- Issue No. 181 No. 190, July 6, 1972 The Pound Afloat: The reason given for the U.K.'s decision to float sterling was the weight of international short-term capital movements which, despite concerted intervention from the Bank of England and European central banks, had necessitated massive sup­ port operations. The U.K. is anxious that the rate should quickly o.s move to a "realistic" level, at or around the old parity of %2. 40 - r,/, .• representing an effective 8% devaluation against the dollar. A w formal devaluation coupled with a wage freeze was urged by the :,I' Bank of England, but this would be politically embarrassing in the }t!IJ light of the U.K. Chancellor's repeated statements that the pound was "not at an unrealistic rate." The decision to float has been taken in spite of a danger that this may provoke an international or European monetary crisis. European markets tend to consider sterling as the dollar's first line of defense and, although the U.S. Treasury reaffirmed the Smithsonian Agreement, there are fears throughout Europe that pressure on the U.S. currency could disrupt the exchange rate re­ lationship established last December. On the Continent, the Dutch and Belgians have put forward a scheme for a joint float of Common Market currencies against the dollar. It will not easily be implemented, since speculation in the ex­ change markets has pushed the various EEC countries in different directions. The Germans have been under pressure to revalue, the Italians to devalue. Total opposition to a Community float is ex­ pected from France (this would sever the ties between the franc and gold), and the French also are adamant that Britain should re­ affirm its allegiance to the European monetary agreement and return to a fixed parity. The Swiss banking community, usually an accu­ rate barometer; has indicated it expects a formal U.K. devaluation of between five and 10% together with devalued Italian lire and Danish kroner. In its opinion, the other EEC currencies will float. It has been emphasized throughout Europe that the decision of any ---------This issue is in two pa.rts, consisting of 72 pages. This is Part 1.--------­ e COMMON MARKET REPORTS, Issue No. 181, July 6, 1972. Published weekly by Commerce Clearing House, Inc., 4025 W. Peterson Ave., Chicago, Illinois 60646. Subscription rate $350 per year. Second-class postage paid at Chicago, Illinois. Printed in U. S. A. All rights reserved. EUROMARKET NEWS - p, 2 one country to float is a blow to European monetary cooperation. For Britain, the float means that U.K. industry will become more competi­ tive abroad. Politically, however, the decision is out of line with the high priority the U.K. government has consistently acknowledged for EEC monetary cooperation. Postscript to Stockholm: To the optimists among environmentalists, the U.N. Conference on Human Environment at Stockholm was clearly disappointing because its final declaration did not even mention such complex problems as the population explosion, aligning economic growth with global resources, and tolerance levels of the earth's biosphere - all at least as important as pollution of water, air, and soil. The declaration conf~ned itself to setting forth the objectives to be attained and the principles to be observed to reduce pollution in countries plagued by the ills of civilization and to help the still nonindustrialized nations to avoid the pitfalls. Perhaps the most significant principle is that any nation must see to it that activi­ ties carried on within its boundaries do not cause environmental damage beyond its frontiers. The action plan, though not containing all proposals originally meant for it, is a significant step nonetheless because it sets up the framework (and its 106 recommendations lay down the content) for international cooperation. There are three elements in the coopera­ e tion scheme: an earth watch, a network of 110 observation stations and research activities to provide the facts for decision-making; environment management, a broad term that includes not only actions to determine criteria and tolerance levels of pollution but the drafting of international agreements as well, and - supporting action in the field of education and financing. The content of international cooperation will pertain to possible ef­ fects of air pollution on weather and climate; depletion of global energy resources; preservation of rare species of plan~s and animals and the earth's forests; biocides and toxic metals; noise; city plan­ ning, and impact of environmental measures on international trade, particularly with developing countries. German Industry Fights Cash Deposits: Fundamental disagreement over several aspects of Germany's Cash Deposit Law (Bardepotgesetz) may culminate in court action after a round of discussions between the Bundesbank and industry representatives has produced no conclusive results. A number of major corporations have threatened to take joint legal action against the Federal Bank in order to force clarifi­ cation of disputed points. The controversial law, enacted four months ago, requires companies borrowing abroad to deposit with the Bundesbank 40% of foreign loans exceeding DM 2 million. The measure was designed by the Bonn government to slow the inflow of foreign ex­ change into Germany. Among the law's contested provisions is that pertaining to the dis­ counting of endorsed bills of exchange abroad which industry feels constitute no true credit obligations since they do not show up among the liabilities on the balance sheet. There also are ques­ tions about the treatment of roll-over credits involving a change of currency denomination while in force. Furthermore, companies are ob­ jecting to the Bundesbank practice of declaring a standing credit as a new loan if the debtor has not exercised his option to withdraw. Another issue concerns the operating capital of t_he branches of for­ eign companies active in Germany. In this context, the Bundesbank is not willing to accept the DM 2-million cash deposit exemption for e EUROMARKET NEWS - p. 3 each of several branches a foreign company might maintain in Germany, From the start, industry and economic experts held the law to be un­ tenable in its present form, mainly because high domestic interest rates still make it cheaper for German companies to borrow on the Euro-dollar market rather than at home. These warnings find confir­ mation.in the fact that current cash deposits put "on ice" in special accounts so far total only DM 592 million (~183.5 million), Several of Germany's largest corporations of international standing and with a high foreign debt apparently have balked at honoring the cash de­ posit requirements. The Bundesbank in turn has issued attachment or­ ders to which the companies immediately raised legal objections. Both sides are now determined to involve the administrative courts in the dispute (which, conceivably, might take years to resolve). The law does require the companies, however, to abide by the regula­ tions no matter what the eventual outcome of the legal. actions. Meanwhile, in Bonn, the Finance and Economics Ministry is hard at work trying to plug the holes in the law through which foreign ex­ change continues to come into Germany. In doing so, the government is hoping to win the voluntary cooperation of the banks, which so far have been instrumental in finding the loopholes in the Bardepotgesetz for their clients. -Swedish Payroll Tax to Double: Just before summer recess Sweden's Parliament approved a last-minute revision of the government-drafted tax bill doubling the payroll tax from 2 to 4%, The measure, which had Communist support, represents a turnabout from what the govern­ ment originally had in mind: an increase of the VAT rate from the present 17.5 to 20% to make up for losses expected from an income tax reduction proposed in another bill. Financial observers in the Swedish capital brought up what is con­ sidered a discrepancy in recent government policy, In December 1970 the government obtained legislative approval for a number of measures designed to encourage businesses to invest. Doubling the payroll tax, they say, would be throwing cold water on these incentives. They believe that the added tax burden (expected to yield over 2 bil­ lion kronor annually) will hurt most of those enterprises not able to pass on the hike to consumers through higher prices - either be­ cause of price control or competition. Across-the-Channel Challenge: French finance minister Valery Gis­ card d'Estaing has reaffirmed his country's open attitude toward foreign investment as long as it helps France's balance of payments, provides new jobs, or introduces new technologies and know-how, But any projects provoking unemployment or leading to the breakup of via­ ble French companies or groups would not be permitted, the minister warned, Giscard d'Estaing's statement, made at a Franco-British bus­ iness conference in Paris, was regarded as an unofficial answer to recent British criticism that the French authorities have been veto­ ing British takeovers of French companies without valid reason. Without referring to these charges directly, the minister maintained that all countries have been taking certain protective measures to ward off foreign investment that might be damaging to domestic in­ dustry, Comparing the strong points of British and French industry, Giscard d'Estaing gave the U.K. the edge in transport equipment and food processing, and France in automobiles, rubber, and synthetic fibers. Both countries are about even in the sectors of steel, glass, elec­ trical and electronic equipment, and mechanical engineering, he said, e Among the aims of the Paris·conference was to apprise the French of EUROMARKET NEWS - p. 4 the British entrepreneurial mentality and to explain how France can acquire British financial know-how and benefit from the facilities of the London Stock Exchange.