WEEKLY SUMMARY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A008100030001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 46
• Document Creation Date: December 21, 2016
• Document Release Date: November 4, 2008
• Sequence Number: 1
• Publication Date: August 7, 1970
• Content Type: SUMMARY

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Secret
DIRECTORATE OF
INTELLIGENCE
WEEKLY SUMMARY
State Dept. review
completed
Secret
43
7 August 1970
No. 0382/70
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(Information as of noon EDT, 6 August 1970)
Page
Cambodia: Some Wins, Some Losses . . . . . . . . . . . . . . . 1
Laos: Proposal and Counterproposal . . . . . . . . . . . . . . . 2
Vietnam: No Deals with the Enemy . . . . . . . . . . . . . . . . 4
Communist China: People's Congress in the Works? . . . . . . . . . 6
EUROPE
Sino-Soviet Relations . . . . . . . . . . . . . . . . . . . . . . 7
NATO: Allies Consider Defense Burden-sharing . . . . . . . . . . . 9
Romania: Independent Diplomatic Activity . . . . . . . . . . . . 9
Spain: Government Faces Labor Unrest . . . . . . . . . . . . . 10
East Germany: Harsh Weather Magnifies Economic Problems . . . . 12
USSR - West Germany: Treaty Negotiations . . . . . . . . . . . 12
THE EUROPEAN COMMUNITIES: A MONETARY UNION
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Perna i WEEKLY SUMMARY 7 Auq 70
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MIDDLE EAST - AFRICA
Middle East: The Pace of Peace . . . . . . . . . . . . . . . . 14
Internal Unrest in the Persian Gulf . . . . . . . . . . . . . . . 16
WESTERN HEMISPHERE
Kidnapings in Uruguay . . . . . . . . . . . . . . . . . . . . 18
Peru Announces Radical Industrial Reform Decree . . . . . . . . . 19
Bolivia: Political Twists and Turns . . . . . . . . . . . . . . . 20
Colombia: Policies of the New Government . . . . . . . . . . . 21
Caribbean: Problems for Black Governments . . . . . . . . . . . 22
Panama: Preparation for Treaty Negotiations . . . . . . . . . . . 23
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FAR EAST
Cambodia: Some Wins, Some Losses
In the most significant military action in
nearly a month, government forces repulsed a
series of Communist attacks on the isolated pro-
vincial capital of Kompong Thom Province.
Enemy troops occupied most of the key buildings
in Kompong Thom city in the early stages of the
fighting. Government defenders, supported by
numerous air strikes, doggedly fought back to
drive almost all of the Communists out of
Kompong Thom. The deputy chief of staff of the
Cambodian Army claimed that 200 Communists
died in the fighting, while government forces suf-
fered 42 killed.
Enemy forces remain in a position to direct
harassing small-arms and mortar fire against the
heavily damaged city, and it is possible that they
will make new ground attacks on it.
The Cambodian Army's tenacious defense of
Kompong Thom for the second time in two
months should help boost morale throughout the
army. It may also help compensate for the gov-
ernment's thus-far fruitless effort to retake the
mountain resort town of Kirirom, southwest of
Phnom Penh. There are signs that the next round
in this effort might be postponed indefinitely.
Cambodian Army soldiers in the Kirirom area
have been plagued by bad weather, supply short-
ages, and illness. Moreover, enemy harassing at-
tacks along Route 4 southeast of Kirirom have
complicated the movement of reinforcements
and supplies to support the offensive.
The immediate purpose of the Communist
campaign around Kirirom may be more for
psychological effect than for significant military
advantage. The Communists may hope that with
relatively minimum effort they can expose anew
the Cambodian Army's existing tactical short-
comings, but the enemy may have some longer
range objectives, such as establishing a secure rear
base of operations in the remote mountainous
areas of southwestern Cambodia. Such a base
could be used for launching attacks on govern-
ment positions and lines of communications in
the surrounding provinces.
Elsewhere, in Kompong Cham Province, the
town of Skoun at the junction of Routes 6 and 7
between Kompong Thom and Kompong Cham
cities was captured by the Communists at the
same time they attacked Kompong Thom. Gov-
ernment reinforcements, including three Khmer
Krom battalions sent from Phnom Penh, con-
verged on Skoun on 5 August, but their initial
attempts to reoccupy it failed. The attack on
Skoun may be the first step in an enemy effort to
increase pressure on Kompong Cham city, which
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has been subjected to only light harassment since
mid-May.
On the political front, the government re-
portedly is planning to move ahead with its ef-
forts to revise the constitution along republican
lines. Lon Nol apparently intends to announce
soon the investiture of the National Assembly as a
constituent assembly in order to adopt a new
Laos: Proposal and Counterproposal
The skepticism about the chances for message that Communist envoy Souk Vongsak
significant peace talks in the near future, which delivered to Prime Minister Souvanna Phouma on
had been expressed by Pathet Lao spokesmen last 3 August. The letter from Pathet Lao chief
week, seems to have been confirmed by the Souphanouvong disclosed no new inducements
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for a settlement and dwelt at length on the Com-
munist leader's regret that Vientiane had not
made a "positive response" to his peace proposals
of 6 March 1970.
Souphanouvong's text employed language
that could hardly have been intended to improve
the atmosphere between the two sides. He
claimed that the Pathet Lao peace proposals had
been "intentionally distorted" by the government
and that the "Americans and their lackeys have
combined to intensify the criminal war against
our people." Taking a somewhat sanctimonious
tone, the Pathet Lao leader then stated that his
side would be "persevering nonetheless in its just
position and in its attitude of good will."
proposal contained in tt a note was that Souvanna
should appoint a plenipotentiary to meet with an
as-yet unknown negotiator from the Communist
side to "discuss questions aimed at creating a
favorable situation for the meeting of the inter-
ested Lao parties." I n effect, Souphanouvong
only proposed that, after the current conversa-
tions in Vientiane between Souk and Souvanna,
there should be another stage of exploratory talks
before substantive negotiations could begin.
It is possible that the letter from Souphan-
ouvong did not constitute all that has been com- 25X1
municated to Souvanna in the way of peace
On the military front, the situation remained
unexpectedly quiet except near the Plaine des
Jarres where the Communists staged two heavy
attacks on a government battalion manning de-
fensive positions near the Tha Tam Bleung out-
post. North Vietnamese troops attacked in
strength on 31 July and on 3 August, inflicting
heavy casualties and then retiring from the scene.
These assaults, which represent a significant break
in the normal low level of activity in the north
during the rainy season, could have been intended
to demonstrate Communist strength as talks with
the government got under way or, perhaps more
likely, they may have been only another effort to
keep government forces contained
positions.
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Vietnam: No Deals with the Enemy
President Thieu explained his thinking on a
cease-fire in some detail in a broadcast to the
nation on 31 July, emphasizing two somewhat
contradictory points. First, he reassured the war-
weary population that the government stands
ready to take every reasonable step to achieve
peace, dwelling at length on his proposal of 11
July 1969 for elections with Communist partici-
pation. Thieu again indicated that he would be
willing to consider accepting a standstill cease-fire
before an over-all political settlement is nego-
tiated.
The bulk of the speech, however, was de-
signed to stop growing speculation in South Viet-
nam that a cease-fire might be announced soon.
Thieu laid great stress on the need to negotiate
conditions for any cease-fire. He again asserted
that there must be effective supervision and a
tight control apparatus to prevent the Commu-
nists from reinforcing and resupplying their forces
and to prevent terrorist activity.
The President also stressed that a standstill
cease-fire would not involve ceding political con-
trol of areas where enemy forces might be strong.
Instead, a cease-fire would be a way to stop the
killing until an over-all settlement is arranged that
would allow the Communists to participate in
internationally supervised elections. A cease-fire
could only be justified, Thieu said, if there were
real progress in the negotiations. He made it
amply clear, however, that he expects no such
progress soon.
While trying to maintain a flexible and forth-
coming posture, Thieu clearly wanted to reassure
the armed forces and the people at large that his
government is not about to drop its guard. He
probably also wanted to head off any tendency
among security forces to avoid battle with the
enemy in the belief that a cease-fire is imminent.
Moreover, some of his language seems to have
been intended to caution political leaders, in-
cluding candidates in the upcoming senate elec-
tions, against encouraging antiwar sentiment by
developing a campaign around the peace issue.
The Communists are being very wary of
President Thieu's cease-fire talk. There has been
no propaganda comment on his several recent
statements of willingness to talk about a cease-
fire, including the speech last week in which he
spelled out his position. Although there was ex-
tensive indoctrination of Viet Cong cadre as early
as the fall of 1969 on the possibility of an early
cease-fire, all such discussions-none of which was
very specific in any case-have been tightly held.
By not responding directly to President
Thieu's statements, the Communists give the im-
pression that they are not opposed to talking
about a cease-fire. They are not, however, taking
any initiative in this direction, and they are not
providing any clues as to their real position.
Most of the evidence of Communist planning
for a cease-fire being turned up in South Vietnam
does not suggest that the enemy considers such a
step a real possibility at present. Such planning
usually focuses on some substantial allied con-
cessions toward an interim political set I
Some reports reflect a measure of
confidence that more US troop withdrawals and
the government's economic problems eventually
will create new political opportunities for the
Communists.
Other reports stress the deep misgivings
some Communist cadre have about what might
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happen in the event of a cease-fire.) Madame Binh Strikes Out
porters might be quickly rounded up and im- The visit of Viet Cong Foreign Minister
prisoned or executed by Saigon police if the Madame Binh to India on its own merits was a
agree to lay down their arms prematurely. distinct disappointment to the Communists.
Madame Binh pressed the case for diplomatic
recognition, but the Indians were apparently
negative both for the present and the immediate
future.
These accounts reflect the mixed Commu-
nist feelings about the opportunities and dangers
of a cease-fire. Some cadre apparently would wel-
come a truce and believe that Communist po-
litical skills in organization, subversion, and agita-
tion could quickly undo the South Vietnamese
Government. Others fear a massacre. Although
the Communists have preserved all their options
for a cease-fire situation by never publicly staking
out a position, they probably calculate that sub-
stantial allied concessions, at least in terms of
guaranteed security and freedom of action for
some of their followers, would be required before
the advantages would outweigh the dangers. They
apparently see little opportunity of obtaining
such concessions at this time, and President
Thieu's apparent growing confidence will prob-
ably reinforce the Communist belief that the
chance of obtaining any real security guarantees is
remote.
War Action Remains Generally Light
Action in the ground war in South Vietnam
remains generally light, although Communist
forces are staying in the field and making oc-
casional stabs at allied positions. During the week
the enemy stepped up shelling attacks in two
delta provinces, and South Vietnamese territorial
security forces suffered fairly heavy losses at
several outposts throughout the countryside. For
example, one enemy assault on a South Viet-
namese position in the upper delta early in the
week resulted in nine South Vietnamese dead and
more than 50 wounded.
Even from a purely public relations stand-
point, the visit-the first high-level extended tour
of a nonbloc country by such a high-ranking Viet
Cong personality-must have fallen short of Com-
munist expectations. The visit was played in very
low key and, although Madame Binh was received
at the highest government levels of the Indian
Government, her public appearances were con-
fined largely to those with leftist groups that
already support the Viet Cong cause. The Indian
Government planned her itinerary to prevent
local leftists from exploiting her presence, and it
is doubtful that she made any important new
converts or had a significant impact on Indian
public attitudes toward the war.
The visit did have an unexpected byproduct,
however, as a result of Saigon's efforts to counter
it. The South Vietnamese sent two Viet Cong
defectors to India to try to steal some of Madame
Binh's thunder, but this move succeeded mainly
in annoying New Delhi. Subsequent anti-Saigon
demonstrations in India and anti-Indian demon-
strations in South Vietnam further escalated the
incident and created new strains in New Delhi -
Saigon relations. It may also have generated some
internal problems within the South Vietnamese
Foreign Ministry. The new difficulties thus
generated for Saigon no doubt helped offset
Hanoi's disappointment over the visit its~ 25X1
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Communist China: People's Congress in the Works?
Preparations appear to be well under way for
the convening of the long-delayed National
People's Congress (NPC)-the civil government
counterpart to the national party congress held
last year. When it convenes, it is expected to treat
important matters left over from the Cultural
Revolution period, including the selection of a
new chief of state and the formal restaffing and
restructuring of various central government
organs. In the past, these congresses have also
served as forums for a wide-ranging review of
foreign and domestic policies, but, given the still
fragile and delicately balanced nature of China's
central leadership, the gathering may restrict itself
to achieving certain minimum political objectives.
Although in the past year or so the congress
apparently has been repeatedly postponed, pre-
sumably because of factional quarreling over
personnel and policy issues, the machinery seems
to have been finally put in motion for the con-
vening of a congress. Signs pointing in this direc-
tion include the issuance on 23 July at the local
level of a national "directive" urging the populace
to prepare for the "imminent" opening of the
congress, and reports of the departure of rank-
and-file conqress deleqates to Peking from the
Canton area.
The congress almost certainly will name a
successor to ousted chief of state Liu Shao-chi
and may spell out in some detail the structural
alignment of the central government apparatus. If
major personnel assignments are announced, they
may shed some light on the continued absence of
politburo member and public security minister
Hsieh Fu-chih, who has been out of public view
since 19 March. Hsieh is a vice premier, and his
failure to be reappointed would be conclusive
proof that he has been purged-the first casualty
on China's new 25-man ruling politburo.
The NPC may also provide a convenient ros-
trum for proclaiming a fourth five-year plan, if
Peking can see its way clear to take such a step,
implying as it does additional burdens for na-
tional administration while reconstruction of the
party apparatus is still incomplete. The immediate
significance of such a plan, however, would prob-
ably be more propagandistic than economic. The
economy has been able to function without long-
range planning for years. A third five-year plan
(1966-70) nominally exists, but the intercession
of the Cultural Revolution and its attendant tur-
moii in 1966-68 removed any possibility that it
would be implemented.
A plan is becoming increasingly desirable,
however, in order to shape rather than catch up
with events. Much work on its primary task, that
of establishing priorities, has already been done.
It is clear, for example, that defense is being given
first consideration and that strategic industries
such as petroleum, iron and steel, and rail trans-
port are undergoing important expansion. Agri-
culture is receiving some help from the state, but
light industry, which produces consumer goods, is
at the bottom of the list. A new plan would
probably not bring major changes in policy but
might facilitate enforcement of the key measure
in the regime's investment policy: placing most of
the burden for financing agricultural development
on the rural sector while channeling increased
central government resources to defense and stra-
tegic industries.
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Sino-Soviet Relations
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EUROPE
The Soviets are taking steps to bolster their
claim to a highly sensitive section of the disputed
Sino-Soviet border at a time when their relations
with Peking are as sour as ever. A Soviet party
newspaper reported on 2 August plans of Khaba-
rovsk-the important Soviet Far Eastern city-for
extensive agricultural development of two islands
in the Ussuri River, which forms part of the
Soviet-Manchurian frontier.
These islands are by far the most important
of the more than 700 in the Amur and Ussuri that
are subject to conflicting claims by Moscow and
Peking. They amount to strips of land about 25
miles long at the Amur-Ussuri confluence, which
dominates Khabarovsk. Soviet officials have
stressed that they view this area as particularly
critical because of its strategic location, and Mos-
cow is clearly eager to consolidate its control.
Development of the islands is billed innocently as
Soviets Planning Development of Islands
on Sino-Soviet Border
USSR
Bounds,' shown on
Chinese moos N
Unde,y shown
Russian maps
~', Hei hsra-tzu 1
,,(Chimnaya)
Area of planned
Soviet development
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WEEKLY SUMMARY 7 Aug 70
merely a part of a program announced at the July
central committee plenum to increase Siberia's
self-sufficiency in food production. Nevertheless,
Moscow privately recognizes that the Chinese
have a good legal case based on international law
to support their claim to the islands, and it evi-
dently hopes that the island's development will
enhance the shaky Soviet claim.
The Soviet leaders are aware that deliber-
ately reviving this crucial frontier issue runs the
risk of triggering loud protests from Peking,
which may be provoked to mount its own "de-
velopment" program for disputed border terri-
tory. In any event, the Soviet plan clearly under-
scores the lack of movement in the ten-month-old
border negotiations and bodes ill for any progress
in the future. A previous round of border talks in
1964 broke down, in part because of unresolved
disputes over these islands. Until the appearance
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of the newspaper article, both sides had carefully
avoided public mention of the islands near Khaba-
rovsk since the talks got under way last October.
Meanwhile, the widely rumored exchange of
ambassadors between Moscow and Peking appears
to have run into additional difficulties. Some
rumors circulating in diplomatic circles in Mos-
cow now allege that the Soviet nominee's depar-
ture for Peking has been further delayed because
of "illness." Others claim that he has been suc-
cessful in evading the assignment, which in effect
would be diplomatic exile from Moscow politics,
and that Moscow has selected a new candidate.
The impasse over the on-again-off-again
ambassadorial exchange has been complemented
WEST EUROPEAN SPACE COOPERA-
TION: The 13 members of the European Space
Conference, meeting late last month in Brussels,
agreed in principle to establish a "European
NASA" to replace their existing multilateral space
organizations and decided to send a delegation to
Washington in the fall to discuss European partici-
pation in US space programs. This delegation will
also explore the availability of US launchers for
use with European satellites, but in the meantime
the Europeans will proceed with their own
ITALY: Premier Colombo's skillful negotiations
in forming a new government have kept the cen-
ter-left coalition alive, but underlying tensions
remain. A prime factor in the fall of the previous
cabinet was the disagreement between the mili-
tantly anti-Communist Unitary Socialists (PSU)
and the orthodox Socialists (PSI) over the limits
of cooperation with the Italian Communist Party,
especially at the local government level. Colombo
placated the PSU with a provision in his political
platform that preference should be given to the
formation of a center-left provincial coalition
where possible. He pleased the PSI, however, with
by an upsurge in Soviet polemics against Peking .
the form of reprints of East European diatribes.
One recent article displayed an unusual degree of
Soviet concern over China's nuclear-missile pro-
gram, and other articles have warned that Peking
is not to be trusted despite its adoption of a more
moderate foreign policy posture.
For its part, Peking used the anniversary of
the People's Liberation Army last week to focus
attention on the Soviet military buildup. In par-
ticular, Peking charged that Moscow "greedily
eyes" Chinese territory, but this probably does
not reflect concern over immediate Soviet mili-
tary intentions. Nevertheless, Moscow radio
quickly responded by warning the Chinese that
this kind of talk could "sabotage" the border
negotiations.
launcher development programs. Although the
conference meeting was generally an unexpected
success, it was marred by several familiar prob-
lems. The UK said it needed more time before
making any commitments; France reserved its po-
sition on the institutional arrangements for the
new organization; and the UK, France, and Bel-
gium all limited their financial contribu-
tions.
the stipulation that Socialist participation in the
"leftist" coalitions with the Communists in some
provinces is not to be taken as a "step backward"
toward the discredited popular front. This per-
mits the PSI to join with the Communists in
several provinces where the four center-left par-
ties do not have the votes to form a government.
The other points in Colombo's program, as re-
ported by the press, give him flexibility in dealing
with the economic and labor problems facing
Italy. His experience as minister of finance in
eight previous cabinets will stand him in good
stead.
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NATO: Allies Consider Defense Burden-sharing
The European Allies, urged on principally by
the West Germans, are considering an annual
multilateral contribution to ease the cost to the
US of stationing its troops in Europe. The Allies
apparently now believe that such an effort will be
necessary to fend off sizable reductions in US
combat forces there. They are not likely to find it
easy, however, to settle on the size of the contri-
bution and to distribute the burden among them-
selves, to say nothing of coming up with the
necessary funds.
The Allies, who at first had hoped to prevent
US reductions with a "token" contribution, now
are convinced that more will be required. They
are accordingly pressing for an indication of how
large the contribution must be. The Germans have
said that $1 billion-a figure frequently men-
tioned in the press and by some US Congress-
men-would be unobtainable. They apparently
are willing to assume a significant share of the
cost, but want the offer to be multilateral to help
them sell the plan domestically.
Not all the European members may be as
willing or able as the Federal Republic, however,
to manage their "share" of the cost, and too
limited a participation by the other members
would leave the scheme with a very flimsy multi-
lateral cloak. The UK, which probably would be
expected to. pick up a share second only to
Bonn's, already is emphasizing its own economic
difficulties. The French to date have shown no
interest in participating in the burden-sharing
scheme, and the other European Allies apparently
have not approached Paris on the question.
Expressions of strong opposition to any sub-
stantial change in US force levels have highlighted
the early stages of the NATO study, known as
AD-70, on Allied defense problems of the 1970s.
The Europeans are worried that changes in the US
commitment to NATO might be accompanied by
movement away from the current alliance doc-
trine of flexible response and toward greater reli-
ance on either tactical or strategic nuclear weap-
ons. They are willing, however, to consider in the
AD-70 study how the US could make modest cuts
in noncombat areas, if some reductions were
absolutely necessary, and the West Germans have
indicated that they could accept a reduction in
the US stockpiles in Europe presently available to
support a conventional war for 90 days. The
Germans and the others, however, are hoping
that, in return for a multilateral financial contri-
bution to the US, they will receive a US com-
mitment to retain present combat force levels.
The Europeans hope to come up with a
burden-sharing proposal at their next Eurogroup
meeting, scheduled for 1 October. The defense
ministers may also discuss then in more concrete
terms some possibilities for intra-European de-
fense cooperation, such as exchanges of informa-
tion and cooperation in training, ideas they
received favorably at the last Eurogroup session in
June.
Romania: Independent Diplomatic Activity
Since the signing of the Soviet-Romanian
friendship treaty one month ago, Bucharest has
undertaken diplomatic activities designed to show
that it gave up none of its sovereignty to the
Russians. The Romanians obviously believe that
this helps to substantiate their claim that the
treaty tacitly recognizes their country's special
status within the Communist community and
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their policy of friendship with all parties and all
nations regardless of social system.
Romanian officials are generally relieved
that after a two-year delay the treaty is finally
out of the way. In private they express the belief
that Bucharest came off better than Moscow
because the language of the treaty is more open-
Ended and flexible than that of the other East
European treaties with the Soviet Union. Publicly
neither the Romanians nor the Soviets have
shown any sign of give on the fundamental issues
that divide them, but the atmosphere appears to
have improved marginally, especially in terms of
bilateral economic cooperation.
The Romanians succeeded in balancing the
impact of the treaty signing by sending Defense
Minister lonita on an extended tour of North
Korea and Communist China at the end of July.
By this dramatic gesture, the Romanians hoped to
make clear their position that the treaty's Article
8, which binds them to come to the aid of the
Soviet Union in case of attack by "any state or
group of states," cannot be used to involve them
in any Sino-Soviet confrontation. In his public
statements in China, lonita pointedly noted that
under the Warsaw Pact, Romania is obligated to
defend against "imperialist aggression in Europe."
Spain: Government Faces Labor Unrest
After an official ultimatum to strikers to
return to work, the sudden subway strike in
Madrid ended last week without violence, but a
rising mood of labor militancy poses problems for
the Spanish Government and the official syndi-
cates.
Although the Romanian cautiously avoided
strident anti-Soviet remarks, the Chinese were not
so circumspect. They offered to support Bucha-
rest's independence against unnamed "foreign
intervention, control, and aggression "obviously
a reference to the Soviets.
The Romanians' balancing act also extended
to Europe. Bucharest began a private campaign in
June to promote a conference on Balkan coopera-
tion, knowing that the Soviets could not publicly
object because the friendship treaty contains a
clause specifically blessing such efforts. The idea
apparently received at least favorable lip service in
most of the Balkan capitals except Belgrade. It
was discussed there in several high-level sessions,
probably including the private interview President
Tito held in July with Emil Bodnaras, one of
Ceausescu's right-hand men, but to no avail.
Yugoslav Premier Ribicic, following a private visit
to Romania last week, made it clear that the
Yugoslavs consider Bucharest's initiative im-
practical.
The Romanians plan to continue their dem-
onstrations of independence. Ceausescu report-
edly plans to come to the US for the anniversary 25X1
session of the UN General Assembly, probably in
October, and he is scheduled to make a state visit
to Austria in September.
The subway strike was called on 29 July to
protest the lack of progress in negotiating a new
collective-bargaining agreement with the privately
owned subway company. The workers demanded
that management allot for wage increases 50 per-
cent of the revenue from the recently authorized
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subway fare increase. They want across-the-board
raises of about $40 per month per worker, plus
some fringe benefits. The company's offer just
before the strike was a maximum of 25 percent of
the increased revenue for wage increases.
The government moved immediately to deal
with the strike before it got out of hand. When a
deadline to return to work by early afternoon was
ignored, the Cabinet, meeting in a rare emergency
session, decreed that if the strikers did not return
to work by the next morning they would be
mobilized under military law as provided in a
1969 statute. This allows mobilization in labor
disputes seriously affecting public order. After
meeting all night with officials of the government
labor syndicate, the subway workers agreed to go
back to work. The situation has returned to
normal, and wage contract negotiations are ex-
pected to resume.
Although the strike lasted only one day, the
extent of worker participation and the impact
upon the public made it one of the most effective
demonstrations in recent times. By issuing a
drastic ultimatum, the government was able to
suppress the strike without using the police and
risking a violent clash, such as occurred in Gra-
nada on 21 July when police fired on demonstrat-
ing construction workers, killing three of them.
ARMS CONTROL: Prospects for the US-USSR
draft seabeds treaty have improved as a result of
the agreement of the superpowers' delegates at
the Geneva disarmament talks on changes de-
signed to satisfy most criticisms of the present
text. It now appears likely that Argentina and
Brazil, whose opposition could have produced a
refusal by the Latin American bloc to support the
There have been a number of strikes a,
labor disputes this year, largely from economic
causes. Some 4,000 bargaining agreements expire
and must be renegotiated. Workers are becoming
more militant in pressing for higher wages in the
face of steadily rising prices. They are also dis-
satisfied with the cumbersome official syndicate
system, which tends to favor employers and drags
out negotiations until workers lose patience.
Workers are being encouraged in their militancy
by the illegal labor organization known as the
Workers Committees, as well as by Catholic labor
groups and some Catholic priests.
The Spanish Government is in the process of
reorganizing the official syndicates, but the re-
form law has become bogged down in the Cortes
while a tug of war goes on over more autonomy
for workers. The present demonstrations
strengthen the hand of those who do not want
liberalization, yet further demonstrations are
likely if the workers are disappointed in the re-
form law.
In an effort to maintain labor peace, the
government may permit generous wage increases
exceeding its guidelines of eight percent, but this
would have a serious impact on the
economy.
treaty, will endorse it in its altered form, which is
being referred to the capitals. Failure to reach
agreement on the treaty at the current talks
would increase pressure within the UN General
Assembly to question the adequacy of the Geneva
forum and to launch a more heated debate on
maritime issues than now appears in the off-
ing.
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East Germany: Harsh Weather Magnifies Economic Problems
The East German economy has been hurt by
the very cold and wet winter of 1969-70, the
longest of the century. The effects will fall prin-
cipally on the nation's balance of payments and
on the East German consumer. The impact on
over-all growth will be less serious, with a probable
one half to one percent drop in national income
and shortfalls in agricultural products, brown
coal, and transportation and communications
services.
During the past winter, coal reserves for
both industrial and popular consumption, already
short as an aftereffect of the hard winter of
1968-69. were further depleted and consumer dis-
content rose significantly. The tight food-supply
situation, a result of the summer's drought, also
deteriorated. Grain output, which declined 12
percent in 1969, may drop again this year.
Unwilling to face the political consequences
of a large fall in consumption, the leaders have
announced an $80-million increase in the pur-
chase of foodstuffs in the West, as well as addi-
tional imports from the USSR. Imports of grain
and high-protein feed supplements may rise by as
much as 500,000 tons in 1970. Bituminous coal
imports also will have to be increased sharply to
make up for the lack of domestic brown coal. The
regime is campaigning to increase exports to
minimize the resulting trade deficit, but the seri-
ous balance-of-payments situation will worsen.
The effects of increased imports probably
will be felt most sharply in the balance of trade
with West Germany, which is handled more or less
on a barter basis. Interzonal trade has tradi-
tionally been used to fill emergency needs, be-
cause East Germany can run up substantial nega-
tive trade balances without having to settle with
cash transfers. Imports, which rose during 1969
by almost 60 percent above 1968, continued to
grow at a rate of 42 percent during the first four
months of 1970 compared with the same period
of the preceding year. A recent report indicates
that East Germany's total indebtedness to West
Germany now exceeds $545 million, in addition
to a considerable indebtedness to other Western
countries.
Although the problems caused by a single
severe winter generally are manageable, the ef-
fects in East Germany have been magnified by the
regime's determination to push economic growth
at rates ambitious even under favorable condi-
tions. Major plan indexes, especially for agricul-
ture, had been unfulfilled in 1969, also because of
bad weather. Nevertheless, the leaders did not
reduce goals in the 1970 plan, and those for
agricultural products and foodstuffs, construc-
tion, national income, and most types of in-
dustrial output were actually increased.
Failure to achieve these goals may have an
effect on the targets to be set in the 1971-75
plan, which is still under discussion. Current
drafts apparently again provide for unrealistically
high goals for growth and leave only a minimum
margin of reserves for any sort of emergency. The
effects of the hard winter of 1969-70 could force
reconsideration of the long-term plan and adop-
tion of more realistic growth rates, thus easing
pressure on the East German planners to ensure
fulfillment of unrealistic goals. At the moment,
however, this seems unlikely.
USSR - West Germany: Treaty Negotiations
Soviet and West German negotiators con- Foreign Ministers Gromyko and Scheel since 27
tinned intensive efforts this week to complete July indicate that the Soviets have assigned a high
treaty negotiations. The daily meetings between priority to completing the talks. At the same
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time, textual changes the West Germans have
sought to incorporate in the draft treaty have
encountered Soviet opposition.
Early this week, the Soviets flatly refused to
make changes of substance in the treaty.
Nevertheless, the Soviets have taken cogni-
zance of the Bonn government's need for some
semblance of alteration that would accommodate
German interests and help to overcome domestic
opposition to the treaty. They have been recep-
tive to nonessential changes in the treaty, such as
the addition of language that could be interpreted
by the West Germans as an acknowledgment of
their position but would still be vague enough not
to constitute an explicit commitment by Moscow.
Moreover, the Soviets have agreed to a complex
system of subsidiary protocols that would be
exchanged between the two sides at the signing of
the treaty.
The Germans acknowledge the toughness of
the Soviet position but claim that progress has
been made in defining the problems and resolving
some of them. Such gains, however small, provide
some assistance to Bonn in its efforts to sell the
treaty domestically. The issue is whether they will
be enough or whether it will be necessary, in the
face of "sellout" charges from the opposition, for
the Brandt coalition to ask Moscow for more.
Any agreements that Scheel brings back will be
subjected to close scrutiny and to intensive par-
liamentary debate. Meanwhile, government forces
have restated their resolve to withhold im-
plementation of an accord pending satisfactory
conclusion of the four-power talks on Berlin.
The East German press has continued to
treat the Scheel-Gromyko talks cautiously,
confining coverage to the replay of TASS reports
and brief items noting the contention of "forces"
for and against agreement in the Federal Repub-
lic.
UN-SEABEDS: The US proposal to create an In-
ternational Seabed Resource Authority to govern
exploitation of the ocean floor beyond a water
depth of 200 meters received most of the at-
tention at the meetings this week of the UN
General Assembly's seabeds committee. Most
delegations appreciated the US initiative, al-
though the representative of Chile maintains that
it discriminates against countries with little or no
continental margin. The Soviets, who have con-
sistently opposed the creation of such inter-
national machinery, indicated in their opening
address to the committee that they now may be
more willing to accept some sort of international
agency.
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Middle East: The Pace of Peace
Both Arab and Israeli ranks have been
splintered by the acceptance of the US peace
plan, but the Soviets have pitched in to help Cairo
marshal support.
Moscow Backs Egypt's Stand
The Soviets have gone to considerable
lengths to demonstrate their approval of Nasir's
acceptance of the US initiative and to quiet Arab
critics of his stand. Moscow's strong support was
almost certainly promised during Nasir's recent
visit to the USSR, probably in return for his
agreement to Soviet recommendations that he
respond favorably to the US plan.
I he USSR will probably take advantage of
the presence of a high-level Iraqi delegation in
Moscow to put pressure on Baghdad, which has
been vehemently critical of the Egyptian and
Jordanian acceptance. The Soviets probably hold
no hope of lining up Iraqi support for Nasir, but
they will try at least to soften Baghdad's public
opposition by pointing to Soviet economic and
military aid programs to Iraq.
The Soviet leaders may think that there is
now at least a small chance to gain a settlement in
the Middle East on terms generally favorable to
the Arabs. Even if no settlement is forthcoming,
however, the Russians may be hoping for the
further diplomatic isolation of Israel and for an
even greater Arab hostility toward the US. Never-
theless, the Soviets probably foresee success for
these aims only if the Arabs play their cards
carefully and if hotheaded elements do not under-
mine Soviet-Egyptian maneuvering.
.Arab Bickering Continues
"Meanwhile, the Arabs Are Discussing the
Peace Proposals Among Themselves"
A conference of Arab foreign and defense
ministers-including representatives from Libya,
Egypt, the Sudan, Jordan, and Syria-convened in
Tripoli on 5 August. Originally slated to open
three days earlier, the conference was postponed
to give Libyan Prime Minister Qaddafi a chance to
persuade Iraq to participate. His visit to Baghdad
was unsuccessful, however, and on the eve of the
conference Baghdad Radio continued its scathing
attacks on Nasir and his policies. Algeria joined
Iraq in boycotting the meeting.
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The precise purpose of the conference is not
clear. Egypt's semiofficial newspaper Al Ahram
has said that the talks will be concerned with
ways to bolster the "eastern front" against Israel,
and that Egypt does not intend to discuss its
acceptance of the US proposals. The participants,
however, will almost certainly attempt to hammer
out some kind of joint strategy in the light of the
prospective cease-fire and negotiations.
Some of the states endorsing Egypt's accept-
ance have adopted a more forthcoming attitude
toward the fedayeen than has Cairo. On 4 August,
the Libyan Revolutionary Command Council
issued a somewhat inconsistent statement ruling
out negotiations, peace, or recognition of Israel,
but announcing full support for Egypt and de-
nouncing all attacks on Nasir. Libya also prom-
ised that it would continue to supply funds and
arms to the Palestine liberation movement led by
Fatah as long as it pursued the "true road" of
fedayeen action.
The Sudan's policy has also been somewhat
ambiguous. Khartoum, in line with its pro-Nasirist
orientation, promptly endorsed Egypt's accept-
ance of the US plan, but it has announced that
representatives of the Palestinian movement will
be allowed to use Sudanese radio facilities. Presi-
dent Numayri almost certainly checked this move
with Nasir, however, because the Sudan is too
heavily dependent on Egyptian support to fly in
the face of Cairo's wishes. Nasir may want to
provide the more moderate fedayeen elements
with a propaganda outlet to counter the attacks
against him emitting from Iraq. At the same time,
his refusal to allow the fedayeen to broadcast
from Egypt enables him to give the appearance of
full backing to the peace initiative.
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The UN Climbs Aboard
At the UN this week, Secretary General
Thant's special envoy Gunnar Jarring began inten-
sive consultations with the parties in the Middle
East, representatives of the Big Four, and UN
officials. Jarring appears determined to initiate
indirect talks quickly. He also hopes to emphasize
"quiet diplomacy" to head off speculation on the
course of the negotiations and the terms of a
settlement. UN Truce Supervision Organization
(UNTSO) chief Sulasvuo has returned to the Mid-
dle East after discussions with U Thant and pre-
sumably is canvassing the Arabs and the Israelis as
to what UNTSO might contribute to the policing
of a cease-fire arrangement.
Internal Unrest in the Persian Gulf
The recent coup in Muscat is dramatic evi-
dence that important changes of regime can take
place in eastern Arabia with little warning. As the
British withdrawal from the Persian Gulf ap-
proaches, the fragility of the numerous small
states in the area and their increasing oil wealth
seem certain to lead to more internal instability.
The present trend toward maintaining armies and
security forces largely officered and commanded
by British personnel may slow the growing dissi-
dence, but eventually the dependence upon for-
eign personnel probably will result in greater
support for subversive groups.
The coup in Muscat may prove to be an
unsuccessful palliative to the situation there, as
the young sultan is a moderate dealing with radi-
cal forces. Since 1932 the old sultan had made
little effort to move his government out of the
15th century, even after he obtained considerable
revenues from oil. The sultan's miserliness com-
bined with his general unpopularity encouraged
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local dissidents to increase their active guerrilla
campaign against him.
In Dhufar Province, where the sultan had
resided for years in order to avoid the more
dangerous environment of Muscat, the local dis-
sidence grew into a more broadly based organiza-
tion; the Dhufar Liberation Front, with perhaps
600 men, then became the National Democratic
Front for the Liberation of Oman and the Ara-
bian Gulf (NDFLOAG). It appears to be an
umbrella organization, comprising other Omani
dissidents as well as Baathi and Communist ele-
ments operating in the Trucial States.
In the area as a whole, subversive incidents
are becoming more frequent: last month an ama-
teurish attempt was made to assassinate the ruler
of Sharjah, small shipments of arms are moving
into Ras al-Khaimah, and Southern Yemeni
MOROCCO: The government will probably win
another landslide victory in the parliamentary
elections scheduled for 21 and 28 August. A
newly formed coalition of opposition parties, the
National Front, announced at mid-week its inten-
tion to boycott the elections, but the coalition is
made up of political groups torn by internal divi-
sions and its leaders are mutually suspicious. They
have declared that they will repudiate any candi-
dates running under their party labels, and have
laborers are trying to infiltrate the Persian Gulf
states. The NDFLOAG apparently hopes to
coordinate such activities and thus become capa-
ble of overthrowin all the autocratic rulers in the
area.
So far the
results, including mining incidents, mortar at-
tacks, and propaganda leaflets, have been more
annoying than serious.
The sheiks and rulers still seem too bound
up in their own maneuverings for power to con-
sider seriously methods for dealing with local
subversion. They continue to rely upon repressive
security measures that grow steadily more out of
denounced the future parliament as "an instru-
ment fashioned to exploit and repress people be-
hind the facade of a false democracy." The King,
apparently rankled by the refusal of the opposi-
tion to collaborate on his terms, has publicly and
strongly criticized it for a "selfish quest" for
power. He also warned that "libelous criticism"
would be severely punished, suggesting that press
controls-relaxed during July's referendum cam-
paign-may soon be reimposed.
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WESTERN HEMISPHERE
Kidnapings in Uruguay
The first kidnaping of foreign officials in
Uruguay has intensified the struggle between the
terrorists and the government and probably sig-
nals a higher level of violence in the future.
Coordinated attacks on 31 July netted the
extreme leftist Tupamaros a wounded American
AID official and the Brazilian first secretary.. Two
other American Embassy officers and the minister
of public works escaped capture. For the release
of the two foreigners the Tupamaros have de-
manded the release of all political prisoners, in-
cluding about 150 Tupamaros. The judge who
sentenced many of these Tupamaros to prison
was kidnaped on 28 July, interrogated, and re-
leased unharmed on 4 August.
The terrorists have given the government
until 7 August to agree to the ransom. If Presi-
dent Pacheco continues to reject the demand, as
it appears he will, the Tupamaros have threatened
t:o "pronounce sentence."
President Pacheco's initial rejection of the
ransom demand is in line with his oft-repeated
policy of not dealing with kidnapers. Pacheco is
also under pressure from military leaders not to
accede to the terrorists' demands. In the week
CHILE: It seems unlikely that any of the three
candidates will receive a majority of the popular
vote in the presidential election on 4 September.
In such a case, a runoff vote will be required for
the two top contenders in a meeting of both
houses of the Congress on 24 October, only
eleven days before the inauguration. If a quorum
of 101 legislators, a majority of the congressional
Uruguayan authorities arresting a Tupamaro
during a shootout last year
since the kidnaping, there has been no direct
contact between the government and the
Tupamaros. Although the Papal Nuncio has of-
fered to serve as an intermediary, the impasse ap-
pears to be solidifying.
The Tupamaros have clearly demonstrated
that they retain the initiative in what is now a
state of urban guerrilla warfare. They probably
will continue their campaign to discredit the gov-
ernment and provoke the military, perhaps in
conjunction with Pacheco, into ending democracy
in Uruguay.
membership, is not present on that date, any
number that showed up the following day could
decide the election. The governing Christian
Democrats' candidate still appears to be running
third. Their congressional representation is the
largest, however, and some Christian Democratic
votes would be required if Congress had to decide
between conservative Jorge Alessandri and
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Peru Announces Radical Industrial Reform Decree
President Velasco's long-awaited industrial
decree, which calls for profit sharing and state or
worker ownership in all manufacturing enter-
prises, will worsen the depressed business climate.
Some businessmen have expressed fear that it
may spell the eventual end of private enterprise in
Peru.
The decree reserves all new heavy industry
to the state and requires foreign firms to conclude
with the government contracts setting timetables
for reducing their present equities. Foreigners
may retain only 33 percent ownership if the com-
pany now is wholly foreign owned, but they may
retain 49 percent if it is a joint venture. Majority
ownership presumably would be acquired by the
state.
The decree also provides for the distribution
of ten percent of each firm's pre-tax profits to the
workers and another 15 percent to a newly estab-
lished "industrial community fund." In basic in-
dustries, which are to be largely state owned, the
fund will invest in bonds and will distribute the
interest to the workers.. In most private firms this
fund would gradually buy the company's shares
and turn them over to an employees' cooperative
after 50 percent interest is obtained. It is not
clear, however, whether workers are to acquire
shares in foreign-owned firms. Workers are to
participate in management to the extent that they
or the "industrial community" has ownership.
Tax concessions and other inducements for
investment, however, are included to reduce the
negative impact of the new law. Taxes have been
lowered for firms locating outside the Lima-
Callao area, and liberal tax concessions are to be
given firms making new investments before 1973.
In addition, high-priority industries have been
granted import duty concessions to a varying de-
gree and are to receive liberal credit from state
banks to finance expansions.
There had been some expectation in the
business community that the final decree would
incorporate suggestions by local businessmen and
would be more moderate than a preliminary draft
that had been circulated. Many businessmen thus
were shocked to find the decree more radical.
Although business reaction has been relatively
cautious thus far, the National Society of Indus-
try (SNI) has issued a communique of "construc-
tive criticism." The SNI states that private enter-
prise appears to be on the way out in Peru and
points out that even the worker will not benefit
as much as claimed because he will lose his non-
transferable shares upon leaving his job. The more
conservative press has voiced concern about the
new reform's effect on foreign investment and on
the nation's economy.
ARGENTINA: Guerrillas seem to be changing
their emphasis from bank robberies and raids on
small security posts to larger, coordinated attacks
on several installations simultaneously. Last
month terrorists took over a small town briefly,
seizing the police station, telephone exchange,
and railroad station and-after cutting all commu-
nications in the area-robbing a local bank. Sev-
eral weeks before a similar raid had been carried
out in another town. The terrorists describe them-
selves as members of the Revolutionary Armed
Forces, and the slogans they have painted on
walls suggest that the group is linked with the
left-wing Peronist Armed Forces. F_
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Bolivia: Political Twists and Turns
President Ovando appears to have strength-
ened his position during the past week, but his
conflict with top military leaders has not yet been
resolved. Ovando now has received the resigna-
tions of the entire cabinet, although it is not yet
clear how many he will accept.
The collective cabinet resignation came the
night of 3 August after the commanders of the
three services reportedly decided to overthrow
Ovando. The morning press had carried a sur-
prisingly accurate account of the coup plans,
which were promptly denied by those named as
leaders. By midafternoon Ovando was meeting
with second-echelon commanders at his home
where General Torres-the former armed forces
chief who was recently forced out of his post by
the opposition of army commander General
Miranda-had sought refuge to avoid arrest. Later
that day the President met with labor leaders,
who, he claims, expressed their support for his
government.
While Ovando was lining up his backers, the
three armed services commanders were in session
with Interior Minister Ayoroa and other military
members of the cabinet. Then, in the early morn-
ing hours, came a series of strange announce-
ments. First Ovando announced that he had
presented his resignation to the armed forces but
it had been rejected. This was followed ten
minutes later by Ayoroa's announced resignation
and an hour later by that of the entire cabinet.
The net effect of the moves and counter-
moves is that Ovando remains in office strength-
ened somewhat by the cabinet's resignation. The
armed forces leaders have missed what seemed to
be their best chance to remove him and may
now have lost significant support among lower
echelons in the armed forces.
Nevertheless, army commander Miranda and
the other two service chiefs remain in their posts
and might still be prompted to act if Ovando
completely ignores their wishes in naming his new
cabinet. Furthermore, the President's soft line
toward the guerrillas-the press reports that he
has gone so far as to suggest a possible truce-
might have the effect of healing the divisions in
the armed forces and creating solid opposition to
him.
Since the raid on a US mining company
north of La Paz on 19 July, the pro-Castro guer-
rillas of the Army of National Liberation (ELN)
have managed to elude the army but have done
little else. So far there have been two skirmishes
between the ELN and the army units pursuing
'them through hostile jungle territory, which re-
sulted in the death of at least eight guerrillas and
one soldier and the wounding of several others.
The military's strong concern over the pos-
sible spread of guerrilla operations, combined
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with bolstered self-confidence as a result of
successes so far, is likely to prompt a rather
strong rejection of President Ovando's con-
ciliatory moves toward the guerrillas. Whether
Colombia: Policies of the New Government
The inauguration on 7 August of Misael
Pastrana as president of Colombia may be marred
by minor disturbances, but there is little likeli-
hood of a serious disruption of the ceremony.
Any disturbances, however, will be the least of
the new President's worries during his four-year
germ.
Pastrana was elected last April with a razor-
thin plurality, and he lacks a majority in Con-
gress. He has little political experience and has
given no indication of vigorous leadership. He
will, however, inherit an improved economy, he
will be able to dispense patronage, and he can, if
he considers it necessary, constitutionally ignore
Congress and rule by decree. On balance, it ap-
pears that Pastrana will have an undistinguished
and sometimes stormy term but that he will be
able to complete his four years as president.
The new government probably to a large
extent will continue the policies of the old-
Pastrana was President Lleras' handpicked can-
didate.
the incoming president hopes
to expand trade with the Soviet Union and East-
ern European countries, to gain tighter control of
Colombia's international credit machinery, to
seek improved relations with the United States
Senate Foreign Relations Committee, to reduce
the budget of the Agrarian Reform Institute, to
curtail waste and corruption in the Industrial
Development Institute, and to seek support in
this will be sufficient to overcome the high com-
mand's apparent distaste for a move against
Ovando when all the odds are not on its side
remains to be seen
Congress for the nationalization of the transporta-
tion industry.
In the absence of any clear indication of new
policy directives, however, it is likely that many
of his decisions will be the result of ad hoc
reactions to situations. In his efforts to win po-
litical support for his administration, Pastrana has
attempted to make bargains with numerous poli-
ticians, and such tactical efforts probably will
characterize his presidency.
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Caribbean: Problems for Black Governments
Political leaders in the Caribbean area are
displaying increased sensitivity to a variety of
racial and nationalistic issues.
Recent statements by the prime ministers of
Guyana, Barbados, and Jamaica condemning the
possibility that the UK will sell maritime defense
equipment to South Africa are probably due in
part to the popular domestic appeal of a militant
stand against South Africa's racial policies. Prime
Minister Burnham of Guyana objected to the sale
on the grounds that the arms would be used to
suppress African "patriots" rather than for na-
tional defense. Burnham, however, probably was
bluffing when he threatened to take Guyana out
of the British Commonwealth if the deal is con-
summated.
Prime Minister Barrow of Barbados also
attacked the UK's plans and in effect warned that
"it might be time to have a Commonwealth with-
out the British" if they persisted against the
opposition of other Commonwealth countries.
Jamaica's Prime Minister Shearer has also de-
nounced the arms deal. In addition to their do-
mestic aims, Shearer and Burnham probably are
preparing the groundwork for their attendance at
the Conference of Nonaligned Countries to be
held in September in Lusaka, where they will be
competing with each other for the role of spokes-
man for the Caribbean region.
Burnham is having his own racial problems
at home. His efforts to put the pressure on the
local bauxite industry to allow the government
more "meaningful participation" in that industry
gave the African Society for Cultural Relations
with Independent Africa (ASCRIA)-the major
black power group in Guyana-the opportunity to
demonstrate its strength. ASCRIA, presumably
with government approval, took part in a labor
dispute against a Canadian mining company but
unexpectedly took advantage of the occasion to
attack the government and officials of the
Guyana Mine Workers Union (GMWU), appar-
ently in the hope of influencing upcoming union
elections. ASCRIA's attack led the government to
rebuke ASCRIA publicly for its overzealous ac-
tions.
Prime Minister Pindling of the Bahamas also
has experienced troubles of a racial nature at
home. Visiting Jamaican professor Trevor Mun-
roe, at a seminar of a radical Bahamian youth
organization in Nassau in late July, delivered emo-
tion-charged speeches citing the need for a revolu-
tionary black-power movement throughout the
Caribbean and calling on the Bahamians to be-
come more active toward this goal. Munroe also
urged the expulsion of the economic influence of
"white imperialists" and the destruction of gov-
ernments that manifested the same values and
objectives as those of "imperialist powers."
Although Pindling later said that he "took strong
exception" to some of Munroe's ideas, he was
eager to reaffirm his government's interest in the
youth of the Bahamas and tried to give as little
offense to them as possible.
CUBA - TRINIDAD AND TOBAGO: Havana is
continuing to develop contacts with other Carib-
bean countries. A six- or seven-man delegation
from Cuba will travel to Trinidad-Tobago in mid-
August for an undetermined stay, reportedly for
talks that will deal primarily with agricultural and
industrial development. A similar group from
Cuba traveled to Trinidad-Tobago last December,
and a delegation from Port of Spain repaid the
Cuban visit with one to Havana during Febru-
ary.
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BAHAMAS: US plans to dispose of obsolete
nerve gas in the Atlantic have met with objections
from the governments of the Bahamas and
Bermuda. Both Commonwealth members have
asked the British to intercede on their behalf in
seeking a postponement until a team of British
experts examines the safety considerations being
taken to ensure there will be no contamination of
the surrounding land areas. I he proposed
dumping grounds are located about 1 /0 miles
from the Bahamas and about 280 miles from
Bermuda. The US and British are collaborating in
an effort to reassure government leaders of the
safety features of the project.
Panama: Preparation for Treaty Negotiations
Cgeneral l orrijos appears to be strengthening
his already tight grip on Panamanian political life,
probably in order to protect his flank while de-
voting increased attention to outstanding issues
with the US.
lorrijos this week instituted a number of
changes in the top ranks of the National Guard in
an effort to strengthen his personal control. For
example, he promoted Major Manueal Noriega,
the Zone commander who facilitated Torrijos'
return to Panama during the coup attempt last
December, arid appointed him to the General
Staff. At the same time he retired another Gen-
eral Staff officer who had stood up to him on
questions of fiscal responsibility within the
Guard.
Torrijos has also moved to extend the gov-
ernment's control over all newspapers published
i.n Panama. The publisher of the prestigious La
ls's trella de Panama and its English-language
counterpart was forced out, and the new pub-
lisher has wasted little time in adopting an
editorial policy favorable to the government.
Torrijos Ponders Guard Changes
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Using the carrot as well as the stick, Torrijos
reportedly announced on Tuesday a general
pardon for all political prisoners in the country.
Panamanian security forces have been effective in
keeping opposition elements off balance, and this
is a move from strength rather than weakness.
Torrijos can thus win political points without any
sacrifice of political control.
Despite these domestic moves, Torrijos' at-
tention has been increasingly focused on relations
with the US, with the issue of Rio Hato, a large
US military installation outside the Canal Zone,
assuming particular importance. Torrijos appar-
ently has backed away from an earlier oral com-
mitment to General Westmoreland to extend the
base agreement, which expires on 23 August
unconditionally. He recently told a student dele-
gation that he would demand that the US give
Old France Field to Panama for the purpose of
enlarging the Colon Free Zone as the price for
continued US use of Rio Hato. He has also al-
luded to an increased sugar quota and construc-
tion of a highway. Torrijos, however, has not
outlined a formal position and may be using the
Rio Hato issue as a testing ground for tactics that
might be used against the US during Canal Treaty
negotiations.
Although Torrijos has alleged that his
tougher stance on Rio Hato stems from student
pressure, student and popular interest in either
Rio Hato or Canal Treaty negotiations appears
nearly nonexistent at present. Torrijos seems to
be trying to manipulate the students for his own
purposes. In April, for example, a Torrijos youth
group was organized in Panama City, and this
organization might form the nucleus for ro ov-
ernment demonstrations.
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DIRECTORATE OF
INTELLIGENCE
WEEKLY SUMMARY
Special Report
The European Communities: A Monetary Union
Secret
N9 43
7 August 1970
No. 0382/70A
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I SECRET 1490
THE EUROPEAN COMMUNITIES: A MONETARY UNION
Developing the European Communities (EC) into a true economic and mone-
tary union is likely to be the major internal preoccupation of the Community
membership for the next decade-and probably well beyond. With the national
economies of the member states increasingly interdependent as a result of the
customs union, the common agricultural policy, and other measures the Common
Market has put into effect, all the member states recognize the need for at least a
greater measure of coordination of fiscal, monetary, and budgetary policies at the
Community level. Otherwise, trade and capital flows will be disrupted by restrictive
measures reimposed at the national level whenever a balance-of-payments crisis
threatens.
Some of the elements of a future economic and monetary union are already in
place, such as the agreement on a common system for certain indirect taxes, the
small but growing Community budget, and a great variety of arrangements for
monitoring and discussing national economic trends. In the past few months,
moreover, the member states appear to have made some headway toward agreement
on the broad outlines of a staged program which-beginning with harmonization of
national economic policies-would move toward Community-determined policies
and perhaps ultimately toward a single currency. Nevertheless, the technical prob-
lems involved are formidable, and basic differences in economic philosophies are far
from reconciled. Some of the member states continue in fact to believe that, as long
as national policies and economic structures remain so different, a too hasty
institution of common rules or measures-such as denying the member states the
right to resort to exchange controls-would aggravate rather than prevent crises. The
basic question involved in bringing about uniform management of economic and
monetary policies, of course, is the fundamental, political one of how much power
member states are willing to transfer to Community institutions, and how fast.
Under the best of circumstances, this next stage in the evolution of the
Common Market will probably be no less difficult or contentious than the transi-
tional period that was completed last January. But-to the members, the candidates
for membership, and the other participants in the international monetary system-it
will be more important. The question has already been raised of how to relate the
Community's current deliberations to the monetary problems that will be posed in a
year or so by Britain's prospective accession. Whether new ways can be found to
improve the functioning of the international monetary system will depend in good
part on the Community's success in consolidating a stable monetary system of its
own.
Special Report - 1 -
7 August 1970
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The Hague Communique
The impetus for the present discussion of
monetary union arose largely from the agreement
reached last December at the "summit" confer-
ence of the Six at The Hague to "relaunch" the
Communities. The basic elements of that agree-
ment were to accelerate decisions on internal poli-
cies and to open negotiations for enlargement. As
part of the internal program, the member states
recorded their intention, as stated in The Hague
communique, to develop during the course of
1970 "a plan to be carried out in phases...with
the purpose of achieving an economic and mone-
Monetary Union
What does monetary union mean: Unrestricted and
irrevocable freedom of money and capital movements
among the participating states, exchange of the member
currencies among each other at fixed and unchangeable
rates, pooling and joint administration of the foreign
exchange reserves, unrestricted operations of all credit and
finance institutes in the area of the Community as a
whole. Such a monetary union can be kept free of ten-
sions and crises only if aggregate demand in the individual
member states were to develop parallel (that means at the
same growth rhythm relative to the real growth potential
prevailing in the individual member states). Not only
credit creation by the local banking systems, but also
public spending, as well as wage and other income devel-
opments in the economy, would have to be subjected to
this parallelness.
-From speech by West German Bundesbank Vice
President Otmar Emminger in Bad Godesberg in April
].970
Economic and monetary union will permit the reali-
zation of an area within which goods and services, people
and capital will circulate freely and without distortions of
competition-without giving rise at the same time to struc-
tural or regional imbalances.
-From the Interim Report to the Werner Group to
the Council and Commission, May 1970
Special Report
tary union." It was further stated that the "de-
velopment of monetary cooperation should be
based on the harmonization of economic policy."
In addition, it was decided "to have investigated
the possibility of creation of a European reserve
fund which should flow from a common eco-
nomic and monetary policy."
The monetary objectives adopted at The
Hague meeting reflect a Community history of
difficulty in coping with balance-of-payments
crises. Existing Community mechanisms have thus
far lacked both the speed and the resources to
deal with losses of reserves resulting from pro-
longed deficits or sudden speculative runs. The
Treaty of Rome makes provision for mutual aid,
but the relevant clause-Article 108-proved in-
sufficient as early as 1964 to deal with the pay-
ments crisis that developed the same year in Italy.
While the Council of Ministers was still debating
procedures and conditions for providing aid, the
US came to Italy's rescue. Again in 1968, it was
international aid, this time from the Group of
Ten meeting in Bonn, that met the threat to the
French franc resulting from the unprecedented
flight from it to German marks and Swiss francs.
With aid available through international ar-
rangements such as that provided by the Group of
Ten and the so-called Basle Club of central bank-
ers, the need for credit arrangements within the
EC as such has been questioned. Indeed, until
recently the view has prevailed among the Six
that discussion and examination of monetary and
financial policies within the Community would be
sufficient to maintain equilibrium, and a host of
committees have devoted themselves to this task
in the past decade.
The 1968 crisis, however, brought home the
disruptive potential of crises arising from sudden
and large speculative capital flows-originating in
this case predominantly from within the Com-
munity itself. Although supplementary aid from
extra-EC sources might always be needed,
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Existing Monetary Arrangements in the Community
Budgetary, monetary and credit policies are made
through independent decisions by the competent national
authorities--treasuries and central banks-and the organs
of the Community have little opportunity to intervene. In
other words, while it is true that the economic policies are
subject to a considerable effort of coordination, it is also
true that this process is limited to marginal adjustments.
These are designed to make allowance to some degree for
the interests of the other member nations without, how-
ever, impinging on the policy-making process which takes
place essentially on a national scale.
The very provision of the Rome Treaty that each
member nation is required to regard its exchange-rate
policy as a problem of common interest translates itself in
practice into a prior consultation-when it takes place at
all-on a parity change decision which has already been
made by the national authorities. The countries of the
Community are not yet accustomed to discuss the con-
sistency and validity of the existing parities. There has
never been a Community consultation, at least on a politi-
cal level, about the adequacy of the exchange rate of a
member country's currency, even when the phenomenon
of apparent disequilibrium in the exchange rate existed
over a long period of time.
- From remarks by Italian Treasury Minister Emilio
Colombo at a meeting of EC finance ministers and cen-
tral-bank governors in February 1970
The first two medium-term programs did not
generate sufficiently harmonized objectives-a basic con-
dition of effective coordination. Examinations of the
short-term situation in the Community have often ended
only with recommendations formulated in completely
general terms, even when the Community interest would
have called for adopting more concrete positions. In gen-
eral, the consultation procedures have not given the
hoped for results, either because they assumed a purely
formal character, or because the member states protected
themselves by resorting to escape clauses.
-From the Interim Report of the Werner Group to
the Council and Commission, May 1970
Special Report
Community authorities became convinced that if
European integration were to be taken seriously,
divergent policies within the Community as a
cause of payments crises would have to be taken
into account, and some sort of effective support
mechanism would have to be developed to give
expression to Community responsibility in the
future.
Meanwhile, the member states became in-
creasingly conscious that the growing interde-
pendence of their economies meant that the Com-
munity as a whole would be more and more
susceptible in the future to economic imbalances
in one of the member countries. As demonstrated
in the monetary crisis of 1968 and the German
and French exchange-rate adjustments of 1969,
such events can, in the words of a report done for
the EC Council in May 1970, "seriously com-
promise the integration achieved in the fields of
freeing movement of goods, services, and capital.
This goes particularly for the common agricul-
tural market." It can be argued that temporary
restrictions on goods and capital movements do
not seriously affect the long-term development of
the Common Market, but such measures undoubt-
edly create a poor psychological climate in which
to move forward. This is especially the case when
the exceptional measures are not planned emer-
gency procedures but rather are expedients
adopted by the member governments and ratified
at the Community level after the fact.
Moreover, the possibility of resorting to such
expedients has gradually declined as the Com-
munity has developed. The growing interpenetra-
tion of the economies of the Six has weakened
the autonomy of national short-term policies. For
example, with trade accounting for an ever-
greater proportion of national income in all the
Six, national borders are no barrier to inflation.
Thus some of the anti-inflationary tools normally
used by national governments-such as credit re-
strictions-can be used by the Community mem-
bers but with less effect. At the same time, these
tools have not been given over even in part to the
Community to enable it to deal with Com-
munity-wide disequilibrium.
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Still other considerations have inspired in-
creased Community interest in economic and
monetary union. Some within the Community
have been motivated to support it by a sort of
"nationalistic" spirit-for example, as the most
effective way of furthering a Community "eco-
nomic personality" vis-a-vis the world in general
and the US in particular. A Community "iden-
tity" would presumably be able to deal more
effectively with the problems posed by "multina-
tional" companies, uncontrolled "Euro-" markets
in dollars and securities, and speculative move-
ments of international capital. All of these post-
war phenomena have their positive sides, but they
also involve a certain loss of control by the Com-
munity members over economic trends.
Finally, some of the present interest in push-
ing the Common Market into a further stage of
integration stems from the purely political objec-
tives that motivated the Community founders in
the first place. Economic and monetary union is
seen as a way of creating new links between the
EC members to supplement the cohesive effect of
past measures that for various reasons may not be
New Commission President on Economic
and Monetary Union
No one can deny the purely political character of an
undertaking on such a broad scale. No one can believe
that such an important political problem can be solved
simply by using more or less sophisticated techniques and
simply by mobilizing forces belonging to the national and
Community administrative bodies. To be achieved, a polit-
ical objective requires a strategy capable of mobilizing, to
as large an extent as possible, the national parliaments, the
trends of opinion, the parties, and the trade unions.
--From speech by Franco Maria Malfatti to the Euro-
pean Parliament, July 1970
so binding in the future. In a recent interview, for
example, Raymond Barre, the EC Commission
vice president responsible for economic and finan-
cial affairs, cited the tariff reductions resulting
Special Report
from the Dillon and Kennedy Rounds, the pros-
pective enlargement of the Community, possible
tariff reductions with regard to Eastern Europe,
and continued high US investments in the EC as
developments that have lessened or will lessen the
importance of the Community's external tariff
wall. Hence, in his view, it is politically essential
to find new ways to knit the Community to-
gether.
In the aftermath of the November 1968
crisis, the Commission in February 1969 sub-
mitted to the Council a new memorandum en-
titled "Coordination of Economic Policies and
Monetary Cooperation in the Community." This
so-called Barre memorandum made suggestions
for concerting medium-term economic policies-
with respect to rates of growth of production and
employment, price trends, balance of current ac-
counts, and over-all balance of payments. It also
called for better coordination of short-term poli-
cies, and for a Community mechanism for short-
and medium-term financial aid. The short-term
aspects of the Barre plan were approved in Jan-
uary 1970 and the various medium-term aspects
have been or shortly will be submitted as draft
decisions for Council approval.
The short-term arrangements, as imple-
mented by the Council, provide credits up to one
billion dollars available automatically on applica-
tion and a further one billion in drawing rights
available on a standby basis. The drawings of
individual countries from the first billion are
limited to the amounts of their quotas-30 per-
cent each for Germany and France, 20 percent
for Italy, and 10 percent each for the Netherlands
and Belgium-Luxembourg. The second portion is
available in theory for any country up to one
billion dollars, but in practice the central bankers,
whose approval is needed for drawings on this
sum, might be reluctant to see one country draw
up to the limit. Short-term support is initially for
three months; it can be renewed once if agree-
ment is reached on measures the deficit country
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should take to correct its situation. Moreover, in
connection with these arrangements for short-
term currency support, the member states are
agreed that consultations should take place within
the relevant Community committees before any
member introduces short-term economic or fiscal
measures likely to have repercussions on another.
The principal significance of the short-term
agreements was, as Barre had originally intended,
to lay the groundwork for medium-term sup-
port-and this in turn would make medium-term
coordination of policies desirable. Although the
short-term programs were accepted by the Six
because there were no real alternatives, their
shortcomings were widely appreciated at the
time. For example, Guido Carli, governor of the
Bank of Italy, said shortly after approval of the
short-term credits that, despite pledges to the
contrary, coordination of economic policies
within the EC would be ignored when domestic
considerations were strong. He conceded that the
short-term credits were better than nothing, but
that swap credits with the US Federal Reserve
were much more useful in practice, an opinion
shared by Italian Treasury Minister Colombo. (In
March 1970, the Federal Reserve did grant Italy
an additional swap credit of 500 million dollars,
with no objections from Italy's EC partners, who
were consulted.) Carli's conclusion was that it was
doubtful that monetary cooperation and policy
coordination could go very far within the EC
without strengthened political cohesion.
Medium-term Aid and Policy Coordination
The medium-term arrangements asked for by
the Commission are in fact an attempt to achieve
some greater degree of political cohesion without
having to make a direct attack on the problem of
federal unity. Procedurally, its proposal for
medium-term (two to five years) financial aid
within the Community is intended to flesh out
the inadequate and cumbersome guidelines for ad
hoc action laid down in Article 108. The mutual
assistance provided for in that article is intended
to overcome balance-of-payments adjustment dif-
Special Report
ficulties without having to resort to changes in
exchange rates or to other measures prejudicial to
integration. In contrast with the first portion of
the short-term credits arrangement, there is noth-
ing automatic about the proposed aid provided
for by the medium-term scheme. Such aid can be
extended only by a qualified majority vote in the
Council on a recommendation by the Commission
and after consultation with the Monetary Com-
mittee. Moreover, a qualified majority will decide
on the conditions for the loan, including the
economic policy commitments of the receiving
country. Finally, the medium-term policy would
require coordinated action by the Six if one of
the member states seeks additional aid from an-
other international organization.
The total sum to be available in principle
under the medium-term aid is another two billion
dollars, subscribed to in the same proportions as
the short-term credits. The Council is scheduled
to discuss the assistance scheme this fall, when it
presumably will be taken up together with the
general question of further steps toward mone-
tary union.
The remaining aspect of the Commission's
1969 memorandum would commit the Com-
munity to coordinate medium-term economic
policies-that is, rates of growth of production
and employment, inflation trends, the balance of
current accounts, and the over-all balance of pay-
ments. The aim would be to bring to light re-
gional and labor situations of the member states,
as well as disparities in the economic structures,
and to bring about a convergence of their eco-
nomic plans and programs, the periods of which
now do not always coincide. The Commission's
idea is to stimulate action by getting Council
approval for medium-term (five-year) statistical
projections of each country's GNP, employment
trends, rate of inflation, and balance of payments.
Since early this year, specific goals suggested by
the Commission have been under discussion
within the Community. Once agreed by the Coun-
cil, such projections would presumably serve as
terms of reference for national economic policy
decisions.
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Unified (or Common) vs. Coordinated
(or Harmonized) Economic Policies
...unified economic policies are something much dif-
ferent from merely coordinated economic policies. The
latter are defined and worked out on a national level and
then compared with the view of possible minor adjust-
ments. Unified economic policies, instead, are defined and
worked out on a Community level rather than on a
national level .... It is hard to imagine the formulation of
unified economic policies in the framework of the existing
Community structures. Unified economic policies pre-
suppose a continuing dialogue conducted on political and
technical levels by bodies sitting with the necessary conti-
nuity.
-Emilio Colombo
February 1970
Following The Hague summit meeting in De-
cember, the EC Council appointed a committee
to study the available options for a phased estab-
lishment of economic and monetary union. The
committee is chaired by Luxembourg's Prime
Minister and Finance Minister Werner-a long-
time advocate of action in the monetary field-
and the members are the chairmen-of the five EC
committees concerned with economic and mone-
tary matters plus a representative of the Commis-
sion. None of these experts necessarily represents
the official views of his government. Bernard
Clappier, for example, Deputy Governor of the
Bank of France and chairman of the EC Monetary
Committee, told the US Embassy that he could
not function effectively if he had to get formal
instructions from the French Government-there
being too many differing views in Paris for re-
conciliation within the timetable under which the
Werner Group was working.
In the group's recent discussions the points
of reference were four more-or-less specific plans
for economic and monetary union offered by
Werner himself, Belgian Finance Minister Snoy,
West German Economics Minister Schiller, and
the Commission. In addition to these plans,
Special Report
Italy's Colombo and German Bundesbank Vice
President Emminger had recently made extensive
relevant remarks. Also, as part of a study on
"Problems of British Entry into the EEC" pre-
pared for the Action Committee for the United
States of Europe, Italy's Carli and Yale's influen-
tial monetary economist Robert Triffin, respec-
tively, had recently presented cases for mobile
parities in an intermediate period of Community
monetary integration, and for a European Reserve
Fund "to support and ensure within the Com-
munity itself the harmonization of monetary poli-
cies." The latter idea is also supported by
Colombo.
Common to all these specific plans is a
transition period to economic and monetary
union of from eight to ten years, with movement
to take place in from three to seven stages. More-
over, all of them envisage early completion of the
Commission's proposals for medium-term fi-
nancial support and policy-goals agreements.
There are, however, four major issues on which
the authorities tend to divide: (1) whether the
stress ought to be placed first on reaching eco-
nomic union-involving common policies on
budgetary, fiscal, inflation, incomes, and balance-
of-payments objectives-rather than on monetary
union; (2) whether fixed exchange rates are com-
patible with differing national goals during the
transition to monetary union and, if not, which
will give way; (3) whether monetary union is
possible without first achieving political union;
and (4) how to enlarge the Community member-
ship without impeding progress toward economic
and monetary union.
The question of whether to give precedence
to monetary or economic integration has assumed
the dimensions of a doctrinal dispute despite the
efforts of some, notably EC vice president Barre,
to dismiss this as a false dilemma and to stress
that parallel progress in both areas is necessary.
The problem on a technical level seems to be that
it may be easier to take certain monetary
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measures-such as to narrow the band within
which exchange rates are permitted to fluctuate
or to contribute a portion of national monetary
reserves to a common pool-than it is to bring
often widely disparate economic policies into
line. These differences in national economic poli-
cies may in fact reflect such basic factors as
differently timed business cycles, different politi-
cal pressures, different vulnerabilities to external
events, and differing exposures to internal trade-
union power. Therefore, it could be dangerous,
before a true economic union is achieved, to
restrict the range of monetary measures and cor-
rectives available to the individual states to deal
with their respective situations. This-overly sim-
plified-is the position of the so-called "econo-
mists" in the debate.
The "monetarists" do not necessarily argue
with the assumption that economic integration is
inherently slower than monetary integration. But
they would contend that monetary integration
should provide the stimulus to move ahead, for
example, in unifying commodity and capital mar-
kets-one of the conditions necessary for unifica-
tion of economic policies. Werner, who is usually
included among the "monetarists," in a January
1968 speech frankly characterized monetary unifi-
cation as: "...a means of promoting economic
integration which is very efficient and even some-
times brutal. It can end by forcing the economy
into a new mold at the unfortunate price of
tensions and pressures."
The "monetarists" would cite in support of
this position the kind of problems that may arise
for specific industries when monetary integration
lags behind the real industrial integration encour-
aged by the customs union. An example of these
problems is the demarche made to the Commis-
sion last June by important aircraft firms from
five Community countries. Announcing their own
increasing efforts to integrate and asking for Com-
munity action to help meet American competi-
tion, the firms noted that their cooperation in
carrying out long-term programs would be hind-
ered by the absence of guarantees against changes
in exchange rates. So long as there is no "Euro-
pean" currency, they argued, exchange guarantees
should be established in order to offset distor-
tions resulting from possible changes in monetary
parities.
Among the Six, the Germans-in part fearing
the "pressures and tensions" to which "prema-
ture'-' monetary arrangements might give rise and
in part fearing what they might have to con-
tribute to reserves-represent the "economists'
wing. Schiller's plan, although carefully drafted to
link economic with monetary measures in each of
its four phases, would in fact require considerable
progress toward economic union before monetary
mechanisms could be activated. The French for
their part have not provided any step-by-step ver-
sion of their ideas on economic and monetary
union, but it is clear that on the political level
they emphasize early monetary measures as an
earnest of Community "togetherness." Within
this spectrum the Belgians and Luxembourgeois
generally are closer to the French in stressing
monetary elements, and the Dutch and Italians
are closer to the Germans in giving higher priority
to economic integration. The Commission advo-
cates a parallel approach.
Closely related to the issue of priority of
economic vs. monetary union is the question of
exchange-rate adjustments. Many advocates of
monetary union believe that the best approach is
gradually to narrow the margins within which
member-state currencies could fluctuate in rela-
tion to one another. Ultimately, margins among
member-state currencies would be eliminated and
the Community would function as a fixed-rate
currency bloc with respect to the dollar and other
third-country currencies. The French, Belgians,
Luxembourgeois, and the Commission would in-
troduce narrower margins at an early stage. The
Germans and Italians favor postponing the nar-
rowing of margins until later phases of economic
and monetary union.
Those who favor such a delay do so in part
because they doubt the early feasibility of
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correcting every disequilibrium among the mem-
ber states with the immediate and finely tuned
adjustments of national policies that would be
required. They would also allow for the possi-
bility that, in the current pattern of exchange
rates, some of the currencies may prove to be
under- or overvalued. Thus, the Italians advocate
a system that would, in Carli's words, "admit,
within limits to be decided (2 percent per annum
at the most), monthly or quarterly devaluations or
revaluations." These would "compensate and cor-
rect the disequilibrium persisting in the evolution
of national prices and costs, and so maintain a
greater stability of competitive conditions." This
concept has apparently not found much favor
within the Community, although Carli claims that
the very uncertainties in the exchange market
introduced by his scheme would put pressure on
governments to accelerate the coordination of
their economic policies.
The Commission, on the other hand, believes
that to increase exchange-rate flexibility within a
budding monetary union is absurd and argues that
the greater policy cooperation among the Six
resulting from even the early stages of economic
and monetary union would serve to make parity
changes more "orderly." If policy coordination
has not been able to overcome basic imbalances
and thus avoid the need for exchange-rate adjust-
ments by the member states during the transition
period, resort could be made to the traditional
one-time devaluation or revaluation techniques.
Although it is evident that the achievement
of all the steps required for effective economic
and monetary union would carry the Community
very far toward some kind of federal Europe,
there is not at this point any disposition to face
up to this fact. The "pragmatists," such as the
Commission, prefer to speak of the progressive
creation of a "functional" economic and mone-
tary union stopping short of an actual federation,
which Barre says, "for obvious political reasons
would be more difficult to achieve within the
same period."
Special Report
Nevertheless, the question of national vs.
Community sovereignty will arise at each stage of
the enterprise and become more pressing with
each further advance. In connection with the
medium-term policy proposals now under discus-
sion, the contentious issue of majority decisions
has already been raised. The preference of the
French for a certain automaticity in monetary
measures is probably related to their distaste for
the majority voting that economic policy coordi-
nation probably requires if it is to be more than a
facade. Moreover, the future powers and responsi-
bilities of the European Parliament-already a
sensitive question-can hardly be ignored forever.
As the Community moves toward harmonizing
economic policies and creating common mone-
tary mechanisms, the member states will be relin-
quishing to Community councils grave responsi-
bilities while they themselves remain the politi-
cally accountable authorities-unless account-
ability is transferred to the Parliament.
Naturally, none of the member states wishes
to face this dilemma squarely, and-depending on
the economic and political climate and the skill of
the Commission-it may be possible to avoid the
kind of confrontation that occurred in 1965 when
De Gaulle sought to prevent a further extension of
the majority voting scheduled to occur at that
time. But the question of how to run an eco-
nomic union of the Community's dimensions can-
not in the long run be left unanswered.
The interim report of the Werner Group, as
presented to the Council meeting of 8-9 June,
sketches the situation at the "point of departure"
for economic and monetary union and outlines
the scope of the union at the "point of arrival."
At the last stage, for example, there would be
effective Community organs, having well-defined
responsibilities with respect to "democratic
rules"; and labor would participate at the Com-
munity level in working out an incomes policy.
The report then spells out at greater length the
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Barre on Economic and Monetary Union
First, there are technical obstacles: the problem now
is not to eliminate quotas or tariffs, but to harmonize the
economic, fiscal, monetary and social policies of the mem-
ber countries and to hammer out common policies in all
the fields where they are needed.
Then there are political hurdles to be overcome: the
drive to build up our Community is now encroaching on
areas directly affecting the responsibility of governments
to their parliaments and public opinion. Here we must
tread carefully... because we are attempting to align na-
tional policies at the very moment when economic, social,
intellectual and even moral protest is the order of the day
in all our countries.
If the Community countries really want to safeguard
and increase the agricultural, industrial and commercial
advantages of the Common Market... sooner or later they
will have to accept, whether they like it or not, a fuller
and more effective economic and monetary organization
of the Community.
...an organized Community monetary grouping, with
its own individuality, within the international monetary
system is a growing necessity. For not only must the
specific interests of the six countries be safeguarded, but a
better balance of forces must be established within the
international monetary system ensuring that international
monetary cooperation can function harmoniously.
Finally, there are international difficulties: a Com-
munity gradually gathering economic and monetary
strength will acquire a new degree of influence. This is
bound to change the current system of economic and
monetary relations, upon which at the present time no
single member state can have anything more than a very
limited impact. So it is not surprising that a stronger
Community is a source of concern in some parts of the
world and is not welcome everywhere.
The monetary disturbances which afflicted the com-
munity in 1969 and the serious difficulties the interna-
tional monetary system ran into have made the public
more and more sensitive to the internal and international
monetary aspects of our community venture: only the
specialist can really grasp how the elaborate and sophisti-
cated machinery works, but the public has realized how
important it is in practice and in politics.
-From a speech in Bellagio on "The European Economic
Community in the '70s," June 1970
proposed actions for the first phase. At its June
meeting, the Council "rioted with satisfaction"
the conclusions of the Werner Group's interim
report, and this has been widely taken as signify-
ing Council agreement with the principles out-
lined. In summary, these state that:
-the Council must rule before the end of 1970
on medium-term quantitative economic pol-
icy guidelines and on the introduction of
medium-term financial aid;
-the ultimate objective appears attainable
within the present decade, provided it re-
ceives the permanent political support of the
governments;
-the necessary powers for economic policy
decisions will be transferred from the na-
tional to the Community level, and this
could eventually lead to a single currency;
-action in the transition period will be taken
simultaneously and progressively on a num-
ber of fronts. Although some measures will
require amending the Treaty of Rome, the
present provisions already permit substantial
progress;
-a period of three years from l January 1971
for completing the first stage appears suit-
able from the technical point of view. This
stage is intended to render Community in-
struments progressively effective and to
mark the beginning of the Community's
"identity" within the international mone-
tary system;
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-the first stage should include a tightening up
of consultation procedures, conducting of
budgetary policy by the member states in
the light of common objectives, introduc-
tion of some degree of fiscal harmonization,
close coordination of monetary and credit
policies, and stepped up integration of finan-
cial markets;
the Community should progressively adopt
common positions in monetary relations
with nonmember countries and in interna-
tional organizations and, in particular, must
not avail itself of any provisions that might
render the international exchange-rate sys-
tem more flexible.
How much of this can be accepted as for-
mally "agreed" remains to be seen. The Germans
still seem to stress the necessity of progress on
effective economic cooperation prior to monetary
commitments, and the Dutch may be reluctant to
move very far at all before the British are brought
into the negotiations. In any case, the Werner
Group report itself notes the so-far unreconciled
divergence among its members on monetary meas-
ures that should be taken during the first stage.
The report presents two options: on the one
hand, a limited reduction of Community ex-
change margins should be undertaken during the
first phase, supported either by a fund for ex-
change stabilization-the functioning of which is
spelled out at length-or by coordinated interven-
tion on the exchange markets by the central
banks. Alternatively, such specific monetary ac-
tion-perhaps both premature and too risky in the
first phase-should be deferred in favor of further
steps toward the harmonization of the economic
policies and situations. The Council hopes that
the Werner Group's final report in September will
include suggested compromises.
Economic-Monetary Union and the British
Monetary problems are bound to play an
important role in the negotiations on British ac-
cession to the Community, but there is so far
Special Report
little information on the respective negotiating
positions. In general, the Commission's view is
that, at the time of entry, the UK and the other
candidates will have to take the same measures
that the present EC countries have taken. In its
March 1970 proposal, the Commission noted,
moreover, that progress toward economic and
monetary union could in fact help solve some of
the problems that both the Community and the
candidate countries will face as a result of the
Community's enlargement. The British, for their
part, have welcomed the moves the Community
has already made toward economic and monetary
integration and have expressed a readiness "to
play our full part."
The problems for Britain in the monetary
area are, in the first place, the adverse impact on
its balance-of-payments that its participation in
the Community may have-at least at the begin-
ning. Although the British fully expect the long-
run effects of accession to be beneficial, the ini-
tial influx of imports from the other Community
countries, a possible outflow of British capital,
and the contributions that London will have to
make to the Community's financing could at the
beginning cause sizable deficits. Secondly, there is
the question of the sterling balances owned for
the large part by members of the sterling area
abroad. It is feared that these balances make
Britain particularly vulnerable to speculative
crises, although immediate concern on this score
has lessened as a result of the 1968 Basle arrange-
ments aimed at underwriting the value of the
holdings. Various proposals involving consolida-
tion of these overseas sterling balances, possibly
combined with the creation of a European Re-
serve Fund, have been made in connection with
Britain's joining the Community. Triffin, for ex-
ample, argues that the Six individually already
have to act as creditors for Britain in various
international support arrangements and might as
well make a virtue out of necessity by acting as a
unit.
A reserve fund could also play a role in
meeting the first problem--i.e., an early deficit on
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current accounts. Although there seems to have
been little discussion yet at the Community level
of the modalities of a reserve pool, it could sup-
port sterling during a transition period when
Britain's reserves might be under pressure. On the
other hand, the suggestions of Carli and others
that British entry could be facilitated by the
introduction of limited exchange-rate flexibility
both on an international scale and, for an interim
period, within the Community seem unlikely to
get very far in view of the agreement among the
Community members not to apply among them-
selves any widening of exchange rate margins that
may be authorized at the international level.
Moreover, those members that oppose adoption
of greater international exchange-rate flexibility
are likely to press the UK to take a similar posi-
tion.
The question of British support for the
studies now under way within the International
Monetary Fund on greater flexibility in interna-
tional monetary exchanges is thus also closely
linked with the UK's negotiations with the Com-
munity. Inasmuch as the US is interested in pur-
suing such studies at the international level and
France is the chief opponent of introducing more
flexibility, the British-aware that the outcome of
the entry negotiations depends in large part on
France-are to some extent caught in the middle
of another potential US-French monetary skir-
mish. In any case, because the Community as a
whole remains divided on international flexi-
bility-with the Belgians siding with the French,
and the Germans, Italians, and Dutch willing to
consider the various proposals for moving away
from fixed rates, it is clear that agreement in the
IMF on exchange-rate reform will probably have
to await a common Community position. A Com-
mission official told the US mission in mid-July
that the Community expects to reach a decision
on this issue in the fall, but this may be opti-
mistic.
Even if some consensus on principle were
reached, it would seem that implementation of an
Special Report
international scheme would have to await further
progress in the Community's achievement of
economic and monetary union, as well as a com-
mitment by Britain to its content and procedures.
In order to move as a bloc vis-a-vis outside cur-
rencies in a world of greater exchange flexibility,
the Six would have to achieve greater monetary
unity among themselves. For example, are the
Germans, who favor more international flexi-
bility, yet ready for more monetary unity within
the Community? Or are the French, who might
be less opposed to international flexibility if it
would lead directly to increased intracommunity
solidarity, nevertheless willing to relinquish the
degree of national monetary control required for
movement toward such unity? Despite the delays
the Community may cause, however, its proposed
common economic and monetary policies are
designed to foster stable relationships that would
eliminate intracommunity problems as a potential
source of international monetary crises.
In any case, these complex questions may
suggest not only the difficulty, but also the
importance, of what the Community is trying to
do. With the establishment of the customs union
and the common market for agricultural prod-
ucts, the Community has emerged as the world's
largest trading unit. As has been amply demon-
strated already, the Community's commercial
policy carries clout, and how that policy is made
and by what Community interests it is influenced
have become vital concerns of the international
trading world. The Community's influence in in-
ternational monetary affairs is potentially no
less-provided it combines its resources, concerts
its policies, and speaks with one voice. But
whether the stabilizing potential of this develop-
ment will be fully realized will likewise depend on
who or what determines the Community's
policies.
The problems and the opportunities the
Community faces internally are comparably stag-
gering. The Community's gross national product
is already second only to that of the US. The
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instruments by which Washington gives the US federal system of government developed over a
economy direction and stability-the huge federal period of nearly two hundred years. Brussels is
budget, the income tax, and the Federal Reserve allowing itself a little over two decades to pro-
system with its controls over credit policy, duce instruments that it hopes will be-if not
etc.,-materialized as the country grew, and as the comparable-at least reasonably effective. F---] 25X1
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