Report by the Commission on the monetary organisation of the Community (1973)

Caption: On 28 June 1973, the Commission of the European Communities submits a report to the Council on the

adjustment of short-term monetary support arrangements and the conditions required for the progressive pooling of

reserves.

Source: Bulletin of the European Communities. 1973, No Supplement 12/73. Luxembourg: Office for official

publications of the European Communities. "Monetary organization of the Community".

Copyright: (c) European Union, 1995-2014

URL: http://www.cvce.eu/obj/report_by_the_commission_on_the_monetary_organisation_of_the_community_1973-en-

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Last updated: 20/10/2014

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Monetaryorganizationof theCommunity

Commission

of the European Communities

2 / 17 20/10/2014

Monetary organizationof the Community

Economic and monetary union is to he estab-lished in the Community by 31 Deeeinber1980. This commitment was entered into bythe Council in its Resolution of 22 March1971 and reaffirmed by the Heads of State orGovernment at the meeting they held in Parisin October 1972.Economic and monerary union means in partic-ular that the Community must from a singlemonetary entity within the internationalsystem, characterized by the total and irreversi-ble convertibility of its currencies, the abolitionof margins of fluctuation for its excha1l:gera~es,the fixing of irrevocable parity relationships,which is essential to the creation of a singlecurrency, and involving a Community-Ievelorganization of Central Banks which shouldassist in attaining the objectives of stability andgrowth in the Community.A third of the time fixed for attaining theobjectives of economic and monetary union hasalready passed and if the plan is to be seenthrough on time, measures must be taken totranslate political declarations rapidly into con-crete acts,

With the member countries' economies openingup to each other and becoming highly interde-pendent it IS more and more urgent for abindependent monetary system to be set upinvolving fixed but adjustable parities. In theenlarged Community, the main share of com-mercial and financial transactions is betweenMember States and this share is constandygrowing. The cohesion and well-being of theMember States are very largely dependent onsecure exchange rate relationships in these trans-actions. This is all the more important as,for a number of years, the international .mone-tary system has been shaken by deep andrepeated crises which seriously jeopardize theeconomic unification process between themember countries, Attempts are being made

S. 12/73

to .reform ,the· monetary system .and theCommunity is using all its influence to helptowards thisreform, but it stillcannot besaidhow much time will be needed and whatshape the reform will take. The Communitycannot go on enduring the uncertainty and thedangers this presentsfor further integration.. asregards, in particular, the development of exter-nal trade or rhe establishment of a Europeancapital market. The creation of a stable andlasting monetary system is just as importantfor making the necessary progress in otherspheres of Community activities.A Community system of Central Banks eanonly be arrived at progressively by increasing insuecessive stages the role played by the Mone-tary Cooperation Fund which is the embryonieform of this system. In fact the Commissionfeels that the objectives :set for 1980 are suchthat abasie structure must be ereated imme-diately and be substantial enough to enablethern to be achieved by the agreed date. Thisis the line taken by proposals that the Commis-sion outlines in this report in accordanee withthe mandate it received: progressive pooling offoreign exchange, improvement of ereditmachinery with a stronger aeeent being laid onits Community nature, strengthening of thecoordination of domestic monetary policies,Community watehing brief on exchange ratepolicies, joint action on international monetaryrelations, In brief, the main proposals are asfolIows:

(i) Extension of the tasks of the MonetaryCooperation Fund with the gradual pooling ofreserves beginning with .an inital contributionof 20 % on 1 January 1974, to finish with allreserves pooled in 1980;(ii)· Improvement of eredit maehinery so thatthere are uninterrupted eredit faeilities rangingfrom automatie short-term loans to longer-term loans with specific eeonomic poliey eondi-tions attaehed;

In the absence of effective eoordination of eeo-nomie policies this structure might seem fragile.The Commission already stressed this prob-lem in, its cornmunication concerning the

3

Monetary organizationof the Community

Economic and monetary union is to he estab-lished in the Community by 31 December1980. This commitment was entered into bythe Council in its Resolution of 22 March1971 and reaffirmed by the Heads of State orGovernment at the meeting they held in Parisin October 1972.

Economic and monetary union means in partic-ular that the Community must from a singlemonetary entity within the internationalsystem, characterized by the total and irreversi-ble convertibility of its currencies, the abolitionof margins of fluctuation for its exchaD:ge ra~esthe fixing of irrevocable parity relatIOnshIps

which is essential to the creation of a singlecurrency, and involving a Community-levelorganization of Central Banks which shouldassist in attaining the objectives of stability andgrowth in the Community.

third of the time fixed for attaining theobjectives of economic and monetary union hasalready passed and if the plan is to be seen

through on time, measures must be taken totranslate political declarations rapidly into con-crete acts.

With the member countries' economies openingup to each other and becoming highly interde-pendent it is more and more urgent for anindependent monetary system to be set upinvolving fixed but adjustable parities. In the

enlarged Community, the main share of com-mercial and financial transactions is betweenMember States .and this share is constantlygrowing. The cohesion and well-being. of theMember States are very largely dependent 'secure exchange rate relationships in these trans-actions. This is all the more important asfor a number of years, the international mone-tary system has been shaken by deep andrepeated crises which seriously jeopardize theeconomic unification process between themember countries. Attempts are being made

S. 12/73

to reform ,the.. monetary system . and theCommunity is using all its influence to helptowards this reform, but it still cannot be saidhow much time will be ne~ded , and Wl1atshape the reform will take. The Communitycannot go on enduring the uncertainty and thedangers this presents for further integration,. asregards, in particular, the development of exter-nal trade or the. establishment of a Europeancapital market. The creation of a stable andlasting monetary system is just as importantfor making the necessary progress in otherspheres of Community activities.

Community. system of Central Banks canonly be arrived at progressively by increasing in

successive stages the role played by the Mone-tary Cooperation Fund which is the embryonicform of this system. In fact the Commissionfeels that the objectives set for 1980 are suchthat a basic structure must be created imme-diately and be substantial enough to enablethem to be achieved by the agreed date. Thisis the line taken by proposals that the Commis-sion outlines in this report in accordance withthe mandate it received: progressive pooling offoreign exchange, improvement of creditmachinery with a stronger accent being laid onits Community nature, strengthening of thecoordination of domestic monetary policies,Community watching brief on exchange ratepolicies, joint action on international monetaryrdations. In brief, the main proposals are asfollows: (i) Extension of the tasks of the MonetaryCooperation Fund with the gradual pooling ofreserves beginning with. an inital contributionof 20 % on 1 January 1974, to finish with allreServes pooled in 1980; (ii). Improvement of credit machinery so thatthere are uninterrupted credit facilities rangingfrom automatic short-term loans to longer-term loans with specific economic policy condi-tions attached;

In the absence of effective coordination of eco-nomic policies this structure might seem fragile.The Commission already stressed this prob-lem in, its communication concerning the

3 / 17 20/10/2014

secend stage, and proposed solutions concern-ing, inter alia, the adoption of additional mea-sures concerning the coordination of monetarypolicies and concerning exchange rate policies.

*Based on a number of new measures andaehievements extending throughout eeonomicpoliey, the economic and monetary union mustbe the result of growing integration and solida-rity between Member States and will clear thepath for the European Union. Progresstowards the creation of the Community's ownmonetary system is an expression of Commu-nity solidarity; it is a sign of the increasingunity of the Member States' economies, policiesand objectives. This monetary system is at thesame time a reflection of the need for theCommunity to ensure it acts as a single entityon the international economic scene and of itswill to speak with one voice.

1. The Community's monetary organizationis, at present, made up of various elementswhich do not fit together very well,The principal feature of that organization isknown as the 'Community's band of fluctua-tion' within which the widest possible marginbetween two Community eurrencies is Iimitedat any given moment to 2.25 %. Interventionmust be effected by the issuing authorities ofthe currencies at either extreme of this margin.These transactions are financed on an 'interim'basis under a system of very short-termcredit (30 days-end of month), with no limitson amounts. Observance of the fluctuationmargins may require substantial interventionfor which the means of financing must beautomatically available. Upon expiry of thetime limit, the debror central bank may eitherarrange for short-term monetary support totake over from very short-term credit, by ini-tiating the procedure under the Agreeementbetween Central Banks of 9 February 1970, orsettle the debt by transferring assets in accor-dance with the composition of its reserves.Organizing the system whereby one form ofcredit takes over from the other is marle

extremely complex because both work on abasically bilateral basis. Furthermore, theworking of both systems has been stronglyimpeded by the following difficulties:

(a) The short-term monetary support mecha-nism was worked out at a time when the dollarwas the only 'intervention currency on the ex-change markets; the procedures for operatingit are therefore no longer entirely appropriate topresent circumstanees in which the dollar is notconvertible.

(b) The limits placed on the credits availableunder the system, as regards both the amounts!and the duratiorr' reduce the clearing possibili-ties between credit and debit positions,

(c) Finally, these settlement operations haverun into increasing difficulties. The debtorcentral banks have shown more and more reluc-tance to hand over gold reserves at an officialprice which diverges considerably from themarket price; the opposite attitude has beenadopted as regard settlements in dollars. Topalliate these difficulties increasingly compli-cated techniques of keeping accounts separatehave been worked out.

When first considering the development of theCommunity monetary system, it was thoughtthat the Communityeredit system should beadjusted by merging the credit faeilitiesdeseribed above within overhauled machinery,to be followed by the progressive pooling ofreserves. But while an 'adjustment of creditarrangements', both in volume and duration,would help improve clearing, it would still fall

1 The quotas are as folIows: Germany, Franee, U.K.:300 million u.a. eaeh; Italy 200 million u.a.; BLEUand the Netherlands: 100 million u.a. eaeh; Denmark:45 million u.a.; Ireland: 17.5 million u.a. Subject tothe approval of the Committee of Governors of theCentral Banks, the borrowing facilities of eaeh eentralbank, whieh would normally be limited to its quota,may be extended up to an iamount eorresponding tothe total quotas, that is, 1 362.5 million u.a.II Utilization of the facilities within a maximurn of onemonth, duration of credit three monrhs, renewableonee.

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second ,stage, and proposed solutions concern-ing, inter alia~ the adoption of additional mea-sures concerning the coordination of monetarypolicies and concerning exchange rate policies.

Based on a number of new measures andachievements extending throughout economicpolicy, the economic and monetary union mustbe the result of growing integration and solida-rity between Member States and will clear thepath for the European Union. Progresstowards the creation of the Community s ownmonetary system is an expression of Commu-nity solidarity; it is a sign of the increasingunity of the Member States ' economies , policiesand objectives. This monetary system is at thesame time a reflection of the need for theCommunity to ensure it acts as a single entityon the international economic scene and of itswill to speak with one voice.

1. The Community s monetary organization, at present, made up of various elements

which do not fit together very well.The principal feature of that organization known as the 'Community' s band of fluctua-tion' within which the widest possible marginbetween two Community currencies is .limitedat any given moment to 2.25 %. Interventionmust be effected by the issuing authorities ofthe currencies at either .extreme of this margin.These transactions are financed on an ' interimbasis under a system of very short-termcredit (30 days-end of month), with no limitson amounts. Observance of the fluctuationmargins may require substantial interventionfor which the means of financing must beautomatically available. Upon expiry of thetime limit, the debtor central bank may eitherarrange for short-term monetary support totake over from very short-term credit, by ini-tiating the procedure under the Agreeementbetween Central Banks of 9 February 1970, orsettle the debt by transferring assets in accor-dance with the composition of its reserves.

Organizing the system whereby one form ofcredit takes over from the other is marle

extremely complex because both work on abasically bilateral basis. Furthermore, theworking of both systems has been stronglyimpeded by the following difficulties:

(a) The short-term monetary support mecha-nism was worked out at a time when the dollarwas the only intervention currency on the ex-change markets; the procedures for operatingit are the.refore no longer entirely appropriate topresent circumstances in which the dollar is notconvertible.

(b) The limits placed on the credits availableunder the system, as regards both the amountsand the duration2 reduce the clearing possibili-ties between credit and debit positions.

(c) Finally, these settlement operations haverun into increasing difficulties. The debtorcentral banks have shown more and more reluc-tance to hand over gold reserves at an officialprice which diverges considerably from themarket price; the opposite attitude has beenadopted as regard settlements in dollars. palliate these difficulties increasingly compli-cated techniques of keeping accounts separatehave been worked out.

When first considering the development of theCommunity monetary system, it was thoughtthat the Community credit system should beadjusted by merging the credit facilitiesdescribed above within overhauled machinery,

to be followed by the progressive pooling ofreserves. But while an 'adjustment of creditarrangements , both in volume and durationwould help improve clearing, it would still fail

1 The quotas are as follows: Germany, France, U.

300 million u.a. each; Italy 200 million u.a.; BLEUand the Netherlands: 100 million u.a. each; Denmark:45 million u. ; Ireland: 17.5 million u.a. Subject tothe approval of the Committee of Governors of theCentral Banks, the borrowing facilities of each centralbank, which would normally be limited to its quota,may be extended up to anal1lount corresponding tothe total quotas, that is, 1 362.5 million u.:I Utilization of the facilities within a maximum of onemonth, duration of credit three months, renewableonce.

S. 12/73

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to eliminate the drawbacks deriving both fromthe bilateral bias of the credit mechanisms andfrom the complex nature of the settlementmethods, itself due to the heterogeneity of theassets transferred.

Furthermore, intervention in dollars has alwaysbeen kept outside the :system of interim financ-ing, clearing and settlement. It would not bedesirable to .maintain this attitude. The possi-bility of action having to be taken on theexchange rates of Community currenciesagainst the dollar cannot be ruied out com-pletely, and in such a case the question of thedistribution of risks would inevitably arise,Besides, the Community' s objective in the fieldof international monetary relations still is toreturn to stable but adjustable parities, and thiswould require, when the time arrives, resortingagain to systematic intervention vis-a-vis thedollar.

The existing credit mechanisms must thus beimproved so as to enable the Fund to achievefull multilateralization of all transactions onthe exchange markets. For this objective to beattained, two essential conditions must be met:(i) the Fund must be provided with its ownresources which would enable it to act as agenuine intermediary between creditors anddebtors within the Community and to asumeresponsibility for risks arising from interven-tion in dollars;(ii) a unit of account must be adopted whichwould be used as a means of settlementbetween the monetary authorities and as areserve instrument.

In other words, the very technique of the pool-ing of reserves must be adopted.

Finally, the pooling of dollar reserves wouldmake it easier to consolidate the dollar balan-ces, generally considered to be one of the mainproblems in the reform of the internationalmonetary system, If part of the dollar balan-ces were thus in the hands of a single body, thedecisions which the Member States of theCommunity are aiming at in this field wouldbe easier to take. Meanwhile the Fund would

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administer these balances, thus givingconcreteform to the general policy of the Communityas regards the involvement of member coun-tries in international affairs.

2. This new stage in the monetary organi-zation of the EEC must not involve the samerisks that other similar Community attemptshave encountered in the past (the system beinggenerally called into question, individual dero-gations being applied to interventions and set-tlements, certain currencies withdrawing fromthe Community band). This is why it isimportant for the machinery set up to be in aform which clearly reflects that it is intendedto be permanent and to be imposing enoughto make those involved believe in it.First of all, it is therefore recommended thatMember Stares subscribe from their budgets acapital of 500 million u.a., to be paid into theEuropean Fund. This total would be appor-tioned berween the Member States accordingto the scale fixed for short-term monetarysupport set up under the Agreement of9 February 1970. 1 The capital of the Euro-pean Fund would be subscribed exclusively incurrencies of Community countries, It wouldtranslate the legal personality of the Fund atfinancial level and would enable operatingexpenditure to be financed from the revenue itearns.

Two separate formulae should be used for pool-ing reserves:(a) the progressive transfer to theFund ofofficial reserves (gold, assets linked to gold anddollars) accumulated in the past. The initialcontribution could be of the order of 20 % ofthe total reserves of the EEC countries, whichwould be equivalent toa total in the region of11 000 million u.a. (on the basis of a total ofCommunity reserves of 56 000 million u.a. atthe end of March 1973).

1 The seale used in this agreement is the following(in %): Germany, Franee, UK: 22.02· each; Italy:14.68; BLEU and NetherIands: 7.34 eaeh; Denmarle3.3; Ireland: 11.28.

5

to eliminate the drawbacks deriving both fromthe bilateral bias of the credit mechanisms andfrom the complex nature of the settlementmethods, itself due to the heterogeneity of. theassets transferred.

Furthermore, intervention in dollars has alwaysbeen kept outside the :system of interim financ-ing, clearing and settlement. It would not bedesirable to maintain this attitude. The possi-bility of action having to be taken on theexchange rates of Community currenciesagainst the dollar cannot be ruled out com-pletely, and in such a case the question of thedistribution of risks would inevitably arise.Besides, the Community s objective in the fieldof international monetary relations still is toreturn to stable but adjustable parities, and thiswould require, when the time arrives, resortingagain to systematic intervention vis-a.-vis thedollar.

The existing credit mechanisms must thus beimproved so as to enable the Fund to achievefull multilateralization of all transactions

the exchange markets. For this objective to beattained, two essential conditions must be met:(i) the Fund must be provided with its ownresources which would enable it to act as agenuine intermediary between creditors anddebtors within the Community and to asumeresponsibility for risks arising from interven-tion in dollars;(ii) a unit of account must be adopted whichwould be used as a means of settlementbetween the monetary authorities and as areserve instrument.

In other words, the very technique of the pool-ing of reserves must be adopted.

Finally, the pooling of dollar reserves wouldmake it easier to consolidate the dollar balan-ces , generally considered to be one of the mainproblems in the reform of the internationa1monetary system. If part of the dollar balan-ces were thus in the hands of a single body, thedecisions which the Member States of theCommunity are aiming at in this field wouldbe easier to take. Meanwhile the Fund would

S. 12/73

administer these balances, thus giving concrete

form to the general policy of the Communityas regards the involvement of member coun-tries in international affairs.

2. This new stage in the monetary organi-zation of the EEC must not involve the samerisks that other similar Community attemptshave encountered in the past (the system beinggenerally called into question, individual dero-gations being applied to interventions and set-tlements, certain currencies withdrawing fromthe Community band). This is why it important for the machinery set up to be in form which clearly reflects that it is intendedto he permanent and to be imposing enoughto make those involved believe in it.

First of all, it is therefore recommended thatMember States subscribe from their budgets acapital of 500 million u. , to be paid into theEuropean Fund. This total would be appor-tioned between the Member States accordingto the scale fixed for short~term monetarysupport set up under the Agreement 9 February 1970. The capital of the Euro-pean Fund would be subscribed exclusively incurrencies of Community countries. It wouldtranslate the legal personality of the Fund financial level and would enable operatingexpenditure to be financed from the revenue itearns.

Two separate formulae should be used for pool-

mg reserves:(a) the progressive transfer to the Fund ofofficial reserves (gold, assets linked to gold anddollars) accumulated in the past. The initialcontribution could be of the order of 20 % the total reserves of the EEC countries, whichwould be equivalent toa total in the region of11 000 million u.a. (on the basis of a total ofCommunity reserves of 56 000 million u.a. atthe end of March 1973).

1 The scale used in this agreement is the following(in %): Germany, France, UK: 22.02. each; Italy:14.68; BLEU and Netherlands: 7.34 each; Denmark:3.3; Ireland: 11.28.

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(b) The surrender to the Fund of reservesnewly acquired or transferred as a result ofinterventions in exchange markets.

The process of pooling should be completed in1980 by the transfer to the Fund of MemberSates' total reserves. A fixed time-table couldbe laid down for the contributions to be madein the intervening period; at Intervals of18 months, for instance, calls could be madefor additionalcontributions, raising the overallcontribution successively to 40 %, 60 %, etc.of the total reserves held by the central bank atthe time of pooling. Depending on thecircumstances and on the extent to which eco-nomic policies have been harmonized, theCommission could propose to :speed up or slowdown the progressive pooling of reserves.

It is necessary to avoid any formula for thepooling of reserves which would result in thisoperation starting out half-hea;-redly anddepending merely on the trend which the pay-ments relationships between Member Stateshappened to show, This would result if themethod used consisted of pooling only reservesarising from intervention either in Communitycurrencies or in dollars. In addition to beingslow to take effect, such an operation couldcome up with results which were distinctlyunequal as between the countries contributing tothe pooling of reserves or between the assetsbuilt up in this way.

At present, and as long as the problem of. theprice of goldhas not been settled, the contribu-tion of this reserve asset poses a problem ofevaluation. But it is not advisable to poolreserves without including gold, for the opera-tion would then lose most of its credibility, Inview of the uncertainty currently surroundingthe price of gold it would be understood t~atonce a new official price was fixed or a pncewas agreed between central banks, the Councilwould have to take adecision to makeallowance for this new fact.

The balances which the monetary authoritieswould be credited with in the accounts of theFund would be denominated in 'Europeanmonetary units of account', which would

6

become a settlement and reserve Instrument.These units would be available for the settle-ment of positions arising from intervention inCommunity currencies, and exchangeable, inthe Fund, for foreign exchange ro finance inter-vention vis-a-vis third currencies, This unitof account, sinee it would become a settlementand reserve instrument, would be guaranteedby the Fund, which constitutes a weighty argu-ment in favour of contributions in gold.

3. Settlement and eredit operations in theCommunity would be operared through theFund, which would be the centre of exchangerelations between Member States.

(a) As regards settlements, arrangements ~oreredit to finanee intervention would be mam-tained as they stand (no limit on amounts,30 days-end of month), Uponexpiry of thesecredit arrangements, the debtor central bankcould settle either by a transfer of units ofaccount in the Fund's books or by transfer ofreserve assets to the Fund;

(b) In the ease of credits, a Bank whieh didnot wish to made an immediate settlement asabove eould make use of the Fund's ereditfacilities. In this seeond ease, the Fund wouldgrant the credit in aceordance with the follow-ing rulese

(i) part of these credits would be used tocreate possibilities of clearing within the Fundand would be granted automatically; theywould be for six monthsand renewable onee;whenever they were renewed, an examinationwould automatically be earried out ofthesituation of the debtor eountry; ceilings ondebts would be fixed at six times the quotascurrently laid down for short-term supporr'; ineoncrete terms, a eredit would be granted to acountry by paying units of account into itsaccount with the Fund;

1 The basic quotas are as folIows: Germm.y~ France,UK: 300 million u.a. each; Italy: 200 million u.a.;BLEU and Netherlands: 100 million u.a. each; Denmark:45 million u.a.; Ireland: 17.5million u.a.

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(b) The surrender to the Fund of reserveSnewly acquired or transferred as a result ofinterventions in exchange markets.

The process of pooling should be completed in1980 by the transfer to the Fund of MemberSates ' total reserves. A fixed time-table couldbe laid down for the contributions to be madein the intervening period; at intervals of18 months, tor instance, calls could be madefor additional contributions, raising the overall

contribution successively to 40 %, 60 %, etc.of the total reserves held by the central bank atthe time of pooling. Depending on thecircumstances and on the extent to which eco-

nomic policies have been harmonized, theCommission could propose to speed up or slowdown the progressive pooling of reserves.

It is necessary to avoid any formula for thepooling of reserves which would result in thisoperation starting out half-hea;redly and

pending merely on the trend which the pay-ments relationships between Member Stateshappened to show. This would result if themethod used consisted of pooling only reservesarising from intervention either in Communitycurrencies or in dollars. In addition to being

slow to take effect, such an operation couldcome up with results which were distinctlyunequal as between the countries contributing tothe pooling of reserves or between the assetsbuilt up in this way.

At present, and as long as the problem of . theprice of gold has not been settled, the contnbu-tion of this reserve asset poses a problem ofevaluation. But it is not advisable to poolreserves without including gold, for the opera-tion would then lose most of its credibility. Inview of the uncertainty currently surroundingthe price of gold it would be understood t~atonce a new official price was fixed or a pncewas agreed between central banks, the Councilwould have to take a decision to makeallowance for this new fact.

The balances which the monetary authoritieswould be credited with in the accounts of theFund would be denominated in ' Europeanmonetary units of account , which would

become a settlement and reserve instrument.These units would be available for the settle-ment of positions arising from intervention inCommunity currencies, and exchangeable, inthe Fund, for foreign exchange to finance inter-vention vis-a.-vis third currencies. This unitof account, since it would become a settlementand reserve instrument, would be guaranteedby the Fund, which constitutes a weighty argu-ment in favour of contributions in gold.

3. Settlement and credit operations in theCommunity would be operated through theFund, which would be the centre of exchangerelations between Member States.

(a) As regards settlements, arrangements ~orcredit to finance intervention would be malll-tained as they stand (no limit on amounts30 days-end of month). Upon expiry of thesecredit arrangements, the debtor central bankcould settle either by a transfer of units ofaccount in the Fund's books or by transfer ofreserve assets to the Fund;

(b) In the case of credits, a Bank which didnot wish to made an immediate setdement asabove could make use of the Fund's creditfacilities. In this second case, the Fund wouldgrant the credit in accordance with the follow-ing rules:

(i) part of these credits would be used tocreate possibilities of clearing within the Fundand would be granted automatically; theywould be for six months and renewable once;whenever they were renewed, an examination

would automatically be carried out of thesituation of the debtor country; ceilings ondebts would be fixed at six times the quotascurrently laid down for short-term support ; in

concrete terms, a credit would be granted to acountry by paying units of account into itsaccount with the Fund;

1 The basic quotas are as follows: Germ~y~ France,UK: 300 million u.a. each; Italy: 200 mdhon u.BLEU and Netherlands: 100 million u.a. each; Denmark:45 million u. ; Ireland: 17.5 million u.

S. 12/73

6 / 17 20/10/2014

(ii) any credit needs beyend the limits onamount (six times the quotas currently laiddownfor short-term support) or duration (sixmonths, renewable once) would requirerecourse to a procedure which would reflectthe purely conditional character of the facilitiesgranted; this procedure would, to begin with,involve an examination of the economic situa-tion of the debtor country by the Commission,together with theMünetary Committee,followed by a decision by the Council, Thisdecision could lead to the granting of an addi-tional credit by the Fund or the granring of amedium-term credit; in both cases the Councilwould attach economic policy conditions.

(iii) the rules relating to the utilization ofcredit facilities and the ceilings on debts shouldbe subject to review at a later date, fürinstance when the Member States make theirsuccessive contributions to the Fund.

The Commission will make proposals beforethe end of the year as regards profits and lossesmade by the Fund as a result of changes in thevalue of its assets.

If all the proposed measures are to be success-fully put into effect, the econornic policies ofthe Member States must beeffectively broughtcloser together, If full use is made of all thevarious types of coordinating machinery avai-lable to the Community, it should be possibleto maintain sufficient cohesion between theeconomies of the Member States for the pro-posed monetary organization tü operateharmoniously. In connection with this [ointCommunity-level application of economicpolicy instruments, it would also be necessary,and, at the same time, easier, to reinforce mea-sures für the development of a European capi-tal market. Community cohesion would alsobe strengthened if all the Member States wereequipped with sufficiently effective instrumentsto ward off Inflows of capital from abroad.

In the Commission's view, für the ideasoutlined in this document to be given shape,there will be no need für new institutionalmeasures to be adopted at the same time.However, there will have to be a firm political

S. 12/73

will to apply striet1y the existing coordinatingmechanisms and new means will be required inconnection with exchange rate poliey. TheCommission stressed in its Communication tothe Council of 19 April 1973 on the change-over to the secend stage that it is not possible todo without parity adjustment in a monetaryarea in the process of being established, butany adjustments must be made under Commu-nity control by giving the Community awatching brief regarding changes in exchangerelationships.

Artiele 107 of the Treaty of Rome providesthat the Member States must treat their policieswith regard to rates of exchange as a matter ofcommon concern. It is now a question ofgiving concrete form tü the application of thisprinciple.

The utilization of reserves, changes in theemphasis on the various economie policyinstruments and amendments to exchange ratesare largely interchangeable, Exchange ratepolicies governing national currendes, underthe pressure of increasingly heavier constraintsas a result of the growing unity of the econo-mies and the existence of a Communityexchange rate system, must henceforth allowfor the Community dimensions and not be thesole responsibility of the Member States.

It should also be stressed that no durable pro-gress towards Economic and Monetary Unioncan be made, and that that Union cannot beviable, unless the Member States are all boundby the same principles as regards exchangepolicy.

*The main technical aspects of the guidelines setout in this report are discussed in the Annex.The Cornmission proposes to put fürward aseries of fürmal proposals to implement theseguidelines.

The Commissions would like the Council, ünthe basis of the proposals whieh it will makefollowing this report, to take the necessarymeasures to establish the European monetarysystem outlined above.

7

(ii) any credit needs beyond the limits onamount (six times the quotas currently laiddown for short-term support) or duration (sixmonths, renewable once) would requirerecourse to a procedure which would reflectthe purely conditional character of the facilitiesgranted; this procedure would, to begin withinvolve an examination of the economic situa-tion of the debtor country by the Commis&iontogether with the Monetary Committee,followed by a decision by the Council. Thisdecision could lead to the granting of an addi-

tional credit by the Fund or the granting of amedium-term credit; in both cases the Councilwould attach economic policy conditions.

(iii) the rules relating to the utilization ofcredit facilities and the ceilings on debts shouldbe subject to review at a later date, forinstance when the Member States make theirsuccessive contributions to the Fund.

The Commission will make proposals beforethe end of the year as regards profits and losses

made by the Fund as a result of changes in thevalue of its assets.

If all the proposed measures are to be success-fully put into effect, the economic policies ofthe Me.mber States must be effectively broughtcloser togethe.r. If full use is made of all thevarious types of coordinating machinery avai-lable to the Community, it should be possibleto maintain sufficient cohesion between theeconomies of the Member States for the pro-posed monetary organization to operateharmoniously. In connection with this jointCommunity-level application of economicpolicy instruments, it would also be necessary,and, at the same time, easier, to reinforce mea-sures for the development of a European capi-tal market. Community cohesion would alsobe strengthened if all the Member States wereequipped with sufficiently effective instrumentsto ward off inflows of capital from abroad.

In the Commission view, for the ideasoutlined in this document to be given shapethere will be no heed for new institutionalmeasures to be adopted at the same time.However, there will have to be a firm political

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will to apply strictly the existing coordinatingmechanisms and new means will be required inconnection with exchange rate policy. TheCommission stressed in its Communication tothe Council of 19 April 1973 on the change-

over to' the second stage that it is not possible todo without parity adjustment in a monetaryarea in the process of being established, butany adjustments must be made under Commu-nity control by giving the Community awatching brief regarding changes in exchangerelationships.

Article 107 of the Treaty of Rome providesthat the Member States must treat their policieswith regard to rates of exchange as a matter ofcommon concern. It is now a question ofgiving concrete form to the application of thisprinciple.

The utilization of reserves, changes in theemphasis on the various economic policyinstruments and amendments to exchange ratesare largely interchangeable. Exchange ratepolicies governing national currencies, underthe pressure of increasingly heavier constraints

as a result of the growing unity of the econo-mies and the existence of Communityexchange rate system, must henceforth allowfor the Community dimensions and not be thesole responsibility of the Member States.

It should also be stressed that no durable pro-gress towards Economic and Monetary Unioncan be made, and that that Union cannot beviable, unless the Member States are all boundby the same. principles as regards exchangepolicy.

The main technical aspects of the guidelines setout in this report are discussed in the Annex.The Commission proposes to put forward aseries of formal proposals to implement theseguidelines.The Commissions would like the Council, onthe basis of the proposals which it will makefollowing this report, to take the necessarymeasures to establish the European monetarysystem outlined above.

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Technical Annex

Monetary organization of the Community

1. The .present Community exchange ratesystem consists of elements which were placedside by side as required by circumstances andaltogether is rather disjointed.The rules of the Basle Agreement of April 1972on the practical organization of the Commu-nity exchange rate system were drawn up andimplemented in a period of major upheavals ininternational monetary relations: in less thanthree years the relatively narrow (1.5 %)spread ('tunnel') within which the currenciesmay fluctuate against the dollar grew wider(4.50 %), then disappeared compietely after19 March 1973. Therules of the Agreementon the narrowing of margins have had to befrequently adjusted, with respect in particularto settlements in gold anddollars, and there isstill no sign that this process has come to anend.The short-term monetary support mechanisrnset up by the Agreement between CentralBanks of 9 February 1970, is based on notionsbelonging to the time when the dollar was theonly intervention currency and no concreteplans existed for the Community to have itsown monetary exchange rate system,The introduction of the European MonetaryCooperationFund in relations that have con-tinued on a fundamentally bilateral basis, hasnot made the very complex system any simpler.

2. In this respect, the following pointsshould be made:(i) Banks accounts are kept according tocategory of maturity corresponding to the set-tlement date for a given operation, so that aCentral Bank can be in credit with the Fund atthe same time but with different maturitydates.(ii) Clearing, the frequency of whichreducesthe size of settlements, is the exception rather

8

than the rule, for the length of 'inrerim finan-cing' is very short and the procedure for provid-ing short-term monetary support was notdesigned with this in mind,(iii) The arrangement for monetary supportto take over from very short-term facilities isnot weIl suited to present exchange ratecircumstances.

(iv) Intervention in dollars, which wascompulsory under the arrangements applyingprior to 19 March and which today is possibleonly after a joint decision, is formally excludedfrom the Fund's accounts, although it is of aCommunity nature.(v) Depending on the nature of the opera-tions, the Fund has had to resort to accountingtechniques involving various types of units ofaccount in view of the fact that settlementsmust be made in proportion to thecompositionof the reserves of the debtor country and thatthe attraction of these elements varies greatlyaccording to whether gold, SDRs or dollars areinvolved.

3. In calling on the Comrnission to reporton adjustments to credit arrangements and onthe progressive pooling of reserves, the Councilprovided an opportunity to seek means ofreforming the entire system.

It had originally been thought that in the firststage, arrangements merely had to be made forone type of credit machinery to take over fromanother-very short-term credit facilities beingfollowed by short-term monetary support-without modifying their essential characte-ristics. It had been intended to merge thesetwo formulas in the secend stage and fit theminto one piece . of 'overhauled machinery'.Finally, in a later stage, reserves were to beprogressively pooled.

In Part lof this Annex, the problems raised bythe 'adjustment of-credit arrangements' will beexamined. It will be 'seen that -some of thedifficulties encountered in organizing the pro-cess whereby one -credit facility takes over from

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Technical Annex

Monetary organization of the Community

1. The. present Community exchange ratesystem consists of elements which were placedside by side as required by circumstances andaltogether is rather disjointed.The rules of the Basle Agreement of April 1972on the practical organization of the Commu-nity exchange rate system were drawn up andimplemented in a period of major upheavals ininternational monetary relations: in less thanthree years the relatively narrow (1.5 %)spread ('tunnel' ) within which the currenciesmay fluctuate against the dollar grew wider(4.50 %), then disappeared completely after19 March 1973. The rules of the Agreementon the narrowing of margins have had to befrequently adjusted, with respect in particularto settlements in gold and dollars, and there isstill no sign that this process has come to anend.

The short-term monetary support mechanismset up by the Agreement between CentralBanks of 9 February 1970, is based on notionsbelonging to the time when the dollar was theonly intervention currency and no concreteplans existed for the Community to have itsown monetary exchange rate system.

The introduction of the European MonetaryCooperation Fund in relations that have con-tinuedon a fundamentally bilateral basis, hasnot made the very complex system any simpler.

2. In this respect, the following pointsshould be made:(i) Banks accounts are' kept according category of maturity corresponding to the set-tlement date for a given operation, so that a

Central Bank can be in credit with the Fund atthe same time hut with different maturitydates.(ii) Clearing, the frequency of which reducesthe size of settlements, is the exception rather

than the rule, for the length of 'interim finan-cing' is very short and the procedure for provid-ing short-term monetary support was notdesigned with this in mind.

(iii) The arrangement for monetary supportto take over from very short-term facilities isnot well suited to present exchange ratecircumstances.

(iv) Intervention in dollars which wascompulsory under the arrangements applyingprior to 19 March and which today is possibleonly after a joint decision, is formally excludedfrom the Fund's accounts, although it is of aCommunity nature.

(v) Depending on the nature of the opera-tions, the Fund has had to resort to accountingtechniques involving various types of units of

account in view of the fact that settlements

must be made in proportion to the compositionof the reserves of the debtor country and thatthe attraction of these elements varies greatly

according to whether gold, SDRs or dollars areinvolved.

3. In calling on the Commission to reporton adjustments to credit arrangements and onthe progressive pooling of reserves, the Councilprovided an opportunity to seek means ofreforming the entire system.

It had originally been thought that in the firststage, arrangements merely had to be made forone type of credit machinery to take over fromanother-very short-term credit facilities beingfollowed by short-term monetary support-without modifying their essential characte-ristics. It had been intended to merge thesetwo formulas in the second stage and fit theminto one piece. of ' overhauled machineryFinally, in a later stage, reserves were to beprogressively pooled.

In Part lof this Annex, the problems raised bythe 'adjustment of. credit arrangements ' will beexamined. It will ,be .seen that .some of thediffic~lties .encountered in organizing the pro-cess whereby one ' credit facility takes over from

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8 / 17 20/10/2014

another cannot be solved simply by adjustingcredit arrangements. In Part 11, the technicaldetails of a progressive pooling of reserves willbe looked at.

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Part I

Adjusting credit arrangements

4. The action to be taken would have torelate mainly to improving the details of thearrangement under which short-term monetarysupport takes over from very short-term credit.It would be based on the following principles:(a) The provisions of the Basie Agreementpermitting the running up of unlimited debt fora very short period would be retained.(b) When these financing facilities matured,the debtor would have a right to have thecredit extended up to a specific amount andduration! but would have to settle in reserveassets the portion of his debtabove this amount.(c) The credit obtained to this end throughthe Fund would in practice be granted by theinitial creditor. In other words, this creditorwould continue to have a claim on the Fund inu.a. equivalent to the amount of the credit.(d) This claim would rank as areserve asset,"for it would be guaranteed by all participatingcentral banks and could be mobilized ifneeded. This would he done in the followingway:(i) if the currency of the initial creditor hadin its turn to be supported through interventionin a Community currency, the resulting indebt-edness would be set off against the originalclaim. A new creditor would take the placeof the initial creditor; he would have the samerights and obligations as the former.(ii) in the case of intervention in dollars (sel-ling), the initial debtor would be free to mobil-ize his claim on the Fund against dollars; tothis end, the Fund would be able to draw on

1 The limits on amountand duration could be thoseoutlined in Part 11,Secrion B II.2 The credit position in European monetary units ofaccount (u.a.) with the Fund would form an integralpart of the 'lfficial reserves of each central bank.

9

another cannot be solved simply by adjustingcredit arrangements. In Part the technical

details of a progre.ssive pooling of reserves willbe looked at.

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Part I

Adjusting credit arrangements

4. The action to be taken would have torelate mainly to improving the details of thearrangement under which short-term monetary

support takes over from very short-term credit.It would be based on the following principles:

(a) The provisions of the Basle Agreementpermitting the running up of unlimited debt fora very short period would be retained.

(b) When these financing facilities maturedthe debtor would have a right to have thecredit extended up to specific amount andduration1 but would have to settle in reserveassets the portion of his debt above this amount.

c) The credit obtained to this end throughthe Fund would in practice be granted by theinitial creditor. In other words, this creditorwould continue to have a claim on the Fund in

a. equivalent to the amount of the credit.

(d) This claim would rank as a reserve assetfor it would be guaranteed by all participatingcentral banks and could be mobilized ifneeded. This would he done in the followingway:

(i) if the currency of the initial creditor hadin its turn to be supported through interventionin a Community currency, the resulting indebt-edness would be set off against the originalclaim. A new creditor would take the placeof the initial creditor; he would have the samerights and obligations as the former.

(ii) in the case of intervention in dollars (sel-ling), the initial debtor would be free to mobil-ize his claim on the ' Fund against dollars; tothis end, the Fund would be able to draw on

1 The limits on amount and duration could be thoseoutlined in Part II, Section B II.2 The credit position in European monetary units ofaccount (u. ) with the Fund would form an integralpart of the ')fficial reserves of each central bank.

9 / 17 20/10/2014

credit lines in dollars with the participatingcentral banks, Use of these credit lines wouldgive rise to a claim in u.a. on the Fund-,

(e) At fixeddates, for instance on 30 Juneand 30 December of each year, the accountswould be cleared. This lumping together ofmaturities, while encouraging clearing, wouldput the debtor at a dis advantage where theperiod of the credit obtained was not fixed butvaried with the date on which the credit wastaken up.

(f) To prevent the. credit period being short-ened in this way, the Fund would ask centralbanks able to dos'O to grant ad hoc credits(i,e, credits with specifically tailored amountsand periods) permitting settlement with thecreditor on the appointed day and enabling thecredit to the debtor to be maintained until thenormal maturity date.

5. This adjustment would improve thecurrent system appreciably: the process of oneof the two types of financing taking over fromthe other would be more effective, particularlybecause it would be automatie up to the ceil-ings fixed; there would be increased possibili-ties of clearing, which would reduce the size ofsettlements.

6. However, there would still be somedeficiencies:

(i) Adjustment of the credit arrangernentswould not eliminate the fundamentally bilate-ral character of the credit mechanisms.Though transactions in Community currencieswould have to pass through it, the Fundwould not be a genuine intermediary capableof ensuring conversion designed to put the rela-tionships between central banks on a fullymultilateral basis. In the circumstances, theaccounting and settlement methods wouldremain complex, and the Fund could not avoidkeeping accounts separate and using a varietyof units of account because of the heterogeneityof the assets transferred between central banks.(ii) As the granting of ad hoc credits wouldrequire the assistance of the central banks, the

10

debtor would have noguarantee of obtainingthe credit for the whole period which he wouldnormally be entitled to,(iii) Any intervention in dollars wouldremain outside the scope of interim financing,clearing and settlements, which would beabnormal in a system under which such inter-vention must necessarily be based on concertedaction. Given the Community character of the

. decision to which this procedure leads, itwould be equitable to share out the relevantrisks among an participants.

To get round these difficulties, considerationcould be given to setting up a continuous clear-ing system under which the Fund, drawing ona 'buffer' formed by its own reserves, wouldfinance the period between the date for settle-ment with the creditor and repayment by thedebtors on normal maturity of the credit. Butthis technique would be precisely that of pool-ing reserves.

It can therefore be seen that from a technicalpoint of view the pooling of reserves is indis-pensable. The only question is whether fornon-technical reasons this pooling shouldinvolve successive contributions leading to thecomplete pooling of reserves. The main partof this document sets out reasons which, froma Community angle, argue for this approach.

1 Action on the dollar in the form of buying wouldcontinue to be for the party's own account.

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credit lines in dollars with the participatingcentral banks. Use of these credit lines wouldgive rise to a claim in u.a. on the Fund1

(e) At fixed dates, for instance on 30 Juneand 30 December of each year, the accountswould be cleared. This lumping together ofmaturities, while encouraging clearing, wouldput the debtor at a disadvantage where theperiod of the credit obtained was not fixed butvaried with the date on which the credit wastaken up.

(I) To prevent the. credit period being short-ened in this way, the Fund would ask centralbanks able to dos'O to grant ad hoc credits(i.e. credits with specifically tailored amountsand periods) permitting settlement with thecreditor on the appointed day and enabling thecredit to the debtor to be maintained until thenormal maturity date.

5. This adjustment would improve thecurrent system appreciably: the process of oneof the two types of financing taking over fromthe other would be more effective, particularlybecause it would be automatic up to the ceil-ings fixed; there would be increased possibili-ties of clearing, which would reduce the size ofsettlements.

6. However, there would still be somedeficiencies:

(i) Adjustment of the credit arrangementswould not eliminate the fundamentally bilate-ral character of the credit mechanisms.Though transactions in Community currencieswould have to pass through it, the Fundwould not be a genuine intermediary capableof ensuring conversion designed to put the rela-tionships between central banks on a fullymultilateral basis. In the circumstances, theaccounting and settlement methods wouldremain complex, and the Fund could not avoidkeeping accounts separate and using a varietyof units of account because of the heterogeneityof the assets transferred between central banks.

(ii) As the granting of ad hoc credits wouldrequire the assistance of the central banks, the

debtor would have no guarantee of obtainingthe credit for the whole period which he wouldnormally be entitled to.

(iii) Any intervention in dollars wouldremain outside the scope of interim financing,clearing and settlements, which would beabnormal in a system under which such inter-vention must necessarily be based on concertedaction. Given the Community character of the

, decision to which this procedure leads, itwould be equitable to share out the relevantrisks among all participants.

To get round these difficulties, considerationcould be given to setting up a continuous clear-ing system under which the Fund, drawing ona 'buffer ' formed by its own reserves, wouldfinance the period between the date for settle~ment with the creditor and repayment by thedebtors on normal maturity of the credit. Butthis technique would be precisely that of pool-Ing reserves.

It can therefore be seen that from a technicalpoint of view the pooling of reserves is indis-pensable. The only question is whether fornon-technical reasons this pooling shouldinvolve successive contributions leading to the

complete pooling of reserves. The main partof this document sets out reasons which, froma Community angle, argue for this approach.

Action on the dollar in the form of buying wouldcontinue to be for the party s own account.

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10 / 17 20/10/2014

Part 11

Progr~ssive pooling of reserves

Three questions will be examined: the choiceof the merhod for pooling reserves, the advan-tages of pooling fromthe .point of view ofsettlement andcredit arrangements and certainimportant.points connected with this pooling.

A. Methor;fs of pooling reserves

Reserve assets and holdingsof Community currencies

7. The first question is whether it is not onlyreserve assets that are to be pooled, but alsoholdings of currencies ofthe Community coun-tries. . At first sight, it could be felt thathanding over to the European Fund largeamounts incurrencies of the Member Stateswas quite natural in a Cornmunity enterprise.Then the Central Bank whose currencyrequired support would no longer turn directlyto the Central Bank . whose currency hadappreciated to obtain the resources necessary tofinance intervention, but to the Fund instead.

Under eloser examination, however, this argu-ment proves to be weak: it should be recalledhere that the financing of interventions can,under certain circumstances, involve extremelylarge sums (in the case of speculative attacksOll a currency ,for instance) which exceed theamounts of national currency which mighthave been handed over to the Fund; the Fundwould then have to make a special call on thecreditor central bank. It can then be askedwhat wouldbe gained by setting up suchcumbersome financing mechanisms, when usecould be made of those which already existand which require each central bank to grant,through the Fund, unlimited credits in itscurrency to the partnercentral banks for avery short period. Retaining direct financing

S. 12/73

operations between central banks in no waydetracts from the Cornmunity nature of anundertaking which would be based on a unitof account acting as a means of settlement anda reserve instrument within the Fund.The idea of supplying the Fund with amountsin national currencies had also been putforward to make the overhaul of Communitycreditarrangements easier. It will be shownbelow that a credit system can operate veryweIl without contributions in national curren-cies having to be made to the Fund.

Methods of contributing reserve assets

8. Two separate formulae exist for poolingreserve assets alone:(a) the transfer to the Fund of reserves newlyacquired(i) from intervention in dollars,(ii) from intervention in Comrnunity curren-cies.(b) the transfer to the Fund, as an initialcontribution, and afterwards at a fixed pace, ofofficial reserves accumulated in the past in theform of gold, assets linked to gold and foreignexchange, mainly dollars.If the first merhod alone was chosen, the deci-sion to pool reserves would, at the beginning,appear half-hearted, whereas the Fund needs tobe given massive resources if the credit systemit is administering is to operate satisfactorily.It isprobable that, as regards intervention indollars, in a system where such intervention isno longer systematic, this method would beslow to take effect and would create inequali-ties; for example, only countries buying dollars(non-guaranteed) would transfer these to theFund in exchange for units of account (with aguaranteed vaIue). As regards intervention inCommunity currencies, the pace of contribu-tions would, in the present circumstances, beless slow and the inequality less marked, for itcan be assumed that there .wouldbe a certainrotation between debtor countries which

11

Part

Progr~ssive pooling of reserves

Three questions will be .examined: the choiceof the method for pooling reserves, the advan-tages of pooling from the ~point of view. settlement and credit arrangements and certainimportant points connected with this pooling.

A. Methor;fs of pooling reserves

Reserve assets and holdings

of Community currencies

7. The first question is whether it is not onlyreserve assets that are to be pooled, but alsoholdings of currencies of-the Community coun-tries. . At .first sight, it could be felt thathanding over to the European Fund largeamounts in currencies of the Member Stateswas quite natural in a Community enterprise.Then the Central Bank whose currencyrequired support would no longer turn directlyto the Central Bqnk. whose currency hadappreciated to obtain the resources necessary to

finance intervention, but to the Fund instead.

Under closer examination, however, this argu-ment proves to . be weak: it should be recalledhere that the financing of interventions canunder certain circumstances, involve extremelylarge sums (in the case of speculative attackson a currency , for instance) which exceed theamounts of national currency which mighthave been handed over to the Fund; the Fundwould then have to make a special call on thecreditor central bank. It can then be askedwhat. would be gained by setting up suchcumbersome financing mechanisms when usecould be made of those which already existand which require each central bank to grantthrough the Fund, unlimited credits in itscurrency to the partner central banks for avery short period. Retaining direct financing

S. 12/73

operations betwee.n .central banks in no waydetracts from the Community nature of undertaking which would be based on a unitof account acting as a means of settlement anda reserve instrument within the Fund.

The idea of supplying the Fund with amountsin national currencies had also been putforward to make the overhaul of Communitycredit arrangements easier. It will be shownbelow that a credit system can operate verywell without contributions in national curren-cies having to be made to the Fund.

Methods of contributing reserve assets

8. Two separate formulae exist for poolingreserve assets alone:

(a) the transfer to the Fund of reserves newlyacquired

(i) from intervention in dollars

(ii) from intervention in Community curren-CIes.

(b) the transfer to the Fund, as an initialcontribution, and afterwards at a fixed pace, ofofficial reserves accumulated in the past in theform of gold, assets linked to gold and foreignexchange, mainly dollars.

If the first method alone was chosen, the deci-

sion to pool reserves would, at the beginning,appear half-hearted, whereas the Fund needs tobe given massive resources if the credit systemit is administering is to operate satisfactorily.It is probable. that, as regards intervention in

dollars, in a system where such intervention isno longer systematic, this method would beslow to take effect and would create inequali-ties; for example, only countries buying dollars(non-guaranteed) would transfer these to theFund in exchange for units of account (with aguaranteed va1ue). As regards intervention inCommunity currencies, the pace of contribu-tions would, in the present circumstances, beless slow and the inequality less marked, for itcan be assumed that there would be a certainrotation between debtor countries which

11 / 17 20/10/2014

would, in settling up, contribute to the Fund arange of different reserve assets (gold, assetslinked to gold, dollars) in proportion to thecompositionof their reserves.

It can then be seen that even if this rnethod isnecessary for risks that would be involved inany intervention in dollars to be underwrittenon a Community basis, it would still havesome deficiencies that would have to be madeup by contributing reserves built up previously.It would be essential to make use of thissecend method, for it alone would offer thepossibility of fixing the exact initial contribu-tions, of making detailed arrangements forsubsequent contributions and of distributingevenly transfers of reserves to the Fund. Itwould also make it possible to set up trulyCommunity credit machinery. Finally, as it isbeing assumed that all reserves will have to bepooled in the present decade, only with thismethod is it possible to do it progressively.

The two methods set out above must thereforebe used together, The following paragraphsdescribe how they would be implemented.

Description of the processfor pooling reserves

9. (a) Settlement 0/ interuention. in Com-muniiy cutrendes

Intervention in Community currencies alreadyinvolves entries, in units of account, in theFund's books. The central bank which haslent the currency for this operation has itsaccount credited and the central bank borrow-ing the currency has its account debited.These positions must be settled-by transfer ofreserve assets to the creditor-within shortperiods.Following pooling, the operations would beeffected as folIows:(i) the central bank would receive from rheFund a credit in monetary units of account asa final settlement;

12

(ii) the debtor bank would clear its POSItIonby transferring reserve assets ro the Fund.'This settlement would be made:

• on the date when the very short-term faci-lity falls due, or• at a later date if the facility has beenextended by a credit from the Fund, the termsof which are discussed in section B below.

(b) Pinancing interventions vis-ä-uis thedollarNormally, any interventions vis-ä-vis the dollarwould have a Community character becausethey would influence the position of the'snake' . Financing and bearing the exchangerisks connected with these interventions wouldtherefore have to be regarded as Communityoperations:(i) the dollars purchased would be handedback to the Fund against a credit entry in u.a.,(ii) the dollars sold would be obtained fromthe Fund against adebit entry in u.a.However, the Board of Governors of the Fundshould remain free to vary application of thisprinciple in accordance with circumstances.In the present situation, a countrymay forinstance wish to restriet the appreciation of itscurrency against the dollar while its partnerswould be prepared to let this movement con-tinue. In this case, the dollars which the coun-try concerned purchased with the authorizationof the Fund, would be purchased on that coun-try's own account; they would not be handedover to the Fund but would remain with thecentral bank making the intervention.According to the same principle it could beconceived that a country whose currencytended to be used as a reserve instrumentcould, with the authorization of the Fund, useits dollar holdings when the balances in itsown currency had been run down.

1 The credit position in European monetary units ofaccount (u.a.) with the Fund is an integral part ofeach central bank's official reserves.

S. 12/73

would, in settling up, contribute to the Fund arange of different reserve assets (gold, assets

linked to gold, dollars) in proportion to the

composition of their reserves.

It can then be seen that even if this method isnecessary for risks that would be involved inany intervention in dollars to be underwrittenon a Community basis, it would still havesome deficiencies that would have to be madeup by contributing reserves built up previously.It would be essential to make use of thissecond method, for it alone would offer thepossibility of fixing the exact initial contribu-tions, of making detailed arrangements forsubsequent contributions and of distributingevenly transfers of reserves to the Fund. Itwould also make it possible to set up trulyCommunity credit machinery. Finally, as it isbeing assumed that all reserves will have to bepooled in the present decade, only with thismethod is it possible to do it progressively.

The two methods set out above must thereforebe used together. The following paragraphsdescribe how they would be implemented.

Description of the process

for pooling reserves

9. (a) Settlement of intervention in Com-munity currencies

Intervention in Community currencies alreadyinvolves entries, in units of account, in the

Fund' s books. The central bank which haslent the currency for this operation has itsaccount credited and the central bank borrow-ing the currency has its account debited.These positions must be settled-by transfer ofreserve assets to the creditor-within shortperiods.

Following pooling, the operations would beeffected as follows:

(i) the central bank would receive from theFund a credit in monetary units of account asa final settlement;

(ii) the debtor bank would clear its positionby transferring reserve assets to the Fund.This settlement would be made:

on the date when the very short-term faci-lity falls due, or

at a later date if the facility has beenextended by a credit from the Fund, the te.rmsof which are discussed in section B below.

interventions vis-a-vis the(b) Financingdollar

Normally, any interventions vis-a-vis the dollarwould have a Community character' becausethey would influence the position of thesnake

' .

Financing and bearing the exchange

risks connected with these interventions wouldtherefore have to be regarded as Communityoperations:

(i) the dollars purchased would be handedback to the Fund against a credit entry in u.

(ii) the dollars sold would be obtained fromthe Fund against a debit entry in u.

However, the Board of Governors of the Fundshould remain free to vary application of thisprinciple in accord,~.nce with circumstances.

In the present situation, a country may forinstance wish to restrict the appreciation of itscurrency against the dollar while its partnerswould be prepared to let this movement con-tinue. In this case, the dollars which the coun-try concerned purchased with the authorizationof the Fund, would be purchased on that coun-try s own aCCO\lnt; they would not be handedover to the Fund but would remain with thecentral bank making the intervention.

According to the same principle it could beconceived that a country whose currencytended to be used as a reserve instrumentcould, with the authorization of the Fund, use

its dollar holdings when the balances in itsown currency had been run down.

1 The credit position in European monetary units ofaccount (u. ) with the Fund is an integral part ofeach central bank' s official reserves.

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12 / 17 20/10/2014

(c) Feeding the Fund through pooling officialreserueholdinge

This type of pooling would cover all compo-nents of official reserves: gold, SDRs, reserveposition in the IMF, foreign exchangeholdings.'However, certain legal difficnlties over thetransfer to the European Fund of reserve posi-tions in the IMF and of SDRs would have tobe solved beforehand. For the reserve posi-tions no solution seems in sight at the moment,As regards the transfer of SDRs, however,one could envisage applying to the IMF for theEuropean Fund to be given the status of 'otherholder'.

Ways ofcalculating the contributions

10. The contributions of reserve assets canBe made according to two methods: either as auniform percentage of the reserves of each cen-tral bank, or by reference to quotas.

Under the percentage methodeach centralbank would transfer to the Fund an identicalproportion of its reserves, in successivetranches. The composition of the contributionwould reflect the share of the individualreserve assets in the country' s total reserves,The table below shows how this methodwould be applied, assuming that reserves worth11 300 million u.a., or about 20 % of all offi-cial reserves of the Community countries at theend of March 1973, would be pooled.

Under the quota method each central bankwould pay into the Fund reserve amounts fixedby reference to its share in the capital of theFund. As under the previous method, thecontribution made by each central bank wouldbe such as to reflect the share of the individualreserve assets in total national reserves.

A comparaison of the two methods shows that:(i) the 'identical percentage' method enablespooling to be staggered withour difficulty up tothe end period envisaged for the operation

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There would be a timetable for the contribu-tions: they would have to be made at inrervalsof 18 months so that each country's total con-tribution would rise successively to 40 %,60 %, etc, of its total reserves at the timewhen the contributions were due. The othermethod, however, would cause the totalreserves of a given country to beexhaustedbefore the end of the period, which means thatit could be used for a few years only.

(ii) the quota method provides an automaticsolution to the allocation of risks and gains onreserves built up previously which have beenpooled; as this allocation would be made inproportion to the contributions, the conse-quence of such 'losses' or 'gains' for a countrywould be the same, regardless of whether itsreserves had been pooled or not. This neu-tral effect would, however, be lessened whenreserves werecontributed in connection withintervention on the foreign exchange markets,

In the light of this comparison, the identicalpercentage formula seems tobe the most satis-factory solution.At present, and as long as the problem of theprice of gold has not been settled, the contribu-tion of this reserve asset poses a problern ofevaluation. But it is not advisable to poolreserves wirheut including gold, for the exer-eise would then lose most of its credibility,Consequently, in view of the uncertaintycurrently surrounding the price of gold, itwould be understood that once an agreementwas reached at international level or betweenthe Community Central Banks on the price ofgold, the Council would have to take a deci-sion to make allowance for this new fact.

Furthermore, a solution would also need to befound to the matter of allocating the revenue

1 Excluding the small amounts of various currenciesheld by the central banks with their correspondents,amounts which in most cases relate to the role ofTreasury accountant played by the central bankconcerned,See annexed table on the total level and compositionof Member States' official reserves as at the end ofMarch 1973.

13

(c) Feeding the Fund through pooling officialreserve holdings

This type of pooling would cover all compo-nents of official reserves: gold, SDRs, reserveposition in the IMF foreign exchangeholdings.

However certain legal difficulties over thetransfer to the European Fund of reserve posi-tions in the IMF and of SDRs would have tobe solved beforehand. For the reserve posi-tions no solution seems in sight at the moment.As regards the transfer of SDRs, howeverone could envisage applying to the IMF for theEuropean Fund to be given the status of 'otherholder

' .

Ways of calculating the contributions

10. The contributions of reserve assets canbe made according to two methods: either as auniform percentage of the reserves of each cen-tral bank, or by reference to quotas.

Under the percentage method each centralbank would transfer to the Fund an identicalproportion of its reserves, in successivetranches. The composition of the contributionwould reflect the share of the individualreserve assets in the country s total reserves.The table below shows how this methodwould be applied, assuming that reserves worth11 300 million u. , or about 20 % of all offi-cial reserves of the Community countries at theend of March 1973 , would be pooled.

Under the quota method each central bankwould pay into the Fund reserve amounts fixedby reference to its share in the capital of theFund. As under the previous method, thecontribution made by each central bank wouldbe such as to reflect the share of the individualreserve assets in total national reserves.

A comparaison of the two methods shows that:(i) the 'identical percentage' method enablespooling to be staggered without difficulty up tothe end period envisaged for the oper~tior,

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There would be a timetable for the contribu-tions: they would have to be made at intervalsof 18 months so that each country s total con-tribution would rise successively to 40 %,60 %, .etc. of its total reserves at the timewhen the contributions were due. The othermethod, however, would cause the totalreserves of a given country to be exhausted

before the end of the period, which means thatit could be used for a few years only.

(ii) the quota method provides an automaticsolution to the allocation of risks and gains onreserves built up previously which have beenpooled; as this allocation would be made inproportion to the contributions, the .conse-quence of such 'losses ' or ' gains ' for a countrywould be the same, regardless of whether itsreserves had been pooled or not. This neu-tral effect would, however, be lessened whenreserves were contributed in connection withintervention on the foreign exchange markets.

In the light of this comparison, the identical

percentage formula. seems to be the most satis-factory solution.

At present, and as long as the problem of theprice of gold has not been settled, the contribu-tion of this reserve asset poses a problem ofevaluation. But it is not advisable to poolreserves without including gold, for the exer-cise would then lose most of its credibility.Consequently, in view of the uncertaintycurrently surrounding the price of gold, itwould be understood that once an agreementwas reached at international level or betweenthe Community Central Banks on the price ofgold, the Council would have to take a deci-sion to make allowance for this new fact.

Furthermore, a solution would also need to befound to the matter of allocating the revenue

1 Excluding the small amounts of various currenciesheld by the central banks with their correspondents,amounts which in most cases relate to the role ofTreasury accountant played by the central bankconcerned.See annexed table on the total level and compositionof Member States' official reserves as at the end ofMarch 1973.

13 / 17 20/10/2014

Breakdoum, by country and reserue asset, 01a contribution 0111 300 million u.a. made to the Fund in accordance toith the

'identical percentage' method (20 %)

l\.s a percentage Contribution As a percentage Contribution l\.s a percentageTotal of the country's in gold or in of the country's in foreign of the country's

Country contribution total assets Iinked relevant exchange relevant(in mill. u. a.) reserves to gold holdings (in mill, u. a). holdings

(in mill. u. a.)

Belgium/Luxembourg 807 20 502 20 305 20

Denmark 178 20 40 20 138 20

Gerrnany (FR) 5 251 20 1 207 20 4 044 20

France 1 854 20 912 20 942 20

Ireland 173 20 18 20 155 20

Italy 1 037 20 711 20 326 20

Netherlands 999 20 619 20 380 20

United Kingdom 1 001 20 294 20 707 20

Composition of Fund's holdings 11 300 100 4 303 38.1 6 997 61.9

Breakdown, by country and reserve asset, of a contribution of11 300 million u.a. made to the Fund in accordance ioitb the

quota method'

As a percentage Contribution As a percentage Contribution l\.s a percentageTotal of the country's in gold or in of the country's in foreign of the country's

Country contribution total assets Iinked relevant exchange relevant(in mill, u. a.) reserves to gold holdings (iu miU. u. a.) holdings

(in mill. u, a.)

BelgiumlLuxembourg 829 20.5 516 20.5 313 20.5

Denmark 373 41.8 84 41.8 289 41.8

Germany (FR) 2 488 9.5 572 9.5 1 916 9.5

France 2 488 26.8 1 223 26.8 1 265 26.8

Ireland 145 16.7 15 16.7 130 16.7

Italy 1 659 32.0 1 138 32.0 521 32.0

Netherlands 829 16.6 513 16.6 316 16.6

United Kingdom 2 488 49.7 730 49.7 1 758 49.7

Composition of Fund's holdings 11 299 100 4 791 42.4 6 508 57.6

(l) Rounded figures,

14 S.12/73

Breakdown~ by country and reserve asset, of a contribution of11 300 million u.a. made to the Fund in accordance with the

identical percentage' method (20

1\.s a percentageContribution As a percentage Contribution 1\.s a percentage

Total of the country in gold or in of the country in foreign of the countryCountry contribution total assets linked relevant exchange relevant

(in mill. u. a. reserves to gold holdings (in !l1i11. u. a). holdings(in !l1i11. u. a.

Belgium/Luxembourg 807 502 305

Denmark 178 138

Germany (FR) 251 207 4044

France 1 854 912 942

Ireland 173 155

Italy 037 711 326

Netherlands 999 619 380

United Kingdom 001 294 707

Composition of Fund' holdings 11 300 100 4303 38. 997 61.9

Breakdown, by country and reserve asset, of a contribution of11 300 million u.a. made to the Fund in accordance with the

quota method1

As a percentage Contribution As a percentage Contribution 1\.s a percentageTotal of the country in gold or in of the country in foreign of the country

Country contribution total assets linked relevant exchange relev.ant(in !l1i11. u. a. reserves to gold holdings (iu mill. u. a. holdings

(in mill. 11. a.

Belgium/Luxembourg 829 20. 516 20. 313 20.

Denmark 373 41.8 41.8 289 41.8

Germany (FR) 2488 572 1 916

France 2488 26. 223 26. 1 265 26.

Ireland 145 16. 16. 130 16.

Italy 659 32. 138 32. 521 32.

Netherlands 829 16. 513 16. 316 16.

United Kingdom 2488 49. 730 49. 1 758 49.

Composition of Fund's holdings 11 299 100 4791 42.4 6 508 57.

(1) Rounded figures.

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14 / 17 20/10/2014

Credit ceiling for each country(u.a. millions)

BelgiumlLuxembourg Germany (FR) I France ItalyDenmark Ireland I Netherlands I United

Kingdom

600 270 1 800 1 800 105 1 200 600 1 800

earned by the Fund from the investment of thetransferred reserve assets. This problem bearsno resemblance to that of possible exchangerates gains. It is proposed that this revenueshould be allocated to the central banks inproportion to the participation of eachMember State in the capital of the Fund.

B. Community settlementand credit arrangements followingthe progressive poo/ing of reserves

General principles

11. By pooling reserves it would be possibleto strip the settlement and intra-Communitycredit machinery of the bilateral characteristicsthat remain attached to it-even after the over-haul-and the shortcomings of which werementioned above.After pooling, the Fund would no longer be an'intermediary' institution through which settle-ment and credit operations between theMember States pass, but would become theorgan which itself settled up with the creditorand lent to the debtor.The following machinery is envisaged here:(i) Very short-term financing (30 days fromthe end of the month in which the credit isgranted) would continue as at present;(ii) Far-reaching changes would be made inshort-term credit arrangements, as regards theamounts involved, the duration of the creditand the conditions under which it was granted.There should be no link between the amount

S. 12/73

of reserves contributed and the ceiling fixed,If the percentage method was used for thepooling, such a link would have undesirableresults, for countries of comparable economicsize would end with vastly differing creditpossibilities.Taking into account firstly the amounts andthe duration of credits Hkely to improve possi-bilities of using clearing in the Communityexchange rate system, and, secondly, 'reason-able' levels of indebtedness, ceilings could befixed at six times the : quotas granted theMember States under the short-term monetarysupport mechanism.' These ceilings could beadjusted later. The table above gives the

. amounts proposed,Credit up to theabove ceilings would begranted automatically for aperiod of .sixmonths with the possibility of being renewedonce. Any renewal would result automaticallyin thesituation of the debtor country beingexamined. Where credit needs exceed thelimits on amount or duration, a procedurewould have to be used which reflected thestrictly conditional character of the facilitiesgranred.

Method of implementation

12. The Fund's accounting procedure wouldneed to distinguish between the u.a. obtained

1 The short-term monetary support quotas are asfollows: Germany, France, United Kingdom: 300 mil-lion u.a, each; Italy: 200 million u.a.; BLEU andNetherlands: 100 million u.a. each; Denmark 45 mil-lion u.a, and Ireland: 17.5 million U.a.

1S

Credit ceiling for each country(u.a. millions)

Belgium!

LuxembourgI Germany

(FR) I France Italy

600 270 1 800 1 800 105 1 200 600 1 800

Denmark

earned by the Fund from the investment of thetransferred reserve assets. This problem bearsno resemblance to that of possible exchangerates gains. It is proposed that this revenueshould be allocated to the central banks inproportion to the participation of eachMember State in the capital of the Fund.

B. Community settlementand credit arrangements followingthe progressive pooling of reserves

General principles

11. By pooling reserves it would be possibleto strip the settlement and intra-Communitycredit machinery of the bilateral characteristicsthat remain attached to it-even after the over-haul-and the shortcomings of which werementioned above.

After pooling, the Fund would no longer be anintermediary' institution through which settle-ment and credit operations between theMember States pass, but would become theorgan which itself settled up with the creditorand lent to the debtor.

The following machinery is envisaged here:

(i) Very short-term financing (30 days fromthe end of the month in which the credit isgranted) would continue as at present;

(ii) Far-reaching changes would he made inshort-term credit arrangements, as regards theamounts involved, the duration of the creditand the conditions under which it was granted.There should be no link between the amount

S. 12/73

Ireland Netherlands I UnitedKingdom

of reserves contributed and the ceiling fixed.If the percentage method was used for thepooling, such a link would have undesirableresults, for countries of comparable economicsize would end with vastly differing creditpossibilities.

Taking into account firstly the amounts andthe duration of credits likely to improve possi-bilities of using clearing in the Communityexchange rate system, and, secondly, 'reason-able' levels of indebtedness, ceilings could fixed at six times the' quotas granted theMember States under the short-term monetarysupport mechanism. These ceilings could beadjusted later. The table above gives the

. amounts proposed.

Credit up to the above ceilings would begranted automatically for a period of sixmonths with the possibility of being renewedonce. Any renewal would result automaticallyin the situation of the debtor country being

examined. Where credit needs exceed thelimits on amount or duration, a procedurewould have to be used which reflected thestrictly conditional character of the facilitiesgranted.

Method of implementation

12. The Fund's accounting procedure wouldneed to distinguish between the u.a. obtained

1 The short-term monetary support quotas are asfollows: Germany, France, United Kingdom: 300 mil-lion U.a. each; Italy: 200 million u.a.; BLEU andNetherlands: 100 million u.a. each; Denmark 45 mil-lion u.a. and Ireland: 17.5 million U.

15 / 17 20/10/2014

against reserves handed over and the u.a. repre-senting credits obtained. A country should beable to obtain credit even before it has begun todraw on its reserves, including its holdings inu.a, For operational reasons it would be advis-able to recordseparately the various types ofcredits a country had received.

Each central bank would thus have three sepa-rate accounts with the Fund:

(i) a 'reserve' account with an initial creditentry corresponding to the reserves contributed;

(ii) a 'very short-term financing' account onwhich the amounts necessary for support inter-vention would be debited;

(iii) a 'short-term credit account' recordingthe short-term credits received from the Fund.

Thus, when intervention is made in Commu-nity currencies, the Fund would record theoperations in the various accounts as follows:

(a) The Fund would settle up immediatelywith the central bank providing thehard curren-cy by crediting its reserve account with theequivalent, in u.a., of the amount of its curren-cy sold when intervening.

(b) The Fund would debit the same amountto the 'very short-term financing' account ofthe central bank whose currency wassupported. At the present time there is noceiling on this type of finance, but the positionmust be cleared by the debtor central bank atthe end of the period agreed (end of month,30 days). This would be done by the follow-ing methods, used separately or jointly:

(i) debiting the reserve account with theFund;

(ii) handing over reserve assets not yet trans-ferred to the Fund, in proportion to their rela-tive share in the debtor's total reserves;

(iii) having short-term credit take over fromvery short-term finance up to the amountsavailable under this head.

16

C. Points connected with the pooling01 reserves

13. Two major points deserve to be men-tioned in connection with the new stage in themonetary organization of the EEC.

Capital of the Fund

Under the proposals set out in this document,the Fund, a legal personality, takes on a majormonetary role. The Fund should be providedwith its own capital to mark this stage,

This capital, amounting to 500 million u.a.,would be subscribed in Community currenciesfrom the Member Stares' hudgets. This capitalwould be apportioned between the MemberStates in accordance wih the scale fixed for'short-term monetary support' and could bepaid up in successive tranches, for insistance atthe same pace as reserves are pooled.Giving the Fund its own capital could enable itto finance its operating expenditure from reve-nue obtained from the investment of its re-sources. Futhermore, this capital could be usedas the scale for allocating the revenue earnedfrom the joint management of the reserve assets,

Larger role for the European monetary unitof account

The instrument used for the pooling of reserveswould be the European monetary unit ofaccount (EMUA), a definition of which wasgiven in Article 5 of the Statutes of the Euro-pean Fund. This unit would not only serve forkeeping the accounts on the Fund's operationsbut would also become a payment andreserveinstrument.Against this background .it must be askedwhether or not the present definition of this unitof account should be reviewed. Here, the ideais sometimes floated that the value of this instru-

S. 12/73

against reserves handed over and the u.a. repre-senting credits obtained. A country should beable to obtain credit even before it has begun todraw on its reserves, including its holdings ina. For operational reasons it would be advis-

able to record separately the various types ofcredits a country had received.

Each central bank would thus have three sepa-rate accounts with the Fund:

(i) a 'reserve' account with an initial creditentry corresponding to the reserves contributed;

(ii) a 'very short-term financing' account onwhich the amounts necessary for support inter-vention would be debited;

(iii) a 'short-term credit account' recordingthe short-term credits received from the Fund.

Thus, when intervention is made in Commu-nity currencies', the Fund would record theoperations in the various accounts as follows:

(a) The Fund would settle up immediatelywith the central bank providing the hard curren-cy by crediting its reserve account with theequivalent, in u. , of the amount of its curren-cy sold when intervening.

(b) The Fund would debit the same amountto the 'very short-term financing' account ofthe central bank whose currency wassupported. At the present time there is noceiling on this type of finance, but the positionmust be cleared by the debtor central bank atthe end of the period agreed (end of month,

30 days). This would be done by the follow-ing methods, used separately or jointly:

(i) debiting the reserve account with theFund;

(ii) handing over reserve assets not yet trans-

ferred to the Fund, in proportion to their rela-tive share in the debtor s total reserves;

(iii) having short-term credit take over fromvery short-term finance up to the amountsavailable under this head.

C. Points connected with the poolingof reserves

13. Two major points deserve to be men-tioned in connection with the new stage in themonetary organization of the EEC.

Capital of the Fund

Under the proposals set out in this document,the Fund, a legal personality, takes on a majormonetary role. The Fund should be provided

with its own capital to mark this stage.

This capital, amounting to 500 million U.would be subscribed in Community currenciesfrom the Member States ' budgets. This capitalwould be apportioned between the MemberStates in accordance wih the scale fixed forshort-term monetary support' and could bepaid up in successive tranches, for insistance atthe same pace as reserves are pooled.

Giving the Fund its own capital could enable itto finance its operating expenditure from reve-nue obtained from the investment of its re-sources. Futhermore, this capital could be usedas the scale for allocating the revenue earned

from the joint management of the reserve assets.

Larger role for the European monetary unitof account

The instrument used for the pooling of reserveswould be the European monetary unit ofaccount (EMUA), a definition of which wasgiven in Article 5 of the Statutes of the Euro-

pean Fund. This unit would not only serve forkeeping the accounts on the Fund's operations

but would also become a payment and reserveinstrument.

Against this background it must be askedwhether or not the present definition of this unitof account should be reviewed. Here, the ideais sometimes floated that the value of this instru-

S. 12/73

16 / 17 20/10/2014

mentshould be defined on the basis of thecurrencies of the participating countries. Thiswould mean linking the value and adjustments

in the value of this unit mainly to the value ofthe component currencies rather than to mone-tary.events outside the Community.

Level and composition 01 the offidal reserves 01 the countries01 the European Community

(situation as at the end of March 1973)

Total reserves Holdings in gold or in assets linked to gold Holdings in foreign exchange

Country AsaAs a percentage Asa percentageof the reserves of of the reserves of

Amount percentage Amount Amount(in mill. u. a.)1 of EC (in mill. u.a.)1

The countryl(in mill. u. a.) 1

The country Ireserves TheEC TheEC

Belgium/Luxembourg 4 034 7.1 2 512 62.3 11.7 1 522 37.7 4.4

Denmark 892 1.6 200 22.5 0.9 692 77.5 2.0

Germany (FR) 26 255 46.5 6 034 23.0 28.1 20 221 77.0 57.8

France 9 269 16.4 4 558 49.2 21.2 4711 50.8 13.5

Ireland 867 1.5 91 10.5 0.4 776 89.5 2.2

Italy 5 182 9.2 3 554 68.6 16.5 1 628 31.4 4.7

Netherlands 4 995 8.8 3 093 61.9 14.4 1 902 38.1 5.4

United Kingdom 5 003 8.9 1467 29.3 6.8 3 536 70.7 10.1

Community 56 497 100 21 509 38.1 100 34 988 61.9 100

(1) 1 u.a. = 0.888671 g of fine gold = 1.20635 US$.

S.12/73 17

ment should be defined on the basis of thecurrencies of the participating countries. Thiswould mean linking the value and adjustments

in the value of this unit mainly to the value ofthe component currencies rather than to mone-taryevents outside the Community.

Level and composition of the official reserves of the countriesof the European Community

(situation .as at the end of March 1973)

Total reserves Holdings in gold or in assets linked to gold Holdings in foreign exchange

Country As aAs a percentage Asa percentageof the reserves of of the reserves of

Amount percentage Amount Amount(in mill. u. a. of EC (in mill. u.

The country! The EC(in mill. u. a.

The cOtmtry Ireserves The EC

Belgium/Luxembourg 4034 2 512 62. 11.7 1 522 37. 4.4

Denmark 892 1.6 200 22. 692 77.

Germany (FR) 26 255 46. 6034 23. 28. 20 221 77. 57.

France 9269 16.4 4558 49. 21.2 4711 50. 13.

Ireland 867 1.5 10. 0.4 776 89.

Italy 5 182 3 554 68. 16. 1 628 31.4

Netherlands 4995 3 093 61.9 14.4 1 902 38. 5.4

United Kingdom 5003 1 467 29. 3 536 70. 10.

Community 56 497 100 21 509 38. 100 34 988 61.9 100

(1) 1 u.a. = 0.888671 g of fine gold = 1.20635 US $.

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17 / 17 20/10/2014