98. Telegram From the Consulate in Frankfurt to the Department of State 1

1132. For Tyler from Rostow. Herewith major conclusions my two-day intense education in Rome.2

Italian problem a classic dangerous example stabilization-development dilemma. Deflation has begun but foundations not yet laid for expansion needed to avoid political and social rupture.
Import decline has yielded favorable balance of payments position past several months. Prices steady. Good harvest in sight. Unemployment and partial unemployment rising. Import decline and other signs suggest unemployment rise to perhaps dangerous proportions by autumn.
Government struggling to get wage settlements in key industries at sharply reduced rates of increase, as compared to past several years.
Past wage increases and end of mass labor reserve in south require radical increase in industrial investment for Italian industry to remain internationally competitive. Vast flow to northern cities in past decades has created great deficit in housing, schools, hospitals. Concentration on durable consumers goods production last decade has left great deficit in docks, roads, and other infra-structure. Italy needs a big investment boom in both private and public sectors.
Politically, Moro’s government is a group of good men of integrity and mutual loyalty. Moro holds them together in Rome as he used to hold together the DC Party. But he and they do not project a strong image to the country in part because their problems will not yield to simple quick solutions in part because some of the solutions are extremely difficult for the left wing to take. As men, they feel themselves beleaguered in the stockade, with two groups of Indians circling about and shooting flaming arrows. They are not disheartened. They would like time to work all this out. They like and trust each other as men. They realize they represent a parliamentary majority and a popular majority if they can hold together. But they also realize the government could fall at any time.
Outside the government there are strong right wing elements who wish to bring the government down and business groups who are sitting on their hands hoping for devaluation of the lire. There are also the Communists who are distracted by both international schisms and some puzzlement as to how to play domestic wage policy, but basically the Communist unions are pressing for inflationary wage increases and making life difficult even though the odds are for a right wing rather than left wing succession, should Moro fail.
Now for the rescuing cavalry. Marjolin came to town and made a good impression with his manner and his advice. He apparently urged strong, quick deflationary medicine. As a fellow-socialist his advice had more impact than that of some other European commentators on the scene. Not knowing what he said, in fact, I can only comment on the state of Italian thought post-Marjolin.
There is a potentially dangerous confusion between two proportions [positions]. One, Italy needs deflation. Politically and socially Italy can stand very little deflation, and a deflationary process is already underway. Two, Italy needs the acceptance of wage guidelines [Page 194]which would relate future wage movements to productivity changes and guarantee that expansion in public and private investment would not lead to price increases. This is the crux of the matter.
Moro and Carli are apparently hoping that if they get through the current wage negotiations and the DC Congress in tolerable style they will be able to relax the restrictions on private credit. I doubt that this modest prospect, combined as it will be with new austerity taxes, will prove sufficient for Nenni to hold his cohorts in line. What Nenni needs, I am convinced after a long talk with Lombardi and others, is an add-on in the form of a public investment program. But Italy does not command the resources for this add-on unless there is an absolute wage freeze for a substantial period. And this is tough.
The critical economic and political question as I see it, therefore, is whether Europe via Marjolin can generate a large capital infusion into Italy, if Moro and Nenni can, in effect, get wage guidelines installed. As is typical in these stabilization-development problems, what the politicians may be able to do depends partially on their knowing what help is available from the outside if they do it.
If this analysis is shared in Washington, Rome, and Brussels what is required, therefore, is a continuation of the Marjolin-Rome dialogue to see if this parlay can be pulled off.
My conviction about all this was strengthened at lunch yesterday by somewhat higher and more knowledgeable authority. Carlo Schmidt told me that the Pope, whom he had seen, fears a dangerous right wing reaction in Italy if unemployment rises and Moro fails, urging on Germans and Europeans a program of assistance to Italy.
  1. Source: Johnson Library, National Security File, Country File, Italy, Vol. 1. Confidential; Priority. Also sent to Bonn, Rome, Brussels, and Paris.
  2. The Embassy in Rome reported on Rostow’s June 22-24 visit to Rome in telegram 3484, June 24. (Ibid.)