EUROPEAN REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00289R000100040001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 26
• Document Creation Date: December 22, 2016
• Document Release Date: April 22, 2011
• Sequence Number: 1
• Publication Date: September 25, 1985
• Content Type: REPORT

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Directorate of
Intelligence
pct
European Review
25 September 1985
ecret
EUR ER 85-022
25 September 1985
Copy 4 5 0
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European Review
Briefs West Germany:
25X6
Foreign Affairs Appointments
25X1
Netherlands: Peace Movement Against Cruise Missil
es
25X1
Romania: Export Push
25X1
Hungary: Banking Ref
25X1
The recent conclusion of a rescheduling agreement with Western
governments has done little to brighten Poland's financial outlook.
Warsaw will be hard pressed to meet the payments required under
this agreement and those made with banks. Poland probably will not
achieve its planned hard-currency trade surplus for 1985, and
creditors remain reluctant to extend enough loans to cover the
financial gap. Difficulties will increase in 1986 as more repayments
of principal fall due on previously rescheduled debt. The regime
probably will try to bridge the gap by favoring payments to banks
over governments with the hope that the Paris Club will not call
default for nonpayment. Another possibility is for Warsaw to
request a further rescheduling of repayments due on the 1981 and
1982 agreements.
25X1
25X1
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Hungary: Multiple Candidate Elections
The competitive elections for the National Assembly and local
governments this summer-a novelty for Hungary and the Soviet
Bloc-were a limited success for the Kadar regime. While
presenting little risk to the party, they won Budapest favorable
publicity in the West as the most moderate and "democratic"
regime in the Soviet Bloc, provided it a better measure of popular
attitudes and grievances, and paved the way for reforms to revitalize
the country's legislative and local administrative bodies. But they
apparently have done little to enhance the regime's legitimacy-one
of the major objectives of the experiment. The regime's turn toward
limited political reform at a time of economic stagnation may reflect
insecurity about its relationship with the Hungarian people and
concern about the viability of the Kadarist social contract that has
helped preserve social stability for the past three decades
Yugoslavia: Slovenia's Role in the Reform Debates
Slovenia, Yugoslavia's most economically advanced republic, has
become an increasingly vocal player in the debate over changes in
the country's political and economic systems. In an officially
Communist state, Slovenia routinely blocks efforts to centralize
power in Belgrade, resists federally sponsored redistribution of
resources to the poorer southern republics, and staunchly defends its
Western cultural heritage and unique language. The republic will
continue to exploit the decentralized post-Tito system to protect its
interests but will press for market-oriented reforms and efforts to
streamline the cumbersome federal bureaucracy.
25X1
25X1
25X1
25X1
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. Comments may be directed to the
authors
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Secret
West Germany Social Democratic Infighting
A draft paper by Social Democratic Party (SPD) security expert Andreas von
Buelow has provoked a storm of public criticism and controversy within the SPD.
The paper proposes turning the Bundeswehr into a Swiss-style militia and cutting
military service,time in half. It suggests that these and other measures could
induce the Soviets to withdraw their troops from Eastern Europe by the end of the
century, after which the United States could remove its forces from West
Germany except for a symbolic contingent in Berlin. The paper has no official
party standing, but the Christian Democrats are branding it as further evidence of
SPD hostility to NATO and the United States
Social Democratic moderates leaked 25X1
the paper to the press in order to isolate von Buelow, whom they suspected of
wanting to force leftist foreign policies on Johannes Rau in his race for chancellor
in January 1987. The SPD leaders, however, generally defended von Buelow both
within the caucus and in Bundestag debate, although they disavowed the notions of
US troop withdrawals and turning the Bundeswehr into a militia. As a result,
party moderates reportedly doubt whether Rau will be able to buck the leftist
trend in the Social Democratic leadership. As a precondition for accepting the
nomination for chancellor, Rau has demanded that the party stem its drift toward
anti-Americanism and reaffirm its strong commitment to NATO, according to the
sourc 25X1
The Kohl government has finally filled two major foreign policy posts vacant since
early this year. Hans Stercken will replace the late Werner Marx as head of the
Bundestag Foreign Affairs Committee, and Lutz Stavenhagen will take over from
the late Alois Mertes as parliamentary state secretary in the Foreign Ministry.
The new appointees are both members of Chancellor Kohl's Christian Democratic
Union and have been in the Bundestag since 1976 and 1972, respectively.
Initial reactions to the appointments have been somewhat skeptical because 25X1
neither has had much experience in foreign affairs. One conservative newspaper
lamented in particular their inexperience in dealing with Eastern Europe and the
Soviet Union. Stercken at least served on the Foreign Affairs Committee and
gained some exposure to West European, African, and Israeli affairs.
Stavenhagen, on the other hand, has a predominately commercial background and
has focused in parliament on fiscal and research policy. It is too early to predict
what effect these appointments will have on the formulation and conduct of Bonn's
foreign policy, particularly since the chancellery retains a pivotal role. In any case,
Kohl and his advisers clearly wanted to keep these posts in the hands of Christian
1 Secret
EUR ER 85-022
25 September 1985
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Secret
Dietrich Genscher, especially in the realm of Ostpolitik.
Democrats despite the party's dearth of foreign policy expertise. Nevertheless, the
upshot may be a freer hand for Foreign Minister-and Free Democrat-Hans-
Netherlands Peace Movement Against Cruise Missiles
Agency indicated 51 percent of the Dutch population will sign the petition.
The Coordinating Group of the Dutch Peace Movement has launched a two-month
national petition to defeat a decision on INF deployment to be taken by the
government on 1 November. The group hopes to reach a minimum of 80 percent of
the 5.2 million Dutch households between 7 and 29 September and will present the
results to Prime Minister Lubbers on 26 October at a mass rally. Mass signature
campaigns are uncommon in the Netherlands, and historical precedent shows a
mixed record of success. An August poll by the NIPO Public Opinion Polling
The petition, we believe, is not likely to prevent a favorable government decision on
INF basing. Prime Minister Lubbers has stated repeatedly that his government
will accept the deployment of cruise missiles if, by the decision date, the number of
Soviet SS-20s exceeds 378. A successful petition drive, however, could jeopardize
parliamentary ratification of the decision next year by increasing anti-INF
tendencies in the Christian Democratic Party, the government's senior coalition
partner.
Romania Export Push
Bucharest has increased bonuses for managers and technicians whose enterprises
exceed export and energy plans and has imposed stiffer fines for underfulfillment
in an all-out effort to avert a financial crisis this fall. The decree, which will
remain in effect for the rest of the year, also stipulates equivalent fines-the loss of
up to 50 percent of wages-for managers of enterprises failing to make timely
deliveries of raw materials and other goods to firms producing exports.
production well into the summer
substantial shortfalls in planned energy production continued to hamper export
compared to the same period in 1984.
serious disruptions of last winter, increasing l l percent in the second quarter
exports had recovered from the
winter
Bucharest must boost export earnings because prospects are uncertain for a $150
million commercial bank loan needed to meet debt repayments due this fall. The
new measures are unlikely to increase exports of most goods because shortages of
raw materials and intermediate goods caused by import restrictions are the chief
constraint on export production. The regime, however, may augment exports of
refined petroleum products by cutting allotments to the domestic economy, leaving
the country vulnerable to severe energy shortages comparable to those suffered last
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Secret
Hungary Banking Reforms
Hungary is moving ahead cautiously with its program to create a less centralized
and more competitive banking system. According to the US Embassy in Budapest,
the government recently created eight new institutions to finance technological
development and foreign trade for state enterprises and cooperatives. The new
banks will be allowed to peg their interest rates up to 1.5 percentage points above
the base rate set by the National Bank. In addition, Budapest approved Citibank's
plan to open in January 1986 a joint venture bank, after the IMF persuaded senior
National Bank officials that the plan would not weaken their control over hard
currency debt. The joint venture-of which Citibank will own 80 percent and the
National Bank 20 percent-will engage in both domestic and international
banking operations. Finally, the Foreign Trade Bank is to enter the domestic
lending market while the State Development Bank can now issue bonds and
establish joint ventures and financial institutions.
Budapest hopes these measures will improve the efficiency of credit allocation in
the economy, but its wariness of excessive decentralization will limit the activities
of the new banks. The National Bank will need to develop new policy levers to
regulate financial institutions that are not its own subsidiaries. The new banks
probably will remain cautious in their lending until they develop expertise in
judging the creditworthiness of firms and the likely profitability of investment
proposals.
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Poland:
Financial Crisis Continues
The recent conclusion of a rescheduling agreement
with Western governments has done little to brighten
Poland's financial outlook. Warsaw will be hard
pressed to meet the payments required under this
agreement and those made with banks. Poland
probably will not achieve its planned hard currency
trade surplus for 1985, and creditors remain reluctant
to extend enough loans to cover the financial gaps.
Difficulties will increase in 1986 as more repayments
of principal fall due on previously rescheduled debt.
The regime probably will try to bridge the gap by
favoring payments to banks over governments with
the hope that the Paris Club will again not call
default for nonpayment. Another possibility is for
Warsaw to request a further rescheduling of
repayments due on the 1981 and 1982 agreements.
reconsider the situation if problems develop.
Financial Situation in 1985
Poland signed an agreement with the Paris Club of 17
Western government creditors in July-after more
than a year of talks-to reschedule all $11 billion in
principal and interest due during the period 1982-84.
By eliminating Warsaw's massive arrearages to
Western governments, the agreement was a vital step
toward normalizing relations with creditors. The two
sides had initialed terms in January, but formal
signing was delayed when Warsaw tried to obtain new
credits from the governments and failed to make
required payments on arrears from the 1981
rescheduling agreement. The Poles claimed that
without new credits they could not meet payments
required under the agreement. Warsaw signed the
accord only after Western creditors agreed to
The Paris Club extended very generous rescheduling
terms to the Poles. The overdue debts were
rescheduled for 10 years with a five-year grace period
ending in 1990. Half of the interest due this year was
rescheduled over four years; subsequent interest
payments will be paid in full when due. To implement
the agreement, the Poles must pay 50 percent of the
1981-83 interest arrears on the 1981 rescheduling
Table 1 Million US $
Poland: Debt Service Due a
Total 15,750 14,797 4,835
Paris Club 12,602 12,807 2,109
Of which:
Banks
Other
agreement-about $200 million-and conclude
bilateral agreements with the individual governments.
Warsaw must also come up with approximately
$1 billion in interest payments due for this year on its
two rescheduling agreements with the Paris Club.
New credit commitments will be decided between
Poland and Western creditors during bilateral talks in
the coming months.
Financing Sources
Warsaw probably lacks adequate resources to meet
these payments plus its obligations due under bank
rescheduling agreements. Excluding the $11.6 billion
in debt relief from the Paris Club, we estimate
Poland's sources of financing at $2.4-2.6 billion
compared with Warsaw's projection of $3.6 billion.
The Polish estimate for a hard-currency trade surplus
of $1.5 billion seems overly optimistic because the
surplus in the first seven months of 1985 was $589
million, about $300 million less than the same period
last year. Warsaw, so far, has not cut imports as in
past years to meet its surplus goal. Imports in
Secret
EUR ER 85-022
25 September 1985
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Table 2
Poland: Sources of Financing
Polish
Estimate
CIA
Estimate
Polish
Estimate
CIA
Estimate
Total
3,917
15,264
14,064-14,264
5,202
3,622-3,822
Earned b
2,035
1,900
1,500-1,700
2,050
1,700-1,800
Hard currency trade
1,456
1,500
1,200-1,400
1,650
1,400-1,500
Exports
5,828
6,300
5,700-6,100
6,850
6,000-6,400
Imports
4,372
4,800
4,500-4,700
5,200 .
4,600-4,900
Services and transfers, net
396
500
400
500
400
Interest earnings
183
-100
-100
-100
-100
Borrowed
1,882
13,364
12,564
3,152
1,922-2,022
New credits
218
1,000
200
1,830
600-700 c
Recycled interest d
240 e
815 f
815E
440
440
Credits extended, net
-176
-100
-100
-100
-100
Debt relief
1,600
11,649
11,649
982
982
1,600s
^ Polish financial data.
b Earned payment capacity equals the current account balance
excluding interest.
c Assumes $400-500 million in credits from the IMF.
d Separate agreements during the bank rescheduling accords of
1982, 1983, and 1984 provided that certain percentages of interest
payments be re-lent in the form of short-term loans.
C Net figure: The Poles received $1.18 billion in revolving credits in
1984 but repaid $940 million.
s The bank rescheduling of July 1984 covered payments due
between 1984 and 1987.
h Includes rescheduling of about $10.3 billion due in 1982-84, and
$1.4 billion due in 1985.
January-July were up about 11 percent, with
purchases of capital equipment rising more than 25
percent due to the regime's lack of control over
investment. Exports to the West decreased 2.5
percent, with sales of coal and chemicals falling
because of production and transportation problems
caused by the extremely cold winter. Warsaw, which
was relying on a large rise in machinery exports to
meet its surplus target, was able to increase sales of
these items only by marginal amounts.
Requests to Western governments for $600-800
million in new credits seem to have fallen on deaf
ears. By the end of August, only Austria had signed a
bilateral rescheduling accord with the Poles and
provided $20 million in new commodity credits-less
than 15 percent of Warsaw's original request-and a
$20 million extension of an existing line of credit for
agricultural items. The Dutch, Belgian, Swiss, Italian,
and Canadian bilaterals, however, were held up due to
disagreements over the rates of interest that would
apply. If the accords are signed, West Germany may
grant $30 million, Switzerland $20 million, and
France about $10 million, but only after the 1985
rescheduling accord is signed and all payments are
completed. The British, Italians, and Swedes also may
grant some trade credits. The Belgians, Portuguese,
Greeks, and Canadians have yet to decide on granting
25X1
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new loans while the Japanese, Danish, and Spanish
governments claim they will extend no new credits.
25X1
Obligations
Even with the rescheduling of 1982-84 debt and
assuming the rescheduling of all 1985 maturities,
Poland owes about $3.1 billion,' leaving a financial
gap of $500-700 million. In addition to payments to
the Paris Club, Warsaw owes bank creditors $1.6
billion and other creditors over $400 million. Poland's
payment schedule will be particularly difficult over
the next few months. Payments include:
? $286 million for 1984 interest on the 1981
government rescheduling agreement now due.
? $220 million for 1985 interest on the 1981
government accord due 30 November.
? $284 million for principal on.the 1981 bank
rescheduling agreement due 10 December.
? $586 million for 1985 interest on the 1982-84
government rescheduling due 31 December. F--]
The Poles already have failed to pay the governments
completely the interest arrears on 1981 debt. As a
result, the September Paris Club meeting to finalize a
1985 rescheduling accord was postponed as well as
bilateral talks with several governments concerning
some bankers, however, expect Poland to make the
December payment to the banks on time, despite
shortages of hard currency. They believe that Warsaw
will continue to favor the banks over Paris Club
governments because of the lesser risk in failing to
pay official creditors. 25X1
the 1982-84 accord.
Warsaw also may have some hidden payment reserves
that do not show up in the projections provided to
creditors. The Polish people have about $1.2 billion in
hard currency deposits in their domestic state banks,
including $340 million put in earlier this year as a
result of increased interest rates and incentives for
travel. Data from the Bank for International
Settlements (BIS) showed Polish deposits in Western
banks at $1.6 billion in March 1985. Warsaw claims
these deposits are "working balances" for banks and
' Private banks in July 1984 rescheduled $1.6 billion of debt due
during the period 1984-87.I
enterprises. Although the Poles do not consider these
items as reserves, Warsaw probably could draw upon
some of this money if forced to do so.
Financial Situation in 1986
The gap between sources of financing and payments
due probably will widen in 1986. Warsaw will owe
about $4.8 billion next year assuming Western
governments reschedule almost $1 billion due in
principal and interest on original maturities. Banks
and Paris Club governments are due about $2 billion
each under previous rescheduling agreements, and
other creditors are owed over $700 million. The bank
payments include $568 million in repayment of
principal under the 1981 agreement and $316 million
from the 1982 accord, while repayments to the Paris
Club include $550 million in principal due from the
1981 agreement.
We estimate that Poland probably can pay only $3.6-
3.8 billion next year, although the Poles project
covering all payments. We believe Warsaw is once
again being overly optimistic in its projections of the
trade surplus as well as the amount of IMF credit
available in 1986 if readmission is granted. Warsaw
projects a trade surplus of $1.65 billion with exports
increasing by 9 percent and imports by 8 percent.
Based on 1985 performance, exports are likely to rise
only half that amount mainly due to a continued lack
of raw materials and quality goods to sell in the West.
Imports probably will be lower than the Polish plan
because of the lack of hard currency revenue. Thus,
the surplus is likely to rise only slightly above the
1985 level of $1.2-1.4 billion.
Poland is not likely to receive the large amount of
credits it projects for 1986. Warsaw is counting on
readmission to the IMF early in 1986, from which it
hopes to obtain over $1 billion in new credit next year.
However, the regime most likely will have access to no
more than $400-500 million in IMF loans after entry,
not the estimated $1.1 billion in standby credits.
Moreover, before receiving a larger amount of IMF
money, Poland would have to negotiate a stabilization
program. Such a program would require the support
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debt repayment.
of workers whose continuing demands for increased
consumption would conflict with IMF requirements
for greater austerity to improve Poland's capacity for
Near-Term Outlook
While the recent Paris Club agreement has created
the impression of progress on Poland's debt problems,
Warsaw continues to be mired in a financial crisis. Its
lack of funds to make payments on its rescheduling
will force the regime to choose one or more of these
options:
? Pay the banks, not the governments. The Paris Club
allowed Poland to run up arrears of $12 billion in
1982-84 without calling Warsaw in default. As a
result, Poland most likely will delay payments to
Paris Club members, hoping for the same outcome.
The Paris Club most likely would protest such
a choice as well as continued payments to other
creditors, but the governments have no real leverage
over Warsaw.
? Cut imports. The regime slashed imports in 1983
and 1984 to achieve targets for hard-currency
surpluses when exports did not reach planned levels.
Warsaw apparently is holding off on this option in
1985, hoping exports will increase.
? Keep pressing for new credits. Another round of
requests for loans from Western governments-
without more serious attempts by Poland to improve
its trade performance-is not likely to have much
success.
? Request afurther rescheduling of the 1981 and
1982 bank and 1981 government agreements.
Poland owes about $1.2 billion in principal to banks
from these agreements and $550 million to
governments in 1985 and 1986-about the sum of
the financial gaps in both years. Creditors would not
welcome such a request, and
Warsaw has given no signals that it would
ask for such a package. A rescheduling of the
agreements would require the cooperation of banks
and governments in the sharing of Poland's
payments-which has not occurred up to now. If
Warsaw enters the IMF in 1986, the Fund could
play a role in guiding future negotiations. The IMF
probably would press governments and banks to
provide more debt relief and new credits before
extending its own loans under a standby program.
In any case, these options will provide just another
short-term solution to most immediate financial
problems. Warsaw has not made the policy changes
necessary to stimulate hard-currency exports and
escape the endless cycle of requiring more credit and
debt reschedulings. An adjustment policy formulated
by the IMF in cooperation with the regime may offer
some hope of improvement, but any progress will be
slow.
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Hungary:
Multiple Candidate Elections
The competitive elections for the National Assembly
and local councils (local governments) this summer-a
novelty for Hungary and the Soviet Bloc-were a
limited success for the Kadar regime. While
presenting little risk to the party, they won Budapest
favorable publicity in the West as the most moderate
and "democratic" regime in the Soviet Bloc, provided
it a better measure of popular attitudes and
grievances, and paved the way for reforms to
revitalize the country's legislative and local
administrative bodies. But they apparently have done
little to enhance the regime's legitimacy-one of the
major objectives of the experiment. The regime's turn
toward limited political reform at a time of economic
stagnation may reflect insecurity about its
relationship with the Hungarian people and concern
about the viability of the Kadarist social contract that
has helped preserve social stability for the past three
decades.F___1 25X1
The Election Results
The elections presented no risk to the leadership.
Thirty-five of Hungary's most prominent regime-
approved personalities were placed on a "national
list" and ran without opposition. In the competitive
electoral districts, the Patriotic People's Front (PPF),
Hungary's umbrella front organization, organized
nominating meetings and put forward the names of
two candidates to compete in the election. In addition,
nominations could be submitted from the floor, but all
candidates had to openly accept the program of the
PPF, and only those who captured at least one-third
of the votes at two or more nominating meetings were
allowed to stand for election.
The authorities carefully controlled the nominating
process by employing such techniques as orchestrating
the debates at the nominating meetings, packing the
halls with party supporters, introducing other
candidates to dilute the vote, and moving the meetings
without providing sufficient advance notice. In this
way, the regime was able to prevent the most
objectionable candidates from standing for election.
Of the 873 candidates who cleared the nominating
process for the Assembly election, only 78 (9 percent)
were nominated from the floor (43 were eventually
elected to serve in Hungary's 386-seat Assembly).
Similarly, of nearly 90,000 nominees for the local
government positions, only about 4 percent were
proposed by the voters.
Despite the regime's precautions, several well-known
retired and active officials were defeated in the
election, some rather soundly. Two prominent
retirees, former Politburo member and reputed
conservative Bela Biszku and former premier and
reform advocate Jeno Fock, lost their races as did five
retired county first secretaries, including one who
received only 16 percent of the vote. In addition, three
of the 21 active party officials running for office were
defeated. But the candidates who fared least well in
the elections were the trade union representatives.
The head of the Iron and Steel Workers Union was
defeated as were 10 of the 17 union delegates running
for election.
International Reaction
Western observers reacted favorably but guardedly to
the elections. They applauded the existence of
multiple candidates but pointed out that there were no
true opposition candidates in the field. And while
many conceded that the elections might be a small
step in the direction of democracy, they questioned
whether a greater role for the National Assembly
would automatically ensue.
Overall, most observers concluded that the elections
constituted an unusual experiment in Eastern Europe
and compared them favorably with electoral practices
of other Bloc states. The Hungarian media gave
prominent place to Western press accounts, but
objected to the Western focus on the fate of the
"independent" candidates, and chided those
Westerners who dismissed the elections because they
brought no change in power.
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Reporting in the Bloc press was more restrained, with
most party newspapers-including Pravda-simply
noting that the elections demonstrated the unity of the
party and the people and affirmed the decisions taken
at the Party Congress last March, without mentioning
the multiple candidates. Only the Polish press went
into any detail on the new election law and the results
of the election.FI 25X1
Domestic Reaction
The Kadar regime's major domestic goal probably
was to enhance its legitimacy. After the trauma of the
1956 revolution, Kadar sought popular acceptance of
his government on the basis of a "social contract"
under which it provided the people with economic
benefits and social freedoms that were not available in
the other East European states. The economic
stagnation that has bedeviled Hungary in recent years
has clearly undermined the regime's credibility.
Budapest appears to believe that limited political
reforms, of which the multiple candidate elections
form only one part, are needed to take up the slack.
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The leadership apparently hoped that the appearance
of a choice and the actual opportunity to vote officials
out of office would elicit more voter participation.
Postelection assessments in the Hungarian press
centered on assertions that the elections had indeed
engendered greater public interest in political affairs
and had thereby contributed to national unity.
Turnout figures suggest, however, that this may be an
overly optimistic interpretation. In the previous
parliamentary election, 97 percent of the eligible
voters cast their ballots, but only 93 percent did so
this time. Moreover, only 83 percent of those eligible
voted in the byelections held later in the month.
The regime also hoped that greater participation
would help it get a better grasp of popular attitudes
and grievances. The Central Committee, in a recent
statement, directed the newly elected members of the
National Assembly and the local councils to make use
of all proposals raised at the nominating meetings.
Some in the leadership, however, appeared
disappointed with the outcome of the electoral
debates. Istvan Horvath, a Central Committee
secretary, worried openly in his report to the Central
Committee on the elections that the large number of
local issues raised during the parliamentary campaign
would hinder the Assembly's ability to consider the
good of the whole nation. Horvath apparently had
hoped that the National Assembly election would
identify major national issues and that matters of
purely local interest would be raised in the local
council elections.
New Roles for Old Institutions
The competitive elections may also have been
intended to set the stage for changes in the now
largely moribund National Assembly and local
governments. According to the Central Committee,
the leadership wants the National Assembly to play a
more active and visible role in discussing important
social issues, in defining major new policy measures,
and in monitoring policy implementation by
government bodies. Although the party appears
unwilling to give the Assembly greater policymaking
authority, it apparently wants to increase its
credibility as a means of legitimizing the policies that
it votes into law. The regime took a step in this
direction last year by creating a constitutional council
within the parliament to review laws and regulations
made by local government organs and central
ministries for consistency with the constitution.
The regime also apparently intends to expand the role
of the local councils. These local government bodies
are expected to do more to identify and discuss
important local interests, to exploit local resources,
and to stimulate greater popular participation in civic
affairs. The authorities have already moved to give
the councils more authority by abolishing the
administrative districts that had existed between the
local councils and the counties; the granting of
increased financial and policy autonomy to the
councils also has been discussed. Such measures are
considered to be the logical outcome of the greater
independence assigned to economic enterprises as a
result of Hungary's economic reforms.
A Regime III At Ease?
Budapest's search for new ways to increase its
legitimacy and open new lines of communication to
the people suggests an uneasiness with its position. In
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particular, the leadership seems to feel it is losing
touch with the mood of the country and thus risks
being surprised by destablizing social developments.
The population's longstanding cynicism toward
politics and reluctance to participate in the officially
directed political process have contributed to the
regime's uneasiness.
Further reflecting its concern, the regime also has
ordered local party organs to take greater note of
important social issues at party forums and to be
better prepared to explain and defend central
decisions. In addition, Kadar, himself on several
occasions, has expressed concern over public
discontent with stagnating living conditions and a
growing alienation among various sectors of society.
The regime's anxiety level will rise even higher as the
succession to the 73-year-old Kadar grows nearer, and
could lead to more daring measures as the leadership
tries to maintain its social contract with the
Hungarian people.
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Yugoslavia
Population 22.8 million
Per capita national income $1,259
Unemployment 15%
Slovenia
Population 1.9 million
Per capita republic income $2,210
Unemployment 2%
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Yugoslavia: Slovenia's Role in
the Reform Debates
bureaucracy.
Slovenia, Yugoslavia's most economically advanced
republic, has become an increasingly vocal player in
the debate over changes in the country's political and
economic systems. In an officially Communist state,
Slovenia routinely blocks efforts to centralize power in
Belgrade, resists federally sponsored redistribution of
resources to the poorer southern republics, and
staunchly defends its Western cultural heritage and
unique language. The republic will continue to exploit
the decentralized post-Tito system to protect its
interests, but will press for market-oriented reforms
and efforts to streamline the cumbersome federal
Opposition to Federalist Reforms
Leaders of the more centralist-oriented Serbian
republic and some federal officials have introduced
the major proposals in the national reform debates,
while Slovenia has assumed a leading role in
opposition. Slovenia, not surprisingly, favors change
that would shift Yugoslavia closer to Slovene
practices. Its leaders argue for greater political
freedom including more open public debates and more
objective media reporting. They back greater reliance
on market forces in the economy, and, according to
US diplomats, would restrict federal regulation to
monetary and fiscal policies that provide a framework
for market-based decision making.
Slovene opposition centers on efforts to block
federalist proposals for granting greater power to
central authorities:
? Slovene leaders frequently attack Serbian proposals
for constitutional amendments enlarging Belgrade's
authority in both political and economic affairs.
? In cooperation with Croatia, the Slovenian republic
has vigorously countered Serbian-backed proposals
of the federal government to centralize control over
hard currency earnings. The two republics last
spring took the unprecedented step of drafting
alternative legislation on the foreign exchange
system for the Federal Assembly.
? The Slovenes have sought a reduction in federal
control over mandatory aid to the poorer southern
republics and have demanded smaller aid quotas.
? Slovenia's state president has denounced a proposal
made in the Party Central Committee last summer
for federal legislation to control locally determined
wages. F__1
The Roots of Slovene Behavior
Long a part of Catholic Central Europe, Slovenia is
more Western in culture than most other republics.
Slovenia also industrialized earlier than most of the
rest of the country and has remained more closely
linked with Western economies. The republic's
distinct language and cultural isolation from the rest
of the Yugoslav federation have allowed Slovene
politicians to expand the limits of acceptable
Yugoslav Communist behavior. The result is a
republic where dissent is generally tolerated, relations
with the Catholic Church are cordial, and skill and
efficiency are bywords of economic management.
The Political Leadership
Slovene leaders differ from those of other republics in
several ways, particularly in their openness to new
blood and extensive interaction with Slovenian
society.
Mobility and Diversity. Slovenia invests more
authority in its cadre of young, pragmatic
technocrats. US diplomats note that in recent years
the Slovenes have favored younger, market-oriented
officials with reputations for able management. Both
the young and old Partisan generations have diverse
professional backgrounds: labor, journalism, business,
party and state bureaucracy, academia, and even the
internal security apparatus.
Secret
EUR ER 85-022
25 September 1985
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France Popit, 64, Republic
President
Most irdfuential figure in
Slovenia ... vocal advocate of
republic interests.
Andre) Marinc, 54, Republic
Party President
Postwar politician ...
professional party man ...
defender of decentralized
status quo and Slovene
economic practices. F--]
Joze Smole, 58, Ljubljana
Party President
Longtime journalist ...
outspoken defender of political
tolerance.F---]
Milan Kucan, 44, Member of
Federal Party Presidium
Trained as lawyer... . critic of
constitutional change and
political interference in
economy. F--]
MitJa Ribicic, 66, Member of
Federal Party Presidium
Liberal,, but republic leaders
publicly disavow his most
radical statements.F
Stane Dolanc, 59, Member of
Federal State Presidency
Partisan generation ... far
more conservative than most
Slovenes ... little power base
at home.F---]
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Diffuse Authority. Slovenia has long avoided
concentrating political authority, and no single body
seems capable of dictating policy. Senior officials
share substantial decisionmaking power with local
party officials, republic legislative bodies, and
enterprise managers. US diplomatic reporting
indicates that even groups normally subordinate to the
party-including the Socialist Alliance of Working
People (a party-organized front organization) and the
Socialist Youth League-exercise considerable
autonomy.F__1 25X1
to have widespread support in the republic.
Fundamental Agreement on Issues. US diplomats say
that the Slovenes demonstrate virtual unanimity on
political and economic reform issues and that
occasional disagreements apparently cut across
generational lines. The US Consulate in Zagreb
reports that Republic President France Popit appears
Limited Participation in the Federation. Many
Slovenes reportedly prefer a confederation to the
present federal structure. Slovene leaders
reportedly have gone so far as to suggest that the
Army-generally considered the final guarantor of
Yugoslav unity-be disbanded in favor of a stronger
regionally based militia. Slovenia's choice of persons
to serve on federal executive bodies who do not reflect
mainstream Slovene thought suggests a low priority
on participation at that level. Instead, Slovenia
appears to rely almost entirely on its representatives
in the Federal Assembly and Party Central
Committee to block undesirable policies.
Role for Public Opinion. The Slovenians have gone
further than other republics in allowing public opinion
a' role in the political process. One member of the
republic state presidency told US diplomats recently
that Slovenian officials are particularly sensitive to
public opinion. The press frequently debates political,
social, and economic issues. 25X1
silent on current problems.
Political Tolerance. Slovenes are proud of their
relatively liberal political system and are quick to
defend their practices against outside meddling. US
diplomats report that the public regards mutual
tolerance and respect as fundamental values. Senior
politicians frequently say publicly that they see no
point in suppressing different ideas or in keeping
The Economy
Since the 1970s the Slovene economy has done well by
Yugoslav standards. Slovenia is the most
industrialized and least dependent on agriculture of
the Yugoslav republics. With only 8 percent of the
national population, Slovenia provides 15 percent of
national output and 25 percent of the country's hard
currency earnings. Worker efficiency is the highest in
Yugoslavia, and unemployment stands at only 2
percent. In the first half of 1985, Slovenia was the
only republic to record an increase in real wages. F_
Nonetheless, the Slovenian economy faces underlying
problems. The US Embassy in Belgrade reported last
spring that Slovenian officials are worried over long-
term economic prospects, noting the need to
modernize the republic's industrial base. A Croatian
official told US diplomats five years ago that official
data showed that Slovenia's capital stock was among
the oldest and most exhausted in Yugoslavia; yet
during the period 1977-82, investment in industry and
mining dropped by roughly one-third.
Although Slovenes generally agree on economic
policy, implementation has not always been smooth.
According to diplomatic reporting, former republic
Premier Zemljaric told the Slovenian Party Central
Committee in late 1980 that only nine of the
republic's 64 active investment projects appeared
geared to needed export growth; a senior Slovene
official told US Embassy officers early this year that
bad investments continue to haunt the Slovenian
economy. Public comments by politicians and
businessmen also suggest that the Slovenian market
has been weakened by its fragmentation into many
small markets controlled by local politicians and
business monopolies. F_~
The Culture
A militant popular commitment to Slovene culture
and language also appears to influence republic
resistance to increasing outside political and economic
interference. US diplomats reported early this year
that Slovenia was gripped by an angst resulting in
large part from cultural concerns
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Historically, Slovenia has been the most ethnically
homogeneous republic, and its small population still
worries about being overwhelmed by the Serbo-Croat
majority to the south. Over the past few years,
Slovenia has imported many workers from the south
to supplement its undermanned labor force; a
Croatian news magazine reported in early 1984 that
immigrants had grown to 20 percent of Slovenia's
population.
Slovenia and Future Debate
As the national debate proceeds, Slovenia will
continue to resist central authority in Belgrade. Over
the next several months, Slovenes will fight to dilute
federal government legislation to centralize control
over foreign exchange and will work through party
channels to kill the current southern-backed federal
wage system proposal. While Yugoslav politicians are
likely to propose many changes to strengthen the
central party before its congress next summer, the
Slovenes will seek allies in other republics to prevent
any loss of power at the regional level. And the post-
Tito political system, which yields decisive power to
the republics, will enable them to block most of the
changes they find unacceptable. At the same time,
Slovenia will continue to lead the country in the
implementation of market-oriented reforms called for
by the party in 1983 and will probably support efforts
to streamline the Party structure.
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Economic News in Brief
Surge in new domestic orders probably strengthening
West Germany's resolve not to reflate ... 5.1-percent
jump in July follows solid 2.1-percent gain in second
quarter ... spurt in domestic sector joins robust
exports.
Direct foreign investment in Spain totalled $1.2 billion
first half of 1985, down 2 percent from same period
last year ... foreign investment on Madrid stock
exchange doubled to $160 million ... Madrid expects
recently liberalized regulations to boost foreign
investment activity in second half of 1985.
Portugal announced a general reduction and reform of
domestic interest rates ... basic discount rate cut by 2
percentage points, loan rates by 2.5 points, and
deposit rates by 3 points ... aimed at promoting
private investment, increasing industrial production,
and improving the flexibility of financial
markets ... with national elections on the horizon,
government intent on improving economy's
performance.
Malta has lifted trade, travel restrictions on Italy
imposed last October ... Rome will reactivate
military mission in Malta, negotiate financial
aid ... economic problems, impending elections
prompting Malta to mend fences.
Bulgaria has announced new measures to cope with
shortages, poor industrial performance ... prices
raised for electricity, gasoline, heating oil, drinking
water, construction materials, luxury foods ... staple
prices held constant to avoid criticism.
Secret
EUR ER 85-022
25 September 1985
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