CELEX: 51974PC0689
Language: en
Date: 1974-05-13
Title: PROPOSAL FOR A COUNCIL DECISION on the adjustment to the guidelines for economic policy for 1974. (submitted to the Council by the Commission)

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COM (74) 689
Vol. 1974/0108
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 ---pagebreak---  COMMISSION OF THE EUROPEAN COMMUNITIES
                                                  COM(74)689 Final
                                                  Brussels . 13 May 1974
                                PROPOSAL FOR A
                               COUNCIL DECISION                    *
           on the adjustment to the guidelines for economic policy
                                   for 1974 .
                 (submitted to the Council "by the Commission )
COJî(74 ) 689 Final
 ---pagebreak---                      PROPOSAL FOR A COUNCIL DECISION
  on the adjustment to the guidelines for economic policy for 1974
 THE COUNCIL OP THE EUROPEAN COMMUNITIES
 Having regard to the Treaty establishing the European Economic Community ,
 and in particular Article 103 thereof ,
 Having regard tp the Council Decision of 18 February 1974 on the „
 attainment , of a high degree of convergence of the economio policies of the
Member States of the European Economic Community , and particularly Articles
 1 and 2 thereof ,
Having regard to the proposal by the Commission
TAKING INTO CONSIDERATION that the Council agrees with the analysis of the
economic situation set out in the Communication from the. Commission of the
                concerning the adjustment of the economic policy guidelines for
1974 ,
HAS ADOPTED THIS DECISION
                              Article 1
         The Member States pursue their economic polioies in conformity with
the guidelines whioh are specified^ in the Annex to this Decision .
                              Article 2
         This Decision is addressed to all Member States,
Done at Brussels ,             1974 &                     For the Council
                                    *          •           The President
 ---pagebreak---                                                          ANNEX
                                    - 1 -
     GUIDELINES FOR ECONOMIC POLICY
     a) General guidelines
        The ourrent situation requires that Member States' short-
term economio policies aim at the following objectives :
– restructuring their economies to adapt them to the changes in the
  external situatior^
– stepping up the fight against inflation in order to preserve
  purchasing power j              !
                                  /
– in the case of those oountries whose external situation had deterio­
  rated appreciably even before the orisis , aohieving a reduction
  whioh must be substantial in the balance of payments deficit .
        The fulfilment of these requirements may in certain cases
endanger full employment . Although this is also a priority objective
it is necessaiy to stress that in the current situation it oannot be
aohieved by a general stimulation of nominal internal demand , but
rather by means of specifio aotions .
        In order to realize all these objectives , some means of
regulation of overall demand is indispensable , but it must , necessarily
and especially in present circumstances , be incorporated into a
longer-term view . The changes to be brought about are of such size
that they imply aotion in depth which needs to be undertaken forthwith
in order to aohieve results in a reasonable period of time . The
sacrifices they will require will be the more acceptable the better
they are distributed over time and between the different socio­
economic groups *
 ---pagebreak---      0
         The essential problem posed for the coming year is the
maintenance of a substantially lower rhythm of growth of private
expenditure than that of gross national product . Only in this way
will it be possible to free the necessary resources to enable the
additional investment and export effort to be made . To this end
the expansion of all money inoomes must be slowed down , in order to
avoid adding to inflation and the disequilibrium of the balance of
payments . This objective can only be attained where the social
partners indulge in a constructive dialogue .
         A possible way of reaching agreement between them might be
if inoome restraint was acoompanied by social measures . Various
steps oan be envisaged , according to the speoific situation of each
member country . A speoial effort should be made in oertain countries
to bring all the various forms of wealth , in particular housing ,
within reach of all seotions of the population . Such a move oould
well strengthen the propensity to save of households .
         The number of workers in danger of having to change their
jobs will be noticeably higher than in the past . The aim should be
to safeguard employment by improving the flexibility of the labour
market , rather than preserving jobs which are no longer productive .
To this end , the infrastructure can be considerably strengthened
where the situation arises , as well as expenditure on retraining of
 ---pagebreak--- labour . It is above all during the period of readaptation that the
worker should be guaranteed a level of income not too far below that
which he previously enjoyed .
         This highlights the importance of schemes for maintaining
a substantial portion of incomes during retraining . At a time , like
this when the level of training and retraining required is expeoted
to increase , Member States should be prepared to increase the
effectiveness of the Social Fund .
         In the member countries , where unemployment benefits only
represent a small fraction of money incomes , the amount available
for this purpose will have to be improved . In any case , community
solidarity must help to prevent a flow of labour back to Italy and
Ireland , where the employment problem is already at its most acute .
         A movement towards the necessary restructuring of production
will come about spontaneously , and it should moreover be encouraged
and not resisted , All the actions to be taken should thus be designed
to encourage investment in the energy sector and the other priority
areas .
         Special efforts are necessary , as regards research and
investment , with a view to achieving a more rational use of energy
and developing sources of energy capable of guaranteeing the Community
a certain degree of autonomy in the longer term , at a reasonable cost .
It would thus be possible to soften the impact of the higher price cf
oil on the balances of payments arid real incomes . In order to speed
up the process of substitution and to save energy , the rise in the
price of oil will have to be reflected in the structure of domestic
prices of oil produots .
 ---pagebreak---                                 - 4 -
         The faiweaching transformations whioh must be made in the
Community 's energy patterns require considerable investments whioh ,
in some cases , are fax from certain to prove a suocess . On a Community
scale , more possibilities exist for research into new sohemes and at
the same time the burden would-be less . The Community owes it to itself
to exploit fully the advantage offered by its size , by putting into
operation a common energy policy «
         The measures proposed here will contribute towards the
absorption within a reasonable period of dis equilibria in the balance
of payments position . However , this can only be done by a gradual process
of adjustment , more especially as the reestablishment of a general
balance to be aohieved at the world economy level . In the meantime , the
solidarity of the member countries must enable those with the largest
deficits to obtain , by means of Community machinery already existing
or to be created , at least part of the means of financing necessary .
         A differentiation of actions is certainly necessary , as regards
oonjunctural polioy . Against a background of olose coordination this
must take aocount of the initial situation and the outlook in eaoh
member oountry . Inside the Community one can , indeed , distinguish two
groups of countries according to their external payments situation
                                                                Ο · · /· · ·
 ---pagebreak--- and. their inflationary tendencies . The firBt group comprises
Germany and the Benelux oountries , whose ourrent accounts in
1974 will fee in surplus or close to equilibrium , despite a sharp
deterioration . The second group oomprises the other countries
( Italy , the United Kingdom , Denmark and , to a lesser degree ,
France and Ireland ) , which will have to oope with heavy deficits
on their external balances and very rapid price inoreases .
          In the countries included in the first group , especially
Germany , the authorities responsible for economic policy must
make sure that the recovery expected between now and the end of
1974 culmiaates , towards the end of the year , in a trend which ,
while not exoeeding the growth of productive capacity , can never­
theless be regarded as distinctly upward . It is desirable for the
growth in real gross national product in these countries to reach
a trend rate of 3 "to 4 $ by the end of 1974 » The resulting
deterioration in the balance of payments on current account would
have to be accepted . It would help to reduoe the inflationary
tendencies in these countries while assisting the countries with
large defioits in their efforts to improve their balance of pay­
ments situation .
          Economic policy in the first group of countries will have
to be , if necessary , so contrived as to act on the growth of
demand principally by applying budgetary measures . Should the
expected budgetary stimulus not be sufficient to sustain growth ,
an easing of the burden of direct taxation or additional expendi­
ture should be considered , especially with a view to providing
extra incentives for investment in the energy seotor . A relaxation
of the monetary restrictions would , however , not seem advisable at
present having regard to the exohange rate relationships within
the Community and at the international level .
 ---pagebreak---                             - 6 -
          In the seoond group of countries the constraints imposed
"by the "balance of payments situation and "by the vigorous upsurge
 in oosts and prices call for polioies to restructure demand aimed
 at improving the external "balance . To stimulate exports , the
 economio policy of these countries will have to aim at reducing
"by the end of 1974 » the growth of domestio demand to a rate distinct–
 ly "below the expansion of productive oapaoity . •
          In the countries which before the oil crisis had already
 noted a sharp deterioration in their "balances o | payments on
 ourrent account an important part will have to lpe played by mone–
                                                  i
 tary policy in order to help make the necessary adjustments . The
 restrictive line of monetary policy must therefore be maintained
 or even tightened . The reduction in domestio liquidity as a result
 of the defioits on current acoount will help in this respect .
 Interest rates should be maintained at high levels , as much to
 ensure an adequate level of real rates as to maintain a sufficient
 margin over the rates obtaining in the main foreign markets . This
 expected deterioration in the budgetary positions will have to be
 curbed either by outting back the growth of expenditure or by in­
 creasing taxes . In this connection the stepping up of exports and
 investment in the energy seotor are to be considered as priority
 aims at the expense of consumption expenditure by the publio
 authorities and households . With regard to the fight against the
 rises in oosts and prices a stabilisation of exchange rates would
 appear desirable .
          The eoonomic policy described above will have both more
 rapid and more effective results if the main trading partners in
 the Community act in parallel . As for the Community , it should
 work in this direction within the framework of international
 cooperation ^
                                     I                          •••/•••
 ---pagebreak---      b ) Guidelines for the individual countries
         In Denmark the main features of the economic situation in tne
period up to the end of 1974 could be a slowdown in economic aotivity ,
an increase in inflationary tendencies and a deterioration in the
balance of payments on current acoount whioh already showed a heavy
deficit in 1973 »
         Eoonomio policy should aim more at restoring equilibrium in
the balance of payments and curbing rising prices and costs . If this
objeotive is to be achieved , private consumers' demand must be reduced
and the increase in government spending checked . The resouroes freed
in this way should then be directed towards exports ,, The measures
adopted reoently by the Government , which include in particular a
reduction in publio spending and the introduction of compulsory pri­
vate saving , are a first step in this direction ,, However , if these
should prove inadequate to bring about the desired reduction in the
growth of domestio demand in money terms it would be necessary to
supplement them by further cuts in publio spending , or new taxes in
order to maintain the budget surplus at a level near to the guide­
lines for the 1974^75 finanoial year in the third annual report on
the eoonomio situation in the Community .
         In the monetary field a distinct slowdown in the expansion
of domestic liquidity has been observed since last autumn . Care
should be taken to see that this tendency is maintained . The authorities
should continue to concentrate particularly on curbing consumer credit
as part of a policy for restricting bank lending .
 ---pagebreak---          After the slowdown recorded, in the second half of 1973 » economic
 aotivity in Germany remained at a relatively high level at the beginning of
 1974 . Despite the oil orisis a certain recovery in expansion seems pro­
bable in the ooraing months . The rise in prices is likely to remain rapido
         The authorities meanwhile , find themselves with the particularly
delicate task of supporting the tendency towards an improvement in the
 level of eoonomio activity and at the same time reducing inflationary
pressures# In this respect the development of the balance of payments does
not impose any appreciable constraints } on the contrary , a rise in im­
ports could contribute to an improvement in internal equilibrium . The
effects of the lifting of the tax restrictions introduced in May 1973
combined with the expansionary pressures resulting from the defioits in .
the Federal and Lander budgets should be sufficient to bring about a
3 to 4 % growth rate in the eoonoiqy towards the end of the year . If ,
however , it should appear that this objective will not be obtained , the
Government should cautiously go about stimulating the econon^y further ,
essentially to enoourage investment .
         The acceleration in budgetary expenditure compared to the initial
forecasts , chiefly as a result of the steeper rises in wages and prices ,
the selective measures in favour of specific industries and certain
regions , and the lifting of the tax restrictions , will mean that in 1974 »
the Federal Government and the Lander together will have a net borrowing
requirement of DM 11.000 to 13.000 million , instead of the slight surplus
foreoast in the third annual report . The deficit in the Federal Govern­
ment and Lander budgets should be financed primarily through the capital
market and only to a lesser degree by drawing on the " counter-cyclical
reserves " at present frozen with the Bundesbank.
         The policy on liquidity should continue along the present lines .
 ---pagebreak---          In France i economic expansion will probably remain appreciable
although somewhat slower compared, to last year. The strains which
affected production capacities in 1973 will probably slacken . The
situation on the labour market should gradually become easier during
the year . The increase in the prices of imported basio products and
in particular of energy products will probably give rise to a large
external deficit . Furthermore , domestio prices are likely to continue
to rise at an increasing rate .
         The economic policy to be implemented in 1974 must aim pri­
marily – as part of a medium-term strategy – at gradually absorbing
the external defioit . It would be advisable , above all , to faoilitate
and encourage the re–adjustment of productive capacity in order to
achieve a distinct improvement in the position on external account in
1975 . At the same time , the increase in domestic costs should be curbed
in order to safeguard the country 's competitive position and to ensure
the stabilization of the exchange rate .
         In the field of public finance , recent tendencies indicate that
there will be a budget surplus in 1974 which will exceed the level of
2.000 million francs fixed in the guidelines laid down in the third
annual report . Budgetary management in the course of the first half of
1974 will have a distinctly restrictive character . If the trend towards
a slowdown in growth should become too pronounced the introduction of
fiscal measures to encourage investment in priority sectors should be
considered..
         It would be advisable to maintain the restrictive bias which
has progressively been given to oredit policy j nevertheless , without
prejudicing those measures neoessaiy to promote capital expenditure on
adjustments made necessary by "the energy crisis . Consumer credit and
credit granted for investment in non-priority seotors should continue
to be kept striotly curbed .
 ---pagebreak---                                        - 10 -
                    In Ireland , before the presentation of the budget , the genera.1
          outlook for the Irish econony was for a modest resumption of growth
          following the slow down experienced in the second half of 1973 * No
          great improvement in the labour market seemed likely .
                    The reoent National Pay Agreement would . lead tp a large in-.
I crease in salaries , Prices would continue to rise briskly and the. current
 , balance of payments            would show an appreciable deterioration.          A continua­
          tion of net capital inflows was expected.
                    To ensure that the economy would operate in 1974 at a level
   I
    ; olose to the full utilisation of capaoity the Government decided to
   \ provide a stimulus in the budget presented in the beginning of April .
     , Despite a reform of the income tax structure and a considerable ad–
      ' vance towards securing greater equity in the distribution of the tax
       ! burden , principally by extending the tax base and the introduction
        , of a. capital gains tax , the budget defioit forecast is substantial ,
        i Due to the delicate balance needed to aohieve external and internal
          equilibrium it is necessary to adopt a flexible economic policy .
      ' If the capaoity of the economy proves to be insufficient to absorb the
     j additional stimulus of the budget on internal demand and inflationary
   j pressures beoome stronger than foreseen it will be necessary to revise
           eoonomio priorities particularly in the oontext of the execution of
  : the budget •
 !
 j                  During the seoond half of 1973 "the growth of domestio liquidity
 I aooolerated' . ' The present restrictive, stance of monetary policy sllduld
          »>e continued with regard to the money supply and should be accompanied also '
        in the future by selective measures in favour of. _the most                    .... .
   i productive investments ,.         The . task , of the monetary authorities would be
     : made easier by less . reliance on monetary means for the financing of the
          budget deficit .
                                                                            • • /• • •
 ---pagebreak---                               - 11 -
         In Italy , last year 's strong reoovery in demand, should maKe
oontinued economio growth possible in 1974 * however , in spite of a
faster expansion of exports , its pace may slow down appreciably as a
result of the oil crisis . Little change should occur in the labour
market situation . The most pressing problems will concern the overall
equilibrium of the econonyj in this respect , it is to be feared that
the increase in prices , already rapid in 1973 , will accelerate further
and that the defioit on current account of the balance of payments
will increase considerably . The apparently excessive depreciation of
the lira has increased the inflationary pressures without alleviating the
difficult current acoount position .
         In these circumstances , the emphasis of economio policy should
be on eliminating the disequilibrating factors . The immediate problem
facing the Italian authorities is that of rapidly achieving tangible
results in the form of a distinct improvement in the external accounts
which cannot be allowed to continue on their present trend . Given the
high level of Italy 's external indebtedness , a distinct improvement in
the balanoe of payments current account will have to be achieved in the
second half of the year and during 197 5 • As 'the depreciation of the
lira since February 1973 will have its greatest effect on the volume
of exports next year , economic policy must aim at reducing the total
balance of payments current deficit in 1975 "to not more than Lit .
2.000.000 millions . In this respect , it is appropriate to recall that ,
within the deficit –jf Lit . 4*100.000 millions forecast for 1974 ,
approximately Lit . 2.800 o 000 millions axe the result of the increase
in oil prices . Given that the high current balance of payments deficit
forecast for 1974 is not only the consequence of increases in the
price of oil but equally to internal factors due to the increase in
total demand and the rapid acceleration of the price spiral , strict
control of the growth of domestic demand as well as some moderation
of internally–originated cost pressures , are necessary from now on .
In this conneotion , urgent action is required not only to stabilize
the exohange rate of the lira , but also to use the instruments of
demand management in such a way as to divert resources into productive
investment and , above all , into exports .
                                                                o . . /• . .
 ---pagebreak---                                - 12 -
         With respect to budgetary policy all the possibilities still
available should be used to reduce the budget deficit for the current
year and measures should be introduced to bring about a gradual im­
provement in the public finances of national and looal government and
sooial insurance bodies . For the present exeroise a strong effort should
be made to restriot less urgent . forms of expenditure , especially those
directly linked to consumption . At the same time , it would be advisable
to support , either directly or indirectly , priority investment expen­
diture , especially where linked to exporting activities and infrastructure
improvements . Taking into account the supplementary expenditure decided
upon since last autumn , the Government 's net oash deficit will amount
to Lit . 9*200.000 million in 1974 * Suoh a figure is a ceiling which
should not be broken under any circumstanoes . To achieve this result ,
an increase in the fiscal burden seems inevitable . Incidentally , the
defioit should be financed to a large extent by non–monetary means 0
         As regards monetary policy , the balance of payments deficit
should contribute to mopping up excess liquidity . On the other hand ,
the growth in lending must be limited in order to stay well below the
ceiling of 22.400.000 million lira fixed in the letter of intent
addressed to the IMP . It will be necessary , nevertheless , within this
overall framework to give priority to investments in those sectors
clearly orientated towards exports and energy . The rise in interest rates
which will result from these restrictions should tend to improve the
balance of payments on capital account , mitigate import price rises by
supporting the exohange rate of the lira , and stimulate saving .
                                                                  • · · /ο · ·
 ---pagebreak---                                   13
           In the Netherlands , it is expeoted that the expansion of demand
  and production will he relatively moderate "between now and the end of
  the year and the employment situation is liable to deteriorate . Prices
  will tend to rise more sharply . The external "balance should deteriorate ,
  whilst remaining in surplus .
           The Government , anxious to maintain a satisfactory level of
  national expenditure , has already announced policy actions to support
  demand – especially in the budgetary field : (deferment of the intro­
  duction of the investment tax in the oountry 's western region , accele­
  ration of the second stfeuge of the ant i–unemployment programme adopted
  last September) and other measures were announced on the 19th March ,
  1974 (a reduction of income tax with effeot from 1 July 1974 » an in­
  crease in tax allowances for investment , supplementary expenditure ).
  In the event of such measures being adopted , the net borrowing re­
  quirement may be expeoted to exceed by PI . 700 millions the figure of
' Fl . 1.500 million  laid down in the third annual report . Any eventual
  further budgetary measures – especially to increase investment – should
' involve as far a possible a restructuring of public expenditure without
: further increasing the deficit .
           The principal feature of the monetary situation up to now has
  been a substantial inorease in secondary liquidity . Special factors
, have contributed to this development . The general stance of monetary
  policy requires no modification for the present .
           The speoial powers act of 10 January 1974 ? which will remain
  in force until the end of the year , gave the Dutch authorities very
  wide powers in the field of incomes policy . In this oonneotion , the
  imposition of temporary controls on prices , and all incomes , accompanied
  by a reduotion in direot taxation on small incomes seems appropriate
  insofar as it may help to ourb the rise in wage costs .
                                                                  • • • /• « •
 ---pagebreak---                                - 14 -
            In Belgium , the slackening of world, demand and the rise m
   import prices resulting from the oil crisis will not fail to affect
   eoonomio growth in 1974 * Unemployment could well spread.. The current
   account surplus of the "balance of payments will be substantially re­
   duced , though still in surplus . In these oircumstances , it is important
 ; at present to maintain very selectively the current level of activity
   during the ooming months whilst , given the persistent price and oost
   inoreases , taking care to maintain it below productive potential .
            In the budgetary field , it seems that the reduction in the
   deficit recommended in the third annual report and provided for in the
   budget presented by the Belgian Government will be maintained as the
   increase in prices is likely to affect budgetary receipts as much as
< expenditures . This nevertheless implies restrictions on additional ex­
   penditures given the structural nature of the budgetary defioit . The
   need for new investment in the energy field should be covered essen­
   tially by restructuring expenditure .
            A restrictive monetary policy should be preserved . International
 ! trends may , however , cause a rise in interest rates .
            In order to prevent the higher cost of raw materials from
   leading to a persistent upward price–wage spiral , an aotive price
   policy should be maintained and the various social and occupational
   groups should be persuaded to moderate their claims for higher inoomes .
   In this connection , inoreases in inoomes in oertain sectors must not be
   allowed to set the pace for other seotors .
                                                                   • • •/• • •
 ---pagebreak---                                - 15 -
        In Luxembourg , a high level of economic activity will pro­
bably be maintained during the coming months , especially in the iron
and steel industry . The upward movement of consumer prices is likely
to gather additional momentum during 1974 * The external balance should
continue to show a substantial surplus .
        The outlook for the employment situation is favourable , so
economic problems appear less acute than in some other countries of
the Community . Because inflation essentially originates abroad , it
can only be curbed very moderately by internal measures . It does not
seem necessary , therefore , to make any appreciable changes to the
general guidelines for budget airy policy recommended by the Council in
the third annual report . Nevertheless , a degree of caution appears
necessary in allocating budgetary resources for new measures in the
implementation of the Government 's social programme .
                                                                   Λ
 ---pagebreak---                               - 16
          In the United Kingdom , economio trends will be strongly
 affeoted throughout the rest of the year by the repercussions of the
 temporary limitation of the working week to three days and of the
 miners' strike . Even assuming that production losses during the first
 quarter are partly made good later in the year , the gross national
 product in real terms will certainly be considerably reduoed for the
 year as a whole . The trend of rising prices could increase sharply
 during the coming months© Prospects for the balance of payments on
 current account , already in very large deficit in 1973 » continue to
 give cause for concern .,
          Thus , the need to bring the external account back into a
 sound basis and to protect the foreign exchange reserves conflicts
with the desire to avoid an excessively      low level of economic activi­
 ty and a deterioration in the employment situation ,, Thus , although the
 improvement of the position on current account is a priority objec­
 tive , it should be placed within a strategy covering a period longer
 than the current year . In this respect , it is anticipated that the
beneficial effects of the depreciation of the effective exchange rate
 of sterling , which has ocourred since mid-1972 , will become increasing­
 ly important . Judging from previous experience , the full effects on
the current balance will be felt in 1975 and subsequent years . From
now on , economio polioy should have the objeotive of ensuring that the
total current acoount deficit , in 1975 » will be less than L 2 milliards .
This amount would correspond to that part of the deficit which , in 1974 »
 is attributable to dearer oil . The achievement of suoh an objective
requires an economic policy which will permit the release of the real
resources necessary for a vigorous expansion of exports .
          As for budgetary policy , measures to moderate domestic demand
should be introduced following a return to normal economio activity .
The budget for the fiscal year 1974/75 constitutes an important step
in this direction . While providing for a reduotion in the fiscal burden
at the lowest income levels , where purchasing power has already been
sharply eroded by inflation , and while introducing subsidies in order
to contain the rise in food prices , the budget aims at restraining
                                                                  • • •/• • •
 ---pagebreak---                               - 17 -
domestic demand botn by a limitation in trie growtn of expenditure
and by an increase in taxation . If during the coming month it appears
that domestic demand in nominal terms is rising at a rate inconsistent
with the required improvement in the current account of the balance
of payments , additional measures will be necessary in the budgetary'
field . These should aim at preserving productive investment as much
as possible .
         In view of the rapid and continued increase in the principal
monetary aggregates , fresh efforts should be made to slow GOTO the
expansion of the money supply in 1974 * However , within the overall
framework of such action , there are grounds for applying any restric­
tions on bank lending selectively , especially in relation to those
small and medium-sized business which have been most affected by events
at the beginning of the year , and also where exports are concerned .
Moreover , the balance of payments situation calls for short-term
interest rates to be maintained at a level appreciably higher than
those prevailing on international monetary markets . This policy should
contribute to the desirable stabilisation of the external value of
sterling and to containing inflationary pressures which , in the recent
past , have arisen from the depreciation of the currency .