Office of International Security Affairs files, lot 52–26, ECA—Rome: Telegram
The Chief of the ECA Mission in Italy (Dayton) to the Acting Administrator for Economic Cooperation (Bissell)1
Toeca 1230. Toisa. Ref: Rome Ecato 1231 rptd info Paris Torep 8960, London Ecato 1543.2
A. Major limitation on any substantial increase Italian defense production effort at this stage is availability of budgeted funds. Italians confirm that balance of payments deficit and shortages of raw materials not yet the true limiting factors. Certainly capacity and manpower take third place behind above factors as potential ceiling on defense effort. Hence most important element now is size of budget authorization (plus organization and administration to place orders rapidly and effectively). These comments apply all sectors Italian defense effort. Particular sectors where budget limitation seems especially severe are ammunition, electronics, and AA fire control.
B. Off-shore procurement target seems feasible from Italian end, i.e. plants capable producing kinds of items needed have available capacity and manpower. Whether cash receipts will reach figure shown depends on (1) rapidity of order placement on US side; (2) possibility of advance payments or progress payments during current FY. Factors on Italian side which may retard program are possible political considerations in choice of plants (tendency of Italians to favor less efficient government-owned facilities) and high costs of production in many other Italian plants. On balance we regard target as feasible but point out this depends on earliest possible start.
C. Mission strongly doubts realistic possibility of obtaining actual expenditure of $1005 million in FY 1952, even with $275 million direct aid plus other earnings shown. This judgment based on fact FY well under way and our feeling that physical job stepping up actual expenditures to rate well above 1005 so as to reach that total for year very difficult one. Actual total expenditure of Defense [Page 736] Ministry for July–August 1951 was $78.4 million compared with $62.0 million July–August 1950 which represented 11.5 percent of total 1950–51 expenditures. However, expenditures remainder of 1951–52 should accelerate upon passage of bill for 80 percent financing of govt contractors during progress of work. In light of all relevant factors, have reached conclusion that $900 million maximum realistic goal for actual expenditures. Note that Italian defense commitments for FY 1953, however an important element in reaching judgement on aid and expenditure figures for FY 1952.
D. If additional aid from transfer proposal made available on straight quid pro quo basis, see no reason why we could not get it channeled into production of items in priority sectors.
E. On basis above considerations team recommends that transfer of entire $112 million necessary raise aid figure from 163 to 275 be regarded as ultimate possibility, but that no more than $35 to 40 million be considered for transfer at this time. This would raise direct aid figure to neighborhood $200 million, which should prove adequate support military expenditure program assuming (a) $900 million military expenditure actually reached and (b) off-shore procurement goals fulfilled. Note that ratio of increase in military expenditure to needed increase in aid is 2.5, which is relatively high figure and shows desirability of pushing such a shift assuming that Italian Govt will agree to increased expenditure. If in course of year actual expenditure can be still further accelerated, and if program in other respects proceeding satisfactorily, could then consider transfer of remaining amount of any portion thereof.
This proposal would (a) accord with present estimate maximum rate defense expenditures and related need for aid, (b) retain incentive to accelerate that rate if possible, (c) avoid cutting end-item program prematurely, (d) leave final evaluation for later in year when progress indigenous production, off-shore procurement and end-item programs more clearly apparent.
Additional comment: Prior to actual shift of funds from end-item program to economic aid, MAAG Rome requests opportunity to comment on actual end-items to be deflected.