ARCHIVES HISTORIQUES
DELACOMMISSION
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DOCUMENTS "COM"
COM(75)428
Vol.1975/0164

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COMMISSION OFTHEEUROPEAN COMMUNITIES
COM(75 )428final .
Brussels .25July 1975
COMMUNICATION' FROM THE COMMISSION TOTHE COUNCIL
Effects ofdevelopments intheinternational monetary situation
ontheworking oftheEuropean Development Fund .
CCM(75 )428final *

C0MMI3BI0H
07THEEUROPEAN COMMUNITIES
COMMUNICATION FROMTHECOMMISSION TOTHECOUNCIL
Subject tEffectsofdevelopments intheinternational monetary
situation ontheworkingoftheEuropean Development Fund*
Thedevelopments whichhavetakenplaceintheinternational monetary
situation since10thMay1971("thedateofthefloatingoftheGermanMark
andtheDutohflorin)havecreatedseriousproblems -intheadministration
oftheE*D*F*
Inordertounderstand thenatureoftheseproblemsitisessential
tobearinmindthetextsofthefollowing doouments whichareorwereappli­
cabletotheadministration oftheFundt
1)Protocol N°7relatingtothevalueoftheunitofaccount
2)Article3»paragraph 4»oftheInternal Agreementrelatingtothe
financing andadministration ofCommunity aid
3)Artiole2fparagraph 5»oftheFinanoial Regulations oftheEDFlaid
downintheInternal Agreement relating tothefinancing andadministration
ofCommunity add*
ThesetextsareattachedtothepresentCommunication asAnnexes 1and2
Protocol N®7definesthevalueoftheunitofaccountandspecifies
themethodsofcalculating thev&riouscurrencies oftheMemberStatesin
relation totheunitofaccounts
Article 3»paragraph 4»oftheInternal Agreement relatingtothe
financing andadministration ofCommunity aiddealswiththeprovision foran
exchangeguarantee fortheCommission *soreditsrepresenting thememberStates *
contributions shownintheTreasuryaccountsofthe(tigmberStates*

Article 2,paragraph 5»oftheFinancial Regulations oftheEDF
describes themethodsfortheapplication ofthisexchange guarantee.
WithregardtoEDFoperations ,developments intheinternational
monetary situation havegivenrisetofoursuccessive decisions t
l)thedeoisionof10thMay1971oftheGermanandDutchgovernments to
expandtemporarily thefluctuation marginsoftheircurrencies *
l\
2)thedecisionof15thAugust1971oftheU.S.Government tosuspendsine
dietheconvertibility oftheU.S.dollarintogold(orintoanyother
reserveasset)–thisdeoisionitselfbringing aboutthefloatingas
from23rdAugust1971oftheBelgianFranc,theLuxembourg Francandthe
ItalianLira*
3)thedecisiontakenon18thDecember 1971inWashington bytheGroupof
Tentoconstitute anew,stableinternational financial system
eitherintheformofparities orintheformof.acentralrateandalso
towidenthefluctuation marginsfortheexchangerateofeachoftheir
currencies to2.25%eithersideofthiscentralrate,
4)thedecisiontakensubsequently bythetalianGovernment (on14thFebruary
1973)andbytheFrenohGovernment (on21stJanuary1974)toallowthe
ItalianLiraandtheFrenohFranotofloat*
Thefirstsentence ofArtiole 2ofProtocol N®7setsouttheprinci­
plethattheparityofamemberStatecurrency withrelation totheunitof
accountistherelationship betweentheweightoffinegoldcorresponding to
theparityofthiscurrency asnotifiedtotheInternational Monetary Fund.
Theseoondsentence,envisaging thehypothetical caseinwhichthe
exchangerateofthecurrencyinquestion wastodifferfromtheparitybya
margingreaterthantheauthorised bytheIMF(ashappenswhenacurrencyfloats)

specifies thatitwillthentoenecessary insuchcircumstances tocalculate
whatweightoffinegoldcorresponds tothevariation intheexchangerate
andgoesontodescribe themethodofcalculation tobeadopted :theweight
offinegoldcorresponding totheparityshallbecalculated onthebasisof
theexfchangerateusedinthememberStateforcurrenttransactions onthedayof
thecalculation inacurrencydirectly orindirectly definedandconvertible into
goldonthebasisoftheparitynotified totheIMPofthisconvertible currency#
I
I
Thecurrencydirectly orindirectly definedandconvertible intogold
referredtointhelastpartofArtiole 2was,infact,theU*S*dollarwhich,
untilthedateoftheU»S*Government 'sdecision,wastheonlycurrencyto
meetthetwopreconditions tdirectorindirectdefinition andconvertibility
intogold*
AftertheU.S.Government 'sdecisiontosuspendthedollar'sconverti­
bilityintogold,theCommission stafffoundthemselves confronted withalegal
impasse *Theynolongerhadamethodbywhichtocalculate theparityofthe
different floating currencies vis-^-vistheunitofaccount *
Pacedwiththissituation theysubmitted tothefinancial expertsof
thememberStatesnumerous proposals forasolution whiohwouldenablethem
properlytoadminister theEDP*
Noneoftheproposals formulated bytheCommission staffreceivedthe
unanimous approvalofthememberStateswho,fortheirpart,wereunableto
produceanysolutiontotheCommission authorities *
However,theneedforadailycalculation ofnumeroustransactions
obligedtheCommission authorities toagreeonaprocedure whichmaybe
summarised asfollows :
l)fortheperiodbetween10thMayand15thAugust1971whiohisonlyconcerned
withthemeansofconverting theGermanMarkandtheDutchflorinintounits
ofaocount,Artiole2ofProtoool K°7applies,whichhadforeseentheneed
torelatetheexchangeratesoffloatingcurrencies totheU*S*dollar s

Thiswastheonlypointuponwhichtherewasunanimityinthe I
positions oftheCommission andofallthememberStates* i
I
2)fortheperiod "between15thAugustand18thDecember 1971inclusive . i
followingproposalsfromtheCommission andcounters-proposals fromthe j
GermanDelegation ,agreement wasreachedbetweentheCommission and.the
delegations offivememberStatestotheeffectthattheexchangerates j
ofmemberStatecurrencies vis-&wvis theunitofaccountbecalculated by
reference tothemovements oftheexchangeratesofthefloatingcurrencies
againsttheonlymemberStatecurrency whichwasnotfloating,which,atl
thattime,wastheFrenchfranc*
»
OnlyItalyfeltunabletoagreetothis* 1
3)fortheperiodfollowing 18thDecember 1971#theCommission putforward
aproposalthatthenewcentralrateswhichhadjustbeenagreedat i
Washington shouldbeconsidered asthenewparities *
Thisproposal,however,didnotobtaintheunanimous approvalofthe i
memberStates:Italy,inparticular ,asfrom18thDecemberandafter j
thedevaluation ofthedollar,continuedtoequate1unitofaccountwith j
1U*S*dollarandtopayitscontributions onthebasisoftheexchange
rateoftheItalianLiraagainsttheU*S*dollari*e*1U.S.sf»581*5I»*it*|
!
4)fortheperiodfollowing 14thFebruary 1973(thefloatingoftheItalian
Lira)and21stJanuary1974(thefloatingoftheFrenchfranc)theCommission !
hasletitbeknownthatithas^adoptedthefollowing procedure :
••fortheconversion intounitsofaccountofthenon-floating currencies
ofthememberStatestthecontinuation oftheformermethod,
••fortheconversion intounitsofaccountofthefloatingcurrencies ,the
useofaratebasedontheaverageoftheexchangeratesofallthe
currencies inthe"snake"againstthecurrencyinquestion andasquoted
onforeignexchange markets *Thismethodisidentical tothatusedfor
theECSCunitofaccountasdeoidedbytheCommission Decision n°
3542/73ECSCof19thDecember1973*

ItalyandPranceneveragreedtothismethodandpaidtheircontri­
butionsasfollows tPrance "byreference totheparityoftheFrenchfranc
declaredtotheIMP,Italybycontinuing toapplytheexchangerateofthe
ItalianLiraagainsttheU*S,ftof1U.S.^=581*5It*L*
Naturally ,theCommission authorities accounted allEDFtransactions –
"bothcommitments andpayments –according totheprocedures whichtheyhad
adopted,thatistosayasfaraspossible,andinthespiritoftheprovi­
sionsofProtocol N°7referring tothedevelopment ofrealexchangerates
andnottototallyoutdatedparities *
Itwasinthislight,notably,thattheCommission stafflaiddown
therulesbywhichtenderssubmitted bythevarious MScompanies forcontracts
financed bytheEDFweretobejudged*Thisenabledcompanies inthoseMS
whosecurrencies werefloating downwards tomaintaintheircompetitiveness
vis-&–viscompanies fromMSwhosecurrencies werefirmer*
Duringthisperiod,however,somereceipts werecashedbytheCommis­
siononthebasisofparities whichnolongeraccordedwiththeirreal
values,resulting inalosstothetreasury which,atpresent,isoftheorder
of30m*unitsofaccount.This means,ineffect,thattheCommission staff
arenotinapositiontoguarantee thepaymentofthelatestpaymentvouchers
relating toEDFcontracts :
Giventhissituation ,theCommission proposesthattwothingsbedonet
–thefirstwiththeimmediate aimofbringing theprocedures foraccounting
ofexpenditure intolinewiththosefortheencashment ofreoeipts sothat
thepresentdeficitdoesnotincreasestillfarther,
–thesecond,toputinorderthepasttransactions between10thMay1971and
1stJuly1975*
Λ

6.
1*Thestepstobetakenimmediately
On1stJuly1975'theMSareduetopaytotheCommission thesecond
partoftheirEDFcontributions forthefinancial year1975*
TheCommission proposestoapplyinadvance,asfrom1stJuly1975»
thebasket–typeunitofaccountdecideduponon21stApril1975foroperations
tindertheFundconstituted tindertheLomSConvention forthereceipts and
expenditures oftheFundsnowinbeing*AsfromthesamedatevtheCommission
authorities willoeasetojudgetendersandtoaocountforexpenditure acco]>-
dingtotheso-called ECSCmethod*Insteadthesewillbebasedontheexohange
ratesresulting fromthe"basket"system*
Iftasseemslikely,thedecision askedoftheCounciloomesafter
thepaymentofthecontributions dueon1stJuly,theCommission andtheMS
wouldthenmakethenecessary adjustments retrospectively *
2éThestepstorégularisé thepast
Thedeficiton30thJune1975mustbecovered*Thereare,intheory,
fourpossible methodsofdoingthis*
Method 1
Toadjustalltransactions onthebasisoftheLome"basket"type
unitofaocount *
AttherequestofthememberStates *finanoial expertstheCommission
staffdidaconsiderable amountofworkrecalculating about350transactions
inmemberstatescurrencies inthisunitofaccount *Theresults showthat
ifthismethodweretobeadoptedtheCommission wouldreceiveonly13*5
unitsofaooount *

7
Asaconsequence thismethodwouldleaveanoutstanding deficitof
around16*5m*unitsofaccount*
Itcannot "beenvisaged thatthisdeficitcould "becovered "bydrawing
fromtheEDF"balances asuminadditiontotheexisting commitments *
Inthepresentstateofthe1st,2ndand3rdEDFs,thereisnotin
factanyunoommitted sumofthissize*
Thefirstmethodis.therefore ,impracticable *
Method 2
Nottoregularise thereceipts fouttomakeupthedeficitsimplyby
actingonexpenditure only*
Sincealltheavailable moneyofthe1st,2ndand3rdEDFshasbeen
committed orreserved undertheprogramming ofthe3rdKDF,itwouldbe
necessary toreducethecreditsallocated tothosecountries wherethepace
ofexecution hasfallenbehindschedule *
Ifitwereconsidered moredesirable tosharethereduction between
alltheAASM,theapplication ofthissystemwouldpenalisethoseAASMwhose
speedofprojectexecution washigh,becauseitwouldinevitably leadtocuts
intheprojeotsforthoseoountries *
Ineitheroase,itwouldmeanthattheAASMwouldbebearingtheoon–
sequenoes ofcurrenoyfluctuations oftheMS*
Thismethodispolitically indefensible *

8.
Method 3
Tocontinuetobalancetheaccounts whichhavejust "beencriticized
bytheControlCommission ,"byincluding withinthemcreditstoberecovered
assumsduefromtheMS*
Thisartificial methodwouldmeanthatwhenthefundsofthe3rdEDF
passedtothe4thEDFthenewMSwouldhavetocontribute tofootingthebill*
Method4
Toputthesereceiptsinorderbyusingthesamesystemasthoseused
uptonowforaccounting forexpenditure .
AlthoughthismethodwouldmeanaveryheavyburdenforItalyand
aratherlighteroneforFrance,theCommission considers thatitistheonly
methodwhichiscompatible withtheprinciple ofequality betweenthecontri­
butionsoftheMSandwhichrespects thespiritofthecommitments madetothe
Associated States*
Accordingly theCommission proposesthattheCounciladcsthemember
StatesandtheCommission toapplythismethodbytheadoptionofthe
Gentlemen'sAgreement ,thetextofwhiohisattachedheretoasAnnex3*

Annex 1
Il r
PROTOCOL H°7
concerning thevalueoftheunitofaccount
TheHighcontracting parties
Haveagreeduponthefollowing provision ,whichareannexedtotheConvention t
Article 1
Thevalueoftheunitofaooountusedtoexpress sumsintheConvention of
Association orintheprovision adoptedinimplementation ofthisConvention
shallhe8,88867088 gramsoffinegold*
Article 2
Theparityofthecurrency ofamemberStateinrelation totheunitofaocount
definedinArticle1shallbetherelation "betweentheweightoffinegold !
containedinthisunitofaocountandtheweightoffinegoldcorresponding j
totheparityofsuchcurrency asdeolared totheInternational Monetary Fund*
Shouldthere "benodeclaredparity,orshouldtheratesofexchange applied
tocurrentpaymentsdifferfromtheparity "byamargingreaterthanthat
authorized "bytheMonetary Fund,theweightoffinegoldcorresponding tothe
parityofthecurrencyshallhecalculated onthebasisoftherateofexchange
appliedinthememberState,forcurrentpayments,onthedateofthecalculat­
ion,toacurrencydirectlyorindirectly definedandconvertible intogold,
andonthebasisoftheparityofthatconvertible ourrency asdeolaredtothe
Monetary Fund#
Article 3
Theunitofaccount,asdefinedinArtiole 1above,shallremainunchanged
throughout thewholeeffeotive duration oftheConvention *However,ifbefore
thedateofexpiryoftheConvention thereshouldensueauniformly propor­
tionatealteration intheparityofallourrenoes inrelationtogold,by
adeoisionoftheInternational Monetary Fond,tinderArtiole4fsection7of
itsStatute,thentheweightoffinegolddefiningtheunitofaccountshall

varyininverseratiotosuchalteration#
IfoneormorememberStatesshouldnotimplement thedecision of
theInternational Monetary Pondreferredtointhepreceding paragraph ,the
weightoffinegolddefining theunitofaccountshallvaryininverseratio
tothealteration decidedupon "bytheInternational Monetary Fund*However,
theCounciloftheEuropean Communities shallexaminethesituation thus
createdand,onaproposaloftheCommission andafterobtaining theopinion
oftheMonetary Committee ,shalltaketheneoessary measures byqualified
majority vote*

Thecollection oftextsrelating tothe
management oftheearlier Fundshasnever
beentranslated intoEnglish.
Annexe2
Article 3«§4.del'Accordinterne
"Acompterdeleurexigibilité etpendantladuréedecedép6tyles
fondsconservent lavaleurcorrespondant àlaparitéenvigueurau
jourde1*exigibilité parrapportàl'unitédeoomptedéfinieau
Protocole n°7annexéàlaConvention#
Article 2,S5«duRèglement financier
"Aucasoùlaparitédelamonnaied'unEtatmembreparrapportà
l'unitédecomptesemodifie,l'ajustement ducomptespécial••••
esteffectué dansundélaidedeuxmoisaumoyen,soitd'unverse­
mentcomplémentaire del'Etatintéressé ,soitd'unreversement à
oetEtat*

Annex 3
GENTLEMEN 'SAGREMENT
TheMemberStatesagreethattransaotions relating totheEDF
shouldbemadeinunitsofaccountinaooordanoe withthefollowing
provisions :
1)Fortheperiod10thMayto15thAugust1971
Theoonversion oftheGermanMarkandDutohFlorinintounitsof
accountshallbemadeonthebasisoftheaverageofficial exchangerates
oftheU«S«dollarasgivenattheFrankfurt andAmsterdam StockEchanges
respectively onthedayofcalculation andbasedonthedollarparity
deolared onthatdatetotheIMF*
2)Fortheperiod15thAugustto18thDecember 1971
ForthosememberStatecurrencies whoseexchangeratesmovedoutside
thefluctuation marginsallowedbytheIMFtheoonversion intounitsofaocount
shallbemadeonthebasisoftheparityoftheFrenchfranodeclared onthat
datetotheIMF*
3)Fortheperiodfollowing 18thDecember 1971
Conversion intounitsofaccountofthecurrencies oftheMember
Statesshallbecalculated t
–forthosecurrencies whoseexchangeratesdidnotmoveoutsidethefluctua­
tionmarginsallowedbytheIMFfonthebasisoftherelationship onthedayof
calculation betweentheweightoffinegoldcontainedinthisunitof j
aoootuatandtheweightoffinegoldforthecentralrateofeachof
thesecurrencies ,asdeolaredtotheIMFandagreedbythatbody*
•Λ

Annex 3
2.
–foreachofthosecurrencies whoseexohangerateswereoutsidethemargins
offluctuation allowed laytheIMF,onthebasisoftheaverageofthe
exohangeratesonthedayofthecalculation ofallthe"snake"currencies
vis-^-viseachoneofthesecurrencies onthelatter'sforeignexchange
markets *
4)Fortheperiodfollowing 1stJuly1975
Theconversion oftheunitofaccountintothecurrencies ofthe
memberStateswillfollowtheprocedure resulting fromtheDecision
oftheCounciloftheEuropean Communities of21stApril.1975*