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Before the British crisis developed, the main subject of concern this year for the European Recovery Program had been the revision of the plan for intra-European payments. This is too technical a subject for extended treatment in a note; but the large amount of time that has been devoted to the plan, both last year and this, and the nature of the conflict that arose over the revision of it, seem to require that an attempt be made to see this aspect of the recovery program in the right perspective.
The plan as adopted in October 1948, with its provisions for drawing rights and conditional aid, supplied a means whereby part of the E.C.A. aid from the United States could be used to finance intra-European trade balances and enable the countries to obtain imports, not only in the United States or by such "off-shore" purchases in non-O.E.E.C. countries as E.C.A. would approve and pay for (for example, Canadian wheat), but also from each other. The amount of trade actually financed in this way to the end of June 1949 was $677,000,000, or roughly 14 percent of total E.C.A. aid for the fiscal year 1948-49. Much has been said in criticism of the original plan, in particular that it provided wrong incentives to both debtors and creditors -- to the former by encouraging them to have deficits (France, for example, got from us not only $981,000,000 of direct aid to finance her dollar deficit but about $280,000,000 net additional to finance her intra-European deficits, or more than a quarter of total E.C.A. aid), and to the creditors by encouraging them to have intra-European surpluses when their main problem is to try to sell to the dollar area. Another important criticism, which in the present revised plan achieves further significance, has been that to the extent provided for in the plan we have departed from our basic principle of direct control of aid.
A further complaint concerned the rigidity of the plan; and the main purpose in seeking revision of it this year was to make it more flexible. It was argued that by providing for automatic transferability of drawing rights, to be accompanied by an equal transfer of conditional aid, intra-European trade could be made more competitive, and an effective first step could be taken toward breaking away from the network of bilateral agreements in which the European countries find themselves entangled. But one question is whether this is not asking too much from too little. The total amount of drawing rights for this year has not yet been announced but will perhaps not much exceed $600,000,000, or some 7 percent of the total intra-European trade; and according to the final compromise reached, only 25 percent of these are to be automatically transferable. Intra-European trade, moreover, will be affected by the availability of goods as well as prices. This, in fact, has been one of the main points at issue. Belgium has concentrated more on current production and less on investment than the other countries, and her favorable export position within Europe has rested on her ability to supply current goods as well as on prices. A further important consideration was the comparative availability of the drawing rights, which had been limited by the principle that E.C.A. aid to any country should not exceed its dollar deficit. Belgium's intra-European surplus is about twice the size of her dollar deficit, whereas Britain's dollar deficit much exceeds her intra-European surplus. As the British pointed out, this might well mean that France, for example, might use sterling drawing rights to buy in Belgium, not because Belgian prices were lower than British, but because France had more British drawing rights than Belgian and found certain goods more available in Belgium than in Britain. Thus Britain might find part of her dollar aid transferred to Belgium for reasons that would not necessarily prove anything about competitive conditions.
In the final compromise reached at the end of June, after prolonged and tense negotiation, the issue was mainly resolved by our agreeing to depart from our basic principle of limiting aid to the amount of a country's dollar deficit, and giving Belgium an additional $112,500,000 to help finance her intra-European surplus, provided that Belgium herself extend credits of $87,500,000, and that any loss of dollars by Britain to Belgium shall not exceed $40,000,000. Thus in total we are giving Belgium $312,500,000 toward financing her European surplus of $400,000,000, though her direct dollar need to buy goods from us is only some $200,000,000; Britain's potential loss of dollars to Belgium is reduced; and we achieve limited recognition of the principle of automatic transferability of drawing rights and conditional aid, though at the price of departure from another and more basic principle of the Marshall Plan. Whether in consequence of these revisions intra-European trade will be made more competitive seems to me doubtful.
In the final compromise, automatic transferability of drawing rights was limited to 25 percent. There had been a proposal for limited convertibility of drawing rights into dollars, but this was dropped. The purpose had been to introduce competition with the dollar area, in addition to the competition among the European countries themselves. The amount of intra-European trade which by this proposal would be expected to "compete" against dollar imports would be very small. To be exact, assuming 25 percent convertibility of drawing rights, it would be some 25 percent of 7 percent of the total intra-European trade. It would be surprising if for this marginal fraction of their trade the European countries could not find more essential imports here than in Europe, quite apart from competitive conditions. So far as I can see, the only effect of the dollar convertibility would have been to transfer E.C.A. aid from intra-European surplus countries to intra-European deficit countries. Perhaps the proposal was never seriously intended; it may have been a bargaining point.
One must try to appraise the intra-European payments plan in relation to the recovery program as a whole. The deep concern last year about intra-European trade and about the need for providing dollars to encourage it was understandable in view of the very bad conditions of 1947, when the trade of the Western European countries among themselves was at only two-thirds of the prewar level. But the trade has now recovered to about that level. Last year's payments plan may have been in part responsible for this recovery, though it seems likely that the all-round expansion in production, the lessening of inflation, and the increased buying by Britain from the Continent (partly in response to previous complaints against the British austerity policy, and partly in response to such factors as the Italian and French devaluations) played a large part. In any event, though the payments plan may need to be continued, there does not seem to be the same justification as in the beginning for devoting so large a part of the attention of both O.E.E.C. and E.C.A. to this aspect of the recovery problem.
Two questions in particular must be borne in mind. One is that this is a purely temporary device, which does not of itself promise to develop any sustainable pattern of intra-European trade after 1952, when the dollars are withdrawn. The other is that it may even contribute to a distortion of what must eventually be the trade pattern if the dollar gap is to be overcome. The revised plan is still open to the criticism that it provides the wrong incentives; intra-European debtors are still being encouraged in their deficits; and the surplus countries are being encouraged to export to Europe at higher prices rather than to the dollar area at lower prices. Europe having lost its overseas income, and being in consequence more dependent on the outside world than previously, extra-European exports must be expanded relative to intra-European exports. For the same reason, the European countries must be working toward a more even balance with each other, except as this may be modified by credit extensions or capital movements among themselves, or by a truly intra-European clearing of balances. In so far as the payments plan may be fostering the opposite kinds of changes, it is working in the wrong direction.
J. H. W.