Reference: Our letter 3151 of October 17/55.

Copies referred by bag to all OEEC countries, Geneva.

OEEC - THE NEXT SIX MONTHS

When we last wrote on this subject, OEEC was in the doldrums. There was little new work on the horizon and the weak U.K. position gave little hope of progress toward convertibility or toward the fulfilment of the 90 percent stage of intra-European liberalization. The prospects, if not the situation, have now altered considerably and it is now possible to speculate on the general aspects of the work of the organization over the next six months.

2. The principal new elements derive from the Messina Conference, in particular the proposals for a European Nuclear Organization and for a common European market. As you know, the OEEC Working Party on Nuclear Energy in its report C(55) 305 of 15 December has put forward proposals for the establishment of a European nuclear energy administration under the aegis of OEEC. Previously the Brussels Preparatory Commission of the Messina Powers had drawn up the basis for a nuclear energy authority of the Six Powers (Euratom). Neither of these proposals has yet been discussed by ministers but it is expected that the Messina ministers will meet in mid-February (if the French can form a government in time) and the OEEC Council of Ministers is scheduled to meet on February 28-29. In view of the political uncertainties involved, it is unlikely that much definitive progress will be made in OEEC in elaborating the Working Party's report prior to the Ministerial Council. It is expected that this will be one of the most important items on its agenda. It would be hazardous to speculate on the outcome of the struggle for position between the Messina Powers and the OEEC, but compromises are possible. Regardless of the institutional structure which may emerge there is a general recognition of the need for some form of European nuclear energy organization.

3. The situation with regard to the common market is different. The proposals of the Brussels preparatory commission have been publicized and digested. U.K. has made its position clear on this question of an OEEC Heads of Delegations meeting in December: i.e., that the U.K. will not be able to participate in a common market. The U.K. has taken the line that any proposals should be carefully considered by the OEEC with a view to ensuring that non-participating countries are not harmed. Since this question is also primed with political content, further discussion in OEEC has been postponed until the Ministerial Council on February 28-29.

4. Depending on the outcome of the ministerial discussions both these initiatives could give rise to new programs of work for OEEC.

5. The more traditional work of OEEC in the trade and payments field is still overshadowed by the adverse U.K. position and the difficulty for that country to take the lead. Also the French position remains incalculable largely because of political uncertainties.

6. On the payments side, the Managing Board has its usual mandate to report to Council by March 31 on the conditions under which the European Payments Union should be prolonged after June 30, 1956, and, if necessary, to make any proposals for ameliorating the European monetary agreement. Although the Board is only just beginning its discussions this week there seems to be a fairly general conviction that EPU will be renewed for another year without substantial alteration. It has been mentioned by the creditors that the gold ratio might be increased to perhaps 90 percent but country positions have not yet been taken on this issue and it is not yet possible to see what the balance will be.

7. The Managing Board is also giving some thought to the relationship between EPU and non-participating countries - particularly Yugoslavia and Spain. The purpose is to see whether some method might be found for multilateralizing some of the bilateral arrangements with those countries and perhaps with other countries. This study is sparked by the increasing interest which has been shown by Spain and Yugoslavia in OEEC. The Managing Board's work in this field ties in closely with the work of the Joint Trade and Payments Committee on more general aspects of bilateral agreements between OEEC countries and non-member countries which is just now under way.

8. The Managing Board has also a continuing interest in the subject of capital movements (on which it submitted a report recently C(55) 318 of December 27). It will pursue this work in conjunction with the new Committee on Invisibles. Although there is strong pressure from the Swiss delegation for more progress in liberalizing capital movements and invisible transactions, it is a very difficult field and not much may be expected from the current studies.

9. On the convertibility front there is nothing to report or to foresee at the moment. The consultative committee on problems connected with the move to convertibility (C(55) 194 final) has not met and there has been no suggestion that it should meet in the near future. Any movement will depend on the U.K. which, in turn will depend on the success of the U.K. government's efforts to contain inflation and reverse the trend of Sterling reserves.

10. On the trade side the negotiations which will take place in OEEC are beginning to take shape. They will be centred on the fulfilment of the ministerial decision C(54) 291 final taken in January 1955 concerning the extension and stabilization of intra-European trade liberalization at the 90 percent level. This decision to proceed provisionally and by stages to the 90 percent level by October 1, 1956 was taken, if you will recall, only after great heart searching on the part of the European countries with relatively more liberal commercial policies and it provides specifically that progress should be made on aspects of commercial policy other than QR's so as to provide reciprocity for the more liberal countries. More specifically, progress was envisaged in the reduction of restrictions on agricultural products, tariff reductions by high tariff countries, and reductions of artificial aid to exporters. The Steering Board is already beginning to work on its report on the fulfilment of the decision (C(54) 291) which it must submit to Council by June 30, 1956. Already the Danish and Belgian delegations have served notice that, if reciprocity is not forthcoming, they will not be prepared to maintain the liberalization of QR's at the 90 percent level.

11. It is still uncertain whether the subject of trade liberalization will be on the agenda of the next Ministerial Council. There are good reasons for not putting it on the agenda: in the first place the Steering Board would not be able to provide more than a preliminary report as a basis for discussion. Secondly, neither the U.K. nor France would be in a position to take a positive stand, and finally the discussion that might be envisaged might tend to show up the OEEC in rather a bad light just at the time when the major political decisions on the common market will be discussed. It might seem more likely that a major debate on intra-European commercial policy in all its aspects will be postponed until the autumn meeting when, in any case, a definite decision will be necessary on the maintenance of the 90 percent level.

12. Another proposal which is being discussed partly in connection with the 90 percent decision, but also in more general terms in connection with the procedure to be followed after the 90 percent stage is consolidated, concerns new methods for calculating the level of trade restrictions in each member country. The need for a new basis of calculation of percentages of trade under QR's was recognized by ministers (C(55) 291, paragraph 16) and a mandate was given to the Steering Board to suggest a revision of the 1948 base year. The Organization has not however been able to agree on a new base year.

13. The Steering Board is now giving preliminary consideration to new methods of procedure for the further elimination of QR's after the 90 percent consolidation. There is fairly general agreement that the percentage method of procedure by stages has served its purpose and that major concentration should be directed to the non-liberalized items many of which do not even appear in 1945 import figures. The principal ideas which have been put forward are (1) a percentage method for remaining restrictions with perhaps some credit given for relaxation as opposed to removal of QR's, (2) a product by product method - i.e., a negative list approach. The Secretary-General will shortly issue a paper on this subject which, we understand, will also include proposal for tackling the tariff problem and the general problem of reciprocity. We shall report separately on this matter as soon as we find out more about it. All discussions so far have been preliminary and have even been described as nebulous by a member of the Steering Board.

14. With regard more specifically to tariffs, the Steering Board will watch closely the developments in Geneva and, if progress is not very great, will be under pressure from the low-tariff countries to produce proposals for reducing tariffs by some European scheme. This is a possibility which we are watching closely. The Steering Board is also in the process of drawing up a report on artificial aids to exporters in pursuance of the ministerial mandate contained in C(55) 6. This report will probably be completed in mid-February. It is regarded as particularly important by the U.K. that some progress should be made (mainly by France) since the U.K. government is under pressure from its own exporters to provide export aids to enable them to compete on the continent and in their markets. With regard to agricultural restriction, the Steering Board is disposed to await the results of the confrontation of agricultural policies and the subsequent opinion of the agricultural ministers on policy questions before undertaking a serious initiative aimed at reducing restrictions.

15. With regard to dollar liberalization, a report by the Joint Trade and Payments Committee is in the final stages preparation. It will contain both the positive and negative elements and is not likely to give rise to any new initiatives in this field. The European countries are too concerned about incipient inflation and the adverse trend of their trade balance with North America as well as the trend of U.S. commercial policy for us to hope for major new moves at the present time. The Organization will probably decide to review the whole situation again in the fall of 1956 on the basis of another dollar liberalization report. We might point out that, if the E.P.U. is hardened by increasing the gold ratio, the effect would be to increase the desirability of liberalizing dollar import restrictions.

16. This is a brief tour d'horizon of the OEEC and will give us a broad picture of possible developments over the next six months as we see them. We have not mentioned the work of the European Productivity Agency from which nothing startling seems to emerge nor the work of the vertical committees. These committees remain interesting forums for discussion but produce very little apart from general reports on their respective fields of interest.

[L.D.] WILGRESS