Chapter

III. Regional Arrangements

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1973
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The negotiations for the enlargement of the EEC with several European countries were completed in January 1972. After the ratification of the Treaties of Accession, Denmark, Ireland, and the United Kingdom became full members of the EEC as of January 1, 1973. However, Norway did not join the Community because the Acts of Membership were rejected in a referendum held in September 1972. In accordance with the terms of entry, industrial tariffs between the original and the new member states will be eliminated in five stages by July 1, 1977, agricultural alignment will be accomplished in six stages by December 31, 1977, and restrictions on capital movements are generally to be aligned on the relevant EEC directives within 5 years of accession. Free trade agreements were signed on July 22, 1972 by the enlarged EEC and five member countries of the European Free Trade Association (Austria, Iceland, Portugal, Sweden, and Switzerland) providing for the gradual reduction and eventual elimination by July 1, 1977 of customs duties and other fiscal customs charges applying on trade in industrial products. Longer transitional periods are provided, however, for paper (11 years) and a few other industrial products. These agreements also came into force on January 1, 1973. A similar agreement with Finland was initialed but has not as yet been signed.

Although two members of the European Free Trade Association (EFTA)11 joined the EEC and five signed free trade agreements with the EEC, EFTA continues in force. A Protocol concerning the maintenance of EFTA free trade was signed on December 21, 1972, the parties being Austria, Denmark, Finland, Iceland, Norway, Portugal, Sweden, Switzerland, and the United Kingdom. They undertook to give effect to the transitional arrangements concerning the relations between Denmark and the United Kingdom on the one hand and the remaining EFTA countries on the other, as set out in the annex and appendices to the Protocol. Toward the end of 1972 the EEC began negotiations with the Government of Norway for the conclusion of a free trade agreement. Negotiations were completed on April 16, 1973, when the agreement was initialed, and signature was expected to take place on May 14, after which the first tariff reductions were to be made on July 1, 1973.

On May 12, 1972 Mauritius signed an agreement by which it would become the first Sterling Area country to become associated with the EEC through the Second Yaoundé Convention. The EEC signed or extended preferential trade agreements with a number of Mediterranean countries, including Egypt.

The previous Report noted some important steps taken by the EEC, following the realignment of currencies in December 1971, toward the establishment by stages of an economic and monetary union. The most important of these was the adoption on March 21, 1972 of a Resolution of the Council of the EEC which, inter alia, proposed that the EEC central banks progressively narrow the spread between their currencies. The Resolution also proposed the intervention techniques in the exchange markets and procedures for settlement of balances resulting from intervention in EEC currencies of the narrow margin scheme, and the regulation of short-term capital flows and the neutralization of their impact on EEC economies. The narrower margins came into effect on April 24, 1972, when the central banks of Belgium, France, Germany, Italy, and the Netherlands began to apply arrangements to ensure that the maximum divergence from cross-parities between any two currencies did not exceed 2¼ per cent. The United Kingdom and Denmark joined the scheme as of May 1, but withdrew on June 23, 1972, after the market rate for sterling ceased to be confined necessarily within its announced margins, although Denmark rejoined on October 10. Norway joined as of May 23, 1972. Italy in mid-1972 was granted a waiver permitting it to intervene in U. S. dollars in order to maintain its margins against other EEC currencies. This waiver expired at the end of the year. Early in 1973, when Italy announced that the market rate for the lira in the official market would not necessarily be confined within the announced margins, it also withdrew from the narrower margin arrangement. The Benelux agreement of August 1971 reducing the margins between the Belgian franc and the Netherlands guilder to 1½ per cent either side of their cross-parity remained in effect; this cross-parity remained unchanged both in the Smithsonian realignment of December 1971 and subsequently.

Intervention in EEC currencies entails for the participants the accumulation by their central banks of the currencies of other members and thus the need for settlement of accumulated balances. The scheme that went into effect in April 1972 provided for settlement of balances on the last day of the month following the one in which the balance appeared, though with the possibility of postponement of settlement for an additional three-month period by mutual agreement. The arrangement provided that settlements would take place either in the currency of the creditor or in gold, SDRs, reserve position in the Fund, and foreign currencies. The proportions of gold and gold-based assets on the one hand and foreign currencies on the other were to reflect the proportions in which they were held in the debtor’s reserves.

The scheme for settlements on this basis initially encountered operational difficulties as a result of the sharp rise in the free market price for gold, which made deficit countries unwilling to use gold reserves in settlements. Thus, following the floating of the pound sterling in June 1972, Italy was allowed to use dollars in support interventions to keep the lira within the agreed intra-EEC margins whereas the scheme originally provided that intervention in dollars would be undertaken only at the IMF limits.

Council Regulation No. 907/73 of April 3, 1973, which entered into force on April 6, established the European Monetary Cooperation Fund (EMCF) and contains its Statutes. Within the limits of its powers the EMCF is to promote (a) the proper functioning of the progressive narrowing of the margins of fluctuation of the Community currencies against each other; (b) interventions in Community currencies on the exchange markets; and (c) settlements between central banks leading to a concerted policy on reserves.

In the first stage of its functions the EMCF will be responsible for (a) the concerted action necessary for the proper functioning of the Community exchange system; (b) the multilateralization of positions resulting from interventions by central banks in Community currencies and the multi-lateralization of intra-Community settlements; and (c) the administration of the very short-term financing provided for by the Agreement between the central banks of the enlarged Community of April 10, 1972 relating to narrower margins and of the short-term monetary support provided for in the Agreement between central banks of the Community of February 9, 1970, to which the central banks of Denmark, Ireland, and the United Kingdom acceded with effect from January 8, 1973.

In December 1972 it was announced that the European Monetary Agreement (EMA) would be terminated by the end of 1972. New arrangements will carry on some of its functions and will include an agreement on exchange guarantees and the establishment within the Organization for Economic Cooperation and Development (OECD) of a new Committee for Monetary and Foreign Exchange Matters. The exchange guarantee, which was established for an initial period of three years beginning January 1, 1973, provides a guarantee on the working balances held by a central bank on account with another central bank in the latter’s national currency. The central banks participating in this agreement are those of Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, and the United Kingdom. Although the Bank of England is a participant, the provisions of the agreement will not be applied to it until the United Kingdom resumes maintaining the rates for sterling within margins.

The new Committee for Monetary and Foreign Exchange Matters was created with the general purpose of providing a forum for all OECD members in which problems of monetary cooperation, in particular those regarding exchange markets, can be examined. The Committee will supervise the operation of the exchange guarantee; it will also be responsible for proposing to the Council of the OECD any arrangements pertaining to the operation of exchange markets which could be needed in light of developments, and, in particular, of the progress made toward reform of the international monetary system. The Committee will include representatives of each OECD country. Representatives from the Commission of the EEC, the Bank for International Settlements, and the representatives of the Managing Director of the IMF will take part in the discussions of the Committee. Two of the main features of the EMA are reflected in the new arrangements: that of providing a forum for the examination of monetary and financial questions between experts of governments and central banks, and the existence of an exchange guarantee on central banks’ holdings of participating countries’ currencies.

In Africa, the treaty establishing the Community of West African States (CEAO) was signed on June 3, 1972 by Dahomey, Ivory Coast, Mali, Mauritania, Niger, Senegal, and Upper Volta. The CEAO is to replace the West African Customs Union and will come into effect on January 1 of the year following ratification by at least five members. The CEAO, which was established with EEC assistance, is to some degree modeled on the EEC, providing for a common external tariff and the free circulation of goods, capital, and labor. It specifically provides for (a) organized trade in agricultural products; (b) a preferential regime for industrial products; (c) a community development fund to compensate for customs revenue losses resulting from trade liberalization; and (d) policies of economic cooperation concerning industry and transport.

At a meeting of the Association of African Central Banks in May 1972, it was decided to proceed with studies regarding the proposals for the establishment of payments arrangements among central banks. Those taking part were The Gambia, Ghana, Mali, Nigeria, Sierra Leone, and the West African Monetary Union.

At its Eighth Annual Meeting in Algiers in July 1972, the Governors of the African Development Bank (ADB) adopted a resolution calling for a ministerial conference of African States to elaborate a common stance on eliminating monetary and other obstacles to the development of African trade. They also adopted an agreement establishing the African Development Fund (ADF) to assist the ADB in making an effective contribution to the economic and social development and promote regional and subregional cooperation; the ADF is to provide finance in concessional terms for purposes that serve such development. The ADF, which is to have non-African members also, may make its resources available to national development banks and other institutions for relending in respect to projects approved by the ADB.

In October 1972 a study by the Arab League recommended greater integration within the Arab Common Market. It urged members to take advantage of the efforts of the Council for Mutual Economic Assistance to achieve closer cooperation with Arab States.

In Central America on September 1, 1972, Costa Rica announced at the Twelfth Meeting of the Normalizing Commission that it would apply the free market rate of exchange to all imports of nonessential goods from other members of the Central American Common Market (CACM). On September 5 El Salvador, Guatemala, and Nicaragua announced (a) limitations for 1972 trade among the three countries to a level of 5 per cent above 1971 trade; (b) the temporary suspension of duty-free trade regarding Costa Rican goods until that country published a list of essential goods; (c) a guarantee of free trade for only listed products; and (d) the application of retaliatory fiscal measures to all Costa Rican goods not on the essential list. The following day Costa Rica announced the temporary suspension of trade with other CACM members. Certain bilateral trade agreements with Costa Rica have since brought some relief.

On January 3, 1973, following the earthquake in Nicaragua, the central banks of Costa Rica, El Salvador, Guatemala, and Honduras announced their readiness to offer financial assistance to Nicaragua. First, the Central American Monetary Stabilization Fund (CAMSF) would consider a Nicaraguan request for a US$30 million stand-by arrangement as soon as the latter could submit a stabilization plan. Second, the resources of CAMSF (US$11 million) would be invested in Nicaraguan securities. Third, the other central banks could extend credits to Nicaragua for an amount of US$4 million. Fourth, it was recommended that the balances resulting from multilateral compensation in 1973 be refinanced by the central banks of other countries. Fifth, credit lines in addition to existing credits were to be considered by the other members.

On May 9 the central banks of Central American countries and the Bank of Mexico signed an agreement under which the latter would grant a US$10 million credit to the former with an amortization period of up to three years and low rates of interest. The credit would be used to correct temporary imbalances in the overall balance of payments of Central American countries. With the signing of this agreement, the resources of the Stabilization Fund were increased to US$62 million made up as follows: CAMSF members US$20 million, U. S. AID US$10 million, Bank of Mexico US$10 million, Bank of America US$10 million, Deutsch-Südamerikanische Bank US$7 million, and the Central Bank of Venezuela US$5 million. More recently, the German Government has made certain funds available to the Stabilization Fund.

It has been announced that the Caribbean Free Trade Association (CARIFTA)12 is to be transformed into the Caribbean Community, including the Caribbean Common Market. Member countries will have a common external tariff and such economic integration instruments as the Caribbean Investment Corporation and agreement on harmonization of fiscal incentives and on double taxation. In April 1973, at the Eighth Conference of Heads of Government of Commonwealth Caribbean countries, it was agreed that Barbados, Guyana, Jamaica, and Trinidad and Tobago would sign and ratify the Community treaty so as to enable the Caribbean Community and Caribbean Common Market to be established on August 1, 1973; British Honduras, Dominica, Grenada, St. Kitts-Nevis-Anguilla, St. Lucia, and St. Vincent undertook to become members on May 1, 1974; Antigua and Montserrat have not yet decided when they will sign the treaty. CARIFTA, which was formed in 1968 and has laid the foundation for further progress in development and closer regional economic integration among its member states, formally ceases to exist on May 1, 1974.

In May 1972 at the Eighth Meeting of the Financial Policy and Monetary Council of the Latin American Free Trade Association (LAFTA),13 it was agreed (a) to revise the Santo Domingo Agreement (agreement providing multilateral temporary assistance in cases of liquidity deficiency); (b) to increase from 90 days to 120 days the period of compensation under the payments mechanism; and (c) effective September 1, 1972, to subject the debits under the bilateral lines of credit to the rediscount rate of the Federal Reserve Bank of New York less 1.5 per cent.

The Andean Common Market14 moved further toward economic integration, including the financial aspects of economic relations among members, the payments problems of the subregions, and the functioning of the multilateral compensation and reciprocal credit swings with regard to subregional trade. At a meeting in June of the central banks of the countries participating in the Cartagena Agreement (BANCEPAC) it was resolved to recommend the creation of a seminar on the specific aspects of programing and to constitute a working party to which would be recommended the consideration and development of (a) financial mechanisms to stimulate correspondence relations, including granting of credit among central banks; (b) short-term financial assistance for balance of payments reasons; and (c) the possibility of creating a market for banking acceptances in BANCEPAC countries. At a meeting of the Monetary and Exchange Board of the Cartagena Agreement it was resolved, inter alia, to recommend bases for harmonized monetary and exchange policies in the context of sub-regional integration. Early in 1973, Venezuela joined the Andean Group.

Further steps were taken toward economic cooperation among countries in the United Nations Economic Commission for Asia and the Far East (ECAFE). In August, the Intergovernmental Committee for the Establishment of an Asian Reserve Bank met in Bangkok to consider a feasibility study on the project and to develop the draft guidelines for such a bank, which had been formulated in 1970, into a Draft Agreement. On September 25, on the occasion of the Fund’s Annual Meeting, a meeting of the delegates from ECAFE countries was organized to exchange their latest views on integration in the ECAFE region. In February 1973 officials of a number of countries of the region adopted a draft of the Articles of the Asian Clearing Union; signing of the Agreement by central banks was expected to begin soon.

In July 1972, at a meeting of the central banks of the Association of South East Asian Nations (ASEAN) 15 it was declared that there was a need for a clearing scheme among the member countries, and a working party was established to study the matter further.

Its members in 1972 were Austria, Denmark, Iceland, Norway, Portugal, Sweden, Switzerland, and the United Kingdom. Finland is linked to EFTA by the Finland-EFTA Agreement.

The members are Antigua, Barbados, British Honduras, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts-Nevis-Anguilla, St. Lucia, St. Vincent, and Trinidad and Tobago.

The members are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.

The members are Bolivia, Chile, Colombia, Ecuador, and Peru.

The members are Indonesia, Malaysia, Philippines, Singapore, and Thailand.

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