DMS files,
lot W–1425, “Europe—Defense”
No. 260
Memorandum by the Assistant Director for
Europe of the Mutual Security Agency (Cleveland) to
the Chairman of the Mutual Assistance Advisory Committee (Gordon)1
confidential
Washington, May 9, 1952.
Subject:
- Preliminary Estimates of the Impact of Potential Reductions in
Defense Support for 1952/53 on European Defense Expenditures
Attached to this memorandum is a table2 showing our proposed redistribution of the
illustrative defense support figures, by countries, for Title I, on the
basis of possible reductions in defense support of 12.66 percent and 10
percent, respectively, from the total requested; and estimates of the
impact of the reductions in defense support on the countries’ defense
expenditures. Attached, also, are brief statements for each of the
countries where a cut in defense support is indicated, describing the
impact of an overall cut of 12.66 percent; the same line of reasoning
can be used in adjusting to a 10 percent overall cut, for those
countries that have different illustrative aid figures in the two
models.
The Basis of the Distribution of the
Cut in Defense Support:
The overall reduction of 12.66 percent, or $224.1 million, was
distributed on the basis of the following considerations:
- (a)
- no cut for Yugoslavia because of the U.S. commitment involved
in the tripartite agreement;3
- (b)
- no cut for Turkey because of the high value in terms of
defense obtained for the small expenditures on each Turkish
soldier;
- (c)
- no cut for Norway because the original amount requested is so
small that it would be meaningless to reduce it and would have
disproportionate political repercussions;
- (d)
- no cut for Iceland for the same reasons and because we are
committed to finance the dollar costs of completing certain
projects;
- (e)
- a smaller than proportionate cut for Austria, in view of its
economic needs;
- (f)
- for Germany, a cut of 25 per cent, in large part because it
appears unlikely that the Contractual Agreement4 and the EDC
Treaty5 will be concluded in time for Germany to make the
defense contribution to which the original illustrative figure
for defense support was related;
- (g)
- a reduction of 25 percent for Denmark because there is a
prospect that her requirements for dollar coal in FY 1953 will be lower than was
earlier projected and because her level of defense expenditure
is relatively low;
- (h)
- a cut of $28 million for Greece in view of the prospect of a
lower dollar deficit than was earlier projected;
- (i)
- for Italy, a cut somewhat less than proportionate because of
the special budgetary problems and political considerations
involved in that country;
- (j)
- approximately proportionate cuts for France, the Netherlands
and the United Kingdom.
In distributing the smaller cut of 10 percent in defense support, or $177
million, we propose restoring some of the above cuts to Denmark, France,
the Netherlands and the United Kingdom.
Impact of the Reduction in Defense
Support:
With a cut in defense support of $224.1 million (12.66 percent of the
requested appropriation) defense expenditures in the NATO countries (excluding Greece and
Turkey) plus Germany will decline an estimated $495 million. This
estimate based on a country by country analysis indicates that defense
expenditures in the aforementioned countries will decline about two and
one half times the reduction in defense support. There is no special
mathematical formula underlying the result. Rather, the multiplier
effect reflects a number of special factors particularly in Belgium and
Germany, and the particular distribution of the cut in defense support
among the various countries.
We have assumed, in the case of Germany, only about one month’s slippage
in the signing of the EDC Treaty and the
Contractual Agreement. At the present moment it seems more likely that
there will be a slippage of at least three months. Therefore, if it is
politically feasible to go to the Appropriations Committee with a
greatly reduced figure for defense support for Germany, on economic
grounds it appears that defense support can be reduced below the level
of $120 million, which is now provided for under the reduced aid
assumptions. Each month of slippage in the signing of the Agreements
involves a reduction of about $60 million in anticipated
[Page 470]
German defense expenditures. Therefore, if
there is a three-month delay, defense expenditures will be about $180
million less than anticipated.
We will consider further the whole question of the distribution of the
cut in defense support as we complete more detailed work on each of the
countries. We would, therefore, appreciate your comments by Friday, May
16, 1952.
[Attachment 1]
Paper Prepared in the Mutual Security
Agency
Belgium–Luxemburg
Impact of Reduced Aid to Europe on
Estimated Belgium–Luxemburg Defense Expenditures
Although no aid is planned for Belgium in 1952/53, the proposed
reduction of defense support to other countries would necessarily
have an important impact on Belgium’s defense expenditure. This
impact would arise from the effect of the reduction of aid on
Belgium’s exports to the EPU
area.
This reduction of 12.66% in aid to other EPU countries would force those countries to reduce
their EPU deficits by curtailing
imports, including those from Belgium. This development would effect
some reduction in economic activity in Belgium; principally, an
increase in unemployment arising from the decline in the export
trade accompanied by increased unemployment relief and losses in tax
revenue. It is assumed that this deterioration in the government’s
fiscal position, at a time when there was already a considerable
budgetary strain would lead to a decrease in defense expenditure.
Since the ability of Belgium–Luxemburg to finance the proposed
defense expenditure stems from its export surplus, the curtailment
in exports, is expected to result in a decrease in defense
expenditure equal to $67 million, reducing the total from $713 to
$650 million.
[Page 471]
[Attachment 2]
Paper Prepared in the Mutual Security
Agency
Denmark
Impact of Reduced Aid on Estimated
Defense Expenditures
The impact of a reduction of $5 million in defense support to Denmark
can be illustrated as follows:
| Reduction in illustrative aid amount |
|
5 |
| Offsets |
|
– |
|
Increased imports from non-dollar sources |
0.5 |
|
|
Increased dollar exports |
1 |
|
|
Total offsets |
|
1.5 |
|
Net reduction in imports |
|
3.5 |
Since lower total consumption in the entire European area may be
assumed if there is reduced aid, Denmark could probably obtain from
alternate markets as much as half a million dollars worth of goods
that previously were projected from dollar sources.
The use of $11 million reserves shown in the 1952/53 projections
based on $20 million aid is considered the maximum feasible,
particularly in view of the estimated use of $8 million in 1951/52.
Danish reserves at the end of 1952/53 will be at about the lowest
point reached in the post-devaluation difficulties and well below
the 1947/48 amount.
Danish dollar exports were projected at a maximum in the “$20
million-aid” assumption. However, certain food items such as canned
meats, for which there is a dollar market, could be diverted from
the Danish home market and exported since lower domestic consumption
level will result from the lack of aid. This would make about $1
million available for increased self-financed imports.
Because of Soviet bloc demands for embargoed goods, the Danes have
not been able to obtain satisfactory trade agreements with Eastern
countries. Since there is little that the Danes can offer in which
these countries are interested, it is not likely that the Danes
would be able to offset reduced imports from the dollar area by
increased imports from behind the Iron Curtain.
Consequently, if a $5 million reduction in the illustrative aid
figure is effected, goods and services valued at an estimated $3.5
million could not be financed from Danish resources and would be
completely lost to the Danish economy.
[Page 472]
The loss in GNP caused by loss of
dollar imports will be substantial since dollar imports are key
items in the Danish economy and many sectors are wholly dependent on
them for marginal increases in their output. For example, marked
reductions in both quantity and quality of output of livestock
products and in size of the herds could be a direct result of
reductions in the available supply of protein feedstuffs. The direct
and indirect effects of the loss of $3.5 million of imports is
estimated at $27 million. When the loss in net foreign balance is
added, total availabilities are reduced by $36 million.
Civilian consumption, more than any other part of the economy, would
bear the brunt of the loss in resources, and would absorb a
reduction of about $16 million. Investments would be reduced by $6
million, although this reduction will have a depressing influence on
the GNP in 1952/53 and subsequent
years.
On the whole, non-military Government services cannot be greatly
reduced. It is estimated, however, that a cut of $2 million below
the previously estimated level for 1952/53 can be made reducing the
budget to the 1951/52 level; civilian defense would probably bear
most of this loss.
Finally, the remainder of the impact of reduced availabilities
resulting from the cut in aid would be on the defense program which
would be reduced by $12 million from $152 million to $140
million.
[Attachment 3]
Paper Prepared in the Mutual Security
Agency
France
Impact of Reduced Defense Support
on Estimated Defense Expenditures
The impact of the $50 million cut in defense support will fall
entirely on imports. However, since of the $50 million reduction,
$10 million would have remained in the pipeline as of June 30, 1953,
imports in 1952/53 will be reduced by $40 million (cif basis).
No increase in exports, to offset the cut in defense support, can be
expected since the structure of present French prices is such that
the relatively limited foreign market for French exports is already
strained by the present estimate of the volume of exports in
1952/53. An increase in exports could be anticipated only in the
event of a very considerable strengthening of the present
disinflationary efforts in France plus a devaluation of the franc.
Neither of these developments can be counted upon within the near
future.
[Page 473]
The reduction of $40 million in FY
1953 imports in calculated to reduce overall French availabilities
by $216 million (1951/52 prices), including a fall in gross national
product of $178 million, and in the net foreign balance of $38
million.
It is calculated that the reduced availabilities would be distributed
in the following manner:
- (a)
- Given the institutionalized welfare pattern of the French
economy, it can be expected that personal consumption would
fall by a relatively small amount, or $63 million. This loss
would be concentrated to a substantial extent among persons
closely associated with industries primarily affected by the
loss of imports and reduced military outlay.
- (b)
- The reduction in investment is estimated at $35
million.
- (c)
- Civilian government consumption is expected to remain
constant since a large percentage of the civilian budget in
France is composed of transfer payments of various sorts and
of welfare expenditures, neither of which could be expected
to decline under the circumstances assumed.
- (d)
- The remainder of the reduced availabilities, therefore, or
$118 million will come out of the defense program. Reduced
gross national product will also result in a reduction in
tax revenues and customs duties in addition to the loss to
the French Treasury of the counterpart of $50 million of
aid. The loss of revenue will intensify the need for reduced
military expenditures.
The reduction in military expenditures will fall entirely on the
NATO portion of the military
budget, since it is assumed that the Indo-Chinese hostilities will
continue and their cost cannot be reduced at this time. Other things
being equal, it can be anticipated that the reduction in military
outlay in Europe will fall mainly on production and construction,
with the full impact being felt in an earlier and more considerable
flattening out of production in the spring of 1953 than had been
anticipated in the original calculation. Inasmuch as the French are
financing less than $700 million in military production in FY 1952, and a considerable share of
that total is going to Indo-China, a reduction of $118 million in
this item would have a very considerable impact on the French
contribution to Western European buildup plans.
[Page 474]
[Attachment 4]
Paper Prepared in the Mutual Security
Agency
Germany
Impact of Reduced Defense Support
on Estimated Defense Expenditures
A reduction by $40 million in FY 1953
defense support to Germany, lowering the illustrative support level
to $120 million will adversely affect and reduce dollar imports and
GNP, and the consequent
repercussions on Gross National Product and on the budget will cause
an estimated $88 million decrease in defense expenditures.
The immediate effect of this reduction will be cut in dollar imports
of $21 million; part of the cut in defense support is offset by the
amount which would have remained in pipeline at the end of fiscal
1953 ($18 million) and part by an improvement in the services
account ($1 million).
No change in reserves is projected because the German reserve
position is at a very low level. The reduction in imports cannot be
made good from non-dollar sources since Germany has already made
strenuous efforts to shift to non-dollar area procurement. Although
German exports to the dollar area were under the full illustrative
aid assumption projected at a substantially higher level than in
1951/52 (German dollar exports will cover a larger proportion of
dollar imports than in most European countries) it is anticipated
that with the reduction in aid, Germany will attempt to further
increase exports to the dollar area. However, the fact that defense
support levels of other EPU
countries are to be reduced will probably result in a reduction in
German earnings from EPU about
counterbalancing the increase in exports to the dollar area.
The decline in GNP brought about by a
loss of imports will be reinforced by the effect of a loss of
counterpart funds, which in Germany are used primarily for the
elimination of industrial bottlenecks via investment in the basic
industries, particularly coal, steel and power.
The total GNP reduction resulting
from reduced imports and a lower rate of investment in basic
industries is estimated at $150 million. The resultant decline of
available resources will be divided more or less equally between
consumption, investment and government services.
A reduction of government revenues is unavoidable if the GNP declines. At the same time, a lower
rate of economic development means that a smaller proportion of the
increasing labor force can
[Page 475]
be absorbed, resulting in some increase in social welfare
expenditures.
While not large in absolute magnitudes, the combination of increased
welfare expenditures and decreased revenues will sharpen the
well-developed German fear of inflation and cause a reduction of
military expenditures to avoid futher imbalance in the budget. The
minimum reduction which would result is the $88 million referred to
above.
Limitations on the Foregoing
Analysis
A German defense contribution at an annual rate of DM 11.25 billion ($2.6 billion) will not
commence until the coming into force of the contractual agreement
and the Treaty establishing the European Defense Community. Hence,
if the complex negotiations establishing such agreements extend
beyond July 1, 1952, there would be a reduction in the German
contribution apart from the effect of reduced defense support. The
net loss to Western defense would be the difference between the
higher rate of expenditures proposed and the present level of
occupation costs, since the latter will continue until the
conclusions of the above agreements.
[Attachment 5]
Paper Prepared in the Mutual Security
Agency
Greece
Impact of Reduced Defense Support
on Estimated Defense Expenditures
It is estimated that a reduction in FY
1953 defense support for Greece by $28.1 million, from $145.2
million to $117.1 million, will result in a reduction of about $15
million in Greek military expenditures during FY 1953.
The maintenance of the present very large Greek defense effort
constitutes an extraordinarily heavy burden upon the Greek economy,
because of Greece’s poverty of economic resources and very low
civilian consumption level. However, since it is in Greece’s own
interest to maintain, insofar as possible, its effective military
strength regardless of the magnitude of U.S. assistance, it is
anticipated that, rather than endanger Greece’s security by reducing
the country’s military strength, the Greek Government will first
endeavor to divert additional resources to the military
establishment. The Greek Government has already initiated a program
of severe fiscal and financial measures designed to insure the
maximum possible defense effort despite recent large reduction in
the levels of
[Page 476]
U.S.
assistance. Although U.S. assistance has declined to the proposed
level of $145.2 million in FY 1953
from a level of about $300 million in FY 1951 and a level of about $180 million in FY 1952, Greece’s military expenditures
have remained near the high point attained during the period of
guerrilla warfare. It is anticipated that the Government’s present
program, which includes measures for the reduction of non-military
budget expenditures for welfare and investment purposes and
increased taxes designed to curtail civilian consumption, can be
intensified sufficiently to bring about a further diversion of about
$13 million in available resources from the civilian economy to the
military establishment during FY
1953. However, in view of Greece’s poverty, reductions in civilian
consumption much beyond this level would probably result in marked
social instability, thus weakening the base of the military
effort.
It is further anticipated that the estimated reduction of $15 million
in Greek FY 1953 military
expenditures resulting from the proposed reduction in defense
support would not decrease the size of the Greek armed forces.
Instead, it is assumed that the Government would maintain the armed
forces at their present strength and reduce expenditures upon roads,
airfields, fortifications, and other military installations which
are either under way at present or planned for construction during
FY 1953. The prompt completion of
these military installations, however, is considered essential to
Greece’s security and to its maximum contribution to a united
defense effort.
[Attachment 6]
Paper Prepared in the Mutual Security
Agency
Italy
Impact of Reduced Defense Support
on Estimated Defense Expenditures
If Italy obtains $100 million instead of $110 million of defense
support in 1952/53, it is estimated the level of defense expenditure
will fall $20 million below that previously projected. This would
occur mainly because of the effect of the cut in defense support on
the budgetary position of the Italian Government.
It is assumed that not only would Italy fail to receive aid but also
that dollar receipts from EPU would
fall $5 million below the level projected. This drop reflects the
impact on EPU positions of the
reduction of defense support to other EPU members.
The effect on the balance of payments are calculated as follows:
[Page 477]
| Cut in aid |
10 |
| Reduction in dollar earnings from EPU |
5 |
|
Total reduction in dollar availabilities |
15 |
| Offsets |
|
|
|
Amount of cut in defense support which would have
remained in pipeline |
3 |
|
Increased dollar exports |
3 |
|
Improvement in dollar service account |
1 |
|
|
Total offsets |
7 |
|
Decrease in dollar imports |
8 |
|
Reduction in non-dollar imports |
3 |
|
|
Total reduction in imports |
11 |
It is assumed that a lower level of EPU trade and the cutback in dollar imports would cause
a reduction in EPU imports of $4
million, partly offset by a shift of $1 million from dollar to ONPC
imports.
The curtailment of dollar imports will affect key items in
production. It is expected however that the impact of the cutbacks
would be somewhat cushioned by drawing down of stockpiles and
inventories in Italy. Hence, it is estimated that the reduction of
$11 million in imports will result in a reduction of GNP of only $24 million.
The reduction in tax receipts consequent to the lower GNP combined with the reduced
availability of counterpart would decrease the financial resources
of the Italian Government by $20 million. In view of the political
and social situation in Italy and the nature of civilian
expenditures a cut in non-military government expenditures cannot be
anticipated. Therefore in the framework of the conservative
budgetary policy followed by that Government, it is reasonable to
assume a corresponding reduction in defense expenditure.
[Attachment 7]
Paper Prepared in the Mutual Security
Agency
The Netherlands
Impact of Reduced Defense Support
on Estimated Defense Expenditures
The initial effect of a reduction of $10 million ($80 million to $70
million) in defense support would be a decrease in dollar imports of
[Page 478]
about $7 million and
an increase of dollar exports of about $2 million reducing the gap
to approximately $1 million, which can probably be covered by
reduced payments for services.
Total availabilities will be reduced on two counts. First, the
reduction of imports will have a negative multiplier effect of about
2.9 on the GNP, reducing it by about
$19 million, and second, this decrease in imports coupled with the
increase in exports will reduce net goods and services from abroad
by about $7 million. Total availabilities will therefore fall by
about $26 million.
A reshuffling of the economy will result; imports needed for the
export industry will be increased at the expense of imports for
consumption, long term investment, and defense. Imports suitable for
both defense and exports will be shifted to the export industry to
close the balance of payments gap.
A government program to reduce consumption by 10% and investment by
25% since 1950 has been carried out successfully, leaving little
room for further reductions in these categories. Decreases of $5
million and $2 million in consumption and investment respectively is
probably as much as could be expected. Defense will feel the
greatest impact due to the nature of the imports required for it,
and will decline by about $19 million.
[Attachment 8]
Paper Prepared in the Mutual Security
Agency
United Kingdom
Impact of Reduced Defense Support
on Estimated Defense Expenditures
The impact of a reduction of $75 million from the $590 million
projected for defense support aid to the United Kingdom for fiscal
year 1952/53 must be considered in relation to the background of
balance of payments crisis and the severe loss of reserves which the
UK suffered in 1951/52. Any reduction in defense support to the UK
leaves the UK with no alternative but to seek adjustments adequate
to avoid incurring the payments gap which the withdrawal of aid
would otherwise leave. The projections based on the assumption of
$590 million aid already take into account the severe measures of
adjustment which the United Kingdom has introduced and imply the
maximum feasible reliance on the consumption of stocks to support
the level of activity.
Significant offsets to the loss of $75 million are unlikely in
sufficient volume to be able to avoid import cuts even if it is
assumed
[Page 479]
that some military
equipment can be sold in the dollar area and that reduced imports
result in lower dollar service costs. Dollar imports have already
been reduced to essentials and the impact of further cuts cannot
help but be severe. The relationship between imports and GNP is of primary importance in the UK
which imports about half its food and most of its raw materials. The
net cut in imports which would be necessary with reduced aid cannot
help but result in a reduced level of gross national product as
compared with the full aid projection. This loss of product has been
estimated at $300 million.
The reduction in gross national product and the changes in net
foreign balance will effect a reduction of almost 1 percent in the
total resources available for domestic use from prospective
resources available on the assumption of full defense supporting
aid. A substantial reduction in the investment program and in per
capita personal consumption below the 1950/51 level were already
implied with the full aid assumption. Nevertheless, it has been
assumed here that despite the domestic economic, social, and
political problems of imposing additional cuts on the civil sectors
of the economy, the government would seek to protect the defense
effort as much as it could and would attempt to distribute the
reduction in domestic availabilities enforced by this proposed
reduction in aid throughout the economy. Only about half the cut
could be imposed on the civil sectors, however, and an additional
reduction inevitably would fall on defense, equivalent to a defense
multiplier effect from the cut in aid of approximately 2.3. The
defense effort projected at $4,750 million on the assumption of $590
million in aid would thus be reduced to $4,575 million, or a
reduction of $175 million.
