EUROPEAN REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01184R000200620001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: September 10, 2010
• Sequence Number: 1
• Publication Date: January 16, 1985
• Content Type: REPORT

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16 January 1985
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EUR ER 85-082-?
16 Januar 1985
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European Review
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European Review
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Turkey-Canada: Possible Nuclear Reactor Purchase
Turkey: Cabinet Reshuffle
Austria: Sights on Silicon Valley]
Articles Belgium. Elections, Missiles, and US Visits
Backsliding on INF by leaders of his own Flemish Social Christian
Party has embarrassed Prime Minister Wilfried Martens. He
probably hopes his visit to the United States will help overcome his
party's growing fears about the electoral impact of initial missile
deployments. Martens's major problems on INF, however, are due
to domestic factors not readily amenable to influence by Belgium's
allies, and he will have to take considerable political risks to
overcome them. If these considerations induce the Cabinet to delay
deployments from March until after new elections, the risks facing
INF deployments will multiply.
A string of local election victories, capped by a stunning success in
the Europarliament balloting last summer, have propelled Jean-
Marie Le Pen and his rightwing National Front (FN) party into the
center of the French political arena. Already a force to be reckoned
with, and, if successful in forthcoming regional and national
legislative elections, Le Pen would almost certainly be in a position
to influence the right's legislative program for 1986, when
conservatives are likely to regain control of the National Assembly.
This may give the extreme right a powerful (perhaps a ministerial)
voice in conservative ranks, as the right makes its run at the
presidency in 1988.
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GNP growth in West Germany, France, the United Kingdom, and
Italy is expected by most forecasters to average 2.4 percent in 1985,
up only slightly from last year's estimated pace of 2.1 percent. The
slight acceleration in growth will almost certainly be too small to
keep jobless rates from rising, but inflation appears likely to bottom
out. A significant slowdown in US economic activity or a dramatic
fall in the dollar would worsen the growth
Some articles are preliminary views of a subject or speculative, but
the contents normally will be coordinated as appropriate with other
offices within CIA. Occasionally an article will represent the views
of a single analyst; these items will be designated as uncoordinated
views.
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Changes in Civilian Assistance I 25X1
reduce the number of French volunteers in Morocco from 4,000 to 2,000.
Paris is continuing to reduce its presence in Morocco, probably in an effort to
create a more visible balance with similar commitments in other Maghrebian
states. During a mid-December visit to Rabat, French Cooperation Minister Mucci
and Moroccan officials decided to implement a cooperation accord negotiated last
summer, according to the US Embassy. French officials have stressed that the
value of civilian assistance will remain unchanged, but that the new agreement will
in the same period, they remain at lower levels.
The reduction-the latest in a series that began with the Socialist victory in
1981-reflects an overall decrease in France's civilian cooperation budget, which
deals mainly with personnel. In this case, Paris may also be sending a political
message by making a show of balancing aid to Morocco with that given to Algeria,
Tunisia, and Mauritania. Since 1981, France has cut economic aid to Morocco
sharply; military assistance and sales to Rabat also have declined from $155
million in 1981 to about $83 million in 1983. Although similar civilian and
military commitments to Algiers, Tunis, and Nouakchott have increased slightly
Austria Sights on Silicon Valley
will be government funded at first but eventually are to be self-sufficient.
The Austrian Government is helping set up technology parks and venture capital
funds to aid entrepreneurs in starting small, high-technology businesses. Vienna's
approach is to create complexes with easy access to universities and other research
centers where new businesses can share clerical help and lab space. The technology
parks will have staffs on hand to provide business advice and help entrepreneurs
make contacts. The first new venture capital funds will start this month with
mostly private funding. The first technology park will be in business in Vienna in
about a year with future centers slated for Salzburg, Linz, and Graz. The parks
For government and business to cooperate in seeking out new firms rather than
supporting dying industries is an important step toward maintaining Austrian
competitiveness. Vienna, impressed by the success of areas like Silicon Valley, is,
concerned that its industry is lagging in a number of high-technology fields and in
innovation generally. As in West Germany, key features of Austria's economy
work against innovation: a large government role; a preponderance of heavy,
traditional industry; risk-averse businessmen and bankers; and lack of interchange
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A minor reshuffle in the Cabinet of Prime Minister Turgut Ozal may have
implications for the stability of his government and the cohesiveness of his
Motherland Party (ANAP). On 5 January, Ismail Ozdaglar, State Minister for
Energy and longtime friend and supporter of Ozal, resigned under accusation of
misuse of his office. The controversial Minister ofi Energy, Cemal Buyukbas, was
demoted to replace Ozdaglar, and Minister of State Sudi Turel succeeded
Buyukbas.
The Ozdaglar shakeup follows a Cabinet reshuffle in October that involved a
smuggling and bribery scandal, which resulted in the resignation of the Minister of
the Interior and the dismissal of the Minister of Finance. In both "ininicrises," the
accusers and the alleged wrongdoers were on the opposite sides of a divide within
ANAP between the former members or sympathizers of two banned rightwing
parties now struggling for influence: the Islamic fundamentalist National
Salvation Party and the ultrarightist Nationalist Action Party. The two groups
have been quick to use the scandals to their political advantage, with resultant
damage to party unity. Although the Ozdaglar incident, like the October Cabinet
changes, is unlikely to pose a direct threat to the stability of the government, both
events probably have weakened Ozal; formerly concealed party infighting has
surfaced, reinforcing perceptions in the public and parliament that the Prime
Minister's hold over ANAP is slipping and that his cadre is corrupt.
Turkey-Canada Possible Nuclear Reactor Purchase
Turkey soon may announce a decision to build its first nuclear power reactor on a
joint-venture basis with the Canadian firm AECL, according to the US Embassy
in Ankara. The proposed plant is a 665-megawatt natural uranium/heavy water
reactor to be built on the Mediterranean coast at Akkuyu at a cost of about $1.5
billion. The Canadians apparently have agreed to build the plant on a direct
investment basis. AECL will recover its capital through electricity sales over 15
years, when the facility will be turned over to Turkey. The reported decision would
end speculation over which firm would be awarded the contract since the outgoing
military government in 1983 issued letters of intent for three nuclear power
reactors to General Electric, the West German Kraftwerk Union, and AECL.
Proponents-who include the military claim the deal will save Ankara needed
foreign exchange and help overcome an electricity shortfall forecast for the 1990s.
The World Bank and some Turkish officials oppose the nuclear power program
and support thermal and hydroelectric power as a less costly, more efficient
alternative.
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Belgium: Elections, Missiles, and
US Visits
Backsliding on INF by leaders of his own Flemish
Social Christian Party has embarrassed Prime
Minister Wilfried Martens. He probably hopes his
visit to the United States will help overcome his
party's growing fears about the electoral impact of
initial missile deployments. Martens's major problems
on IMF, however, are due to domestic factors not
readily amenable to influence by Belgium's allies, and
he will have to take considerable political risks to
overcome them. If these considerations induce the
Cabinet to delay deployments from March until after
new elections, the risks facing INF will multiply.
The Looming Crisis-and Elections
Leaders of Martens's Flemish Social Christian Party,
Belgium's largest single party and the linchpin of
most postwar coalition governments, have been
worried about the potential electoral impact of a
"prornissile" stand since the NATO dual-track INF
decision in December 1979. They have often told US
officials that the influence of both Catholic "peace
groups" and the long antimilitary tradition in
Flanders makes support for INF risky. Polls
consistently show a majority of Belgians oppose INF,
especially since the opposition Flemish Socialists and
the Volksunie (a hardline Flemish nationalist party)
have used the deployment issue to cut into Flemish
Social Christian strength among younger voters.
Social Christian nervousness came to a head in
November when party leaders, apparently with little
warning to pro-INF ministers, recommended that
initial deployment in March be postponed pending the
meeting between Secretary Shultz and Soviet Foreign
Minister Gromyko and new US-Soviet arms control
talks that could result from the meeting. Martens did
not help his own cause when he said in a television
interview last June that Social Christian losses in the
Europarliament election were in part caused by
support for deployment.
The Flemish Social Christian policy statement, while
not binding on the government, undercut the carefully
constructed deployment strategy that Martens and
Foreign Minister Tindemans have been pursuing.
Essentially, the Belgians have gone ahead with
technical preparations at the Florennes base site while
withholding a "final" decision to deploy-both
actions designed to minimize negative public reaction.
Martens had, furthermore, hoped to separate elections
from missile deployment by proceeding with initial
basing in March and holding elections late in 1985-
by law they must be held by December-thus
providing time for the missile issue to recede from
voters' attention.
Such a strategy, while theoretically sound, makes
INF hostage to contentious regional or economic
issues that can quickly split coalition cabinets.
Although no immediate issue threatens the
government, we believe Flemish Social Christian
leaders have become convinced that Martens cannot
hold the Social Christian-Liberal combination
together long enough to separate initial deployment
from elections.' In private, Social Christian party
' One of the issues that may cause the toppling of the government is
the so-called Happart affair. The Belgian Council of State is soon
to rule on whether or not Jose Happart, the elected mayor of a
francophone municipality in the Flemish province of Limburg, may
stay in office. Regional authorities have tried to deny him the
position on grounds that he does not speak Dutch-applying a law
transparently designed to prevent Walloons (French speakers) from
obtaining elected office. No matter what the ruling, the Social
Christians may be convinced that the issue is too contentious to be
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chairman Swaelen confirmed to US officials that
arms control had less to do with his party's stand than
fear of the electoral impact should March deployment
come anywhere near elections. As long as Social
Christian leaders are convinced that elections are
imminent, they are unlikely to accept March INF
deployments-NATO plans notwithstanding.
Winning Elections and Deploying Missiles:
Whistling Past the Graveyard?
Angry remonstrances by the Liberal members of the
governing coalition that the Flemish Social Christians
had reneged on a NATO commitment as well as with
pressure from Belgium's allies induced Martens to
produce a carefully worded (and typically vague)
government statement on INF that reaffirmed
Belgium's commitment to the dual-track decision.
According to the statement, Belgium will review arms
control prospects sometime in the first quarter of 1985
and make decisions on INF accordingly; the Prime
Minister's visit to Washington probably will have a
major impact on the review.
While Martens was buying time, Social Christian
politicians were trying to reassure Belgium's allies
that everything would work out. US officials were told
that INF could move forward after elections, in which
presumably the Social Christians and Liberals would
renew their current parliamentary majority.
Contradicting his own implicit assurances, however,
party chairman Swaelen admitted that the parties in
power were likely to lose votes over domestic issues,
regardless of INF's role in the campaign.
Swaelen's proposed strategy contains what we see as
the fundamental danger in Social Christian thinking
on INF. He assumes that a center-right majority
government will be reelected and will push through
eventual INF deployment. In fact, polls show that the
Social Christians would lose ground both in Flanders
and Wallonia, endangering prospects for a renewed
Social Christian-Liberal majority.
We are also skeptical of arguments that a positive
deployment decision requires a new mandate from the
voters. Unlike the situation in the Netherlands, where
a bloc of dissident Christian Democrats makes
parliamentary approval of INF chancy whatever the
government's position, we believe the Belgian
parliament would approve deployment if given a
strong lead by the government; it is political will at
the top that is lacking in Brussels.
What the Polls Portend
Worrisome for INF is the fact that the beneficiaries
of Flemish Social Christian losses are likely to be the
Flemish Socialists, strident opponents of deployment.
Thus a postelection coalition that included Flemish
Socialists would probably be the death knell for INF
in Belgium.
If a new government included only Walloon
Socialists-Belgium's major opposition party-it
might move ahead with INF. Walloon Socialist
leaders, including party chairman Guy Spitaels, have
told US officials that they do not believe most
francophone voters care about defense issues. Unlike
their Flemish sister party, the Walloons would not
exclude themselves from a government coalition solely
because it supported INF. We believe Walloon
Socialist leaders have always assumed, however, that
a deployment decision would be made by the Social
Christians and Liberals and that they would simply
accept a pledge already made to NATO. The prospect
of actively accepting responsibility for a positive INF
decision is another matter; following the Flemish
Social Christian statement on INF, Spitaels warned
US officials that he might be forced to take a more
anti-INF posture, especially if elections are in the
offing.
Election Scenarios
We believe INF will be at risk if deployment has not
begun before elections, whether the voting takes place
in the spring or late fall. A self-fulfilling prophecy by
the Flemish Social Christians that early elections are
inevitable is likely to paralyze Belgian decisionmaking
at all levels, as party leaders become less interested in
governing and more interested in looking for
electorally appealing issues.'
2 Some cynical Social Christians apparently contemplate "playing
the papal card" in elections. Party officials have told Embassy
officers that they might try to hold off elections until after the Pope
visits Belgium in May, in the hope that an upsurge of religious
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The Flemish Social Christian leaders may have
reason to believe that their prospects are better in
early elections, but we believe that, based on available
indicators, they risk losses whenever the election is
called. Furthermore, we believe that any hope they
might have that equivocation on INF will remove the
issue from the Flemish Socialist arsenal is unlikely to
be realized. As long as the Social Christians remain
willing to accept INF eventually the position of
Martens, Tindemans, and the majority of Social
Christians-we expect the Socialists to use the issue
against them. In addition, Social Christian leaders,
especially those from the trade union-oriented left
wing, might be tempted to use anti-INF rhetoric that
would make it hard to proceed with a deployment
decision after elections. On the other hand, if the
Flemish Social Christians seem to backtrack on a
NATO pledge, they risk losing votes to the Liberals.
The recent waffling on INF, in our view, reflects less
a rational calculation of electoral trends than long-
brewing nervousness about INF and more recent
panic that a government crisis brought about by
domestic issues will coincide with the beginnings of
deployment. If Martens and Tindemans are to turn
around their frightened party colleagues, they will
have to convince Flemish Social Christians that the
risks of equivocation are worse than those of
remaining firm on the missile issue. Maintaining the
support of Martens's Liberal coalition partners for
deployment will be essential to offset anti-INF
pressure from leftwing parties. While the Flemish
Liberals have to some extent been influenced by
concern for Flemish antinuclear sentiment, we believe
an apparent abdication by the Social Christians of a
NATO obligation would induce the Liberals to
threaten use of the issue in preelection posturing, and,
if necessary, in the campaign itself. Liberal support
for deployment will be essential at all stages of the
INF debate, whether the Social Christians and
Liberals have a parliamentary majority or not.
Otherwise, INF is likely to be put off indefinitely or
bargained away in Belgian domestic deals.
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France: Can the National Front
Make a Difference?
A string of local election victories, capped by a
stunning success in the Europarliament balloting last
summer, have propelled Jean-Marie Le Pen and his
rightwing National Front (FN) party into the center
of the French political arena. The FN's success in the
June contests-almost 11 percent of the vote and 10
seats in the Strasbourg Parliament-is testimony to
the malaise that has overtaken French political life;
Le Pen's message-a combination of anti-immigrant
xenophobia, law-and-order chest beating, and old-
fashioned red baiting-strikes a responsive chord in
many Frenchmen who are fed up with rising
unemployment, diminished purchasing power, and the
country's perceived economic decline. Recent election
victories have already made the National Front a
force to be reckoned with, and, if successful in
forthcoming regional and national legislative
elections, Le Pen would almost certainly be in a
position to influence the right's legislative program for
1986, when conservatives ' are likely to regain control
of the National Assembly. This may give the extreme
right a powerful (perhaps a ministerial) voice in
conservative ranks, as the right makes its run at the
presidency in 1988.
The Le Pen Phenomenon
Although Le Pen's political prominence is quite
recent, he has, in fact, been a fixture on the rightist
fringe for nearly 30 years. He got his political start in
the poujadist 2 protest against almost everything
modern in the 1950s. By the time he entered the
National Assembly in 1956, Le Pen was already a
veteran of the rough-and-tumble rightist youth groups
' Parties of the Giscardian center-right coalition called the Union
for French Democracy (UDF) and the Neo-Gaullist Rally for the
2 Rightwing rabble-rouser Pierre Poujade stirred a nationwide
protest against government attempts to defeat tax evasion. His
followers, mostly self-employed shopkeepers and farmers, also
despised big industry and big unions, both of which they held
responsible for rising workers' salaries. Poujade's 3 million voters
sent several representatives to the National Assembly in 1956,
A veteran of numerous street brawls with the
police, Le Pen lost an eye in one such fracas
during university days
of the universities. During the 1950s, he developed a
political world view that combined reverence for
France's vanishing colonial grandeur, hatred of the
left (especially homegrown Communists), and vocal
admiration for German National Socialism, which,
according to press reports, he continues to
characterize as a "purely popular and democratic
mass movement."'
Le Pen founded the National Front in 1972. For most
of the next decade, it functioned as a haven for
conservatives hostile to what many saw as a tendency
' Le Pen, who is an orphaned son of a naval officer, served in the
Foreign Legion and later became a millionaire. Two events rescued
Le Pen from obscurity: a windfall inheritance from wealthy
businessman Hubert Lambert and notoriety from a 1971 court
battle over his distribution of a record album commemorating "The
Third Reich: Voices and Songs of the German Revolution."
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of then President Giscard, a moderate, to placate and
compromise with the left both at home and abroad.
According to Embassy and press accounts, however,
Lc Pen's star began its spectacular rise only with the
advent of Socialist government in 1981. The
movement's appeal has increased as popular
unhappiness with of Mitterrand has deepened.' The
National Front has demonstrated surprising ability to
capitalize on blue-collar discontent with rising
unemployment and crime. The most astonishing
evidence of this came in the 1983 municipal elections
when Le Pen and his party won control of the district
council in the longtime Communist bastion of Paris's
20th arrondissement.
The FN stands for God, country, and tradition, and it
attempts to conjure up remembrances of a happier,
more orderly past-before, as Le Pen puts it, France
is "ruined by the left and its lackeys on the center-
right." Le Pen's vision of this past is a decidedly white
one-before the hordes of black and brown
immigrants descended on France from the
disintegrating empire-- with just a faint touch of the
old poujadist ideal of a nation of small shopkeepers.
Occasionally, he also stirs in a thinly veiled anti-
Semitism. Although Le Pen most often lambastes the
left in his speeches and interviews, he frequently
reserves his most vitriolic criticisms for the Gaullist
' A recent book, L'efet Le Pen by Edwy Plenel and Alian Rollat,
argues that the FN is almost entirely an expression of this national
RPR and the Giscardian UDF, accusing them of
ideological mushiness and accommodation with the
left. Instead, Le Pen argues, the right ought to stand
for something. Prominent among the FN's favorite
themes are:
"France and the French first," which means
reversing the flow of immigrants into France as
quickly as possible.
Restoration of law and order (sometimes tied to Le
Pen's anti-immigrant message, implying a
relationship between rising immigration and
increasing violent crime) by tougher police methods
and, above all, reintroduction of the death penalty.
Abolishing abortion, which would put an end to
"genocide of French babies." Le Pen often attacks
former Health Minister Simone Veil for having
engineered passage of France's liberal abortion law.
Stiffened opposition to Moscow and especially to its
"stooges" in France, Le Pen has been quoted as
saying he prefers an "RPR idiot" to "an intelligent
Communist," and he defends his movement against
the charge of fascism by arguing that the only SS
France has to fear are Moscow's SS-20s.
The FN has refined these themes through a decade of
campaigning. According to Embassy and press
reports, the feisty, often inspiring Le Pen has turned
them into a well-honed script for his increasing public
and television appearances. His histrionics have
gained him a reputation for showmanship and media
presence; when he recently appeared on the popular
"Hour of Truth" interview program, for example, he
attracted a record audienc
Le Pen at the Polls
Since 1983 the National Front has had a succession of
surprising and, to some, alarming victories at the
polls. In the first nationwide municipal contests after
the Socialists took office, when the opposition as a
whole capitalized on antiausterity disaffection with
Mitterrand, the FN scored some impressive upsets,
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especially in working-class districts where immigrant
concentrations and unemployment were highest. Le
Pen's candidates even won in some Communist
neighborhoods of the "Red Belt" around Paris. The
FN subsequently demonstrated that it could attract
more than a fringe element with local victories in
geographically separate and diverse constituencies,
where it garnered from 9 to 17 percent of the vote.
Between the first and second rounds of the Dreux
contest, the left and even some center-right politicians
mounted a vigorous but unsuccessful anti-FN
campaign. More important, leaders of the RPR, who
at first spurned suggestions of an alliance with Le
Pen, agreed to merge with the National Front in the
second round to ensure that they held on to their
massive first-round advantage.
Le Pen and colleagues registered their greatest
triumph, however, in the balloting last summer for the
Europarliament when National Front candidates won
11 percent nationwide. US diplomats reported that
local observers were "shocked" by Le Pen's victory.
Scoring over 20 percent in many cities and one region,
the FN broke the 10-percent level in over a score of
departments, many of them leftist bastions of the
north and southeast. These victories underscored the
Front's national strength, when compared with the
more moderate right's poorer-than-expected showing,
and they also demonstrated that the UDF and RPR
need Le Pen's FN to cross the 50-percent barrier.
As in many of his speeches, the slogan of Le Pen's lectern promises
"TOMORROW!" The symbolism of the Communist sickle and the
socialist rose, meanwhile, expresses an FN hope-that the
Socialists will be discredited by their alliance with treacherous
among white-collar workers, small businessmen, and
professionals (20 to 22 percent). Students, retirees,
and blue-collar workers are least likely to vote FN-
of the three, the blue-collar workers score 10.5
percent, probably reflecting fears of losing their jobs
to immigrants. Not surprisingly, the Front gets most
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Who Votes for Le Pena and Why?
Numerous polls and various postelection analyses
have shown that Le Pen's appeal is broad, but greatest
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polls conducted after the June balloting, 69 percent of
Le Pen's voters said they had voted for Giscard in the
1981 presidential runoff round; 27 percent had voted
for Mitterrand. These same surveys show clearly that
Le Pen succeeds best among voters concerned about
unemployment and fear of immigrants. Thirty-eight
percent of FN supporters respond to Le Pen's rhetoric
on the immigrant "problem"; fewer are stirred by his
stand on crime and private schools.'
Le Pen and the Right's Agenda
Despite indications from polling that much of Le
Pen's support is "soft," the FN will probably continue
to register some 10 percent of the vote in any national
contest and substantially higher in some local
elections, at least for the next couple of years.
According to a wide variety of press and Embassy
reports, the national malaise that supplies Le Pen with
growing audiences continues to deepen. Opposition
Gaullists, meanwhile, seem ready to form successful
local alliances with the Front as in recent provincial
voting in Corsica. Even centrist and presidential
hopeful Raymond Barre, while ruling out
`"cohaabitation" with Mitterrand after 1986, has met
with i.e Pen.'
Although Le Pen has shown a surprising ability to
loot voters from the left's constituencies, he almost
certainly represents a greater threat to the traditional
right, and especially to Gaullist leader Jacques
Chirac. Le Pen has vowed publicly to make the right
speak to his issues; his racist references to "surplus
Africans" and cryptofascist demand for
"Lebensraum" in the face of immigration have drawn
sharp protests from many on the center-right,
including Auschwitz survivor Simone Veil and former
President Giscard d'Estaing. Chirac, on the other
hand, has tempered his public criticism of Le Pen
with local alliances and a recently adopted harsher
line on immigration and crime. RPR staffers,
meanwhile, have confided to US diplomats that they
hope to undercut Le Pen's appeal to conservative
Gaullists and even to drain off sonic FN supporters
with these tactics.
1984
Sounding plus Ix Pen que Le Pen may shore up
hardline support in his own RPR, but Chirae's
strategy clearly risks alienating moderates in both the
UDF and RPR and could create a serious rupture in
conservative ranks. Although some on the right
almost certainly hope that Chirac will discredit
himself by flirting with extremists, such an
accommodation could play into Socialist hands by
driving some moderates toward an alliance with the
left, which Mitterrand is reportedly eager to engineer.
in 1988.
The long-rumored introduction of a proportional
voting system for the 1986 legislative election that
will benefit small parties, which Mitterrand has
promised to unveil this spring, will almost certainly
strengthen Le Pen's clout on the right. In the near
term, Chirac will probably tread softly in adopting
FN positions and will avoid local alliances except
where absolutely necessary. Eventually, however, he
will come under mounting pressure to attempt an
accommodation with Le Pen, which might include the
promise of a junior ministry, in order to ensure his
hold on the National Assembly in 1986 and to nose
out rivals on the right as he goes after the presidency
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Western Europe: Big Four Forecast
for 1985
GNP growth in West Germany, France, the United
Kingdom, and Italy is expected by most forecasters to
average 2.4 percent in 1985, up only slightly from last
year's estimated pace of 2.1 percent. The slight
acceleration in growth will almost certainly be too
small to keep jobless rates from rising, but inflation
appears likely to bottom out. A significant slowdown
in US economic activity or a dramatic fall in the
dollar would worsen the growth forecast. A drop in
the dollar, however, probably would be accompanied
by lower interest rates, easing the impact of reduced
competitiveness.
the West European
"recovery" is shaping up as the weakest in the
postwar period. Growth in consumption, which makes
up two-thirds of GNP, will lag because of the small
expected increase in the number of jobs and in real
aftertax income. Although lower wage hikes should
improve West European competitiveness and business
profits, the expected slowdown in US and Canadian
growth will force West European countries to rely on
business investment and trade among themselves and
with other countries for economic expansion
Unlike past recoveries, Big Four GNP growth
probably will receive only a small boost from private
consumption. Annual increases in real disposable
income in 1984 and 1985 are expected to average only
1.2 percent-2 percentage points lower than the
annual average increase in the 1972-80 period,
To cut
budget e ct s wl ou crippling investment needed
for restructuring, West European governments
generally have chosen to shift more of the tax burden
from the business sector to the household sector while
holding the line on transfer payments. The exception
has been the United Kingdom, where 1982 income tax
cuts spurred an earlier start to its recovery. Moreover,
Table I
ig Four West European Countries-.
Big Four
1.0 -0.2 0.6
1.1
2.1
2.4
West Germany
1.8 -0.3 -1.1
1.3
2.6
2.7
France
1.1 0.2 2.0
0.7
1.2
2.1
United Kingdom
-2.6 -0.7 2.1
3.4
2.3
2.3
Italy
3.9 0.2 --0.4
-1.2
2.4
2.6
k OECD Secretariat data.
b Consensus forecasts
The consensus forecast is calculated as
25X1
the average of projections by 40 US and foreign private companies
and economic institutes.
25X1
anti-inflationary monetary policies have helped keep
interest rates high--West European real rates are
about 3 percentage points higher than the average of
past recoveries-thereby dampening growth in
consumer spending, particularly for housing. On the
other hand, high unemployment in the Big Four
probably will continue to moderate wage increases.
Investment already is making an important
contribution to Big Four growth-a trend that should
continue throughout 1985. Cost cutting and rapidly
growing export demand have helped revive West
European profit margins. Lower inflation rates have
brightened the outlook for reduced nominal interest
rates, which will cut the cost of financing plant and
equipment and make financial assets relatively less
attractive as an alternative for capital. Capacity
Secret
FUR ER 85-002
16 January 1985
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Table 2
Big Four West European Countries:
GNP Forecasts by the OECD Secretariat
Table 3
Big Four West European Countries:
Consumer Prices a
Big Four GNP growth
1.1
2.1
2.6
Big Four
13.1
11.4
9.8
7.2
6.1
5.9
Private consumption
1.5
1.2
1.4
West Germany
5.5
5.9
5.3
3.0
2.7
2.9
Government consumption
1.6
1.1
0.6
France
13.6
13.4
11.8
9.6
7.6
6.8
Gross fixed investment
0.6
3.6
4.0
United Kingdom
18.0
11.9
8.6
4.6
5.3
5.8
Public
0.1
- 1.2
1.3
Italy
21.2
17.8
16.6
14.6
11.3
10.1
Private residential
3.7
1.8
1.2
OECD Secretariat data
Private nonresidential
-0.1
5.3
5.6
b Consensus forecasts
25X1
Stockbuilding
-0.1
0.5
0.4
Exports of goods and services
1
5
5
9
5
7
.
.
.
25X1
Imports of goods and services
1.5
6.4
4.7
25X1
utilization rates have risen substantially since the
recovery began, in part because outmoded plants have
been closed; if the effects of the West German
metalworkers' strike are taken into account, capacity
utilization in the European Community was 81
percent in the third quarter of 1984, only 3 percentage
points below the 1979 peak. EC surveys show that
West European manufacturing executives intended to
invest at least 7 percent more in real terms in 1984
than in 1983, which would be the strongest expansion
in investment since 1970. According to EC data,
industrial investment should increase this year by
about 10 percent in real terms in France and the
United Kingdom. West German and Italian
intentions suggest much less robust industrial
investment, with real increases last year of only 2
percent and I percent, respectively
Much of the intended increase in investment will
continue to be channeled into restructuring traditional
industries, according to the EC surveys. French
executives last year planned to invest a whopping 75
percent more in real terms in the metallurgical
industries, while West German and British metal
companies intended to spend at least 15 percent more.
Investment in the British textiles, footwear, paper,
and plastics industries was slated to rise 20 percent in
real terms, while the Italian food processing industry
planned to invest 15 percent more in 1984 than in
1983.
Secret
The Big Four countries are expected to continue
benefiting from the recovery in world trade. In the
first half of 1984, world trade volume expanded 20
percent at an annual rate; US import volume grew a
phenomenal 40 percent during the period, accounting
for about one-third of the increase. Soft commodity
prices and the competitive edge given West European
producers by the strong dollar have helped improve
business profits and set off the investment surge. The
West Europeans expect to continue winning market
shares worldwide because of continued strength in the
US dollar. Thus, forecasters believe that the foreign
trade sector will give the Big Four economies as
much, if not more, of a boost in 1985 despite the
projected slowdown in US import demand.
Inflation
Inflation appears likely to bottom out in 1985,
Commodity prices,
including that of oil, show few signs of firming up.
Indeed, spot oil market prices have been falling in
recent weeks, and the financial press has reported
speculation on more cuts in official oil prices.
Moreover, with moderation in wage hike
forecasts Big Four unit labor costs to grow much
slower than the annual average for the past 10 years.
Last, continued tight monetary and fiscal policies
should contain inflationary pressures.
25X1
25X1
25X1
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Secret
Table 4
Big Four West European Countries:
Unemployment Rates a
cut back their imports which are weighted toward
capital goods-much of Western Europe's gain from
Big Four 7.5
West Germany 4.6
United Kingdom 9.5
Italy 8.7
8.7
9.4
6.7
8.2
11.0
11.5
11.6
11.8
9.1
9.7
10.1
10.5
a OECD Secretariat data.
b Forecast.
Unemployment
The slight increase in Big Four growth projected for
next year almost certainly will be insufficient to keep
unemployment-Western Europe's most severe
economic problem-from rising. Efforts to restructure
traditional industries are expected to continue; more
layoffs thus can be expected as businesses cut costs by
shedding excess capacity and seeking more labor-
saving means of production. According to the OECD
Secretariat's latest draft forecast, jobless rates in
three countries of the Big Four should top 10 percent
in 1985; only West Germany is expected to have a
chance of holding the line on the unemployment rate.
The OECD forecast implies an increase in the number
of jobless in the Big Four of 550,000; the largest
rise-about 325,000-should occur in France, where
nationalized companies are paring their work rolls in
line with government directives to operate at a profit.
lower oil import bills would be offset.
The US economy poses greater uncertainty for the
West European economies. Most projections of US
growth in 1985
average of 3.3 percent. Although recent US economic
performance has been below expectations, causing
some forecasters to hedge, most analysts still seem to
think that US import demand will not fall enough to
reduce Big Four GNP growth significantly.
Future movements in the dollar also could influence
West European growth prospects. Most forecasters
are assuming a slight fall in the value of the US
dollar, but they have been expecting it for more than
two years. If the dollar falls, Big Four international
competitiveness would deteriorate, thus reducing
economic growth. West European governments,
however, could take advantage of a weaker dollar to
cut interest rates, which would offset some of the
effects of lower sales growth at home and abroad.
Uncertainties in the Forecasts
Forecasters point to several factors that would cause
them to reassess their 1985 projections. For example,
a fall in oil prices of $2 to $5 per barrel would shift
growth among countries and industries but would
keep the average Big Four growth rate virtually
unchanged. As a net oil exporter, the United Kingdom
would experience slower growth, while the other three
economies would enjoy a somewhat faster expansion.
On the other hand, if OPEC countries significantly
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1jecrer
West German Economics Minister in Tokyo:
Bangemann's main concern during his visit earlier
this month was West Germany's rapidly growing
trade deficit with Japan ... he is hopeful that an
improvement in US-Japanese trade relations will
lower the danger of general US import restrictions ...
Bonn feels vulnerable because its exports to the
United States last year were up 46 percent
Portugal-IMF: The IMF has granted a waiver on
technical grounds for Portugal's overrun of July 1984
limits under its standby program ... Lisbon exceeded
its short-term foreign debt ceiling because
disbursements to public-sector enterprises were larger
than expected ... The waiver permitted Lisbon to
draw previously suspended funds.
Currency Liberalization in Turkey: Ankara
announced that it will now permit the lira to be used
in payment for certain exports, as well as allowing
trading in gold by the Central Bank ... new
regulations reflect Prime Minister Ozal's free market
policy goals, which include making the lira fully
convertible.
End to Rationing Set in Yugoslavia: Belgrade
announced on 26 December that it would soon abolish
gasoline rationing and mandatory travel deposits for
Yugoslav citizens traveling abroad ... two years ago
authorities introduced these measures to save scarce
foreign currency needed to service Yugoslavia's $20
billion debt ... The move will ease austerity but could
aggravate inflation already running at 60 percent-
and threaten stabilization outlook.
15 Secret
EUR ER 85-002
16 January 1985
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Secret
Secret
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