasing  out  of reserve 
currencies.  While  accepting  the  impossibility  in  the 
immediate  future  of implementing  such  arrangements,  all 
members  of the  Committee  would  see  advantage  in 
incorporating  in IMF  articles  some  indication  of this 
direction  of  future  evolution  of  the  international 
monetary  system.  The  point  could  perhaps  be covered  by 
a clause  on the following  lines: 
'Each  member  undertakes  to collaborate  with  the 
fund  and  with  other  members  to  promote  the 
establishment  of the  special  drawing  right  as the 
principal  reserve  asset  and  the  reduction  of the  role  of 
gold  and  of reserve  currencies  in the  international 
monetary  system.' 
Exchange  rate  arrangements 
7. The  disputed  points  in the  Paris  meeting  were:  the 
definition  of the  ultimate  objective,  and  the  sequence  of arrangements  or rules  for  declaration  of a future  par 
value  system  and  initial  adherence  and  subsequent 
obedience  to it. 
8. On  the  ultimate  objective,  the  Committee  would 
wish  to see  included  in the  articles  the  language  agreed 
in the  Paris  communique,  which  was  in turn  based  on 
language  in the  'Outline  of reform'  agreed  in Nairobi  in 
1973,  namely: 
'The  ultimate  objective  is a system  based  on stable 
but adjustable  par  values  and  the  floating  of 
currencies  in  particular  situations,  subject  to 
appropriate  rules  and  surveillance  of the fund.' 
9. Annex  II contains  a series  of drafts  on the  main 
issues  of the  establishment  of a future  par  value  system 
and adherence  to it. There  is no dispute  over  the  formula 
for establishing  the  new  system,  on  a decision  which 
would  require  only  a [simple]  majority.  It is on the  two 
remaining  points  that  difficulty  arises: 
— the  degree  of obligation  on an individual  member  to 
adhere  to the  new  system  by declaring  par  values  for 
its own  currency; 
— the  degree  of constraint  to be applied  to a member 
which  has  adopted  a par  value  and  wishes 
subsequently  to allow  its currency  to float. 
The Annex  offers  three  alternatives  under  each  heading, 
ranging  from  free  choice  of the  member  to full  authority 
of the  fund.  A great  majority  of members  could  agree  to 
alternative  2 under  both  headings,  either  as a first  choice 
or as an attempt  to find  a common  position. 
Revision  of quotas 
10. The  Committee  has  not  considered  quota  revision 
possibilities  in detail.  It considers,  however,  that  the 
Community  should  approach  US  authorities  in order  to 
give them  assurances  that  an adequate  procedure  could 
be arranged  so that  their  new  voting  power  resulting 
from  quota  revision  would  not  come  into  effect  before 
approval  of the amended  articles. 
Appendix  I 
Proposed  undertaking  with  respect  to trading  in gold 
Participants  to the  undertaking  agree  that  monetary  authorities  are  free  to engage  in trans-
actions  in gold  subject  to the understanding  outlined  below: 
(a) transactions  in gold  will  not  be undertaken  with  the  objective  of de facto  establishing  a 
fixed  price  of gold; 
14. 6. 76 Official  Journal  of the European  Communities No C 132/13 
(b) no  purchase  of gold  will  be made  when  the  effect  would  be to increase  the  combined 
volume  of gold  holdings  of the  member  governments  plus  the  IMF  above  the  level  of 
1 May  1975; 
(c) these  undertakings  will  be reviewed  within  two  years  or at any  time  if it appears  that, 
contrary  to the  intention  expressed  in (a) above,  transactions  in gold  are  in fact  leading 
to the  establishment  of a fixed  gold  price. 
Some  members  consider  that  the  effective  date  of the  agreement  cannot  be left  open,  and 
neither  do they  accept  that  the  agreement  be subject  to continual  review.  They  accordingly 
propose  the following  alternative  version  of (c): 
'These  undertakings  will  run  for  two  years  following  the  entry  into  force  of the  amended 
articles.  During  this  period  they  may  be subject  to concertation  if, contrary  to the  intention 
expressed  in (a)  above,  transactions  in gold  are  in fact  leading  to the  establishment  of a 
fixed  gold  price.' 
Appendix  II 
(a) Establishment  of system 
The fund  shall  notify  members,  as soon  as conditions 
permit,  that  par  values  may  be  re-established  for  the 
purposes  of  this  agreement  in  terms  of  the  special 
drawing  right,  or such  other  common  denominator  as is 
prescribed  by the  fund.  The  common  denominator  shall 
not be gold  or a currency. 
(b) Adherence  of a member  to the  system 
Alternative  1 
A member  may  propose  a par  value  at any  time  after  the 
notice  is given  under  (a) above. 
Alternative  2 
A member  shall  propose  a par  value  within  a reasonable 
time  after  the  notice  is given  under  (a)  above  unless  the 
member  represents  to  the  fund  that  the  member's 
circumstances  do not  permit  the  establishment  of a par 
value.  The  fund  shall  not  challenge  such  representation. 
The member  shall,  however,  keep  in regular  consultation 
with  the  fund  and  conduct  its exchange  rate  policy  in 
accordance  with  such  guidelines  for  floating  as the  fund 
may  establish. 
Alternative  3 
A member  shall  propose  a par  value  within  a reasonable 
time  after  the  notice  given  under  (a)  above  unless  the 
member  represents  to the  fund  and  the  fund  agrees  that 
the member's  circumstances  do  not  justify  the 
establishment  of a par  value. 
(c) Subsequent  temporary  floating 
Alternative  1 
The par  value  of a member's  currency  established  under 
this agreement  shall  cease  to exist  for  the  purposes  of this agreement  if the  member  informs  the  fund  that  it has 
terminated  the  par  value. 
Alternative  2 
The par  value  of a member's  currency  established  under 
this agreement  shall  cease  to exist  for  the  purposes  of 
this agreement  if the  member  represents  to the  fund  that 
its circumstances  no longer  permit  it to maintain  a par 
value.  The  fund  shall  not  challenge  such  representation.  A 
member  which  has  thus  terminated  its  par  value  shall 
immediately  consult  with  the  fund  and  shall  conduct  its 
exchange  rate  policy  in accordance  with  such  guidelines 
for floating  as the fund  may  establish. 
Alternative  3 
The par  value  of a member's  currency  established  under 
this agreement  shall  cease  to exist  for the  purposes  of this 
agreement  if the  member  informs  the  fund  that  it intends 
to terminate  the  par  value  and  the  fund  authorizes 
termination  subject  to such  conditions  as it may  deem 
appropriate. 
Certain  members  consider  that  the  Committee  could 
usefully  make  an  inventory  of  a range  of  possible 
technical  variants  to the  alternatives  2 and  3 above 
concerning  both  adherence  to the  system  and  subsequent 
temporary  floating.  In all cases,  the  final  decision,  which 
in the  last  analysis  belongs  to the  member  country,  can 
only  be  taken  after  having  previously  exhausted  the 
following  procedures  which  are  listed  in ascending  order 
of moral  constraint: 
1. the  member  must  justify  its request,  and  authorization 
will be granted  on  the  overwhelming  benefit  of the 
doubt; 
2. the  member  must  justify  its request,  and  authorization 
will be accompanied  by specific  guidelines  defined  by 
the fund  on an ad hoc  basis; 
3. the  member  must  justify  its request.  Before  granting 
its authorization,  the  fund  may  ask  the  member  to 
reconsider  its position  (within  a certain  time  period); 
the member  may,  however,  confirm  its position; 
No C 132/14 Official  Journal  of the European  Communities 14. 6. 76 
4. the  member  must  justify  its request.  Authorization 
will be granted  by the fund  on a temporary  basis  and 
at the  end  of the  agreed  period,  the  member  shall 
renew  its request; 
5. the  member  must  justify  its request.  Authorization  of 
the fund  will  be granted  but  on a temporary  basis, 
and may  be revoked  at any  time; 
6. the  member  must  justify  its request.  Authorization  of 
the fund  will  be granted  on a majority  of [85]  [80] 
[70] [50%]. Other  members  have  suggested  an intermediate  position 
between  alternatives  1 and  2 under  (b) above,  as follows: 
A member  may  propose  a par value  at any  time  after  the 
notice  is given  under  (a) above.  If it does  not  feel  to be 
in a position  to  do  so,  it shall  keep  in regular 
consultation  with  the fund  and  shall  conduct  its exchange 
rate policy  in accordance  with  such  guidelines  for 
floating  as the fund  may  establish. 
/ 
ANNEX  III 
METHODS  OF  PROTECTING  THE  HOLDER  OF  BONDS  AGAINST  INFLATION  AND 
THEIR  EFFECTS  ON  INTRA-COMMUNITY  CAPITAL  MOVEMENTS  IF THEY  WERE 
ADOPTED 
The high  rate  of inflation  prevalent  in most  Member 
States  has  led  the  members  of the  Working  Party  on 
Securities  Markets  to look  into  the question  of protecting 
the holder  of fixed-interest  securities  against  losses  caused 
by the fall in the value  of money. or in part,  when  only  a single  estate  is involved.  This  is, 
for instance,  true  of banks,  which  have  liabilities  which 
depreciate  at the  same  lime  as their  claims,  or of 
individual  bond  holders  who  acquired  real  assets  with 
borrowed  funds.  The  latter  situation  occurs  very 
frequently  as ownership  of real  property  becomes  easier. 
The experts  concentrated  on two  aspects  in particular: 
— the  methods  which  might  be used  in this  connection, 
— the  effects  on intra-Community  capital  movements  if 
they were  adopted  by some  member  countries,  and 
the related  problem  of the  adoption  of concerted, 
policies  on the subject  by member  countries. Secondly,  if one  wished  to compensate  the  holders  of 
bonds  retroactively,  the  date  to  be  taken  into 
consideration  would  need  to reflect  the  date  and  terms 
when  the  bonds  were  acquired.  It would  be inequitable 
to compensate  all bondholders  as if they  had  held  the 
bonds  from  the  date  of issue,  because  the  bonds  might 
have  been  purchased  on more  favourable  terms  later  than 
that date. 
I. General 
1. The  real  yield  on bonds  falls  when  the  currency  in 
which  they  are  denominated  depreciates,  dropping  to 
zero or  even  becoming  negative  when  the  rate  of 
inflation  matches  or exceeds  the  coupon  rate  of the 
securities.  Further,  the  capital  loss  may  be compounded 
by a fall  in the  stock  market  price  of securities  brought 
about  by the rise  in interest  rates  which  usually  occurs  in 
times  of high  inflation. 
This  drop  in the  real  value  of invested  savings  is mainly 
to the  advantage  of the  borrowers.  To  begin  with,  it 
would  therefore  be necessary,  if only  for  considerations 
of equity,  to adopt  measures  to  restrict  and  even 
eliminate  this  transfer  of wealth. Compared  with  the situation  before  the First  World  War, 
there  are  perhaps  not  many  estates  at the  present  time 
which  are  made  up exclusively  of bonds,  and  still  more 
rare are  persons  who  depend  only  on  fixed-interest 
securities  for  their  income.  Nevertheless,  such  situations 
do arise  in the case  of private  individuals  such  as retired 
farmers  who  have  invested  the  proceeds  of the  sale  of 
their  land  in stocks,  or institutions,  particularly  pension 
funds.  The  latter  are  obliged  to finance  expenditure 
which  increases  at about  the same  rate  as inflation  while 
the value  of their  assets  is steadily  shrinking,  and  this 
alone  would  justify  the adoption  of suitable  provisions  in 
their  favour.  Nevertheless,  these  various  reservations 
show  that  the  problem  of protecting  the  holder  of bonds 
is not as simple  to resolve  as might  first  appear. 
But this  observation  must  be qualified. 
Firstly,  because  these  transfers  of wealth  from  lender  to 
borrower  frequently  cancel  each  other  out,  in the  whole 2. Apart  from  considerations  of simple  equity,  it 
should  be pointed  out  that  a continuing  high  level  of 
inflation  will  strengthen  the  need  for  measures  to help 
14. 6. 76 Official  Journal  of the European  Communities No C 132/15 
bondholders  and  savers  in general  if the  finance  needed 
to sustain  economic  growth  is to be made  available.  In 
many  European  countries,  the  post-war  years  show  that 
this was  the  main  reason  behind  the  measures  taken  at 
the time  to protect  savings. 
3. The  most  effective  protection  for  holders  of claims 
would  obviously  be success  in combating  inflation  itself, 
and the  members  of the  Working  Party  agree  that 
keeping  the  value  of money  comparatively  stable  should 
remain  a primary  objective.  But  despite  the  stabilization 
policies  adopted  in the  member  countries,  and  owing 
probably  to the variety  and  complexity  of factors  behind 
the progress  of  inflation,  the  currencies  of  the 
Community  countries  are  all depreciating,  although  to 
differing  degrees. 
Consequently,  there  is unanimous  agreement  among  the 
experts  that  a study  should  be made  of ways  and  means 
of giving  holders  of fixed-interest  securities  minimum 
protection  against  the  decline  in the  real  value  of their 
investments. 
4. Finally,  it is for consideration  whether  arrangements 
to protect  the interests  of savers  should  cover  the past  as 
well as the  future,  and  this  raises  the  problem  of the 
compensation  to be paid  to bond  holders  for the losses 
they have  suffered. 
II. The  various  methods  of protecting  the bondholders 
The various  methods  of ensuring  that  the  real  value  of 
the bondholder's  capital  and  of his  income  from  this 
capital  remains  comparatively  stable  can  be broken  down 
into three  groups: 
1. techniques  for  bringing  issues  more  closely  into  line 
with  market  conditions; 
2. increasing,  in one  form  or another,  the nominal  yield 
of loaned  funds,  so as to ensure  that  the real  yield  on 
the capital  remains  positive; 
3. index-linking. 
The members  of the  working  party  mainly  concentrated 
on the  first  two  points,  but  index-linking  was  also 
discussed  at length.  However,  the general  feeling  was  that 
the introduction  of  index-linking  raised  a general 
problem  which  involved  much  more  than  the  protection 
of the holder  of fixed-interest  securities. 
In addition,  the  inconclusive  results  of past  or current 
index-linking  schemes  have  led  the  majority  of the 
experts  to adopt  a very  reserved,  not  to say  negative 
attitude  to this  matter. 1. Techniques  for  bringing  issues  more  closely  into  line 
with market  fluctuations 
To begin  with,  issues  could  be brought  closely  into  line 
with market  conditions  if operators  were  given  greater 
freedom  in setting  the  conditions  and  terms  of new 
issues.  This  would  help  to recreate  on national  markets 
conditions  similar  to those  prevailing  on the  international 
capital  market,  where,  given  the  absence  of  any 
regulations,  lenders  and  borrowers  can  at all times  adapt 
to circumstances. 
The techniques  to be considered  relate  to the  level  of 
interest  rates  and  the maturity  of loans. 
(a) The  bondholder  would  no doubt  be better  protected 
by an  interest  rate  policy  designed  to  allow 
him a positive  return  on his  capital.  However,  the 
level  of interest  rates  on national  markets  depends  on 
the economic  situation  in  each  country  and 
particularly  the intensity  of inflationary  pressures,  but 
also on the action  taken  by the monetary  authorities, 
which  is itself  determined  by the general  requirements 
of economic  policy.  The  monetary  authorities  are,  in 
any case,  far  from  enjoying  complete  freedom  of 
action  in this  field,  their  freedom  being  restricted  by 
the influence  of external  factors  once  cross-frontier 
capital  movements  have  been  freed  to a satisfactory 
degree. 
These  general  considerations  explain  why  protection 
of the  holder  of fixed-interest  securities  or of the 
saver  generally  cannot  be  one  of the  monetary 
authorities'  major  policy  objectives. 
Consequently,  the  holder  of fixed-interest  securities 
will always  incur  a loss  once  the cost  of money  rises 
above  the  interest  rates  on his  securities.  Of course, 
this risk  exists  even  in times  of comparative  stability, 
but is considerably  greater  in times  of inflation. 
Some  of the  risk  can  be removed  if the  interest  paid 
on bonds  is periodically  brought  into  line  with  market 
conditions.  Variable-rate  issues,  which  appeared  first 
on the  international  capital  market  and  then  on 
certain  national  financial  markets,  perform  this  task. 
Examples  of such  transactions  carried  out  in the 
Member  States  include  a loan  which  ENEL  in Italy 
floated  in June  1974;  this  loan  carried  an interest  rate 
which,  without  being  allowed  to drop  below  4 °/o per 
half-year,  varies  in line  with  the average  stock  market 
yield  of a sample  of bonds.  Similarly,  in December  1974 
in France  the Groupement  de l'industrie  Siderurgique 
floated  a loan  carrying  an interest  rate  that  is to be 
established  in the light  of average  rates  on the money 
market  during  the  six months  prior  to the  coupon's 
date of maturity. 
It should,  however,  be  noted  that  this  technique 
normally  protects  the  holder  against  a loss  in the 
nominal  value  of capital,  but not  always  against  a loss 
in its real  value.  Such  is the  case  when  the  interest 
rate stays  below  the rate  at which  the value  of money 
falls because  inflation  rates  (and  in  particular, 
expected  rates)  are only  one  of the factors  determining 
interest  rate  levels. 
No C 132/16 Official  Journal  of the European  Communities 14. 6. 76 
(b) Another  technique  which  facilitates  adjustment  to 
changing  market  conditions  for  the  operators  is the 
reducing  of maturities  of loans.  Its advantage  for  the 
holder  is that  he,  during  periods  of sharply  increasing 
interest  rates,  can  switch  more  rapidly  to  better 
yielding  investments.  Also  the  loss  in value  will  not  be 
so large  with  short-term  bonds  as it is with  long-term 
securities.  A  trend  towards  bonds  with  shorter 
maturities  has  in fact  been  observed  during  the  past 
few years  in  certain  Member  States  of  the 
Community. 
Thus,  the  average  maturity  of new  loans  issued  by 
public  authorities  and  enterprises  in Germany  has 
been  shortened  in recent  years  from  about  15  to 20 
years  to 10 years  and  temporarily  even  five  years  in 
the autumn  of 1974,  and  that  of mortgage  bonds  from 
30 to 40 years  to 5 to 10 years. 
In Belgium,  there  has  been  a similar  trend  and  an 
increasing  number  of  loans  are  issued  with  an 
intermediate  maturity  which  gives  the  investor  the 
option  of repayment  or of holding  on to his  securities 
until  final  maturity,  with  the  interest  rate  then 
generally  higher. be taken  as a result  of governmental  influence.  On  the 
other  hand,  measures  of  this  kind  would  hardly 
represent  real  help  for  the  saver,  for  they  might  create 
precedents  which  put  the  character  of a fixed-interest 
security  (fixed  interest,  fixed  maturity)  into  question. 
They  could  also  contribute  to  an  unfair 
overburdening  of the  issuer  which  he,  in the  form  of 
prices  or  higher  taxes,  would  have  to  pass  on. 
Furthermore,  in  a large  market  there  exists  the 
possibility  that,  unjustly,  investors  who  sold  bonds  on 
the secondary  market  before  the  measures  took  effect 
would  not  benefit  from  the  improvement  in 
conditions.  Insecurity  on  the  market  and  a 
corresponding  loss  of  confidence  would  follow 
although  the  opposite  result  was  sought  after. 
This  does  not  exclude  the  possibility,  in the  case  of 
the existence  of  flexible  loan  conditions,  of  such 
conditions  being  implemented  by  the  issuer  in order 
to accelerate  the  amortization  of low  interest  bonds, 
thus  avoiding  the  necessity  of savers  being  bound  to 
interest  rates  for  too  long  a period  of time  — these 
interest  rates,  considering  the  tendency  towards 
increased  inflation,  appearing  to be too  low. 
Similarly,  the  loan  contracts  could  feature  anticipated 
repayment  clauses  for  the  benefit  of lenders,  while  at 
present  such  clauses  are  usually  for  the  benefit  of 
borrowers  only,  or  provision  could  be  made  for 
frequent  and  regular  options  of repayment  after  a 
certain  date.  The  GIS  loan  in France  mentioned  above 
carries  a clause  of this  type  from  the  second  year. 
2. Increasing  the  yield  of loaned  funds 
(a) The  techniques  described  above  can  only  be applied 
to new  issues  and  therefore  only  protect  new 
investors.  This  leaves  the  case  of the  holders  of old 
bonds  whose  capital  is shrinking  as  a result  of 
inflation  and  of rising  interest  rates.  Generally,  no 
overall  solution  has  ever  been  evolved  for  this 
problem  since  it is virtually  impossible  to find  the 
resources  that  would  be  required  to compensate  the 
holders.  This  is particularly  true  with  regard  to 
securities  issued  by the  central  government  or public 
bodies,  which  are  heavily  indebted  in some  countries. 
The amounts  which  would  need  to  be  paid  to 
bondholders  would  call  for  a very  substantial  increase 
in tax  revenue,  which  in  most  countries  would 
probably  be difficult  to obtain. 
Additionally  a basic  problem  should  be pointed  out. 
As far  as public  saver  protection  is concerned  it could 
be considered  desirable  to amend  loan  conditions  in 
favour  of the  saver  during  the  term  of  the  loan, 
consequently  deviating  from  the  actual  prospectus 
conditions.  Such  measures,  one  imagines,  could  also In Germany,  this  solution  has  been  recently  adopted. 
There  the  mortgage  banks  and  other  issuing  banks 
have  committed  themselves,  via  their  associations,  to 
the Government  to  using  an  annual  amount  of 
DM 200  million  for  the  voluntary  redemption  of their 
low interest  (5  and  5-5  %) debt.  These  voluntary 
redemptions  are,  in  most  cases,  carried  out  by 
repurchase  outside  the  Stock  Exchange  at the  average 
issue  price.  These  repurchases  are  limited  in amount 
per individual  bondholder  who  has  also  to prove  that 
the securities  have  been  his  property  since  a certain 
date.  This  is designed  to exclude,  wherever  possible, 
the benefit  of these  measures  to securities  previously 
acquired  at the  Stock  Exchange  at prices  below  the 
issue  price.  A further  form  of voluntary  redemption  is 
the anticipated  drawing  or  redemption  of  single 
tranches  or whole  issues. 
In various  countries  there  are  also  isolated  cases  of 
private  or public  sector  borrowers  who  have  agreed 
to repurchase  their  securities  below  the  stock  market 
price  — usually  when  new  issues  are  launched,  such 
as the  recent  IMI  issue  in Italy  — or  to raise  the 
interest  paid  on bonds  in circulation,  as has  happened 
recently  in Austria. 
(b) Consideration  could  also  be  given  to  tax 
arrangements  under  which  tax  is levied  only  on that 
part  of the  interest  which  exceeds  the  rate  of the  fall 
in the  value  of money,  i.e.  the  real  income.  Some 
years  ago  in Germany  a taxpayer  tried  to obtain  a 
ruling  along  these  lines  from  the  Federal  Finance 
Court,  but  without  success  at the  time. 
14. 6. 76 Official  Journal  of the European  Communities No C 132/17 
Similar  proposals  have  been  made  in several  countries 
by various  economic  and  political  groups.  Under  all 
of them,  tax  would  be levied  only  on  part  of the 
nominal  interest  yield:  either  on the  basic  interest  rate 
— interest  received  in excess  being  exempt  — or only 
on that  part  of the  interest  that  corresponds  to the 
proportion  of  the  rate  in excess  of the  rate  of 
inflation.  None  of these  proposals  has  as yet  been 
implemented,  at least  in the  various  Community 
countries. 
(c) In practice,  the  interest  paid  to  bondholders  is 
increased  only  indirectly  and  in  a general  way 
through  measures  to  encourage  savings  generally. 
Examples  include  the French  tax  exemptions  for  bond 
interest  up to FF 3 000,  the tax  exemptions  granted  in 
some  countries  for  funds  invested  in the  form  of 
securities  under  savings  schemes,  and  premiums 
granted  by the State. 
3. Index-linking 
Index-linking  is a highly  controversial  technique.  It 
consists  of establishing  a link  between  the  nominal  value 
of capital  or  interest,  or  both,  and  an  index  of 
purchasing  power. 
The cost-of-living  index  is usually  taken  as a reference 
but this  is not  an absolute  rule  and  it is equally  possible 
to use  the  wholesale  price  index  (Brazil),  the  index  of a 
foreign  currency's  rate  of exchange  (the  US  $ in Israel) 
or an  index  reflecting  the  activity  of the  borrower 
(turnover  for example). 
A large  majority  of the  members  of the  working  party 
agreed  that  it was  hardly  possible  to isolate  the  problem 
of indexing  fixed-interest  securities  from  the  more 
general  problem  of indexing  claims  in the  economy  as a 
whole  0). 
In the  present  economic  setting,  it would  be difficult  to 
introduce  index-linking  on  to  the  financial  market 
without  extending  it to other  forms  of saving.  However, 
general  index-linking  of savings  would  in the  end  be 
likely  to sustain,  if not  exacerbate,  inflationary  pressures. 
Merely  because  of  transfers  between  accounts,  the 
financial  institutions  and  the  banks  would  be obliged  to 
index  virtually  all  their  commitments  whilst  being 
practically  unable  to reassess  their  old claims. 
It would  no doubt  be possible  to restrict  index-linking  to 
financial  assets  tied  up for  a given  period  of time,  such 
as fixed-term  deposits  and  deposits  at notice,  or blocked 
savings  accounts.  However,  were  such  a distinction  to be 
made,  the  financial  institutions  and  the  banks, 
particularly  those  in countries  where  credit  institutions 
(l) The  subject  is discussed  further  in the  study  by  the  OF.CD 
Financial  Markets  Committee  entitled  'Index-linking  of  fixed 
interest  securities'  (OECD,  Paris  1973). are highly  specialized,  would  find  themselves  in very 
different  competitive  situations,  depending  on  the 
proportion  of indexed  items  in their  resources.  Finally, 
choosing  a reference  index  for  financial  assets  is, in itself, 
quite  a delicate  matter. 
Apart  from  these  general  considerations,  another  decisive 
reason  that  in the  view  of a majority  of the  experts 
militates  against  adopting  index-linking  as a measure  to 
protect  the  holder  of fixed-interest  securities  is that  the 
experience  gained  in  the  past  has  not  been  very 
convincing.  The  Finnish  authorities  had  had  to 
acknowledge  failure  in this  field.  The  Brazilian  model, 
which  is frequently  cited  as an example,  operates  against 
an economic  and  political  background  that  would  be 
difficult  to imagine  in Europe. 
In the  Community,  France  is the  only  country  where 
there  were  any  significant  issues  of index-linked  bonds  by 
the public  and  the  private  sector  (during  the  1950s). 
However,  careful  studies  have  shown,  at least  where 
securities  issued  by the  private  sector  are  concerned,  that 
holders  of index-linked  securities  had  generally  not  been 
any better  protected  than  if they  had  bought  ordinary 
bonds. 
Index-linking  to general  purchasing  power  indices  and  to 
indices  of  certain  products  or  raw  materials, 
representative  of price  levels  (for  example  gold),  has  not 
been  permitted  in France  since  the  1958  stabilization 
plan,  but  index-linking  to the  price  of goods  and  services 
produced  by  the  borrower  is still  permitted.  In other 
countries,  notably  Germany,  any  linking  with  the 
monetary  value  of goods  and  services,  or with  indices 
representative  of the  general  price  trend,  is subject  to 
authorization,  which,  however,  is never  granted  in the 
financial  field. 
In the  United  Kingdom,  there  has  not  been  a full  indexed 
savings  scheme  of  any  kind  so  far.  However,  the 
Government  are  introducing  in June  and  July  1975  two 
modest,  experimental  indexed  savings  schemes  strictly 
limited  to small  savers  and  in restricted  amounts.  Under 
these  schemes  only  capital  will  be indexed.  A small  bonus 
will be paid  at maturity  which  will  give  the  saver  a low 
but positive  real  rate  of return.  There  are  no proposals 
for extending  indexation  beyond  these  schemes. 
111. Effects  on intra-community  capital  movements  of the 
adoption  by one  or more  States  of measures  to protect 
bondholders 
Let us assume  that  one  or more  Community  countries 
take  measures  to  protect  holders  of  fixed-interest 
securities.  Would  such  decisions  disrupt  capital 
movements  to  the  detriment  of  the  other  member 
countries?  There  is no clear-cut  answer  to this  question. 
1. In  the  present  circumstances  it should  first  be borne 
in mind  that  private  individuals  investing  in fixed-interest 
No C 132/18 Official  Journal  of the European  Communities 14. 6. 76 
securities  on national  markets  usually  know  little  about 
foreign  capital  markets  and  consequently  are  hardly 
likely  to place  their  money  there.  There  would  have  to be 
a considerable  difference  in the  conditions  between 
markets  for  it to be otherwise.  Where  there  are  tax 
advantages,  these  are  not  usually  any  better  known 
outside  the  frontiers  and  are  frequently  available  to 
nationals  only.  This  ignorance  of markets  other  than  the 
national  market  is further  aggravated  in some  countries 
by the  existence  of rules  prohibiting  advertising  for 
foreign  issues. 
Institutional  investors  are  in a much  better  position  to 
assess  the  advantages  of investing  on one  market  rather 
than  another,  but  many  of them  are  subject  to rules  on 
the investment  of  their  assets  which  in  practice 
considerably  reduce  their  freedom  of action. 
2. Furthermore,  until  a high  degree  of economic, 
monetary  and  financial  integration  has  been  achieved 
within  the  Community,  and  particularly  as  long  as 
currencies  continue  to float,  investors  acquiring  securities 
issued  in other  Community  countries  will  be faced  with 
an exchange  risk  that  is difficult  to evaluate. 
From  this  point  of view,  measures  taken  by a country  to 
protect  bondholders  or savers  in general  could  lose  a 
great  deal  of their  appeal  in that  they  would  reflect  the 
weakness  of that  country's  currency. 3. These  general  arguments  are  less  cogent  in the 
specific  case  of economies  which,  like  those  in the 
Community,  have  particularly  close  economic,  monetary 
or financial  links  with  each  other.  Clearly,  therefore,  any 
measure  taken  in isolation  by  one  of the  member 
countries  to protect  or help  bondholders  or savers  in 
general  could  affect  the  direction  or size  of capital 
movements. 
4. This  will  be exactly  the  pattern  which  will  emerge 
throughout  the  Community  as the  conditions  in which 
capital  markets  operate  are  aligned  within  the  wider 
framework  of the  programme  to achieve  economic  and 
monetary  union. 
IV. Conclusions 
All this  highlights  the  need  for  Member  States  to 
coordinate,  within  the  Community  institutions,  any 
significant  initiatives  they  may  take  to help  the holder  of 
fixed-interest  securities.  The  arrangements  to be made  or 
developed  further  should  be  based  on  the  techniques 
described  in II (1) and  (2)  above,  although  even  these 
measures  can pose  substantial  difficulties.