Foreign Relations of the United States, 1958–1960, Western Europe, Volume VII, Part 2

332. Memorandum of Conversation⁰

March 23, 1960, 4 p.m.

SUBJECT

• Spanish Economic Situation and Bilateral Problems

PARTICIPANTS:

• Spain
  • Foreign Minister Castiella
  • Ambassador Jose M. de Areilza
  • Sr. Passier, Commercial Counselor
  • Sr. Rovira, Director of OCON
  • Sr. Pinies, Foreign Office
  • Sr. Elorza, Foreign Office
• U.S.
  • The Under Secretary
  • Ambassador John D. Lodge
  • Mr. Robert H. McBride, WE
  • Mr. E. J. Beigel, WE

OEEC Trade Discussions. Sr. Castiella began by outlining the Spanish reply to the Group of Four questionnaire on the reorganization of OEEC, in the course of which he asked the Under Secretary to clarify certain points in the US reply.¹ He asked about our view regarding discussion of trade questions in the new organization. The Under Secretary said that after further consideration we had concluded that there is need for some forum in which to discuss trade problems among the members, since we do not foresee an early resolution of current problems between the Six and Seven. He said that while we do not believe it would be necessary to specify in the new charter very much about committees except perhaps the Executive Committee, we believe that some arrangement should be made for a Preparatory Commission, together with the new Secretary General-designate if he can be selected, to decide what parts and activities of the present organization can be carried forward, so that no gap develops during the coming year when the new charter will be signed and submitted for parliamentary ratifications. He said that our reply was premised on the belief that there should be no special trade regime in Europe, in view of the widespread external convertibility of currencies, and that our response was focused on this point, as we made clear in our appearance before the Group of Four.

DAG. Sr. Castiella said he hoped that Spain as a developing country in Europe would not be overlooked by the DAG. The Under Secretary emphasized that during the first DAG meeting² the discussion was confined to an explanation of resources and programs carried on by the participants and did not take up any questions of where funds should be spent. He said that we hope to see a more active policy by Germany and Italy in this field. He said that other participants seemed surprised to learn the full scope and variety of our own efforts. He said that if later discussions get into the question of the effect of aid on others, we must take account of the interests of other countries and report to them on our discussions.

OEEC Powers. Sr. Castiella said that Spain would have some misgiving if the new organization loses the executive controls which had heretofore kept the OEEC countries together. The Under Secretary said that we have submitted some suggested charter provisions to the Group of Four, which are quite similar to the present OEEC charter with regard to the powers of the organization. He said that the field of tariffs would be illustrative of the kind of activities in which we could engage only on the basis of advance authority from our own Congress. He said Canada has agreed with us on the handling of powers in the new charter.

Stabilization Program. Sr. Castiella said the Spanish program is developing satisfactorily with regard to its financial aspects. He said the second stage is now beginning, as the economy enters the critical period of the stabilization effort. He said the government must now withstand pressures from the business community which would only lead to a renewal of inflation. He said that a new 10 percent liberalization list will soon be announced, bringing total quota liberalization to 60 percent. He said that imports during the first quarter of 1960 will reach $300 million, while exports will further increase to a level of $283 million for the first quarter. He said the over-all balance of payments surplus for the eight months ending March 20 was $260 million, exclusive of some $60 million in gold holdings and exclusive of any drawings from the European Fund or the IMF. The Under Secretary expressed his pleasure in hearing of these excellent results, and remarked that the Turkish program had also shown welcome improvements during the past winter after a very slow beginning. Sr. Castiella added that Spain also intends to promulgate a new tariff and prepare to enter into tariff negotiations with the US. Sr. Areilza said that Spanish exports to the US reached a new high of $78 million in 1959.

Foreign Investment. Sr. Castiella said that Spain had adopted a new foreign investment policy, and that 95 percent of recent applications have been given a preferential classification. He said that new and more attractive regulations are also being prepared on this subject. He said that 67 oil exploration permits had been granted for peninsular Spain, the Sahara and Spanish Guinea, involving some 17.5 million acres in all, and that 98 percent of these permits went to companies with US participation. He said that Spain will also welcome the arrival of an IBRD mission to study investment programs in Spain.

Sr. Castiella said that he would like to cover certain financial and economic questions of interest to the Ministers of Finance and Commerce, and he called upon Sr. Rovira, who specialized in these matters, to make the presentation.

Defense support. Sr. Rovira said that Spain felt that the decrease in the level of defense support is too rapid, dropping from $85 million in FY 1954 to $45 million in FY 1960, and to $25 million requested for FY 1961. He asked what the prospects might be for the future. The Under Secretary said that we now have a new provision in the law which requires us to adopt as a policy the eventual elimination of grant defense support programs as soon as economically feasible. He said we have had to find a fair mean between the needs of various countries and the requirements of this policy. He said that because of the excellent position of the Spanish economy, which had just been outlined by Sr. Castiella, it would be much more difficult to justify a large scale grant aid program for Spain. He said that it would be our intention to continue substantial development loans for Spain; he recalled that the Ex-Im Bank had just announced two loans for Spain and has further loans under active consideration. He said that we could not foretell what the eventual appropriation might be this year but that if the request is cut back it is likely that Spain would be one of the last countries to be cut, in view of the reduction already made in the request for Spain in relation to this year. He also observed that the Congress in the past has earmarked defense support for Spain regardless of the amount requested, and that it is possible this will happen again.

Shift to Loans. Sr. Rovira said that Mr. Aldrich³ had recently raised the question in Madrid whether defense support might be put on a loan basis. He said that the silence of the Spanish Government on this question should not be mistaken to signify concurrence. He said that the level of peseta obligations of Spain to the US is already quite high, and that Spain does not wish to see defense support shifted from a grant to a loan basis. The Under Secretary said that we had no intention of seeking such a shift, and that there must have been some misunderstanding in this matter.

Buy American. Sr. Rovira said that a special ICA mission that recently visited Madrid had indicated the interest of ICA in favoring purchases in the US wherever possible. The Under Secretary said that in those cases where we are competitive we are trying to encourage countries to buy in the US, while at the same time maintaining the principle of world competition.

Section 402.⁴ Sr. Rovira said that Spain would like to keep the level of Section 402 sales at a reasonable level. He recalled the understanding that only $10 million of the original $40 million program would take the form of such sales, and that this level had been increased to $15 million when the program was earmarked at $45 million. He said that recently the USOM had submitted a written proposal that the level of Section 402 sales be increased a further $2.5 million.⁵ The Under Secretary said that this would not be in line with our earlier understandings, and that we would look into this. It was suggested to Sr. Rovira that he may have confused this with a recent proposal that of the remaining $30 million, $1.5 million be provided in the form of convertible French francs. He said he referred to a written proposal to increase Section 402 sales by $2.5 million.

Counterpart Releases. Sr. Rovira said that the Minister of Finance had asked him to advise us that US requirements with regard to the release and utilization of peseta counterpart funds were much too strict, and recalled that this matter had also been raised on an earlier visit to Washington.⁶ The Under Secretary said that it was his impression we had agreed to greater flexibility in this regard, and suggested that the subject be reviewed with Ambassador Lodge upon his return to Madrid, so that a report and recommendations could then be submitted by the Embassy/USOM to Washington.

PL 480 Cooley Provision. Sr. Rovira said that Spain is about to submit a new PL 480 request a mounting to some $42 million, and that the Minister of Finance continues to object to any Cooley provision in the agreement. The Under Secretary said that we would be glad to consider a new request for a PL 480 program, but that we would like to know more precisely about the Cooley amendment problem, in view of the increase in foreign investment in Spain and the improved investment climate. He said that a Cooley provision would seem to us to be a further means to attract outside capital to Spain, and emphasized that with the improvement in the Spanish economic situation we had hoped that Spain would change its position, and would henceforth agree to a Cooley provision. Ambassador Lodge commented that the Minister of Commerce had said to him that Spanish opposition stems from the belief that such a provision would “make an American colony out of Spain.” The Ambassador said that in his view this was certainly an excessive estimate of the consequences. Sr. Rovira said he thought this must have been a personal view of the Minister of Commerce, since the reason the Minister of Finance continues to oppose a Cooley provision is that a new credit control system is to be instituted, and that although it is not yet working the Minister of Finance fears that he will lose the initiative in this policy if the Ex-Im Bank starts a peseta lending program in Spain. The Under Secretary suggested that the Spanish Government submit a memorandum to us setting forth its reasoning about the Cooley provision.

Peseta Purchases. Sr. Rovira raised the question of US purchases of pesetas to meet requirements in Spain. He said that he understood the Secretary of the Treasury could not agree to this out of concern for the US balance of payments. The Under Secretary said that the real reason for our position on this subject is the legal requirement that we use up our own peseta balances accruing from defense support counterpart and PL 480 sales proceeds earmarked for US use. He said that one aspect the Minister of Commerce may not be fully aware of, which we were not fully cognizant of ourselves until recently, is that notwithstanding these large peseta balances our military services have undertaken procurement in Spain involving payments in dollars. He said that we have just completed tally of these dollar payments on procurement contracts in Spain, which were as follows:

1954	41,000
1955	3,548,000
1956	8,356,000
1957	10,342,000
1958	12,420,000
1959	18,482,000

He said that in addition some $10 million has been spent in Spain in dollars during this period, in connection with the military construction program. He then handed Sr. Castiella a memorandum with these figures,⁷ and it was passed on to Srs. Klorsa and Rovira.

Peseta Conversions. Sr. Rovira pointed out that the 10 percent counterpart provision cannot be changed without joint consultation. He said that this also applies to PL 480 sales proceeds which are available for US uses in Spain. He said that it is not legal in Spain to make currency conversions except through official channels and that the use of US peseta balances for accommodation expenses is not legal; he contended that such balances can only be used for procurement purposes. Ambassador Lodge commented that the Congress is quite preoccupied about local currency balances around the world, and that we have some 26,000 military personnel and dependents in Spain who make substantial expenditures. He said the effect on Congress would be extremely unfortunate if we did not utilize the peseta balances available to us for all US expenditure purposes. Sr. Rovira repeated that Spanish law calls for conversion requirements to be met from official sources, which would also serve to provide $18–20 million additional dollar earnings for Spain per year. He indicated that he would be willing to give us a note about this legal situation. The Under Secretary said that if Spain were to take such a position we would undoubtedly stop paying out dollars for procurement, and from the amounts he had indicated above, it seems likely that Spain would have little or no net dollar gain as a result.

Lending Policy. Sr. Rovira then raised the question of US lending policy, remarking that neither the DLF nor the Ex-Im Bank wishes to earmark given amounts for Spain, but prefer to work on a case-by-case basis. He said that in order to establish a sound investment policy, Spain would like to have a better idea of its prospects for further loans from these institutions. The Under Secretary said that we have certain problems in countries where both these institutions are active. He said that by law the DLF must not engage in projects in which the Ex-Im Bank is interested. He said that we will in the next month or so be considering how to resolve this policy problem, and that when this review is completed we would be glad to discuss this subject further. He said that of course the Spanish authorities are always free to discuss their problems with the Ex-Im Bank. Ambassador Lodge suggested that the Ex-Im Bank would prefer to lend to private enterprise, and the Under Secretary agreed with this. Sr. Rovira observed that Spain views possible assistance from the Ex-Im and the DLF as parts of the total available investment resources. The Under Secretary said that we have this problem in many countries, and that frequently other countries project their possible loans from the US for a new year on about the same level as may have been their experience in the previous year. He said that he understood Mr. Waugh is quite pleased about the results to date of the Spanish stabilization program, and that he seems interested in continuing the Bank’s operations in Spain. Sr. Rovira said that Spanish relations have been quite fortunate with the Bank so far because the level of Bank expenditure has been high while the repayment burden on Spain has been very limited.

MAP. Sr. Castiella handed to the Under Secretary at the conclusion of the meeting several informal memoranda he had brought from Madrid outlining the needs and interests of the three Spanish military services for further military end-items. He said that these informal notes were for the information of the Department, and that their content had been separately communicated to the Pentagon.⁸

0. Source: Department of State, Conference Files: Lot 64 D 559, CF 1616. Official Use Only. Drafted by Beigel and approved in U on March 26. A summary of this conversation was sent to Madrid in telegram 1344, March 24. (Ibid.)
1. For documentation on the Group of Four questionnaire concerning the reorganization of the OEEC and the replies from the OEEC countries, see Part 1, Documents 1 ff.
2. The first meeting of the Development Assistance Group was held at Washington March 11–13.
3. Richard S. Aldrich, Minister and Director of the U.S. Operations Mission in Spain.
4. Section 402 of the Mutual Security Act of 1954 (P.L. 665, enacted August 26, 1954; 68 Stat. 832) provided that no less than $350 million of the authorized funds be used to finance the sale of surplus U.S. agricultural commodities. The definition of “agricultural commodities” was spelled out in Section 402 of the Agricultural Trade and Development Act of 1954. (P.L. 480, enacted July 10, 1954; 68 Stat. 454)
5. Not found in Department of State files.
6. Rovira visited the United States in November and December 1958; see Document 310.
7. Not found.
8. None of the notes has been found in Department of State files.