London’s Asset “COMMON MARKET” IN FINANCIAL SERVICES

Press, Volume XCVIII, Issue 28869, 14 April 1959, Page 14

London’s Asset “COMMON MARKET” IN FINANCIAL SERVICES

(By

“LYNCEUS”

of the “Economist")

(From the “Economist’ Intelligence Unit).

The latest development on the European Common Market front can only be highly disappointing to all those interested in expanding and liberalising this great and potentially constructive project. The Commission of the European Economic Community has recently published its first memorandum to the Council of Ministers on the question of the wider European Economic Association—the new name for .the still-born free trade area—and though it declares itself in favour of such an association, the procedure it outlines is clearly dominated by the wish to achieve that, objective with the greatest deliberation.

The commission suggests that, while the six countries of the E.E.C. (Common Market) consolidate their customs union and, therefore, the element of discrimination between them and the rest of Europe and of the world, that element of discrimination should be reduced by wider attempts to liberalise quotas and tariffs. The enlargement of restrictive import quotas at the suggested rate of 20 per cent, per annum should be carried out through the Organisation for European Economic Cooperation (but 20 per cent, increases of non-existent or very small quotas will not be in any way impressive), while tariff reductions should be left to the tender and elaborately protracted mercies of the General Agreement on Tariffs and Trade. These proposals give the required lip service to the cause of a multilateral association of other countries of Europe with the E.E.C., while ensuring that nothing will be done to disturb the community and its commission during the early and difficult years of settling down. Delaying Tactics

In the gloom and disillusionment that must be caused by this latest evidence of the delaying tactics pursued by the Common Market it is some consolation to turn to the undoubted progress that is being made in the direction of effective collaboration and even harmonisation of economic policies in Europe through the collective decision of 12 European countries—the Six plus the most impbrtant of the other O.E.E.C. members—to make -theft currencies convertible.

First there is the surprising contrast between the trade discrimination arrangements that were symbolised in the final rejection of the free trade area proposals in Paris on December 15, 1958, and the simultaneous conclusion of the agreement to move towards convertibility which was taking place between central banking representatives, also in Paris. The timing of this move was French inspired. Though most countries concerned, including Britain, were generally in favour of a joint move to convertibility, it was the French need to devalue the franc before moving into the more competitive climate of the first stages of the Common Market, and the desire to give the new franc the virtue of being a convertible currency, that precipitated the move that was announced on December 27. In that move the other central banks of Europe gave France the necessary technical assistance by putting at the disposal of the Bank of France stabilisation credits to the amount of 150 million dollars. These credits, to which the Bank of England contributed its full share, have not been utilised and within the last few days the Bank of France has cancelled the facilities that were put at its disposal. Whether it is a rash and premature decision remains to be seen; but it cannot be denied that in the circumstances and manner in which it was announced it appears as a gesture by France to free itself from any obligation which this European assistance implied. With this credit cancelled by France, there is no likelihood of ’ountries outside the E.E.C. heaping coals of fire upon France’s heads for persisting with the commercial discrimination inherent in the creation of the Common Market. Importance of Sterling Disappointment caused by these developments can, in part, be outweighed by the wider implications of the collective move towards convertibility. This move, whatever its primary objective, must strengthen the multilateral character of European currency arrangements. Removing the European Payments Union and substituting for it the more elastic and less automatic European Monetary Agreement has emphasised the importance of the open market as the means of settlement of intra-European payments. It has thereby emphasised the importance of sterling as the currency in which European trade is transacted and financed.

This is no part of a deep laid and subtle plot on the part of Britain to put its monetary Trojan horse in the camp of the Six; it is an acceptance of the fact that in the provision of financial services of all kinds the City of London is not merely supreme but unique. Since sterling became convertible these services have been improved by removing restrictions on certain overseas credits. In addition the foreign exchange market in London has now attracted most of the business in what was formerly transferable sterling which had been transacted in other centres because British banks were not allowed to handle it directly. No Financial Discrimination

The importance of these developments to Britain and the sterling area should be self-evident. One of Britain’s largest exports is the provision of financial services. Year by year the balance of payments statistics show that Britain is suspended in solvency by these invisibles including the profits and commissions on bank credits, foreign operations, commodity broking, insurance premiums and the rest. There are no Common Market tariffs against these British exports. The collective move to convertibility guarantees that there will be none in the foreseeable future. Whatever discrimination there may be in commercial affairs, there will be none in payments or in the very substantial financial operations of which Britain is the principal provider. Financially we already have the

widest Common Market in Europe. That is not so much a victory for sterling as the reflection of the pattern of European trade Europe, however divided ft may be, needs a truly multilateral sy s . tem of payments. A few figures showing the distribution of European trade provide incontrovertible proof of this. The 17 coun. tries of O.E.E.C. conduct only half of their total international trade with one another. Assuming that a free trade system could be erected in Europe on the basis of a Common Market and an associated free trade area, it would still be conducting a substantial block of its trade with the world outside. The 17 get 80 per cent of their food and raw materials imports from outside O.E.E.C. The trade between the Common Market six and the 11 other members of O.E.E.C. represents 21 per cent of the total international trade of the six and 25 per cent, of that of the 11. Both the six and the 11 have deficits in their trade with the rest of the world.

These figures are proof of the need for a truly multilateral system of payments in Europe, for none other would meet the requirements of the intricate pattern of European trade. An even more reassuring conclusion emerges from these statistics, namely that neither the Common Market nor a potential free trade area could possibly be an inward-looking insulated and autarchic economic bloc. They must live with the world and British fears— and French hopes—that the European Economic Community of the six may develop into a highly protectionist defensive group seem exaggerated.