THE EUROPEAN PAYMENTS UNION: A NEW APPROACH
THE European Payments Union formed in the summer of 1950 was radically different from the payments agreements of 1948 and 1949. Under the Union,each country's surpluses or deficits with every other OEEC country were set off against one another, leaving it with a single net surplus or deficit with the EPU. Debts less than a certain amount were completely covered by an automatic grant of credit. If the debt exceeded the credit grant, part of it was covered by credits and part by payments of gold or dollars. These arrangements made the EPU A flexible and largely automatic system capable of cleaning up a much larger proportion of intra-European debts than the earlier agreements. The successful working of the Union assumed a certain degree of balance in intra- European trade; the sliding scale of dollar payments helped produce a balance by giving debtors an incentive t reduce their deficits.
Because the EPU was so comprehensive, there were difficulties in gearing it with the sterling area payments system administered from London. Long and difficult negotiations led to an arrangement permitting countries to use the sterling payments mechanism when that seemed advantageous, subject to conditions that would not impair the working of EPU. After overcoming other difficulties, the existing debts through the EPU mechanism. Improvements in the British balance of payments during 1950, and a guarantee from the United States, removed the danger that the liquidation of