INFLATION AS AN ISSUE IN THE DOMESTIC POLITICS OF LEADING FOREIGN COUNTRIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79B01737A002100050001-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 7
• Document Creation Date: December 21, 2016
• Sequence Number: 1
• Content Type: MEMO

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13 May 1974
MEMORANDUM
SUBJECT: Inflation as an Issue in the Domestic
Politics of Leading Foreign Countries
The rising cost of the things the voter and his
family buy in the course of their day-to-day living
has become a major political issue in all of the lead-
ing industrialized countries outside the Communist
systems. The problem has come at a time when practically
all industrial countries were already having growing
domestic political problems. Failure to cope successfully
with the price spiral is further complicating the political
scene and has no doubt weakened the position of government
leaders.
What follows is an outline of the salient aspects of
inflation as a political issue in six countries--among them
the US' principal allies.
United Kingdom
Inflation is worse in Britain than in most other in-
dustrial nations, and price rises, now running at an annual
rate of about 20 percent, underlie many of the political
issues facing the country. Public concern about continually
rising prices and the unions' persistent wage demands played
a significant role in the defeat of the Troy government in
the February election.
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The electorate, particularly the working class, is going
to be watching to see how soon the new Labor government's
"social contract" with the unions breaks down. Under this
arrangement, the government has pledged to control prices and
rents in exchange for the unions' promise to restrain wages.
If Wilson is unable to curb inflation and the unions decide
to resort to militant action to get their demands, the Labor
leader may not win a majority in the next election..
Wilson's decision on the timing of the next election
will in fact. depend to some degree on the economic outlook.
He is likely to call an early election if he senses that the
electorate is beginning to blame him rather than the previous
government for the country's economic problems. His govern-
ment, like all British governments, however, will have dif-
ficulty in curbing inflation, in part because of the country's
dependence on imported commodities, the prices of which are
likely to continue to climb.
France
Inflation is the problem most central to the French
election campaign, and control of inflation will be a major
factor in the success of the victor's administration. Interest.
in problems such as unemployment and housing pales next to
voters' obsession with inflation. As a package, however, social
reforms seem to be running neck-and-neck with inflation in the
voters' minds.
In 1973, France experienced-an annual inflation rate
of 8.5 percent, which placed it in the middle range of the
inflation experienced by other EC members. In the first
quarter of this year, the rate soared to 17 percent. The
increase is related to the oil crisis and is expected to
decline in the second quarter. Prior to the energy crisis
the economy was booming, wages were increasing more rapidly
than prices, and unemployment was at a tolerable level. This
prosperity increased demand for expensive domestic programs
which the voters now see as necessities.
Opinion polls have shown that the electorate is most
concerned about the personal effects of inflation. Their
votes in the presidential race will reflect their choice
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CONFIDENTIAL
between the stability necessary for economic growth--Giscard--
and the reform necessary for an improved life for the workers--
Mitterrand. Either man as president will face the immediate
challenge of devising a program that will meet the partly
contradictory demands of strengthening the economy and reform-
ing the society.
West Germany_
The issue of inflation in West Germany produces an
emotional reaction out of proportion to its actual serious-
ness. Given their country's past experience with inflation
and general economic disorder, West Germans--even those who
did not actually go through the turbulence of the twenties,
the depression years, or the early postwar period---react, or
perhaps over-react, to signs of weakness in the national
economy.
Inflation in 1974 will probably amount to about 10-11
percent, which will leave West Germany in a slightly better
position than some of its West European neighbors. Dis-
satisfaction with even this rate of inflation, however, to
say nothing of fears that it may go even higher, is a serious
drain on popular support for the government. No political
party that hopes to stay in power can afford to leave the
impression that it is not dealing effectively with West
Germany's current economic problems.
Italy
Italy is faced with a multitude of problems, but with
consumer prices now rising at an annual rate of 36 percent,
inflation is the issue uppermost in the Italian mind. Accord-
ingly, recent Italian governments have singled out inflation
as one of the major targets of domestic economic policy.
However, the divergent economic philosophies of the coalition
partners--the split is essentially between the Socialists and
the others--have prevented the government from taking the hard
decisions required to deal with the problem.
Inflation is straining the fragile labor peace that
has existed during the last year. Labor leaders have given
the government a breathing spell by refraining from major
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CONFIDENTIAL
strike activity and excessive wage demands. Soaring prices,
however, have created strong rank-and-file pressure for
stronger action. This is reflected in recent settlements
in the autc industry. Fiat, for example, is obliged in its
latest contract to provide many of the social services that
the government has been unable to-deliver. A trend in this
direction could weaken business support for the center-left
coalition and, perhaps, lead some industrialists to conclude
that a government including Communists would be no worse for
business than the present coalition.
A second echelon of popular concerns revolves around
the broad issue of social and economic reform. Government
action in this field has not kept pace with rapid economic
changes. Although GNP increased faster than that of Western
Europe as a whole through most of the postwar period, Italians
have had to put up with overcrowded schools and hospitals, an
antiquated legal system, a shortage of public housing, a
clogged bureaucracy, and an inadequate welfare system. Pressure
for change in these areas accounted in part for the launching
of the center-left coalition a decade ago. But not much has
changed, and reform remains a dominant political issue.
Canada
The dispute over how to deal with inflation brought down
Prime Minister Trudeau's government this week. Both the Tories
and the New Democrats charged that the Liberals' budget did not
go far enough to control inflation. Trudeau, meanwhile, has
announced that he will campaign on his budget, which he believes
the electorate will recognize as a more sensible approach to the
problem of inflation than those offered by the opposition.
The Canadian public is keenly aware of the rise in the
cost-of-living, which amounted to 9.1 percent in 1973 and is
running at about 11 percent this year. Last month a public
opinion poll indicated that 59 percent of the populace believe
that inflation is the most important problem facing the country.
No other single problem came close to inflation. Unemployment
(8 percent) and the energy problem (7 percent) were the second
and third most frequently cited problems in the poll.
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CONFIDENTIAL
Japan
Inflation, which has been running at a rate of about
25 percent per annum, is the concern foremost in the minds
of the Japanese electorate. As such, it is an important
issue in the campaign now being waged for elections to the
Upper House of the national legislature on July 7.
The Japanese have been highly critical of their govern-
ment for failing to stem inflation. However, they recognize
that inflation in part is the result of external circumstances,
especially the rising costs of importing energy and other
resources, over which Tokyo has no control. Moreover, they do
not believe the opposition parties are capable of offering more
effective policies to combat inflation.
Thus, although a major concern, inflation is having little
effective political impact in Japan. The four opposition
part.-Les attempt to exploit inflation as an issue, but their
disunity precludes them from effectively capitalizing on it.
They have been unable to agree to support joint candidates to
successfully challenge the ruling Liberal Democratic Party at
the polls. The ruling party is expected to retain its majority
position in the coming Upper House elections. As a result
Prime Minister Tanaka, whose party also controls the more im-
portant Lower House, is likely to remain in office at least
through the end of his term in 1.975.
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MEMORANDUM FOR:I 25X1
Attached is a quickie response to
your talk with George Carver, Maurice
Ernst and me last weep about inflation
as a political issue. The views here
are simply those of analysts on the
respective country desks in OCI, with
a check by OER.
Deputy Director of Current intelligence
-Ma,-r__ 1. 7_A-
(DATE)
FORM NO. IOi RFPLACLS FORM 10.101
1 AUG 54 WHICH MAY BE USED.
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STAT
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