Foreign Relations of the United States, 1948, Western Europe, Volume III

840.50 Recovery/3–2248: Telegram

The Ambassador in Italy (Dunn) to the Secretary of State

confidential

Rome, March 22, 1948—9 p. m.

1269. This message is intended to bring up-to-date our thinking with respect to Italy’s economic problems, on the eve of ERP.

Signature of the interim aid agreement marked the end of the policy of straight relief.¹ Under that system it had been demonstrated that Italian resources fall far short of the needs for reconstruction and recovery (multiplied and complicated by the unprecedented burden of social charges). Congressional approval of interim aid “to prevent economic retrogression” was tantamount to approval of the principle that continued US aid was essential to recovery if the limited progress already made under the relief policy were not to be lost.

Fact that Italian industrial production has failed even to maintain its slow pace of recovery under relief makes it advisable to reexamine at this point some basic factors conditioning Italy’s economic reconstruction and recovery. In this way we can be prepared to assure the maximum efficiency in the application of US aid to Italy under ERP when it comes.

Production is the key to recovery and ERP is designed to stimulate it to the level where CEEC countries become self supporting.

In the case of Italy the degree of expansion to make this economy solvent is relatively greater than is the case with most of the other CEEC countries. Italy’s invisible assets even before the war were almost never sufficient to balance the trade deficit, the country for years drew on its reserves, to the point where they now scarcely exist. Italy had lost in percentage more of its earning capacity, domestic and foreign, visible and invisible, than the majority of the countries of Western Europe (Germany excepted). For instance:

1. Italy’s shipping fell to about 10 percent of pre-war; it has recovered to 55 to 60 percent of pre-war. In this recovery US credits for purchases of liberties contributed 45 percent of the added tonnage, but before these can add to Italy’s earning power this cost must be amortized in dollars. Amortization is also a charge on new and rebuilt ships leaving Italian yards.3

2. Italy’s emigrants have grown distant from relatives over the years, and the mass emigration prospects for the 400,000 additional population per year are dim. This means an added feeding and social burden without compensating remittances, for even before the war savings to expand industry and agriculture sufficed to provide employment for only a quarter to a third of the new supply of labor.

3. Although Italy’s foreign investments were never large, those in the Balkans are committed to reparations; their earnings will no longer be available to buy the Danubian products which used to help bridge the food margin.

4. War damage to industrial plant, transportation, communications, ports, warehousing, power and housing, and the accumulated effect of deficient maintenance are very large. To these losses must be added the plant taken by the Germans, the gearing of Italian industry to German war economies et cetera.

5. An important portion or Italy’s scarce mineral resources have passed to Yugoslavia, while Italians in ceded areas have returned to live in a yet poorer Italy.

6. Tourism will not entirely recover so long as there is political turbulence and until more adequate facilities (of secondary priority compared with industrial, agricultural and housing construction) can be provided.

7. The accumulated effects of fertilizer shortages, and forced abandonment of crop rotation practices, in order to meet primary food needs during a world shortage, will be overcome only after years of intensive effort and large applications of capital. Before the war imports filled a net caloric deficit in a normal adult diet of 6 percent; last year’s recourse was had to import for 25 percent of the calories in a sub-normal diet.

8. The virtual disappearance of the German market, especially for fruits and vegetables which traditionally paid for Italy’s coal needs, represents an important exchange loss, and threatens the life of an important future source of exchange.

9. Italy’s 1 percent annual population increase exceeds increasing standards of living, in the absence of expansion of the productive capacity of industry, agriculture and power on a scale for beyond Italy’s capital availabilities.

10. Italian industry is essentially a processing industry, importing raw materials and fuel and exporting manufactures. The inflation of world raw material, food and fuel prices being greater than that of the prices of manufactured products, Italian industry, especially since the anti-inflation and credit control policies were inaugurated, is in a serious squeeze.

Two foregoing factors suggest that Italian recovery will require expansion of pre-war earning power.

(1) To defray the capital cost of reconstruction, modernization and extra-maintenance;

(2) To provide for a greater population in a smaller territory disposing of fewer natural resources.

(3) To bridge the gap left by disappearance of invisible earning assets, and at same time to permit reconstruction of an adequate reserve.

In addition to these longer-term considerations, there is now the fact that Italian industrial production has reportedly tapered off to 71 percent of 1938–40 from the postwar peak last September of 82 percent. A number of factors besides the seasonal one are responsible: the political campaign, of course, and the fears concerning the April 18 results; the continued pressure from labor (aggravated and intensified for political purposes by the Communists) for increased social benefits, for labor participation in management, et cetera; the reduction in the volume of available working capital below required levels owing to the government’s tenacious application of controls on private banking credit (which has however arrested the course of inflation); and many expensive and inefficiently applied social measures (blocks on layoffs, multiplicity of social institutions with high overhead, inexperience of the new post-Fascist personnel, feather bedding, et cetera).

All of these factors require progressive correction by Italy. The weight of them must really be serious, considering that the devaluation of the lire last November produced no spurt in exports.

Italy’s recovery must be accomplished by a small scale industry in competition for dollars with a gigantic scale American industry which has increased both its capacity and its efficiency since the war and which has almost all of its fuel and raw materials at its doors, not across the Atlantic; and of course in competition with British and French industries which also have some advantages in size and accessibility of fuel and raw materials. Admittedly this is an Italian problem, but, the US should facilitate its solution, if only in the interest of the American taxpayer. We must accept the conclusion that Italian production and exports must outstrip by far the 1938 levels if the Italian economy is to be made solvent; we must accept the conclusion that it is to the interest of the taxpayer to receive payment, in kind of course, rather than to subsidize his surplus industrial and agricultural production and services, and rather than to put Europe on the dole. This is indeed the hypothesis upon which the Italian balance of payments estimates in connection with ERP should be based.

We must also expect that the trend toward socialization in Europe will be accelerated. Social direction of the basic activities, i.e. power, heavy industry, credit, transportation and communications, may indeed become a necessity on the Italian side for the efficient and productive use of our aid and of the distribution of its benefits over the whole population. ERP stands less chance to succeed if labor believes ERP to be in the interest of conservative industrialists alone. Effect on private enterprise will depend largely upon mechanism by which aid is made available.

Realizing that the question of socialization is controversial and requires careful attention, we are hoping to go into it more deeply with the intention of trying to discover some of the answers which may be helpful for the purposes of our policy. We merely mention it here in passing as a factor we can not discuss merely on grounds of distaste.

Moreover, there should be maximum flexibility in the implementation of ERP. Ready adaptability to varying conditions in the several countries should not be obstructed by non-essential conditions nor frustrated by inadequate central and periphery organization. On the Other hand, in the adaptation and actual execution of ERP, the role of US aid in the foreign economies should be frankly recognized for what it is, and that role can be best played indirectly through CEEC.

Some examples of procedures which should be open to Italy which are within our competence to provide during ERP period are submitted below to illustrate the need for flexibility and good recognition:

1. A number of raw materials, and particularly coal, which are financed by US are coming to Italy from unnatural sources, are traveling unusual distances, and are paying unnatural freight charges. Coal, as the best example, in the last years before the war came ⅔rds from Germany and ⅓rd from England. Its landed cost was around $6, of which about 20 percent was freight; and this coal was carefully selected for quality according to purpose. Today ¾ths or more of the coal comes from the US at an average price of $8 but at a landed cost, after traversing the Atlantic, of close to $20. The effect on the Italian steel industry is greatly to increase cost of production as compared with that of other industrial countries. The high cost of steel is further reflected in many Italian processing industries, especially the mechanical industries. (The steel and mechanical industries are known as the reddest in Italy). It would seem obvious to us that so long as Italian industry must pay the landed cost equivalent in lire to fuel coming from an entirely unnatural source (and moreover for fuel which before the war was paid for largely by exports of fruits and vegetables which are not acceptable to us as payment), Italian exports will not be able to compete in hard currency markets.

To assist in removing unnecessary handicaps on Italian production so long as it is dependent on our dollar financing of acquisitions from abnormal sources, industry should pay economic lire prices for its fuel and raw materials, that is, prices not bloated by the cost of the long Atlantic haul. The formula in its simplest terms would be this: the price to be paid by the Italian consumer for a commodity included in ERP shall be the lire equivalent of the f.o.b. price in the western hemisphere plus the freight between the normal source of supply (that is the Ruhr in the case of coal) and Italy. Under such a formula Italian industry might get started and in due course, accompanied by measures within the competence of the Italian Government and of industry itself (as fast as political circumstances permit) and measures of CEEC cooperation, might be able to compete in dollar markets, including the indispensable US market. Such a formula should have the further virtue of inducing reduction of the price of Polish, Ruhr and British coal, now covered by the American umbrella.

2. In a capital-poor country faced with the necessity to spend large amounts on reconstruction and development programs, as is the Italian case, the importation of goods alone may well be insufficient for attainment of the (production objectives of ERP, and the overall problem of executing certain development programs (we think of electric power expansion and of the reconversion and modernization job in heavy industry) may be solved only through appropriate disposal of lire proceeds so as to make working capital available to supplement private capital which is in deficient supply. There are many ways in which this can be done and many aspects which need careful study; the essential point at this time is that no policy be laid down as to the use of these funds. In this respect there will presumably be close coordination with financing programs requiring dollar credits (Eximbank, World Bank, et cetera).

3. The recent production decline in Italy illustrates the inter-play of political factors, financial policies and purely productive considerations, leading to unforeseen or at least unplanned situations for which there may be no simple remedy. Those who best understand the complexities of the Italian economy (that is the Italian themselves) and also those who are immediately available on the field to study the situation at first hand, should have ample scope to deal with these problems without injuring Italian pride or frustrating Italian initiative. The field administrator under ERP, in connection with country import programs, for example, might recommend maximum and minimum requirement figures within which he could negotiate directly at the local level. The maneuverable portion of a program could be considered either as margin for error or a margin for adjustment, and in either case would serve as a lever for the local administrator and as an incentive for the local government. These margins could do much to provide incentive to the Italians to take the many measures which can only properly be taken here.

4. In regard to our local ERP organization, it is to be hoped that maximum advantage can be taken of the experience and talent of the personnel which the Department has sent out for earlier program.

These are some suggestions among many which the Department has undoubtedly very much in mind. Our main concern is to contribute what thoughts occur to us in field to purpose that nothing be overlooked in our anxiety to see ERP auspiciously launched and efficiently pursued.²

Sent Department 1269, repeated London 134, and Paris 181.

Dunn

1. For information on the interim aid program, see Foreign Relations, 1947, vol. iii, p. 484 and ante, p. 755.
2. In telegram 2028 of May 2, not printed, Dunn reported on a review presented to top members of the Italian Government by Campilli, delegate for international economic cooperation, of the outlook for Italy under ERP. It stressed that ERP alone would not resolve the problems of Italy which primarily depended on the solution of European and world problems; that Italy was short of capital; needed the development of world markets to increase her production, especially the German market for fruits and vegetables; and needed outlets for emigration. (840.50 Recovery/5–248)