Italian Desk files, lot 54D328, 340—ECA
Report by Stanley B. Wolff of the Office of Western European Affairs
Italian Aid Program—Fiscal Year 1951/52
background
On May 15, 1951 the Italian Parliament passed an extraordinary defense appropriation of 250 billion lire ($400 million). The Italian Government promised that all of this extraordinary appropriation would be obligated by the end of 1951 and, if sufficient U.S. aid to cover the dollar balance of payments deficit was received, that it would be completely expended during the fiscal year 1952. Latest available information indicates that $64 million was actually spent over the period January–June 1951, leaving $336 million available for expenditure in fiscal year 1952.
[Page 743]ECA’s Model I associated an aid figure of $163 million (including $4 million for Trieste) with an Italian defense expenditure of $800 million in FY 1952. This $800 million was supposed to be composed of a regular military budget figure of $525 million plus $275 million from the $400 extraordinary appropriation. The assumption was also made, since determined to be erroneous, that $125 million of the extraordinary appropriation would be spent in the period January-June 1951. It has now been determined that the regular military budget for FY 1952 only amounts to $464 million, not $525 million. By coincidence the funds available for military expenditures in FY 1952 still add up to $800 million, i.e. $464, regular budget, plus $336, unspent balance of extraordinary appropriation.
Assumption
Subject to review in the light of events, it is assumed that Italy will not benefit as a result of possible transfers of funds from the end-item to the economic assistance program.
recommendations
1. Tell the Italians that they will receive $163 million in economic aid in FY 1952 to support the defense effort described in paragraph 3 below.
2. Give the Italians the firmest possible assurance regarding the amount of dollars they will receive in FY 1952 from purchases of goods and services by the U.S. military (presently estimated at $47.6 million) and from off-shore procurement (presently estimated at $58 million).
3. Italy should be asked to give assurances that:
(a) the $800 million available for FY 1952 defense expenditures will in fact be spent by June 30, 1952; and
(b) the FY 1953 budget, to be presented to parliament in January 1952, will include at least $400 million for defense production over and above the regular military budget. (No commitment on a dollar import program is considered necessary. The Italians should be encouraged in their effort to increase their imports from EPU countries.)
4. Counterpart should be used for civilian rather than military purposes in Italy, to the greatest possible extent.
5. Italy should not be required to take up any part of its aid in the form of loans, because Italy is not able to assume any additional non-productive dollar loans.
6. Aid should be granted directly to Trieste, rather than being included in aid to Italy; and no deduction in Italian aid should result thereby.
[Page 744]discussion
From all indications the Italian defense production program is lagging badly. This is undoubtedly closely related to Italian uncertainty regarding US aid. Although it is now the middle of November and the fiscal year is four and one-half months gone, Italy has not received any allotment of aid nor has she received any commitment with respect to future allotments. Signor Giuseppe Pella, the Italian Minister of Budget and the man who guides Italy’s economic policies, is noted for his caution and for his determination to preserve Italy’s financial stability. He will not make sizable expenditures until he is assured that his cherished financial stability will not be jeopardized thereby.
It is important, therefore, to give the Italians a firm aid commitment now. Of course, the Italians, who estimate their dollar balance of payments deficit for FY 1952 at $332 million based on their present defense program, have been anticipating receiving a much higher level of aid, at least $275 million. However, it is believed that $163 million (with no deductions for Trieste aid) plus dollar earnings of about $105 million from US military expenditures and off-shore procurement, should be sufficient to prevent any considerable drain on Italian gold and dollar reserves. (The figure of $58 million for earnings from off-shore procurement contemplates advance purchasing of lire, and it is important that this be done.)
The Italians are disturbed about the effect on their dollar deficit of a number of recent unfavorable developments, principally abnormally high requirements for dollar wheat and dollar coal, the necessity of importing dollar oil as a result of the suspension of Iranian oil shipments and the rise in US freight rates. However, present indications are that Italy will earn about $132 million from the EPU in FY 1952 instead of the earlier estimate of $48 million. The increased EPU earnings should be sufficient to meet the additional dollar expenditures.
Our demands regarding Italian expenditures of counterpart funds for defense purposes should be carefully formulated in the light of the urgent need for these funds to support government investment projects designed to relieve unemployment, improve the standards of living in the depressed areas of the South, etc. On the basis of political, economic and social considerations, Italy is one of the NATO countries least able to afford the sacrifice of essential civilian needs to military goals.
Aid is needed in Trieste for predominately political reasons, i.e. to enable AMG to maintain a certain degree of independence, at a time when delicate negotiations are anticipated, in the face of continued Italian attempts to assert sovereignty over Zone A; therefore, [Page 745] the purpose of the aid will be largely negated if the aid is granted through Italy.
Different Assumption
Additional economic aid funds are made available as a result of transfers from the end-items program.
The ECA Mission in Rome is of the opinion that the Italians can be persuaded to spend “something near” $900 million in FY 1952 if “supported by economic aid in the neighborhood of $200 million”. Past experience with the Italians in connection with these aid negotiations and available information on present rate of spending would tend to make one more skeptical than sanguine as to the likelihood of the Italians increasing their FY 1952 expenditures.
However, it would be even more desirable to get the Italians to increase the FY 1953 defense production appropriation, at the time the FY 1953 budget is submitted to Parliament in January. From past experience, it would seem that an aid commitment of $200 million for FY 1952 would not be sufficient to achieve this. If the Model II aid figure of $275 million could be allotted to the Italians, and if the Italians could be assured of substantial US aid and substantial dollar earning from US military expenditures and off-shore procurement in FY 1953, they might be persuaded to appropriate as much as $500 million for extraordinary defense expenditures in FY 1953. It is unlikely that they will agree to a higher figure in view of the political situation within Italy. The elections are due in the spring of 1953 and might be held in the fall of 1952. In a country where there is such a need for butter, it is politically difficult and dangerous for the Government to go beyond a certain point in producing guns.