No. 8

ECA message files, FRC 53A278, Paris: Telegram

The United States Special Representative in Europe ( Katz) to the Administrator for Economic Cooperation ( Foster)1
secret   priority

Repto 2038. Re: (a) Torep 2711, rptd London Repto 356—EPU arrangements for 1951–52;2 (b) Torep A–1422; sent London Ecato A–295.3

1. Purpose this msg give our initial reactions reftel (a), suggest certain possible alternatives, and raise principal questions which have occurred to us thus far. Appreciate necessity some scheme for treatment EPU aspects in relation over-all aid request Congressional presentation,4 but hope such presentation will be such as avoid [Page 23] generally determining in advance results negots with Eurs and among Eurs for EPU financing coming year. Assume you agree that before any final decisions on particular amounts US aid for particular countries to settle EPU deficits, desirable that problem be posed and fully ventilated in existing OEEC forums, and NATO burden-sharing discussions will also at some point have to be tied in.

2. First and most important reaction centers on question of Eur responsibility for Eur problems. More than any other aspects of US-Eur econ cooperation, settlement of intra-Eur payments imbalances constitutes problem area in which Eurs themselves shld face up to necessity right now of their making substantial contribution, with view to eventual assumption by them responsibility for basic problem. One of our major policy objectives since inception ECA and with renewed emphasis during past few months has been that of establishing recognition Eur responsibility for Eur problems. Proposals under review appear not support this policy and in fact run counter to it.

3. Your presentation appears rest on assumption that countries not expected receive dollar aid fiscal 1952 will not make EPU contribution (over and above ordinary EPU quota credits). This position seems to us imply that once a country has become viable in relations with dollar area it has no further obligations with reference to weaker Eur countries. This principle appears to us unacceptable. Moreover in fact countries in question will be receiving extensive mil aid which, being gift, is in fact also econ aid. I believe feasible and justifiable request UK and Belg extend intra-Eur aid thru EPU in consideration of (a) their responsibility to fellow members Eur community and (b) over-all US aid going to them including MDAP.

Re proposal EPU extend aid in para 3 reftel (a). Proposal extend such aid in form loan recognizes precedent set Ger case, and has merit not requiring further formal commitment by members and parliamentary approval. Technique capable further development, but believe at present stage, US shld not stimulate or approve any loans on basis EPU capital except relatively short term (say up to [Page 24] eighteen months). Further EPU loan Ger might be arranged, particularly if performance on terms present special EPU credit creditable. However, need debtors like Turkey appear different case and not best met by short-term loans. Long-term loans likely assume character EPU grants which in fact wld constitute impairment EPU capital and which we wld oppose at present stage.

5. Apart from Austria, Greece, Iceland, possibly Turkey, we believe much advantage extending aid on basis “ultimate positions” rather than “initial positions” whether provided by Eurs or US. Proposed aid to Ger, Netherlands, Norway essentially similar to IP’s, i.e., aid predetermined and preannounced. Prefer ultimate position treatment because (a) IP approach necessarily based on forecasts which, in light experience last three years, are uncertain at best and often vary widely from actual results, and (b) ultimate position approach makes continued review (by ECA, OEECEPU and FEB in connection burden-sharing) more effective means pressure for appropriate econ policies and corrective measures. Funds potentially required for such ultimate positions wld best be retained in ECA reserve fund without preallocation even for illustrative purposes.

6. Re special assistance fund. Agree desirability limited discretionary switches direct aid to help meet EPU deficits described para 4 reftel (a). However do not believe switch arrangements meet problem of need for reserve fund intended (a) as backing unforeseen contingencies and developments not capable being dealt with by switch otherwise, and (b) as source aid for ultimate positions described preceding para. Believe we must consider fully possibility reconstituting special assistance fund for fiscal 1952. Even on basis your figures, it wld be possible reserve $85 million out of proposed aid to Ger, Netherlands and Norway ($110 million proposed reftel (a) for initial aid their countries, minus $25 million to Turkey to complete full cover estimated deficit $50 million by IP fully financed by US).

7. Re analysis and treatment UK problem described both ref msgs. Proposed full dol payment to cover first $200 million estimated UK surplus appears to us to abandon substance while preserving shadow US position on conditional aid to UK. Particularly objectionable since now we are being asked to help finance sterling area surplus with EPU, whereas previously we were asked finance sterling area deficit with US. We can readily appreciate possibility UK wld attempt cut down sterling surplus with EPU by restricting exports, but believe our attitude towards such action shld be related to manner in which continental countries are using raw materials. Alternative way dealing with surplus wld be to increase imports to sterling area thru greater trade liberalization; we shld not [Page 25] foreclose opportunity to push for this. It also seems to us undesirable to modify original quota and percentage gold settlements on basis extremely short experience, and apart from criteria applying to all countries, particularly since amount UK quota always implied possibility very sizeable UK surplus (or deficit). Finally, there seems to us clear connection between development number unfavorable EPU positions (notably Ger) and development UK surplus. Correction extreme deficit positions likely to have significant effect on magnitude UK surplus.

8. Believe important consider what interim arrangements (until new fiscal 52 aid funds available) can be made to finance post-June 30 deficits Greece, Austria, Iceland, where seems desirable present blocking of quotas shld be continued. If no 1950–51 residual funds available (e.g. special assistance fund) it will be necessary unblock quotas temporarily. This technically possible (though complicated because actual operations under quota wld be subsequently wiped off books), but believe preferable if possible give some indication interim financing arrangements to permit continuation or renewal bilateral commercial agreements under which trade carried on.

Katz
  1. Repeated to London for Spofford and Batt.
  2. Document 6.
  3. Not printed.
  4. Reference is to the administration request from Congress for approximately $8.5 billion for a mutual security program for fiscal year 1952, of which about $2.2 billion was to be marked for economic aid. The purpose of the proposed economic program for Europe was to maintain “sufficient economic strength to support the necessary European defense effort and a standard of living and rate of economic development that will insure internal stability.” (Department of State Policy Report, Current Economic Developments, No. 306, May 21, 1951, p. 1, in Economic Affairs files, lot 70D467, “Current Economic Developments”) President Truman signed the Mutual Security Act, as adopted by Congress, on October 11. A detailed discussion of the various provisions of this act, particularly as they applied to European military and economic aid, is ibid., No. 327, October 15, 1951, in Economic Affairs files, lot 70D467, “Current Economic Developments.”