Foreign Relations of the United States, 1949, Western Europe, Volume IV

ECA Telegram Files, FRC Acc. No. 53A278, Paris Torep: Telegram

The Administrator for Economic Cooperation (Hoffman) to the United States Special Representative in Europe (Harriman), at Paris

secret
priority

Washington, October 6, 1949—9 p. m.

Torep 8349. Reference Repto circular 325.¹

1. It is our view in ECA/W, which we discussed in preliminary form with Gordon and which we believe you share, that some redefinition of ERP and redirection of activities of ECA and of Europeans is in order at this time. Such circumstances as interruption of economic progress this summer, partial loss of sense of direction in OEEC, and change in nature of recovery problem in last six months seem to make such redefinition and redirection desirable. We believe forthcoming Mission Chiefs’ meeting provides opportunity to discuss this subject and that such discussion entirely consistent with what we understand to be your plans for meeting.

2. As preparation for meeting of Mission Chiefs and also of OEEC Consultative Group and Council we are working intensively on this problem. As we see it, ECA activities group themselves under five major headings: (a) direct measures to increase dollar earnings of participating countries; (b) internal fiscal and monetary policies and other policies directed toward overall economic balance; (c) policies and activities bearing upon composition of investment and increase of productivity in particular sectors of European economies; (d) internal and external commercial policies and measures to foster competition; and (e) action designed to achieve in short run closer forms of economic association among participants going considerably beyond current economic cooperation. ECA’s position on (a), (b), and (d) seems to us to be well understood and to require only more precise definition. We are currently concentrating on (c) and (e). Hope ECA/W views will stimulate discussion at Mission Chiefs’ meeting. Following are preliminary comments on these five topics. Will send you more detailed statements on (c), (d) and (e) as soon as possible for your consideration and comment.

3. Re increasing dollar earnings, main lines of ECA policy have been covered by Administrator in his statements on subject during recent European trip. However, because this problem is so basic to European recovery, there is always tendency to consider it obvious and devote too little thought and energy to its solution.

4. Re internal, fiscal, monetary and credit policies, our activities in this field have in the past been well directed and well conceived as they relate to broader aspects of inflationary and deflationary problems. Believe however that our influence has been effectively brought to bear on European Governments in only a few countries. We are inclined to believe ECA interest in internal fiscal, monetary and credit policies should be more active, especially in U.K., Netherlands, Norway and Western Germany. This field of policy now assumes special importance in light of devaluations and military expenditure requirements under Atlantic Pact. In Mission Chiefs’ meeting we might usefully explore strategy of approach to governments on these problems, since objectives are pretty well understood.

5. Re investment policy, believe we should take much more interest than hitherto in composition of national capital formation and economic suitability individual sectors of investment programs in order endeavor influence country decisions in positive fashion. Procedurally, we should be able to find some means of unifying ECA activities with respect to (a) investment projects containing ECA-financed dollar component; (b) investment projects involving counterpart and (c) privately financed investment projects over which national governments have some control. Instead of following different procedures with respect to each, we should seek as rapidly as possible to identify critical sectors of each country’s investment program, regardless of method of financing, and concentrate our attention on influencing European decisions in these critical sectors. This means that detailed and technical project review should only be undertaken in critical sectors and only when evaluation of sector as a whole cannot be intelligently pursued without technical examination of individual projects within it. Role of OEEC in international coordination of investments might also be discussed along lines OSR thinking developed last spring.

6. Re commercial policy and fostering of competitive conditions, believe ECA policies and objectives already well understood especially with respect to immediate and longer run influences on increasing dollar earnings. Several topics mentioned para 3, Repto circular 325 fall under this general heading.

7. Re closer economic association among participating countries, our views have developed further along lines discussed recently with Gordon. We believe it essential that before next Congressional presentation European countries undertake firm commitments to form one or perhaps two integrated economic units which, at minimum, would involve some surrender of sovereignty by giving new central agencies some control over (a) national monetary, fiscal and credit policies, and (b) governmental and private barriers to trade and payments among member countries and coordination of commercial policies with respect to non-member countries. Question of precise membership and institutional form of these integrated units cannot be settled in advance, but guiding principle should be that ECA has marked preference for real economic integration of smaller number of countries as against continuation or elaboration presently purely cooperative arrangements among larger number of countries. This work primarily OSR and ECA/W responsibility but believe it important that missions be thoroughly briefed on policy objectives in order that they may be able intercede with individual countries as needed.

8. We realize that exhaustive discussion all of these major topics would take far more time than actually available. Intend only by foregoing paragraphs to give you our conceptual framework of major ECA goals and activities. Suggest that topics needing most discussion with mission chiefs are probably internal fiscal, monetary and credit policies; investment policy; and economic unification. Also suggest we may want to consider general nature of Congressional presentation for fiscal 1951 as it relates to foregoing framework of major ECA activities.

9. Re Congressional presentation for fiscal 51, Gordon is familiar with growing conviction among people here experienced with Congressional relations that reliance solely on traditional balance of payments cum import program approach would be hazardous to attempt again. MAP hearings in particular have demonstrated growing Congressional conviction that U.S. aid, both military and economic, should be used to build and extend functioning Western Europe organism and not indefinitely to prop up individual and separate national economies. This coincides with our own belief that, over long term, attainment and maintenance of economic viability as well as political stability and military security require Western European union or unions. As ECA aid declines in future, we will be less able to cushion shocks and ease adjustments of unification. Time is running out in many ways, not least of which is Soviet possession of atomic bomb so much ahead of schedule. Imperative, therefore, that we bring home to Mission Chiefs urgency of situation and need to overcome customary inhibitions in pressing Europeans actually to do those things now which both we and they know they must undertake sooner or later.

10. Suggested new emphasis of Congressional presentation does not mean that ECA can dispense with statistical forecasts. Will still require balance of payments for fiscal 51 and import programs in at least eight major commodity groups. Gordon familiar with idea discussed here, now endorsed by Administrator, that countries should prepare initial submissions for fiscal 51 on assumption that aid would be some percentage of current year’s allotment and not primarily on basis of need. Major emphasis of country submission would be upon policy changes and actual adjustments necessary to live within reduced allotment rather than upon justification specific commodity import requirements. National submissions of this type would be more consistent with and more helpful to shifting emphasis of ECA activities as outlined above.

Hoffman

1. Not printed; in it Harriman proposed a meeting of the chiefs of ECA missions in Europe to review progress and consider future policy. ECA/W and OSR felt that the recent realignment of currencies opened the way for action along the following lines: liberalization of trade and establishment of a Europe-wide internal market, a direct attack on the problem of productivity, sales to the dollar area, elimination of the discrimination between domestic and export prices, and investment and internal financial policy. (ECA Telegram Files, FRC Acc. No. 53A278, Paris Repto)