868.50/2–1747

The Chief of the American Economic Mission to Greece (Porter) to the Under Secretary of State for Economic Affairs (Clayton)

top secret

My Dear Mr. Clayton: The American Economic Mission has now been in Greece for one month, almost half of which has been spent visiting Macedonia and the Peloponnesus in order to observe reconstruction, agricultural production and other activities in the provinces. Athens, comparatively much better off than the provinces, is in an exceedingly inappropriate place to obtain a real prospective of conditions in Greece.

We have worked with the Ministries of the Government in Athens in an attempt to get a detailed picture of their program for the coming year, but have encountered the difficulties and frustrations, usual in [Page 18]Greece, in getting reliable information. We have, however, made certain progress on governmental reorganization, budget information, trade balances, and related matters.

While I am not prepared at this point to make an interim report, some of my preliminary impressions may be of interest to you and will indicate the extreme gravity of the situation:

(1)
From our preliminary analysis of the budget, it appears that during the current fiscal year ending March 31, 1947, expenditures will be approximately $272 million and revenues $185 million, leaving a deficit of $87 million (using a realistic exchange rate of 8,000 drachma to the dollar). In appraising the magnitude of expenditures, it must be borne in mind that the burden of the military was carried with the assistance of a British subsidy valued at $85 million, and the burden of relief and reconstruction with the aid of UNRRA supplies, surplus property and Eximbank credits estimated at $230 million. Furthermore, over 40% of revenues are estimated to have been derived from the sale of UNRRA supplies.
The Government has not yet faced the problems which will follow inevitably from the cessation of UNRRA aid and, possibly, the British subsidy to the Greek Army; they have not in fact prepared a budget for the fiscal year 1947–48. The first tentative Government estimates of revenues and expenditures for 1947–48, received at the time of writing this letter, place gross expenditures at $421 million and gross revenues at $256 million, a deficit of $165 million. This estimate of expenditures assumes a continuation of the British subsidy to the Greek Army.
While the Government has delayed the presentation of its fiscal plans for 1947–48, presumably because of a reluctance to expose its precarious position, it seems clear that if the Government contemplates a loose and disorganized program of expenditures in the amount indicated above, the deficit could hardly be covered even with drastic tax increases which would inevitably reduce further the already low standard of living of the masses of the Greek people. Estimating the national income roughly at the level of about $800 million, the state of bankruptcy becomes even more apparent. I know of no technique by which an impoverished country—or any country—can hope to survive when its Government is spending up to 50% of the national income, in large part for non-productive purposes.
From a purely technical point of view the Greek fiscal problem could be met, given: (1) a drastic curtailment of expenditures including domestic military expenses, increased taxes, and strengthening of the tax administration; (2) American assistance in financing minimum imports of food stuffs; and (3) a continuation of the British subsidy [Page 19]to the Greek Army. However, the Greek Government has given ns little indication thus far that it will take the steps necessary to bring its budget into approximate balance.
You may be interested in knowing that approximately 1% of the national income, less than $8 million, is collected by the Government in direct income taxes. While revenues from this source would not be considerable in any event, and the Government claims that it has no machinery for their collection, there is no doubt in my mind that failure to require the majority of wealthy Athenians, merchants and businessmen, to bear their proportionate share of the cost of government creates a most fertile field for fomentation by the extreme left.
(2)
From this dismal fiscal outlook, as well as from other indications, notably a failure on the part of the Government to withstand demands for wage increases by Government employees and others, it is apparent that another serious round of inflation may be approaching. It is inevitable unless the Government will realistically plan its program of expenditures and revenues within the limits of reduced foreign assistance. We are meeting with the Ministers concerned to explore methods of narrowing the gap between what they have been loosely thinking in terms of probable expenditures and receipts.
(3)
Statistically we can reduce to about $50 million the $175 million deficit in the too generous balance of payments estimated by UNRRA and the Greek Government. This presupposes, however, effective utilization of United States surplus property and the development of exports to the levels we have indicated to the Government. The situation is particularly acute when one considers the volume of UNRRA supplies which have been poured into the economy during the past two years, although stocks of UNRRA stores in Greece and in the pipeline mitigate the problem to a degree.
(4)
While there are a few bright spots here and there on reconstruction, less has been accomplished since liberation than would be expected. Matériel from abroad for the reconstruction of transportation facilities, as well as drachmae for concurrent local expenses, are extremely limited; however, railways are in operation with scant equipment in much of Greece and temporary highway bridges have replaced most of those destroyed. The use of credits granted by the state bank and private banking institutions has aided the recovery of agricultural output and assisted to some extent in furthering trade and commerce, but has not been adequate to finance long term capital investment. Such little liquid capital as there is in private hands has sought outlet in gold or foreign exchange rather than in development. For example, I have been unable to find a single residential unit in Athens that has been built since liberation for investment purposes; [Page 20]this in spite of an estimated increase of 200,000 in the population of Athens during the past two years. People are not investing in productive enterprise in this atmosphere, and the responsibility rests primarily with the State which has taken no effective steps to create a climate of confidence or to prohibit capital from hedging its risk outside the national economy.
(5)
Discussions with Ministers and industrialists always end up on the political note. They claim it is futile to adopt any policies or to undertake any permanent reconstruction until international and domestic security is achieved. I have insisted that the two must go hand in hand; that this country cannot afford to wait until the United Nations Investigation Commission successfully completes its work before instituting obvious economic reforms. However, we have made but little progress in convincing the Government to adopt this view. Expediency and a hand-to-mouth existence are the order of the day.
(6)
One of the underlying causes of the lag in recovery in Greece is the unhealthy psychological condition of the people. Much of what we observe may be no more than the inherent differences between Greek and American thinking, but in addition to this there appears to be a sense of helplessness on their part; a feeling that because they suffered during the War they should now be cared for by their richer allies; a belief that the external factors in their problem are so large that their individual efforts are futile. There is a pathetic dependence upon the United States. Our presence here is used by the Government to arouse unjustified hopes among the people. There is a consequent misunderstanding throughout the country of the purpose of the Mission, which I have undertaken to correct on every appropriate occasion. I have been meticulous in pointing out that our only proper function is to make friendly and appropriate suggestions to the Greek Government and to carry back to our own Government information upon which it can make intelligent judgments; this has done little to remove the wide-spread belief that our job really is to bail out Greece irrespective of the cost.
(7)
There is really no State here in the Western concept. Rather we have a loose hierarchy of individualistic politicians, some worse than others, who are so preoccupied with their own struggle for power that they have no time, even assuming capacity, to develop economic policy. While I have no actual proof of venality in high places, the discussions current in journalistic and commercial circles claim that there exists a high degree of corruption. The civil service is a depressing farce. I will not burden you with the amazing details of its lack of organization and system, but will set forth fully in our final reports [Page 21]the almost complete deterioration of competence in governmental services.

There appears to be a willingness on the part of the present Government to accept such reasonable suggestions as we may finally make, but I am skeptical of the capacity of this Government, which although claiming to be a coalition in fact represents only a coalition of the Rightist and Conservative elements of the population, to administer effectively the extensive reforms needed. And frankly alternatives are not clear. Maximos, the present Prime Minister, is a kindly, well-intentioned old man, and I accept at face value his profession of patriotism and his desire to adopt a realistic program. Here again, however, I have reservations as to the capacity of Maximos or his Ministers to really face up to the hard realities.

The situation in Greece as indicated by these random observations is very discouraging, but not hopeless. There obviously are the makings of a financial collapse and I need not point out the resulting political implications. The preventatives for inflation are energetic measures on the part of the Greek Government and substantial financial aid from foreign sources. It is characteristic of these people not to take corrective measures until absolutely necessary and then to take only a minimum. Furthermore, we may be judging the competence of the Greek Government by standards too high for this part of the world.

Also on the encouraging side are certain stabilizing factors which might prevent any inflation from resulting in complete breakdown of the economy. Agricultural production has been restored almost to prewar level and industrial production has passed the halfway mark; neither would completely relapse. Furthermore, the economic structure of Greece has always been relatively simple compared to those countries where money and credits play such a dominating role. It is based on agriculture. Events of recent years—occupation and inflation—have made it even more primitive. Banks, insurance companies and industrial concerns play a relatively unimportant role at present and most transactions of any size are in gold or foreign currency. While the setback which inflation would cause to recovery cannot be dismissed as inconsequential, it can be said that inflation might not have the economic effects it would have in a modern, complex society. Its political repercussions could well be catastrophic.

Being conscious of the possibility of political upheaval in times of economic breakdown, it is reassuring to realize that the Greeks are overwhelmingly and articulately in favor of democracy, although the strength of the Left should not be minimized. Amfoge estimated only 9.3 percent of the voters to be communists. There is a strong devotion to democracy and individual freedom.

[Page 22]

Guidance and financial aid from the United States will be telling contributions in the struggle against Greek bankruptcy. I hope that our Mission will present a basic program for the Government which will be sound and practicable. However, because of my stated doubts about this Government’s ability to carry through a program, I believe that day to day guidance by American personnel in Greece is going to be necessary. The American and British members of the Greek Government Currency Committee here performed invaluable services in keeping the economy in balance. I am hoping soon to complete an arrangement whereby Buell Maben, Chief of the UNRRA Mission, will be employed by the Greek Government to develop and supervise a program for exports, imports and distribution of supplies. He will, of course, need the informal support of our Government.

We will probably recommend in our final report that American financial aid be conditioned upon effective efforts of the Greek Government to carry out minimum economic reforms such as foreign exchange controls and adequate taxation, and we will recommend that these efforts be judged by several Americans sent to Greece for that purpose. Not only should this lead to a wiser expenditure of the money, but it will give the Greek Government the added benefit of absolutely necessary reforms which it is apparently incapable of imposing itself.

I am hoping after our discussions this week to be able to set a target date for our return. I will advise you within 10 days of our plans.

Best personal regards.

Sincerely,

Paul A. Porter

Ambassador