700.5 MSP/7–154
No. 296
Memorandum by Laurence C. Vass of
the Office of European Regional Affairs to the Special Assistant to
the Secretary of State for Mutual Security Affairs (Nolting)1
Subject: Possibilities for Loans in the EUR Area
As you requested, we have explored the possibilities of substituting loans for grant aid in the European area, on the assumption that the Congress makes loans mandatory to an extent that a total of $100–$150 million must be placed in Europe.
Looking first at Defense Support, it would appear that loans to Spain or Yugoslavia are out of the question, for reasons well known to you. On purely economic grounds, it would seem that the Berlin program could be on a local currency “soft loan” basis; however, there is considerable doubt that the political situation will be such as to permit a “take it or leave it” loan negotiation. This must be considered as no more than a possible source for a $25 million loan.
Direct force support involves Yugoslavia and the U.K. The former is clearly not suitable for loan; the latter program was eliminated by the House. If the $75 million should be restored in Conference, there is a fair chance that the U.K. would accept a large portion as a local currency, long-term loan, if they were convinced that the mandatory loan provision forced us to impose this condition. This, of course, is on the assumption that we implement our agreement on further financing of “Plan K”. If we do not, the chance of peddling a U.K. loan would be extremely remote.
So far as military assistance is concerned, the small total, and the fact that $200 million is for Spain, the U.K. and Yugoslavia, leaves a very modest total program for countries which might conceivably be requested to accept equipment on a loan basis.* Belgium, [Page 621] Denmark, Germany, Portugal, the Netherlands and Norway certainly have the economic and financial resources to take all of the illustrative Fiscal Year 1955 program on a loan basis. However, these programs total only $100 million. A decision to require 100 percent loans from any of these countries would be considered a major policy change, and lead to damaging charges of discrimination by the countries, bilaterally and within NATO. Only a partial loan would be feasible, at best.
Germany presents a special case. Our large end-item aid program is required because of limitations upon German production, physical and political, rather than because Germany is making an adequate defense contribution from its own resources. Germany certainly could afford to take the small Fiscal Year 1955 program as a loan, and, perhaps, the Fiscal Year 1954 program as well. However, there are two major complications: Germany is peculiarly sensitive to apparent discrimination; and aid will be to EDC, not Germany, if that blessed event occurs. The only possible approach would be to negotiate a partial loan with EDC, and let Germany, Belgium, the Netherlands and Italy conduct their own “burden-sharing” exercise. Of course, if Germany is rearmed outside of EDC, the circumstances at the time will determine whether it will be feasible to adopt a hard-boiled approach and force a sizable loan on Germany.
In summary, on the assumption that the alternative is no aid or loans of $100–$150 million, there are possibilities of reaching this total. Success cannot be guaranteed, and the cost to our foreign policy objectives would be high. I can only conclude that the Administration should do all it possibly can to hold the global loan requirement to about $150 million, as the only reasonably satisfactory answer to this problem.
Because of the early deadline, it was impossible to obtain an EUR position on this memorandum. I am requesting the interested offices to comment directly to your office, if they feel so inclined.