Reference: Our Letter No. 1452 of May 11; (C(54)131).?

During a talk with Cahan of the OEEC Secretariat yesterday we enquired about preparation for the "Ministerial Examination Group" which the Council agreed to set up (C(54)131) in order to examine the different problems which will arise if a number of Member countries re-establish convertibility. A definite date for the Ministerial meeting in London has not yet been set, however, that the Alternates will meet in Paris on June 16th to prepare for the Ministerial Meeting.

2. One of the terms of reference (para 3 (b) of C(54)131) instructs the Working Group to examine:

"What suggestions should be made to Member Countries and Associate Countries concerning the arrangements to be envisaged for international cooperation in both the financial and commercial fields, if a number of Member Countries establish convertibility".

3. These terms of reference in effect raise the question of the future of OEEC and the appropriate international organization to undertake responsibility for trade and financial consultation during the period of limited convertibility and afterwards. ⁷

4. You will have seen the paper entitled "International Organizations", one of five which were recently given by the U.K. to the U.S. Government in connection with proposed talks at the official level on the move to convertibility. Copies of these papers were attached to Leslie Rowan's letter of May 3rd to Ken Taylor.? This paper sets forth the view agreed at the Commonwealth Conference that a Joint IMF/GATT Advisory Group be established "to provide a continuing forum where the world economic situation and also the problems arising in the movement to freer trade and currencies for particular countries would be kept under review and constructively discussed." The U.K. paper then asks the U.S. Administration whether it:

(a) agrees with the objectives which the Commonwealth had in mind in proposing the IMF/GATT Advisory Group

(b) agrees that the proposed mechanism would be the best for securing these objectives, or

(c) can suggest alternative methods of securing the agreed objectives.

5. In the consideration of these questions which will probably be presented in some appropriate form to the Ministers' Working Group, the fate of OEEC as a useful economic organization will have to be decided. Although, to our knowledge there has not been very much definitive thinking on the future of OEEC in the Secretariat or in the main Delegations, you will be aware that there is strong feeling in OEEC circles that some form of European economic cooperation should continue after the major currencies become convertible. These circles consider that the OEEC organization, with its facilities for discussing trade and financial matters in restricted high level boards (i.e. the Managing Board of EPU and the Steering Board for Trade) under the umbrella of a Council which has proved capable of taking decisions, has been extremely successful. This is also our view.

6. At the Ministers' Working Group two questions will probably arise: whether OEEC can usefully continue after some currencies become convertible if an IMF/GATT Advisory Board should be established, or whether a modified OEEC might be a more appropriate body to provide facilities for consultation during the move to full convertibility ⁸ and perhaps afterward.

7. The first question - whether OEEC can continue to provide a forum for high-level consultation on trade and financial questions if an IMF/GATT Board were established - can be answered quickly and in the negative. It would, in our opinion, be unrealistic to suppose that two bodies - whose restricted committees would have largely the same membership could usefully consult on the same problems. OEEC might continue to exist as an umbrella for EPA, and the work of the vertical committees but this would appear doubtful, and, in our view, unnecessary.

8. The next question involves a choice between the advantages and disadvantages of an IMF/GATT Advisory Board and a Modified OEEC as the appropriate body for economic consultation after a measure of convertibility is achieved. We propose here to set out our preliminary views on the factors involved in such a choice.

Factors Involved in an "OEEC Solution"

1. The OEEC at present deals with financial and trade problems in the restricted Managing Board of EPU and the Steering Board for Trade. These two boards, which are composed generally of senior officials closely concerned with the administration of external policy in their capitals, meet each month in Paris. The boards prepare decisions which, after being vetted by committees of OEEC on which all members are represented, are put up to the Council for final approval. This organization of work has proved extremely successful and directly and indirectly has a profound influence on the economic policies of member countries. The contacts and experience which have been developed during the discussion of mainly regional questions could probably, and indeed is being developed to provide equally successful consideration of the broader problems posed by convertibility.

2. The United States and Canada, as associate members, have developed a close working relationship with the OEEC. Continued associate membership with European countries during the move toward convertibility might prove the most easily manageable relationship with these countries. On the other hand, if necessary, Canada and the United States might accept full membership - thus giving a North Atlantic flavour to the organization.

3. The expansion of OEEC into a North Atlantic Organization might be accomplished without entering into the lengthy negotiations that would probably be necessary if the rules and constitution of the IMF and GATT had to be altered. If the IMF and GATT were not altered, there would be no assurance that the decisions of these bodies would be coordinated. An intermediate Advisory Board of IMF and GATT might create more confusion than coordination since its advice on closely linked subjects might be given different interpretation and action in the different bodies.

4. An Organization for North Atlantic Economic Cooperation would fulfil the requirements of Article 2 of the North Atlantic Treaty. It would provide a continuing organization for carrying out the economic work of NATO (which is now being done in OEEC but which would have to be taken over by NATO if the OEEC ceased to exist). Even more important, it would provide an organization for economic consultation and decision in case of emergency. At present there is no body which could do this adequately.

5. An Organization for North Atlantic Economic Cooperation (ONEAC) need not, and in our view should not, be subject to NATO although it should give that Organization full cooperation on matters of concern to it. They should be separate Organizations dealing with separate terms of reference. Too close a relationship with NATO would be undesirable because of the difficulty it would create for countries such as Switzerland and Sweden (and perhaps even Germany) which are not members of NATO. In addition, too close a relationship with NATO would probably make ONEAC more suspect in the eyes of countries outside the North Atlantic area and render essential cooperation with these countries more difficult.

6. One drawback of a North Atlantic Organization would be its limited regional character. This, however, is a political rather than a practical drawback. The Sterling Area would be adequately represented by the U.K., particularly as the members recognize that the responsibility for management of the Sterling Area rests with the U.K.; the Dollar Area would be represented by the U.S. and Canada; the former EPU area and territories would be included or represented; the rest of the world could be represented through close association with the GATT and the Fund. If necessary, the more important countries outside the North Atlantic area might become associate members and have missions accredited to the organization, but it might be assumed that they would not normally participate in decisions.

7. The terms of reference of an Organization for North Atlantic Economic Cooperation in the transitional period of limited convertibility (which can be expected to continue for a considerable period of time) could bear a relationship to the GATT and IMF similar to the relationship between OEEC and those bodies. The "ONAEC" could carry out the detailed negotiations and decisions necessary on the path toward full convertibility under the cover of a general waiver from the GATT and IMF. If this were done, the GATT and IMF need not compromise their constitutions in order to meet the needs of limited convertibility, and could maintain their principles as the ultimate objectives not only of themselves but also of ONAEC. ONAEC, on the other hand, could approach the solution of problems on an empirical basis.

8. If the methods proposed above were adopted, a body of experience could be built up on the working of an OEEC type of organization - combining consultation on trade and finance in a convertible world. If the experience were successful, a reorganization of GATT and IMF might be facilitated at some future date, if this were found to be desirable.

9. The main disadvantages to a North Atlantic solution are political. Some important countries in the Western World would not be directly represented, and would probably not welcome their exclusion. Practical cooperation with these countries could be assured, however, by means of associate membership or by their representation through a member of their monetary area and close association with GATT and IMF. An important advantage of a North Atlantic solution is that it could be put into effect without raising all the issues, including membership, connected with the formation of a new organization. It could be represented merely as a continuation of an old organization with a gradual addition to its terms of reference.

Factors Involved in IMF/GATT Solution

1. The advantages of the IMF/GATT Advisory Board solution would appear to be largely political. Such a solution would enable the main countries in all areas of the Western World to be included in the Board. This might have its disadvantages as well:

(a) Assuming the headquarters of the Advisory Board were set up in Europe, the distance between outlying capitals such as New Delhi and Canberra would make it difficult, if not impossible, for such Governments to provide the same type of representation as the North Atlantic Countries (i.e. Experts closely associated with the administration of their Government's foreign economic policy).

(b) The "common denominator" of agreement would probably be much lower if countries outside the North Atlantic area were included.

(c) NATO economic work would have to be undertaken in that Organization by expanding the Secretariat and Delegations.

2. There might be serious drawbacks to an IMF/GATT Advisory Board. The advice that would be given would be the advice of only a few countries. The decisions which would have to be taken would occur in two widely separated bodies which have not cooperated well in the past. In both of these widely separated bodies, the representatives of the smaller countries might differ substantially on many issues. This is a difficulty which has been well handled in OEEC.

3. An essential element in the success of OEEC has been the close association of the smaller countries with the Secretariat and members of the restricted boards. Through this close association, their views can be made known before the Board's proposals are drawn up in final form. In addition, the Board's proposals are always vetted by subordinate committees on which all Member countries are represented. This permits compromises on the spot with the help of the same Secretariat which has drafted the resolutions. Finally, in the Council, the smaller countries have often agreed to majority decisions (a unanimous decision is required) when they have represented only a small minority because of the spirit of compromise which has been developed in the OEEC Council.

4. This system of information, close contact, and compromise would be practically impossible if an Advisory Board were separated from the delegations of smaller countries and if the delegations of these countries to the IMF and GATT continue to be separated by the Atlantic Ocean. The conclusion one is forced to is that an IMF/GATT Advisory Board might create more rather than less confusion unless it operated in extraordinarily favourable circumstances.

5. We do not wish to imply that an IMF/GATT Advisory Board could not be set up or that it could not provide a focus for useful co-ordination among the more important countries of the West. It would, however, appear to be a not-very-happy ad hoc attempt to make a bad experiment work (i.e. the separation of the Trade and Monetary organizations). A North Atlantic solution, on the other hand, would, on the face of it, represent the reinforcement of success - for the OEEC has been an outstanding success.

9. We have put these preliminary views to you because you will, no doubt, have to give further consideration to the problem of economic organization in the near future. We have not discussed these views to any great extent, but they represent a feeling which we have had for some time that the alternatives (of which we have discussed only one) to the IMF/GATT solution should be fully aired before a decision is taken. As we have pointed out, there will be an important discussion of this question at the Ministers' Working Group. Consequently, preliminary Canadian consideration of the issues we have discussed might be helpful before their first meeting in July.

10. We should be grateful for your comments.

L.D. WILGRESS