THE EUROPEAN COMMUNITIES: A NEW PHASE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001100090006-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 22
• Document Creation Date: December 20, 2016
• Document Release Date: April 24, 2006
• Sequence Number: 6
• Publication Date: March 2, 1970
• Content Type: IM

 ~` R"/ U C. I I I M- O f -i ~, --) h c
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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The European Communities: A New Phase
Confidential
2 March 1970
No. 0478/70
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
2 March 1970
The European Communities: A New Phase
The transition period of the European Economic
Community (EEC) ended on 1 January in an atmosphere
of renewed confidence that the European Communities
(EC)* are again moving forward. Like so many of the
12 transitional years, however, the final one was
marked both by crisis and by progress.. The grave
problems of the common agricultural policy and the
parity changes effected unilaterally by France and
Germany for a time threatened to disrupt the community
before it reached the "definitive" stage. On the
other hand, the summit meeting of the six members
in December--successful in large part because of the
emergence of new governments in Paris and Bonn--pro-
duced a so-called "spirit of The Hague" that led to
salubrious decisions before the end of the year. A
certain fragility in this spirit became apparent early
in 1970 when the financing agreement almost came un-
done, but the members again worked out the compromises
necessary to maintain the momentum.
*The other components of the Communities are the
European Atomic Energy Community (EURATOM) and the
European Coal-Steel Community (ECSC).
NOTE: This memorandum was produced solely by CIA.
It was prepared by the Office of Current Intelligence
and coordinated with the Office of Economic Research,
the Office of Strategic Research, and the Office of
National Estimates.
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What sort of economic community has emerged from
the transition period and how its internal structure
is developing will greatly affect the future organi-
zation of Europe. This memorandum examines the EC as
it now is--its institutions and programs--and discusses
the various political and economic events that will
shape it in the months ahead. The important develop-
ments and decisions that accompanied the end of the
transition period and their impact on the EC are em-
phasized. Primary conclusions are found in paragraphs
31-37.*
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1. The movement of the EEC from its tran-
sitional to its definitive stage is in itself a
landmark in the development of the European Com-
munities. Under the terms of the Rome treaties,
the members were committed to establish during this
12-year period a "common market." The treaties also
provided, however, that the period could be extended
for an additional three years, and in the fall of
1969 it appeared that the EEC might have to take
advantage of this provision. An agreement on how to
finance the Communities did not seem near, and certain
treaty deadlines could not be met. The Commission,
the EC's executive body, nevertheless decided not to
propose an extension, and the members went on to
reach agreement on financing, a stipulation laid down
by the French for their approval of entry into the
definitive stage. Although some treaty commitments,
such as the removal of restrictions on the right of
entrepreneurs to establish businesses and to supply
services throughout the community, were not met, the
Commission hopes to close these gaps during 1970.
2. These few legal shortcomings do not seriously
detract from the many accomplishments of the transition
period. The member states have eliminated customs
duties and most quantitative restrictions among them-
selves and have established a common customs tariff
for third countries. Workers are free to move through-
out the market area and have equal access to jobs in
all six countries. The common agricultural policy
has been established for most products;. the principle
of community financial responsibility for the policy
has been accepted. The members have also gradually
applied a common policy on competition, and all but
Italy and Belgium have adopted the value-added type
of turnover taxation prescribed by the Communities.
Italy and Belgium were granted exceptions and will
have to institute the tax by 1975. In sum, many of
the obstacles to the effective operation of a com-
munity-wide market have been removed, and a solid base
has been created for movement toward full economic
union.
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THE COMMUNITY'S 1969 BUDGET
3,000 (In millions of dollars)
Contributions from
1 -"CSC' levies
18.0
I'axcs and social
security cunt ritill tions
paid by Commmity
- officials
5.2
Miscellaneous
.5
1~ ember' states'
contributions
2,677.7
Salaries and
administrative costs
95.8
Carrying out
common policies
1.9
European Social Fund
Commission
TOTAL
2.680.6
COMMUNITY EXPENDITURE TOTAL 2,701.4
Agricultural Fund
1,549
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Financing the Communities
3. By far the most important event in the in-
ternal development of the EC last year was the agree-
ment reached on how to finance the Communities in
the 1970s. The EC is now financed by contributions
from member states and receipts from levies on
agricultural imports. But under the new agreement,
concluded in principle during a marathon negotiating
session in December and confirmed? in a similar session
ending on 7 February, the Communities will acquire
their own sources of financing and will no longer be
dependent on direct national budgetary contributions.
4. The plan will be implemented in two tran-
sitional stages, the first running from January 1971
through 1974 and the second from January 1975 through
1977. In the first stage, the EC will still receive
all agricultural levies, but added to these funds
will be a portion of the customs duties assessed on
non-agricultural goods entering the EC from the out-
side. Each year, the percentage of customs duties
allocated to the EC will increase. The difference
between the sum total of agricultural levies and
customs duties and the EC's budgetary needs will con-
tinue to be made up by national contributions. Year-
to-year variations in the share of the total cost
burden borne by each of the member countries will be
limited to a narrow range.
5. From January 1975 on, the EC's own resources
will include all the agricultural levies and all the
receipts from the common external tariff. Added to
this will be a portion (up to one percentage point)
of the value-added tax collected by the member
countries. Fluctuations in the relative contribution
of any member will remain controlled only until
January 1978. From then on, the EC will receive all
levies, tariffs, and their portion of the value added
tax.
6. By gaining access to ensured sources of
revenue, the communities have been materially
strengthened. Unofficial estimates suggest that
these sources could bring in as much as $8 billion
a year by 1978. These large independent financial
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CONFIDENTIAL
resources no doubt have potentially important political
significance, but whether they contribute significantly
to the movement toward a more politically centralized
union depends on the decisions made by the members on
the future role of the EC's institutions. The limited
budgetary role given the European Parliament in the
new financing agreement is a reminder that the member
states ready to accept the political implications of
economic union still do not find it easy to move those
that do not.
Budgetary Powers for the European Parliament
7. Because the budgetary resources of the EC
will in large part be free of national parliamentary
control by 1975, the Commission and some of the member
states have long felt that the final budgetary control
in the Communities should ultimately be vested in the
most representative of its institutions, the European
Parliament. The Commission therefore .placed before
the EC Council of Ministers in 1969 a proposal that in
due course would give budgetary responsibility to the
Parliament. A revised version, adjusted on numerous
occasions to satisfy the objections of either the
member states or the parliamentarians, was accepted
by the Council in December. In January, however, the
French Government--in response to pressure from such
ultra-Gaullists as Defense Minister Debre--made it
clear that it would insist on modifying the December
accord. Because none of the other members was prepared
seriously to jeopardize the renewed forward movement
within the community and the prospective negotiations
with Britain, a compromise solution was reached on
February 7.
8. Ever since the Communities were created, the
Parliament's role in the budgetary process has been
an advisory one. It receives an "established" budget
from the Council. If the parliamentarians desire,
they may submit budget amendments to the Council for
consideration, but the Council is free to ignore their
recommendations, and it does not have to explain its
action to the Parliament.
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9. Under the new arrangement, Parliament will be
given somewhat greater authority during the interim
period 1971 through 1974. Final control of the entire
budget will remain with the Council, but the Council
will no longer be able to ignore Parliament's amend-
ments. If the Parliament amends the budget so as to
increase expenditures, the Council must approve the
amendments by a qualified majority vote* before they
will take effect. If no increase in over-all expend-
itures are involved, the amendments will be considered
approved unless the Council overrides them by a qual-
ified majority vote.
10. Beginning in 1975, the Parliament. will have
the final control over that portion of the budget
covering the administrative expenditures of the Com-
munities,currently about three percent. The Parlia-
ment, however, will not be able to increase these
expenditures beyond a point that will be fixed by
the Commission according to a complex formula based
on increases in gross national product, national
budgets, and the cost of living. On the rest of
the budget (currently about 97 percent, most of
which goes to agriculture), the Council will still
be able to reject any parliamentary amendments.
But the fact that the Council will have to muster
a qualified majority to do this will permit the
Parliament to influence even this part of the
budget. Additionally, the Council has agreed
formally to present to the Parliament its reasons
for rejecting any particular amendment--some ad-
vance over the past, when the Council refused to
engage in any such dialogue.
*In qualified majority voting, current arrange-
ments provide four votes each for France, Germany,
and Italy, two each for Belgium and the Nether-
lands, and one for Luxembourg. A total of 12 votes
constitutes a majority; thus no state holds a veto.
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The European Parliament in Session, Strasbourg, France
11. The budgetary powers agreed to are certainly
far short of what the Parliament would have liked, and
continued discontent can be expected from the parlia-
mentarians. But the role of the Parliament may become
somewhat greater in practice than would be indicated
by the small portion of the budget that it will control.
Administrative responsibilities of the Communities will
probably increase in the years to come, especially if
the Six become Ten. The importance of Parliament's
control over funds for these administrative functions
will therefore increase as well. In addition, through
its control over funds for information activities
the Parliament could influence attitudes toward the
EC among European peoples and governments. Most
importantly, the Parliament will have its first
truly supranational powers.
Planning for the Future
12. In spite of the importance of the achieve-
ments during the transitional stage, development of
a true economic union is far from complete. Many
Europeans look upon the opening of the definitive
period as another beginning for the organization.
In addition to fulfilling the speciic treaty require-
ments that were not met on schedule, policies agreed
to must now be applied, many new policies must be
adopted, and community institutions must be further
developed in order to attain a full economic union.
13. Commission President Rey recently set forth
what he sees as the tasks for the EC in 1970: the
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CONFIDENI~A ,
adoption of the Barre Plan for closer coordination
of monetary and other economic policies and the
preparations to move beyond it; reform of the struc-
ture of agriculture (Mansholt Plan); new impetus
for research and technological programs; new guide-
lines for the EC's industrial policy; development
of a common energy policy; reform of the European
Social Fund; and implementation of the regional
policy. In addition to the program listed by Rey,
the application of the common commercial policy,
formulated late last year, will be important in 1970.
The European Communities New Administrative Center, Brussels
Coordination of Monetary Policies
14. The outlook for some parts of Rey's agenda
is comparatively bright. Closer monetary cooperation
among the EC members has long been recognized by
community experts as an essential step toward the
achievement of economic union. In recent years,
particularly in 1969, the national governments too
have begun to realize that the need to strengthen
these ties may override more nationalistic consid-
erations. The devaluation of the franc in August
and the revaluation of the German mark in October,
with their disruptive impact on the common agri-
cultural market, helped to further this view. The
increased volume of commerce across the six national
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boundaries, reflecting the growing interdependence
o:i` the six economies, has made increased coordination
of economic policy a more urgent necessity. Moreover,
the development of common policies (e.g., free internal
trade, common external tariff) has reduced each member's
ability to deal with its economic problems and thus has
made each country more dependent upon the cooperation
of the other members.
15. At The Hague summit meeting, the leaders of
the member countries expressed their intention finally
to take the steps that the Commission had been urging
for some time, and pledged that "a plan to be carried
out in phases shall be developed during the course of
1970 with the purpose of realizing an economic and
monetary union." The first phase will be based on the
Barre Plan, which the Commission presented to the
Council early in 1969. If applied fully in the 1971-
1975 period, the plan would lay the groundwork fur
still more extensive measures later on.
16. Under the Barre proposals, named for Commis-
sioner Barre, the member states would coordinate their
short- and medium-term economic policies. If a member
state wished to follow a course differing from the
common aims or seriously affecting economic develop-
ments in other member states, it would be required
to consult with the other members in the appropriate
EC forums before taking action. The plan also calls
for establishment of mechanisms for.short-and medium-
term monetary assistance. Late in January 1970, the
Council accepted the short-term consultation provisions
and established a fund with member-state credits--
initially of $1 billion but eventually of
$2
billion--
on which the members will be able to draw
balance-of-payments difficulties.
in
times
of
17. At the same January meeting, the Council
postponed decision on the medium-term credit plan on
the grounds that further work on harmonization of
medium-term economic policies would be necessary. This
plan, however, is scheduled for further discussion this
year, after the EC members have agreed -on medium-term
economic goals.
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18. It seems likely that the members, recognizing
the extent to which their national interests are linked
to a stable community, will continue to seek greater
coordination of economic policy. Toward the end of
February, the Commission and the governments of Ger-
many, Belgium, and Luxembourg presented formulas for
proceeding to monetary union, and the six finance
ministers agreed to set 1980 as the target date for
establishment of a common currency within the EC. The
ministers set up a committee to study tie various
proposals. The Commission is now producing a paper
on the possible pooling of the member states' special
drawing rights in the International Monetary Fund, a
proposal made earlier by President Pompidou. In
addition, EC central bankers are working on the eventual
creation of a European central reserve facility. The
countries that traditionally have had balance-of-pay-
ments surpluses, particularly Germany, will press for
close coordination of over-all economic policy before
moving on to further monetary integration. There is
among the members real motivation to move toward a
full economic union, but because of the far-reaching
implications progress is likely to be slow.
Common Agricultural Policy
19. Reform of the common agricultural policy
the costs of which have skyrocketed, remains the EC's
most pressing problem. For over a year, the Six have
had before them the ambitious long-range approach to
agricultural reform proposed by Commissioner Mansholt.
The members, however, generally believed that the
structural reforms envisioned in his..plan would be
too expensive and too sensitive politically. A modi-
fied, less ambitious version proposed by the Commis-
sion late last year has so far also failed to make
any progress.
20. Current prospects are that any broad attack
on the structural problems of community agriculture
will be deferred at least until 1973. As part of
the recent financing agreement, the members decided
to maintain an upper limit of $285 million a year on
EC-financed expenditures for this purpose until 1973,
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when the ceiling may be upped by a weighted majority
vote of the Council. Meanwhile, European farm organ-
izations have tried to convince the Six that the surplus
problem is not really as bad as the Commission has
insisted and are digging in their heels against any
policy revisions. In France, the conservative farm
groups resist any measures that would eventually move
large numbers of farmers out of agricultural production
into other sectors of the economy. In Germany, farmers
strongly oppose reductions in price support levels, and
the battle lines are already drawn within the government
between the finance and foreign ministries, which favor
price cuts, and the agriculture ministry, which opposes
them. Some in the EC would use production controls to
limit surpluses, but the French in particular oppose
this and are supported by Commissioner Mansholt,
21. The co:aplexities of the problem are staggering,
and there will be numerous domestic and. international
repercussions no matter what approach the EC takes.
Although it is possible that The Hague summit commitment
to tackle the problem of curbing the increasing costs
may compel the members to make at least some initial
adjustments, the forthcoming negotiations. with Britain
seem to be a more promising source of pressure for
reform.
Research and Technological Policy
22. An EC Council decision last December to extend
EURATOM's research program has alleviated the chronic
crisis in EURATOM and has improved prospects for
cooperative European efforts in nonnuclear research
and development. Early last year the Commission pro-
posed a five-year program that would involve EURATOM
in nonnuclear as well as nuclear activities. After
months of discussion, however, the Six approached
The Hague summit meeting still deadlocked over
EURATOM's budget and the Commission's recommendations.
Nevertheless, the final summit communique' did contain
a pledge to work out a new pluriannual research program.
23. The next week, the Council of Science Ministers,
noting that they had been inspired by the summit meeting,
in effect voted themselves another opportunity to reach
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agreement. EURATOM's 1969 research program was extended
for one year with the provision that, if a long-term
program is not accepted by the end of 1970, there will
be an automatic additional extension for 1971. This
program, the Council agreed, will cover both nuclear
and nonnuclear research--a provision that will make it
possible to utilize existing research facilities more
fully and perhaps eventually to broaden EURATOM's base.
Still unsatisfied is EURATOM's need for a long-range
program; the hope is that the members can agree on
one this year.
24. Last October the EC invited 11-other West
European nations to join in discussions of the future
of scientific and technological cooperation. The talks,
which are expected to begin early in 1970, will center
on the so-called Aigrain Group's proposals for potential
cooperative programs in seven different sectors: data
processing, telecommunications, new means of trans-
port, oceanography, metallurgy, pollution, and
meteorology. Whether the Europeans eventually decide
on an institutionally integrated program in these
areas or on loosely organized cooperative ventures
will have an important impact on the development of
European unity in general.
Industrial Policy
25. The desire of Europeans to become more com-
petitive with advanced American industry will be an in-
creasingly compelling force in the EC. It should
motivate the EC not only to reach agreement on a non-
nuclear research program for EURATOM,but also to de-
velop new guidelines for the EC's industrial policy.
A comprehensive policy would bring together regula-
tions designed to permit European industries to re-
alize more fully the advantages of the large common
market. It would, for example, permit formation of
a community-wide capital market capable of making
adequate investment funds available when they are
needed and would establish guidelines for foreign
investment. This year, the Six will probably again
attempt to formulate a community company law that
would help European companies to surmount legal and
related barriers to increasing company size and other-
wise enhancing their competitive position relative to
US industries.
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Energy Policy
26. Late in 1969, the Council approved the basic
principles for a common energy policy recommended by
the Commission, and the Commission is expected this
year to submit--at long last--a number of proposals
that could form the core of such a policy. The six
countries import nearly 60 percent of the energy they
consume; ensurance of a dependable and cheap supply
would improve both the living standards of the
people and the competitive position of European
industry. The crucial question is how much energy
should be supplied from domestic sources, mainly
high-cost coal, and how much from imported fuels,
mainly oil. The development of an effective energy
policy has been one of the most vexing of community
issues, and to achieve a meaningful breakthrough now
will require an extraordinary effort.
Social and Regional Policies
27. A social policy that both facilitates in-
tegration and ensures that its benefits are widely
shared plus a regional policy narrowing the develop-
mental gaps between regions are important elements of
the EC's movement toward a full economic union. Last
fall, the Council approved a much-needed social security
program for migrant workers, but the -operations of the
community social fund must be revised to take into
account the changing manpower requirements of EC in-
dustries adapting to the larger and more competitive
market. In the area of regional development, the
Commission has adopted and sent to the Council a plan
to establish a program that would identify areas in
need of assistance, provide loans, and. point the way
for more extensive aid that might be supported on a
national basis.. The proposal--the first meaningful
step in this field--will be discussed by the Council
this year.
Common Commercial Policy
28. The agreement on a common commercial policy
reached just before the end of the transition period
seems likely to have a growing impact on the EC's
institutional development as well as on its commercial
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relations. Some of the consequences of the new policy
are already evident. The Commission has been busy
conducting' trade talks with Israel and Spain, and
early in February, using the negotiating authority
granted it in the treaty, the Commission concluded
a community trade agreement with Yugoslavia. The mem-
ber states have also recently authorized the Commission
to conduct the forthcoming negotiations on renewal of
the long-term cotton textile agreement.. In addition,
the Commission is pursuing exploratory talks with Japan,
and on the basis of these discussions the Council will
decide whether or not to authorize the Commission to
open formal trade talks with Japan.
29. In 1972, the trade relations.of the member
states with Eastern Europe will come more fully under
community purview. Any new trade agreements with
those countries subsequent to that time will have to
be negotiated by the Commission, a procedure already
applicable to the rest of the world. To date, only
Yugoslavia among the East European countries has
agreed to formal negotiations with the EC. But other
East European countries, including the Soviet Union,
have had informal contacts, and some of them have
negotiated limited agreements. The expiration toward
the middle of the decade of a number of more compre-
hensive trade agreements should reveal whether the
member states are prepared fully to implement the com-
mon commercial policy--and whether most Communist
states will still refuse to recognize the EC.
30. The special treatment the Rome treaties
accorded interzonal trade between East and West
Germany may become an increasingly contentious issue.
The Federal Republic traditionally has designated
its trade with East Germany as internal trade because
a foreign trade designation would imply a de facto
recognition of East Germany. The West Germans will
probably wish this special status to continue, but
other EC members may challenge it if the volume of
trade reaches more significant levels as a result
of Brandt's policies toward the East.
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The Hague Summit in the Knight's Hall, 1-2 Dec 1969
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The European Communities and Political Development
31. The end of the transition period has left
the EC--despite its great accomplishments in many
areas--still facing a crucial political reality:
institutional development moves only as far and as
fast as the members desire, and frequently no further
than any single member desires. This fact has not
been altered by the willingness of the six govern-
ments at The Hague summit to reach agreements that
have shaken the organization from its previous
lethargy and have led to concrete accomplishments.
Nor is it necessarily changed by President Pompidou's
relatively flexible views on European unity.
32. The coming year will test whether the EC
can provide the basis for a more structured Europe.
A new commission of nine members--replacing the
current fourteen-member commission--must be chosen,
by unanimous vote of the member states. The caliber
and political orientation of the men selected, many
of whom certainly will be chosen from among the
present Commissioners, will at least partially
determine whether the Commission will be an aggres-
sive advocate of the EC's development. Although it
is the Council that makes the final decisions in
the EC, the Council acts cnly on the basis of Com-
mission proposals. Moreover, the Commission is not
only the initial source of EC policies; it also
administers those policies once they have become
programs and represents the interests of the EC
both at home and abroad.
33. The Commission's authority, however, is
directly tied to the effectiveness of the Council.
Whether the voting arrangements in the Council that
were envisaged by the Rome treaties.can be restored
remains a serious question. According to the
treaties, once the EC had passed to the definitive
stage, almost all matters should be decided by
either a majority or a weighted majority vote of
the Council acting on a Commission proposal. In
the "Luxembourg Compromise" that ended the 1965-
1966 crisis in the community institutions, De Gaulle
insisted that France would not submit to any im-
portant decision with which it disagreed as his
price for a return to full French participation
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in the Communities. The current French Government
still maintains that the right of veto is essential
on "important questions"; whether its will to use
and sustain the veto will be weaker than De Gaulle's
remains to be seen. Nor is it clear that other
member states which have found the tacit threat of
veto convenient on occasion will readily nullify
the Luxembourg agreement.
34. Now that provision has been made for
limited budgetary powers for the Parliament, debate
on its "democratic" nature is certain to resume.
Over the years, this question has been discussed in
many contexts. One argument has been that if the
Parliament is to have real authority,.its members
should be elected directly and not selected by the
national parliaments. The Commission and all the
member states except France subscribe to.this position.
De Gaulle argued that Europe is not ready for a
popularly elected European Parliament,..and.President
Pompidou apparently agrees. Chancellor Brandt and
the leaders of the other member governments probably
are not prepared to force the issue at this time.
Although the topic was raised at The Hague meeting,
the final communique reported only that "the problems
of the method for direct elections will continue to
be examined by the Council of Ministers."
35. The outlook for the future political develop-
ment of the EC, therefore, remains inconclusive. The
recent decisions that have moved the EC closer to a
full economic union were made without any major new
commitments to political unity, but their application
will, in fact, result in further EC encroachments on
national sovereignty. The prime examples are the
provisions for the EC's independent financial re-
sources; the limited but real budgetary powers for
the European Parliament; the stronger requirements
for consultation within the EC institutions prior to
major member-state economic decisions; and EC manage-
ment of commercial relations, including.a role for
the Commission in negotiating bilateral trade agree-
ments with third countries. With the progressive
growth of economic interdependence of the Six, eco-
nomic policy decisions of the member states must
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increasingly be made in the EC context. It remains
to be seen, however, how far these forces will carry
integration and whether the member states will be
prepared at some point to make the conscious decisions
necessary to carry the organization from a developing
economic union to a political union.
36. The six leaders at The Hague stated in their
final communique that the ministers of foreign affairs
should "study the best way of achieving progress in
the matter of political unification,. within the con-
text of enlargement," and the foreign ministers were
directed to report on their deliberations before the
end of July 1970. Whether anything meaningful will
come from these discussions is uncertain.. Pompidou
and Brandt both apparently believe that the time is
not ripe for conclusive steps toward political unity.
They apparently intend to continue the strong bilateral
ties that De Gaulle so carefully fostered, and they
may or may not favor proposals to generalize the Franco-
German relationship into a system of intergovernmental
rather than community political development. But it
can be assumed that the smaller countries and the
Commission will continue to argue for further building
on the existing community system.
37. It is unlikely that the report from the
foreign ministers will lock the EC into.any particular
mode of political development. It may, however, provide
some further insight into a number of key questions:
Do the members believe that enlargement of the com-
munities will require stronger institutions? How
flexible will Pompidou be in dealing with institutional
development? How is the German attitude toward West
European unity being affected by their -policies toward
the East? The answers will have an important bearing
on the development of the EC and the role it will
play in the future of Europe.
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