CONGRESSIONAL RECORD -- SENATE

October 15, 1965

Page 27119

MONETARY REFORM AND THE BALANCE OF PAYMENTS

Mr. MUSKIE. Mr. President, as chairman of the Senate Subcommittee on International Finance, I have learned that monetary reform and the balance-of-payments situation are, in themselves, complicated.

If you add to their inherent complexities the intricate relationships among the Common Market countries, you arrive at a puzzling and difficult picture of economics in the Western World.

If we are to achieve a favorable balance-of -payments position, and if we are to maintain our economic vitality and leadership, we must come to grips with the problems of the Common Market.

These problems cast a long shadow over the Kennedy round of tariff talks, the desire to liberalize world trade, and the hope for international monetary reform.

The economic stability and prosperity of the Western World will depend on the course of the Common Market.

The September issue of the Morgan Guaranty Survey, published by the Morgan Guaranty Trust Co., of New York, carries an article, entitled "The Nature of the Common Market Crisis," which analyzes the problems within the Common Market.

I commend this article to my colleagues, and I ask unanimous Consent that it be inserted in the RECORD at this time.

There being no objection, the article was ordered to be printed in the RECORD, as follows:

THE NATURE OF THE COMMON MARKET'S CRISIS

President De Gaulle's press conference of September 9 did not in itself create a crisis in the development of the European Economic Community. Nor did the crisis start, as so many reports would have it, with the French decision last June to walk out of the Common Market negotiations in Brussels. The actual causes, rather, go back to fundamental problems and conflicts inherent in the idea of community that were only partially perceived, and certainly not adequately dealt with, at the time the Rome Treaty, EEC's basic document, was written.

What General De Gaulle has now done with acute precision is to spell out the problems and define the conflicts. Despite the dismay his action has stirred, it could well have the outcome of ultimately putting relations among the six on more certain and less troublesome footing.

EEC's crisis has less to do with the particulars of economic policy than with the fundamental issues of constitutional form and the lodgment of ultimate power. What is involved most crucially is the Community's momentum toward becoming a political entity above its member nations. This, declared General De Gaulle, is unacceptable to France because it threatens French sovereignty.

He might have noted that it likewise threatens the sovereignty of each of the five other members, and might have asked -- since rhetorical questions are not out of place in his press conferences -- whether any or all of them were more ready than France to sign and seal the substantial surrender of autonomy which the erection of a supranational authority would demand. The general was issuing, in other words, not so much an ultimatum as an invitation to his fellow heads of state in EEC to think through one more time the conditions on which the economies of their countries are to be harmonized.

All this was no more than realists in the Common Market had reason to expect. Where the French leader jolted even the realists was in his strong implication that the Rome treaty must be rewritten. France, he indicated, would require removal of "basic errors" and "ambiguities" from the treaty before it would be willing to go any further with the work of harmonization.

That work has been at a virtual standstill since last June 30, when French Foreign Minister Couve de Murville abruptly ended a session of EEC's Council of Ministers that was laboring to reach agreement on the knotty issue of the Common Market's financing arrangements for agriculture. On the basis of a previous understanding among the Six, those arrangements -- involving member country payments into and receipts from the Agricultural Guidance and Guarantee Fund -- were to have been worked out by June 30. The failure of the Council to meet the deadline, said the French, was the reason for their walkout.

Important as agricultural matters are to France and its farmers, and anxious as the French were to reach an agreement, close observers of Common Market affairs tended at the time to doubt the completeness of that explanation. Negotiations beyond deadlines, it was pointed out, have become commonplace for EEC. Moreover, sharp though the farm differences were, it seemed clear to most that the possibilities of compromise had not been exhausted, nor even fully explored, and that in time a solution would have been found.

As President de Gaulle's statements have now made clear, it seems far more likely that even in June, France had decided that the time had come to face the crucial issue of supranational trend.

In fact, with the effective veto power of individual member countries over major decisions scheduled by the Community's timetable to end next January 1, there exists widespread conviction that General de Gaulle might well have been forced to create a critical issue sometime this year if one had not presented itself. "Sooner or later," he declared, "the crisis was inevitable."

With the transition to majority voting getting near, "sooner" presumably seemed better.

In any event, the end of June would have ushered in a period of enforced repose for the Community. The vacation period was on hand, and looming beyond that were the complications of the German national election in September and the French one in December. The French, meanwhile, could proceed with reasonable confidence that delay in fixing the terms of EEC's agricultural financing wouldn't necessarily mean that any less money would ultimately flow to France, since in practice there is a time lag of many months in disbursements. Nor should it have distressed the French Government that postponing agricultural agreement meant further loss of time for the Kennedy round of tariff negotiations. Paris right along has been distinctly cool toward U.S. determination to get EEC to lower its farm import barriers.

At the center of the controversy, quite obviously, is the gut issue of how much political federalism the Community is to have, if any. Is the absolute sovereignty of each of the Six to remain untouched, or is the Common Market to evolve in the direction of political federation. with its institutions (its executive body and its parliament in particular) wielding political authority which is independent of that possessed by the individual member countries?

The latter course was clearly in the minds of some of the Community's original sponsors and was the chief reason for the enthusiasm with which the U.S. Government supported EEC from the start. It is precisely the concept which President de Gaulle is now challenging. "Nothing," he declared on September 9, "which is important at present in the organization, and later in the operation of the Common Market of the Six, should be decided and, even more, applied, except by the responsible public authorities in the six states; that is, the governments controlled by the parliaments."

While perhaps not so explicitly stated before, this has long been President de Gaulle's view. It has, moreover, numerous other adherents in Europe, a fact which tends to be underappreciated but which is vitally important in trying to assess the probable outcome of EEC's present crisis.

There is rather wide agreement, actually, that few countries of Europe, big or small, have reached a stage where they are psychologically ready to abide by majority votes on economic issues other than the most trifling.

AGRICULTURE AND MUCH MORE

Although the squabble over agricultural financing is clearly of subordinate importance in the present controversy, its details and its chronology help illuminate what the fight is really all about. The origin of the trouble traces back to 1962, when as a condition for agreeing to further industrial tariff cuts, the French insisted that a start be made on a common agricultural policy.

Among other things, agreement was reached at that time on a formula under which member countries would make payments into and withdraw money from an Agricultural Guidance and Guarantee Fund. The formula penalized farm imports from nonmember countries, the intent being to encourage and subsidize agricultural production within EEC.

This arrangement covered only a 3-year period. Thereafter, a new formula, to be worked out no later than June 30, 1965, was to cover the remainder of EEC's transition period, which run through 1969. In December 1964, anticipating the approaching deadline, the Council of Ministers instructed the Community's nine-man executive Commission to draw up and submit proposals for continuing the Fund's operations. The Commission also was asked to investigate how receipts from EEC's common external tariff, scheduled to go into effect July 1, 1967, might be used to replace payments to the Community's budget from national treasuries. It was from this latter request that the whirlwind blew.

STRETCHING THE MANDATE

In carrying out its assignment, the Commission made the fateful decision to construe its mandate in exceptionally broad terms. Besides providing a new formula for operating the Agricultural Fund, it proposed eventual transfer to the Community's coffers of all proceeds flowing from the common external tariff. Although provision was made for the redistribution to national governments of revenues in excess of normal Community needs, one very significant consequence of this arrangement would have been to make budgetary discipline over the Commission by member countries far more difficult.

Predictably, this was a highly controversial recommendation, since even previously the executive body's budgets had been a source of considerable friction. Still more sensitive was the Commission's suggestion that the EEC parliament in Strasbourg -- an institution that draws no real power from the Rome treaty -- assume partial authority over the Community's budget, and thus, in effect, the potential for materially influencing Common Market affairs.

The Commission's recommendations, formally submitted to the Council on April 1 of this year, triggered immediate opposition from the French. They angrily protested the coupling, in an omnibus package, of non farm proposals with those relating to agricultural financing, emphasizing that only for the latter, and for nothing else, was there a June 30 deadline.

The French thought they perceived the Commission's strategy, and they found it offensive. They believed the Brussels group was counting on France to swallow a measure of distasteful integration because of its special interest (as EEC's most important agricultural nation) in getting the details of farm financing settled. Reportedly, the implied suggestion that France might compromise its sovereignty for financial considerations was particularly infuriating to President de Gaulle.

Despite the strong protest from Paris, the Commission -- in what is now regarded as a serious miscalculation of its strength -- proceeded to try to line up support for its package. In May it sought and won the backing of the Strasbourg Parliament for its proposals, a tactic which could only add to the displeasure which the French already felt.

Since there is no public record of debate within the Council of Ministers, the precise position taken on the package by each of the Community's members other than France is not known with certainty. The Dutch, who consistently have been the most federally minded among the Six, unquestionably provided the Commission's strongest support; beyond that, generalizations are risky. Italy, hardest hit of all by the financing formulas applicable from 1962 to 1965, seems to have been principally preoccupied with winning concessions on the matter of contributions to the Agricultural Fund.

The dialog between France and Germany on the Commission's proposals presents, in retrospect, something of a puzzle. On the basis of conversations between the French and German Under Secretaries of State, the French toward the end of June were operating on the assumption that they had reached satisfactory agreement with Bonn on essentials. Then, on June 30, the deadline date, the German Bundestag passed a resolution supporting the Strasbourg Parliament's desire for budgetary power. This abruptly altered the complexion of the Council's deliberations, again giving primacy to the supranational issue, which had been tending to recede into the background. Probably the Bundestag's action, more than any other single event, was what prompted Couve de Murville to break off discussion at 2 a.m. on July 1.

Had agricultural financing alone been the issue, it seems highly improbable that any such outcome would have occurred. Italy and France, it is true, differed quite sharply on the length of the period for which financing arrangements were to be set. Germany, moreover, had introduced some complicated economic requests during the Council sessions of June 28 and 29. But there had been considerable progress, and just before the Bundestag's move the general expectation of close observers of the Brussels negotiations was that a way of compromising differences on financing would be found -- perhaps not by the midnight deadline on the 30th but probably with only a short extension.

A settlement covering agricultural financing alone would have been strongly displeasing to the Dutch, whose legislature had instructed its Government not to agree to a plan for farm financing which did not allow for a strengthening of the powers of the Strasbourg Parliament. But the prevailing belief was that even that problem might have been circumvented by the Council through some mildly worded declaration of eventual intent to consider changes in Parliament's status. Conceivably the Dutch might have balked at such a maneuver, but a position of intransigency would have been difficult for them to maintain had the other five members come to agreement.

But the Bundestag's unexpected vote of support for the parliament's budgetary powers seemed to convince the French that the issue of supranationalism would have to be dealt with decisively before Community integration went any further. "Now we know," President de Gaulle declared September 9, "heaven knows that we know -- that there is a different concept of a European federation in which . . . the countries would lose their national personalities . . . The combination -- premeditated or not -- of the supranational demands of the Brussels Commission, of the support that several delegations declared themselves ready to give them and finally of the fact that some of our partners at the last moment went back on what they had previously accepted, forced us to bring the negotiations to a close."

The issue, then, focuses on the constitutional form the Community is to have and on the location of power within the organizational structure. President de Gaulle is calling for agreement among the Six on the precise limits of the Commission's and the parliament's authority. He clearly is no longer content to rely on anything like a "gentlemen's agreement" that the vote of a majority will not be used to ride roughshod over a dissenting nation's will. Agricultural financing, despite its great importance to France, is secondary, and that is undoubtedly why the French chose to stay away from the July meeting of the Council even though the Commission by that time had belatedly drafted a new set of proposals restricted in essence to agricultural matters.

WHAT FUTURE FOR EEC?

All sorts of difficulties attend any effort to anticipate when and how resolution will come. The relevant considerations range all the way from purely personal animosities among the individuals involved to profoundly different philosophies of political organization. The only thing that can be said with reasonable safety is that the end of the crisis is at least some months off. The new German Government needs time both to get itself organized and to assess the French demands. The French, meanwhile, are nearing the start of their own election campaign. Thus, the chances are that a resumption of EEC negotiations will be delayed, with no hard bargaining likely for the rest of the year.

Eventually, however, France can be rather sure of getting its Common Market partners to focus on the question of revising the Rome Treaty. Waiting may prove all that is necessary. The agreement reached last April to merge the executive apparatuses of EEC, the European Coal and Steel Community, and Euratom contemplates the writing of a new document unifying the three existing treaties. This would afford France an opportunity to make proposals for eliminating the supranational features of the Rome Treaty which it dislikes.

Since last April's agreement calls for creation of a single executive Commission for the unified Community, the merger when it takes effect should provide some element of a fresh start in relationships between the Commission and the Council of Ministers. Some students of EEC's recent difficulties attach high causal weight to French dissatisfaction with present Commission personnel; with or without new faces, the mere event of unification will give the Commission a chance to get off on a new, more amicable footing with the Council.

In a confrontation as confused and ramified as the present one, anything is possible. including even EEC's eventual disintegration. The chances, however, of such an extreme outcome still seem small. A solid alinement against France on the issue of supranationalism, which conceivably could wreck the Community, is unlikely. Moreover, all EEC members, including France, seem convinced that the Common Market has had a lot to do with their prosperity.

Political scientists are busy noodling over the question of how reduced power for the Commission would affect EEC's future development. The prevalent theoretical preference for strong executive leadership inclines most observers to the view that any weakening of the Commission would make further progress toward economic harmonization more difficult. If the Commission's job is that of a catalyst, this line of reasoning goes, it can function effectively only if it has freedom to take venturesome initiatives, to propose boldly. This year's experience, however, casts some question on that basically plausible analysis. If it had not been for the

Commission's boldness last spring, there might not have been a midyear explosion, and agricultural harmonization might now be much further along.

BAD NEWS FOR GATT

In Washington, concern over the Common Market deadlock centers on the harm it does to the Kennedy round tariff negotiations in Geneva. EEC's wrangle prevented it from putting forward the agricultural proposals that were supposed to have been submitted on September 16, and there would appear no prospect that this failure will be remedied anytime this year. This could mean a serious loss of negotiating time, since Congress insisted when granting authority for the Geneva negotiations that cuts in industrial tariffs be made conditional on a lowering of

EEC's agricultural barriers.

With U.S. bargaining authority running to mid-1967, there will still be leeway for constructive negotiations if EEG can resolve its troubles by early 1966 and then go speedily ahead with the submission of tariff proposals for farm products. If the crisis is not settled rather early in 1966, however, the outlook for a satisfactory outcome of the Kennedy round would dim, because the farm negotiations are bound to be troublesome and lengthy. This, in turn could have a pronounced impact for a long time to come on world trade liberalization, since the prevailing judgment in Washington is that it will be a long while before another reciprocal trade measure is voted if the high hopes attached to the 1962 act come to nothing.