Foreign Relations of the United States, 1952–1954, Western Europe and Canada, Volume VI, Part 1

740.5 MSP/7–1152

No. 264
Memorandum by the Deputy Director of the Office of European Regional Affairs (Knight) to the Special Assistant to the Secretary of State for Mutual Security Affairs (Martin)

secret

Washington, July 11, 1952.

Subject:

• Defense Support Aid to WE Countries for FY 1953.

(1) I understand that MSA is recommending the following tentative figures for defense support aid to WE countries for FY 1953:

Austria—	$60 million
Italy—	$80 million
France—	$330 million
The Netherlands—	$33 million
Belgium—	none

I understand also that MSA is not planning any amount of economic aid for Spain out of the 1953 appropriation, on the tentative assumption that the $25 million available for Spain will probably be used for military assistance.

(2) The MSA recommendations and assumptions for France, Belgium, the Netherlands and Spain seem to be reasonable. The French situation is obviously specially important and delicate for numerous reasons, but it has received and is continuing to receive so much detailed attention that it need not be discussed in this paper.

(3) There are attached two separate memoranda with specific recommendations to increase the tentative figures proposed for Austria and Italy. Although I realize that increases over the MSA proposals may make it necessary to transfer funds from military to defense support aid, I believe that in the case of these two countries they are imperative because of what I consider to be two very delicate situations.

A. Austria

I don’t think we can ever afford to forget that in dealing with countries with existing characteristics based on centuries of history and of traditions it is quite unrealistic to assume that over night these countries will acquire all the virtues which we would like to transfuse into their bodies politic (virtues which we do not always have ourselves in excessive quantities). Therefore, while in theory I am perfectly willing to admit that Austria should be able to get along on $60 million, I am convinced that the Austrians will not in practice be able to bring their house into sufficient order to permit them to get through Fiscal 1953 on this modest amount of aid without serious economic and resulting political repercussions. In this regard I understand that MSA’s assumption in proposing originally $86 million in 1953 was that Austria would achieve the entire reform program then under consideration. The Department did not agree with the assumption at that time and has now even less reason to believe that the Austrians will make all the progress on which the $86 million estimate was predicated.

For some time we have been considering in WE the problem of estimating at what reduced figure of aid there might be a sharp increase in the temptation for the Austrians to turn to trade with the Soviet bloc (we should remember that about ⅓ of Austria’s foreign trade before the war was with countries now behind the iron curtain, and that this figure has now been reduced to approximately 11 percent). As a matter of general interest, I might mention that this theoretical question was put to Ben Thibodeaux since his return and without any consultation with us he said that a figure of $60 million would be so low as to perhaps make trade with the east more attractive than U.S. aid tied to east-west controls.

Finally, it may be appropriate to remember that, like Berlin, Austria is a showcase of the west. The Austrians, ever since the war, have been in a dangerously exposed strategic and political situation, and it would seem most injudicious to take the risk which would be involved in reducing the Austrian aid figure to $60 million. I strongly urge that we exert every effort to increase this figure to our original proposal of $86 million.

B. Italy.

We are convinced that a reduction of defense support assistance to Italy to $80 million would result in a decrease in the over all Italian war effort regardless of what undertakings they might be led to assume in the course of the Annual Review of NATO.¹ Once again we would like, and all of us are seeking in whatever ways are open to us, to influence the Italian Government toward a liberalization of Mr. Pella’s financial policies. Not only have our efforts to date been unsuccessful, but we are entering into active electoral period. National elections are less than a year off, and in this period it would be futile to press for any liberalization of the present financial policies which might raise the specter of inflation in order to achieve greater defense expenditures. Furthermore, in such a period the real risk we have to avoid is that the Italian Government might cut military expenditures in favor of social and therefore of politically more attractive programs. I hardly need to stress that the elections will imprint on Italy her political complexion for the following five years. Moreover, while of course the U.S. can not allow itself to be over-influenced by such considerations, it can not be denied that the Italian, be he a cabinet officer or a man in the street, is ever tempted to make comparisons with France, which with a smaller population has more abundant natural resources and a national income almost twice as large. As you know, the proposed figure for France is $330 million.

As a matter of fact, I am coming to the conclusion that a serious reconsideration of the Italian military objectives may be the principal thing which we should attempt at this time. While I can not prove it, experience over the past two years gives me the impression that there is no comparable and logical relationship between the French and Italian Forces and military aid programs, even after taking into full consideration France’s Indochina commitments. If on top of this we further reduce Italy’s defense support allocation (and we must remember also that Italy, to a larger over all extent than any other WE country, depends on imports for her raw materials) it seems that in effect we may be writing off Italy as a military asset to the collective defense. Perhaps this might be the wise thing to do on the basis of European and global strategic considerations, but I am not aware that this is either our present policy or interest.

Perhaps this is not the appropriate occasion to raise this point but unless we are to wake up in a year or two with nothing but the aftermath of an Italian Armed Forces illusion, we should get together with the Pentagon and do some serious thinking in connection with the Italian force program as it now appears in MRC 12.²

In the meantime we think it essential for political reasons that the Department exert every effort to increase the aid figures to $140 million.

[Attachment 1]

Paper Prepared by Peter Rutter of the Office of Western European Affairs

confidential

Washington, July 10, 1952.

WE Comments on Proposed MSA Aid Allocation to Austria in Fiscal Year 1953

recommendation

It is suggested that the Department recommend an amount of aid for Austria for fiscal 1953 of $86 million.

discussion

The tentative allocation of aid to Austria proposed by MSA for fiscal 1953 is $60 million as compared with $86 million proposed to Congress, $120 million received in 1952 and $190 million in 1951. While considered nominally as defense support funds under the terms of MSA legislation, this money in reality is only for economic aid since Austria is forbidden any military organization or ties with NATO, and has very limited possibilities of increasing its earnings through O.S.P. It is believed Austria at this level of aid will experience severe economic difficulties which may threaten the existence of the coalition or even the country’s political stability.

The unique Austrian position merits special consideration. Few, if any, chances exist for the quick conclusion of a treaty which would end the burdensome occupation. So long as this situation continues, the Soviets will keep in effect the series of controls which prevent the best utilization of Austrian resources, and the system of spoliation, which costs Austria $50 million or more a year. Moreover, they retain the power to intervene overtly or covertly in operations designed to weaken the authority of the Austrian Government and to foment disorder. In the fall of 1950 they did support the Austrian Communists’ efforts to capitalize upon public dissatisfaction with a wage-price settlement and they threatened to do the same in the summer of 1951. It is believed that they await only a marked deterioration in economic stability to intervene more actively. Thus, although the coalition Government, which is democratic and friendly to the West, has shown unusual stability and will to resist Soviet pressures since 1945, it is doubtful if it can deal with an economic crisis, which would necessarily entail large-scale unemployment and a decline in the standard of living. Hence the maintenance of economic stability is essential.

The MSA Mission in Vienna has estimated Austria’s balance of payment deficit for fiscal 1952 at $153 million and on the basis of tentative and highly optimistic projections for fiscal 1953 at $92 million. These projections include assumptions that: (1) Austria will have halted its inflation, which has increasingly impeded exports and disturbed wage-price relationships; (2) exports will remain at the 1952 level; (3) imports will drop 10 percent in value; (4) the Poles and Czechs will continue coal deliveries at the 1951–52 rate; and (5) Austria’s EPU deficit can be kept at the low level of the final quarter of 1952. Even if these goals are achieved, Austria on the basis of receiving $60 million in aid will have to spend $32 million from its slender foreign exchange reserves of about $55 million (these exclude gold stocks not available for trade purposes and are sufficient to finance imports for a month), reduce inventories which are already low, or further lower imports to the point where economic activity is seriously reduced. Signs of future difficulties have already appeared. Unemployment for June was 47 percent higher than for June 1951. The sales of certain finished goods industries, especially textiles, are slow. It is doubtful if the Austrian Government can balance its swollen budget. If Austria cannot use aid funds to buy grain at IWA prices, the cost of foodstuffs will increase substantially.

[Attachment 2]

Paper Prepared by Samuel B. Wolff and George A. Tesoro of the Office of Western European Affairs

confidential

WE Comments on Proposed MSA Aid Allocation to Italy in Fiscal Year 1953

recommendation

It is suggested that the Department recommend an amount of defense support aid for Italy for FY 1953 of $140 million.

discussion

(a) The MSA projection for Italian defense expenditures in FY’ 53 is $1027 million. The present MSA tentative direct aid figure is $80 million. If this figure is not increased, and taking into account dollar receipts from OSP and U.S. military expenditures, Italian loss of reserves at the projected level of defense spending would be about $100 million. In fact, on the basis of $110 million in direct aid, MSA had estimated that Italy would lose $25 million in gold and dollar reserves. In arriving at this result, MSA anticipated an Italian EPU surplus of $90 million, resulting in dollar receipts of $45 million from the EPU. However, during the first six months of 1952, Italy has run a deficit with EPU, and the weight of opinion at the present time is that in FY’ 53 Italy will be in balance with EPU or will run a deficit. On this basis, with aid of $110 million, Italy would have a loss of reserves of $70 million. With direct aid reduced to $80 million, the loss of reserves would increase by $30 million to a total of $100 million. Although we may argue that Italian reserves are sufficient to incur such a loss without necessarily imperiling economic or financial stability, there is no likelihood that the Italian Government will agree.

The Italian reserves increased during the second half of 1951 because of a heavy EPU surplus; the Italians claimed that this surplus was of a temporary nature and that the EPU receipts could not be spent but should be kept in reserve to meet future EPU deficits. Developments during the first half of CY 1952 seem to confirm the Italian forecast, and therefore we cannot anticipate that the Italians will be willing to draw down dollar reserves to any substantial degree—except to finance EPU deficits. All our experience in dealing with the Italian Government to date leads to the conclusion that the Italian Government’s concern for financial stability will cause it to reject a defense program that would lead to any substantial diminution of its gold and dollar reserves.

It may be noted also that the MSA estimate of Italy’s balance of payments include other dollar receipts which appear to be very optimistic, such as OSP and utilization of pipeline. A reappraisal of such items would probably increase substantially the Italian aid requirements.

(b) On the basis of the preceding calculation, direct aid of at least $180 million would be required to prevent any loss of reserves. In the light of competing requirements for the limited aid funds available, the problem is basically one of determining the minimum figure for direct aid that will persuade the Italian Government to agree to the projected level of defense expenditures.

It is suggested that the most feasible way of achieving this objective would be to relate the total U.S. direct aid. OSP and military expenditures to be received by Italy in FY’ 53 to the total received in FY’ 52, with sufficient additional aid in FY’ 53 to offset the additional requirement for dollar imports that will arise from the increase of the FY’ 53 program over the FY’ 52 defense program.

In FY’ 52 against a defense program of $811 million, Italy received $162.5 million in direct aid. In addition, it is estimated that the net dollar balance of payments impact of U.S. military expenditures was $22.7 million. (It is not believed that the Italian treasury received any dollars from OSP in FY’ 52). Thus, the dollars received totaled $185.2 million.

The MSA Mission in Rome estimates (Tomus A–296, June 6³) that for every three dollars worth of Italian defense expenditures, one dollars worth of dollar imports is consumed. On this basis, the increase of $216 million in Italy’s defense expenditures from FY’ 52 to FY’ 53 would require an additional $72 million. Thus, the total aid Italy would require in FY’ 53 to be on a comparable basis with FY’ 52 would be $185.2 (FY’ 52 aid) plus $72 million, or a total of $257.2 million. It is optimistically estimated by Defense that the net dollar balance of payments impact of OSP and U.S. military expenditures in Italy will be $116 million in FY ’53 (OSP—$84.3 military expenditures—$31.7). On this basis, the requirements for direct aid would be $141.2 million. With this much aid, Italy’s projected loss of reserves would be reduced to $40 million.

It should be stressed, incidentally, that this computation does not take into account possible changes in the other items of the balance of payments. In fact, however, the Italian balance of trade in the last several months has shown a substantial deterioration, not only with the EPU area but also with the dollar area. Unless this trend changes, therefore, the increased dollar deficit on this account will increase the aid requirements estimated above.

(c) Besides being concerned with the effects of defense spending on the dollar balance of payments, the Italian Government is also seriously concerned with its internal budgetary effects, i.e., the danger to financial stability arising from large budget deficits financed by government borrowing. The Italian budget for FY’ 53 is in deficit to the extent of 498 billion lire, after allowing for the counterpart (120 billion lire) of the $200 million in direct aid contemplated by the Italians. Taking into consideration the new 10% provision for counterpart, if only $80 million in direct aid is given, only 45 billion lire would be available in counterpart funds, thus increasing the budget deficit by some 75 billion lire. If, however, direct aid is increased to $140 million, as recommended, some 79 billion lire would be available in counterpart funds, and the budget deficit would only be increased by some 41 billion lire.

(d) It must also be kept in mind that a most crucial parliamentary election is scheduled for the spring of 1953. Too sharp a reduction in direct U.S. aid to Italy will be interpreted in many quarters as evidence of U.S. loss of confidence in the present Italian Government. Moreover, the U.S. insistence for a larger defense effort, without an adequate defense support aid, could be successful only at the expense of (1) the financial policies followed by Mr. Pella, and (2) the modest domestic economic and social program (which would be suicidal for the democratic parties facing election). Since the major opponents of the present democratic government are the Communists on the left and the neo-Fascists on the right, it is obviously very much in the U.S. interest for the present government to remain in power. This is particularly true because the present Government has been a staunch supporter of the key aspects of U.S. foreign policy towards Western Europe, i.e., NATO, European integration, etc. Thus, there is a strong political argument for a larger aid figure than the MSA proposed $80 million, which would represent a very drastic cut over the aid granted in past years, i.e., 1951—$230 million, 1952—$162.5 million.

1. For documentation on the NATO Annual Reviews for 1952 and 1953, see vol. v, Part 1, pp. 292 ff.
2. Not further identified in Department of State or Mutual Security Agency files.
3. Not found in Department of State or Mutual Security Agency files.