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Volume 9 1948~1951

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Date
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No. 414 NAI DFA/5/305/57/205/2 part 1

Extract from a memorandum by the Department of External Affairs on the European Payments Union
'III Ireland's position in relation to the Scheme'

Dublin, 28 January 1950

  1. The headings under which this question should be considered would appear to be -
    1. Could Ireland become an active member of the Union?
    2. Would it be in her interest to do so?
  1. While it is not expressly stated in the outline, the Scheme is clearly designed to apply to currency areas rather than to separate trading areas. It is not specifically provided that the whole of the sterling area should come within the Union (the ECA scheme specifically envisaged this) nor that the sterling area, if it does come within the Union, be treated as one unit. The outline does however speak at certain points of transactions with participating countries and the monetary areas associated with them, thereby clearly implying that a currency system such as the sterling area is to be regarded as coming within the Union. This being so, it could be contended that Ireland, as a member of the Sterling Area with a currency freely interchangeable, in present circumstances, with the currencies of all the other members of the Area, would not properly be an independent member of the Union. The scheme is designed to overcome the difficulties experienced in converting the currency of one member into the currencies of all the others. If Ireland as well as Britain were fully active independent members of the Union, we would then find two members whose currencies are completely convertible inter se and whose bilateral balances, although they should properly be taken into account in the working of the Scheme, are strictly speaking irrelevant for the purposes of the Union. The case against Ireland's being a fully active independent member while Britain (another member of the sterling area) plays such a role, rests, therefore, on her being a member of the sterling area. That Britain, likewise a member of the sterling area, should be an active member while Ireland is not, rests on the fact that she is the banker of the area. Iceland, is of course in the same position as Ireland.
  2. The foregoing considerations suggest that our position in relation to the European Payments Union now contemplated is rather analogous to our position under the Intra-European Payments and Compensation Agreements (I.E.P.S.), of October 1948 and September 1949. The Payments Union would, of course, be based on different principles and would, in particular, completely ignore the bilateral approach which was a characteristic of the I.E.P.S. Nevertheless, the purpose of the two types of scheme is fundamentally similar and the arguments based on international monetary operations which determine our attitude towards the I.E.P.S. would equally apply here. We signed both the I.E.P.S. Agreements subject to the following reservation in each case:- 'As Ireland has no Payments Agreements with other countries and is a member of the sterling area, the provisions of the present Agreement require no specific action by her, and signature of the present Agreement on her behalf is subject to the understanding that its operation will not modify the existing arrangements governing payments between her and the other contracting parties.' It may be noted that Iceland did not attach any reservation to her signature in either case. As far as we know, however, her position in relation to the I.E.P.S. is essentially the same as ours. We are aware that Britain, under the I.E.P.S., was regarded as representing the sterling area as a whole and we are likewise aware that Iceland did not carry out any of the operations prescribed by the I.E.P.S. and was included with Ireland in the countries of the sterling area whose positions were covered by Britain.
  3. Apart from the foregoing considerations of principle which suggest that Ireland could not, by reference solely to strict monetary criteria, play an independent part within the European Payments Union, there are other considerations of a practical character which would militate against fully independent participation. It is clear that the volume of the gold and dollars available to the Union for fulfilling its obligations will be limited and may well be too small for the calls on it. We may, therefore, anticipate objection on the part of countries with independent reserves on which they must rely for the settlement of their international financial obligations, to the entry to the system of a country not in that position if there is any risk of a loss of gold and dollars to the Union as a result. In support of this objection, they might be expected to advance the considerations of principle set out above. One might answer such objection by showing that for two or more members of a monetary area to participate actively and independently in the Union could not fundamentally affect the drain on the reserves of the Union, as a surplus or deficit of the one member of the area vis-à-vis the other(s) will reflect itself pro tanto in the balance of payments position of the latter vis-à-vis all other members not belonging to the particular monetary area in question, as it would have appeared if the area were treated as one unit for purposes of the Union and had, as it were, a single spokesman. The other, Union members might, however, reply that if the position from the point of view of the operations of the Union remains exactly as it would have been if the monetary area had been represented by one spokesman, no useful purpose would be served by complicating the operations of the Union for the sake of form, and, furthermore, that it would be rather a retrograde move, particularly in this context, to take a step which suggests in some way the disintegration of an already existing monetary area enjoying full transferability. There may well, however, be another objection of a more practical nature. If it is definitely decided that payments of gold and dollars by the net debtors shall be relatively small for the first tranches of the deficit and conversely that the ratio of gold and dollars received by a creditor for the lower tranches of his surplus is greatest, then the fact of Ireland participating independently with Britain in the Scheme will tend to affect directly the drain on the dollar reserves of the Union. Ireland, in normal circumstances, will find herself in the position of a net creditor of the Group as a whole, this position being the result of a surplus with Britain greater than the deficit with all other members. Her independent participation will, therefore, have for effect either to reduce the British surplus or to increase the British deficit. Should Britain be in surplus in the first instance and remain in surplus after our position has been taken into account, the total outflow of gold and dollars will certainly be greater. Whether or not in the event of Britain being a net debtor the outflow of gold and dollars to us will be completely offset by her larger contribution to the Pool will depend primarily on the extent of her deficit before our position is taken into account.
  4. If the Scheme, in its final form, provides that a debtor, in order to receive credits must pay some proportion of gold and dollars, then we would not at the present time fulfil all the conditions applicable to independent participation.
  5. Whether or not it would be in our interest to participate independently in the Scheme, would depend on our assessment of a number of factors, including particularly the following:-
    1. Could we expect to receive such an amount of our net surplus in gold and dollars as would make it worth while to enter the Union, with the possibility of our having to refrain from drawing on the sterling area reserves? Elements relevant in answering this question are the future existence and level of the sterling area reserves, whether (as some comments on the scheme suggest) members are expected to pool all their reserves, whether we are prepared to grant credits in return for receiving some gold and dollars (on the assumption that the proportion of credits granted will probably be higher than the proportion of gold and dollars received).
    2. Do we wish to spread our external assets over a number of countries? If so, the present scheme would enable us to do so while playing a full part in helping recovery.
    3. Would independent participation involve our leaving the sterling area? A relevant point here is that of the future of the sterling area reserves.
    4. Would we be prepared, as we would probably be required, to set up the necessary machinery to enable us to act independently in the matter of our international monetary transaction[s] and, in particular, to establish precise balances with each of the other members, including of course Britain?
    5. Has the Union prospects of a long life or must we expect to have to revert to the status quo ante after a few years? In the latter case, will we have compromised our position in relation to the sterling area and the sterling area reserves?
    6. Would we feel confident about the future of credits granted to the Union, although we do not know against what member(s) our claim in respect of such credits may ultimately lie? Relevant points in this connection are the possibility that all members may give a joint guarantee in respect of the outstanding credits, the fact that we have no assurance of the future soundness of the financial system of Britain where all our external assets are now concentrated, the fact that the pattern of our trade with all members of the Union with the exception of Britain, has traditionally been such that we may expect to be able to use credits with any of them to finance a current deficit (provided, of course, that the credits are not blocked).
  1. Independent membership of the Union should give us some hope of receiving some gold and dollars and of thus recovering, at least a part of that portion of the Special ECA Dollar Fund which represents a deduction from our direct allotment. It is difficult to see how we can otherwise expect to recover any of it. It is unlikely that ECA and/or OEEC would consider that our failure to participate fully in the scheme or to derive direct benefit from it would entitle us to be exempted from the general levy. To endeavour to recover our national share of the Union Dollar Funds from the sterling pool, on the other hand, would be to introduce complications which might have far reaching consequences ultimately in a matter which we contend is quite simple, viz., our fundamental right to draw on the sterling pool as required.
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