A NOTE ON MONETARY CO-OPERATION

BY PETER COFFEY

DESPITE the removal of internal industrial tariffs within the Common Market, the creation of a common external tariff against third parties, and many other achievements, the EEC had, until January of this year, been noted for its conspicuous lack of progress in the monetary field. Granted, it had adopted a common front (to everyone’s surprise) against the Anglo-Saxons during the negotiations for the creation of the SDR’s and the reform of the IMF statutes-thus obtaining for itself a much coveted right of veto in this organization-but there were until this year no signs of the creation of:

(i) a European unit of currency; (ii) a European capital market;

(iii) a European Reserve Fund; nor of (iv) a common monetary policy for the EEC. If a European currency does at all exist, then it is the Euro-dollar;

and if a European capital market exists, then it is the Euro-dollar market-heavily centred on Zurich and London, which are EFTA financial centres. French attempts to make Paris the capital centre of the Common Market came to grief on the barricades in Paris in 1968, and it was largely due to these barricades that the first real attempts to put the EEC on a common monetary course arose and bore fruit early this year.

The French, like the Italians in 1963/64, had followed a classical course -resort to the IMF or to other central banks-in their attempts to save the franc. But this recourse to the dreaded Anglo-Saxons, plus the subsequent devaluation of the franc and the unacceptable degree of speculation preceding the revaluation of the DM, necessitated a drastic change of attitude. Without such a change, the dollar would have ceased to be the defacto European currency and would in future be the sole currency of reference in the Community.

THE BARRE PLAN

Already in February 1969, the now-famous Barre Plan was presented to the Council of Ministers of the EEC.

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The main aim of the Plan was the co-ordination of economic policies

(i) The provision of immediate, automatic and unconditiorial short- term credits to member countries experiencing balance of payments difficulties ;

(ii) the provision of conditional medium-term credits to member countries experiencing persistent balance of payments difficulties;

(iii) an agreement between member states regarding future growth rates; and

(iv) consultation between member countries on the co-ordination of their medium-term economic plans.

and monetary co-operation. This was to be achieved through

THE HAGUE, NOVEMBER 1969 The monetary upheavals which had started in 1968 continued and became acute during the course of 1969 and culminated in the devalua- tion of the franc and the re-valuation of the DM-after an inexcusable degree of speculation had been allowed a free hand for several months. Thus monetary co-operation and the possible creation of a European Reserve Fund were bound to figure highly on the list of priorities during the discussions which took place between ‘the Six’ at the Hague in November 1969.

The main protagonists in the monetary debate were France and Germany. The French, in view of their monetary troubles, wanted the speedy organization of automatic short-term (and even automatic medium-term) financial aid for members of the Community experienc- ing balance of payments difficulties. The Germans, on the other hand, were willing to give financial aid if the French would agree to the co- ordination of the economic and growth policies of the individual member states. Further, as a demonstration of the proof of their good- will, the Germans expressed their willingness to place part of their foreign exchange reserves at the disposal of a European Reserve Fund. In both cases, the French and German proposals marked a volte-face from the policies which they had recommended over the past years.

The outcome of these discussions was then the agreement in principle on the creation of an economic and monetary union and that the details of such a union should be worked out during the course of 1970. In the meantime it was agreed that discussions should take place regard- ing the implementation of short-term monetary aid and the possibility of creating a European Reserve Fund.

Following the discussions just mentioned, progress of almost revolu- tionary dimensions was made on January 26 of this year, when the

BRUSSELS, JANUARY 26, I970

A NOTE O N MONETARY CO-OPERATION 339

Council of the Finance and Economic Ministers accepted the immedi- ate implementation of half of the Barre Plan, and further study of the other half. The agreements were as follows :

(i) The central bankers of the Six were authorized to establish short-

The provision of unconditional short-term credits amounting to $1000, made up of the following contributions:

$300 each

$200

term plans for monetary assistance; they were as follows :

France Germany Italv

J

) $100 each. Belgium and Luxemburg Netherlands

In addition the creation of a further s 1000 of cotiditiond short- term aid (3-6 months) was agreed.

(ii) The question of medium-term aid was referred to the Monetary Commission for further examination, and a report on this matter is expected in March.

(iii) Agreement was reached on periodic discussions of short-term economic policies.

(iv) The Council returned the proposals for medium-term growth/ economic policies for the period 1g71/75 to the Commission’s Medium-Term Committee for further study. This decision was due to the differing proposals on annual economic growth and price ff uctuations (e.g., Germany: 2-5-3-0 per cent per annum, France: 3.4 per cent per annum) put forward by France and Germany.

Before appraising the importance and potential of the agreements concluded on January 26, it is worth examining the other plans which appeared in 1969, i.e., the Triffm and Carli Plans. Both these plans, like the Barre Plan, fall within the same context of problems which were discussed at The Hague.

THE TRIFFIN PLAN

I. This plan, which bears much resemblance to the plans for the European Payments Union, and therefore some similarity to Keynes’s plan for a Clearing Union, aims at

(i) the provision of a European Reserve Fund, which should act as

(ii) maintaining the parities of the currencies of the EEC members,

(iii) providing a European unit of Account.

an Exchange Equalization Account;

both internally and externally;

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2. Trigin sees such a Fund as being able to fund outstanding sterling balances but preventing surplus/creditor members from accepting such currencies as the dollar-without prior authorization from the Fund.

most essential role is not and could not be in any way to ensure the automatic financing of persistent disequilibria between the Community countries.

The main role of such a Fund would be to stabilize the exchange rates and to provide a European unit of account v i s - h i s third parties.

3. However, to Triffin, the Fund's

THE CARL1 PLAN

Governor Carli, whilst accepting the necessity of a European Reserve Fund and of the funding of sterling balances (which he, in fact originally proposed), is in favour of a much more flexible approach in a transitory phase of European monetary co-operation. Thus

(i) he favours monthly and quarterly revaluations of currencies (maximum change 2 per cent per annum) to compensate and correct disequilibria persisting in the evolution of national prices and costs;

(ii) he comes out heavily in favour of the re-cycling of short-term capital ;

(iii) and he asks that monetary authorities should refrain from using interest rates to promote capital movements in order to compen- sate current account disequilibria.

Signor Carli, then, tends to acknowledge the immediate short-term practical difficulties, and (as with his original proposal for the sterling balances) to offer practical and immediate solutions for these problems.

COMMENTS : IMPLICATIONS FOR THE UNITED KINGDOM

The adoption of the main recommendations contained in the Barre Plan doubtless marks a revolution after twelve years of inaction. But experience suggests that where more than one member of the Common Market finds itself in balance of payments difficulties (and we should always bear in mind what might happen should the EEC be enlarged), then the credits which have just been organized would prove quite inadequate. Then, as history shows, it seems that another crisis will have to arise before these amounts are increased.

The other plans should be seen against current problems plus the consequences arising out of Britain's possible membership of the Com- munity. What are these problems and what are the possible conse- quences for Britain and her friends?

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(i) There is the problem of the German industrial pre-eminence in the EEC and her normally strong balance of payments surpluses as compared with France’s need to streamline her agriculture and re-structure her industry. This situation is further aggravated by the vast increase in recent years in trade in consumer durables and machinery between industrial nations. These problems imply the necessity of creating vast amounts of short- and medium- term credits if we are to avoid unemployment. This could mean the creation of a vast European Reserve Fund for internal EEC use-with confiscation of unused balance of payments surpluses, and the creation of another Fund for use with third parties.

(ii) Then there is the problem of the sterling balances. The funding of these balances would simply confirm what Professor T r i fh calls;

the EEC’s preponderant role in the past five years in financing the $6.4 billion dollars of credits to Britain.

(iii) But since the immediate problems are of a short-term and speculative nature, the Carli proposals for flexible periodic revisions of parities and the re-cycling of speculative movements of short-term capital or hot money deserve our complete support. Until the European Reserve Fund is created (and, I would suggest, at two levels), similar measures to those pro- posed by Governor Carli would be absolutely necessary, other- wise we run the risk of a repetition of the events of 1969.

(iv) Should Britain join she would offer, in the monetary sphere, one major advantage to the Community, but then she might well create a number of problems for herself. London, whether we like it or not, would almost certainly become the capital market of the Community-using the members’ currencies of course. Here the immediate danger, would (partly, through the existence of the re-invigorated London capital market) be the temptation for Britons to move large amounts of capital into the continent for investment there. This would naturally necessitate the provision of careful controls by London and Brussels over capital movements, both short- and long-term, if only to avoid excessive levels of inflation and unemployment.

PROPOSALS FOR THE BRITISH NEGOTIATORS

A real economic and political union in Western Europe implies the existence of a European unit of account plus the maintenance of the parities of the national currencies with such a unit. However, at this stage a demand for the maintenance of currencies at their present

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parity could well mean the relegation of France to the position of a European granary and Britain to that of an off-shore island. Coming on top of the removal of tariffs this would not be in anyone’s interests.

For the duration of a transitional period of, say, ten years, the British negotiators might thus make the following proposals:

(i) A major increase in the amounts of short-term credits agreed

(ii) The provision of major amounts of medium-term credits. (iii) Periodic discussions between finance ministers regarding the

level of interest rates in their individual countries. (iv) The co-ordination of fiscal and monetary policies in the frame-

work of the above discussions. (v) The return (re-cycling) of all unauthorized movements of ‘hot

money’ (or short-term capital) to their place of origin or the placing of penal tax rates on such monies on their arrival in any of the Community’s financial centres

(vi) The setting-up of controls in Brussels and the major financial centres with the aim of co-ordinating movements of medium- and long-term capital.

(vii) The setting-up of a European unit of account (the Euro-Livre?) against which the national currencies would be quoted.

(viii) Periodic changes in the parties of the national currencies to take account of prices and costs.

(ix) The setting-up of two European funds. The first one, which would be used for internal Community purposes should provide help to members experiencing balance of payments difficulties. Both the short- and medium-term credits might be placed with this Fund. Normally, members who have unused balance of payments surpluses might be asked to place them automatically at the disposal of this Fund. Such a Fund might well work on an overdraft rather than on a deposit principle.

The second fund should be used to maintain the parity of the European unit of account and/or the national currencies vis-2-vis those of third parties. It would thus play the role of an Exchange Equalization Account. It might also place part of its reserves at the disposal of the IMF.

Finally, as has hitherto been the practice among ‘the Six’, Britain, in the interests of her friends and of herself, should, in the event of lack of progress in the monetary sphere, reserve the right to change the parity of her currency.

upon under the Barre Plan.