INTELLIGENCE MEMORANDUM SOUTHERN EUROPE: SHORT-TERM ECONOMIC PROSPECTS
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Document Number (FOIA) /ESDN (CREST):
CIA-RDP86T00608R000500180009-0
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RIPPUB
Original Classification:
C
Document Page Count:
25
Document Creation Date:
December 14, 2016
Document Release Date:
March 5, 1999
Sequence Number:
9
Case Number:
Publication Date:
May 1, 1975
Content Type:
IM
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' ~ Approved Fbr Release 2001108/21 : Clq~-RDF86T00608R0005001$0009-0 ~
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Confidential
No Foreign Dissent
'intelligence Memorandum
Southern Europe Short-Term
Economic Prospects
Confidential
ER IM 75.9
May :'s/5
Copy N2 74
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NATIONAL SECURITY INFORMATION
Unauthorized Disclosure Subject to Criminal Sanctions
Classified by 013319
Exempt from General Declassification Schedule
of E.O. 11632, exemption categoryi
?.x9(1), (2), and (3)
Auto mallL~llyy ddeclassifled oni
date lmpoulbie to determine
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CONFIDENTIAL
No 1"oreign DJ.ssem
Southern Europe: Short-Tern
Economic Prospects
All six south European countries important to the NATO defense system -
Cyprus, Greece, Italy, Portugal, Spain, and Turkey - have been buffeted by political
and econoi aic troubles over the past year. Their economic problems are remarkably
similar, with notable exceptions in war-torn Cyprus. Faltering output, growing
unemployment, rising prices, and dwindling foreign reserves are characteristic. The
political impact of such difficulties varies widely among the countries. Conversely,
recent political changes are threatening short-term economic progress much more
in some countries than in others.
The oil crisis, domestic political uncertainties, and widespread recession abroad
combined to prevent normal economic growth throughout the region last year,
particularly in the final quarter. Output in Greece and Cyprus actually declined;
in the other countries, increases in GNP were a little below their long-term averages
of 5'Io-7%. The outlook for 1975 is bleaker. None of the countries except Turkey
is likely to expand GNP by more than 3%; Italy faces a small decline in output.
Unemployment increased substantially in all six countries last year as the
effects of domestic economic slowdown were compounded by refluxes of workers
from recession-ridden north European countries. The problem will worsen in 1975,
with average unemployment rates expected to range from 4% to 10%.
The countries' balance-of-payment positions deteriorated drastically in 1974.
All six registered current account deficits, some very large. Higher oil bills were
the main factor, but most countries also suffered a reduced growth in tourist income
and workers' remittances. Al! the countries will incur large current account deficits
in 1975 but should be able to finance them by borrowing from private and official
institutions abroad and dipping into foreign reserves.
Note: Comments and queries regarding this memorandum are welcomed. They may
be directed to of the Office of Economic Research,
Code 143, Extension 7402.
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Inflation raged throughout southern Europe last year, with increases in
consumer prices generally in the 20% range. Soaring energy costs, large government
deficits, and exorbitant wage increases all contributed to the problem. Greece has
made the most progress recently on the inflation front but still faces a double-digit
rate in 1975. In mid-April, the Portuguese government froze prices of' staple
foodstuffs and broached the issue of wage controls. Despite talk of austerity, most
of' the governments seem unwilling to depress demand (and raise unemployment)
in order to break the wa.e-price spiral. For Cyprus, Italy, Spain, and Turkey, price
increases threaten to reach 20%-30% in 1975.
The political and economic outlook is most ominous in Portugal, which is
a member of' NATO and supplies both the United States and NATO with important
mili, ary facilities. The recent abortive coup played into the hands of' the leftist
Armed Forces Movement, enabling it to strengthen its control over the country's
affairs. The political parties have now agreed to the Movement's continued
dominance for a period of 3-5 years.
The Portuguese economy is suffering as a result of the economic
mismanagement of' the revolutionary regime, which has fostered industrial anarchy
and given rise to a phenomenal rise in wages. The go:ernment nationalized banks
and the insurance companies in March and a number of utilities and basic industries
a month later. At the time of' the latter move, Lisbon also decreed a program
of land reform and warned of further nationalizations. Portugal is moving gingerly
toward strengthened economic relations with the USSR.
Across the border in Spain, where the United States also has valuable bases,
economic problems could complicate the eventual transfer of power from Franco
to Juan Carlos. Labor unrest is on the rise as a result of worsening unemployment
and inflation. Prime Minister Arias also is finding it difficult to pluralize Spanish
politics by permitting political associations outside the rightist National Movement.
He probably will continue a hard line on disaffection among students and workers,
aggravating a potentially explosive situation.
In Italy, the bastion of NATO's southern flank, economic woes will cost the
Christian Democrats votes in the June nationwide regional and local elections,
probably to the benefit of the Socialists and Communists. The economy's
difficulties probably will not be severe enough to precipitate a radical leftward
shift; thus, another center-left government is the most likely outcome. It' the
Socialists strengthen their position within the government, Italy may adopt a more
expansionary economic policy after midyear.
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Events in the eastern Mediterranean recently have been dominated by the
Cyprus tragedy. Since the Turkish invasion of Cyprus - site of important British
bases -- life has been thoroughly disrupted by de facto partition of the island and
displacement of a large portion of the population. In the Greek Cypriot sector,
the Makarios government is trying to reorganize the truncated economy and care
for thousands of refugees while attempting to maintain the tenuous unity ..song
rival Greek Cypriot facti ens. The Turkish Cypriots are somewhat better off'. They
got most of the island's resources and have a more stable political situation because
Ankara is running the sector almost like an extension of the Turkish mai "'and.
In Turkey, NATO's southeastern anchor, military success in Cyprus brought
problems as well as an initial euphoria. The shaky Ecevit government fell only
two months after the invasion, and the huge cost of the operation - possibly US
$1 billion so far - has diverted resources needed at home. Economic strains are
adding to the headaches of Prime Minister Demirel's National Front coalition, put
together after six. months of effort. Inclusion of' two extreme-right parties in the
government threatens further left-right polarization of politics.
Greece, which withdrew from NATO's military structure in 1974, has the
brightest short-term political and economic outlook of' the six. The political
situation appears stable, with popular Prime Minister Karamanlis in firm control
of a democratic governmc,1t. A shakeup of' the armed forces to weed out disloyal
officers has raised passions but ultimately should strengthen the principle of'
government by elected civilians. Renewed confidence in the government and a
reflationary economic poh,,y are attracting -oreign investment and helping the
economy recover from the 1974 recession.
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CONFIDENTIAL
CYPRUS: ECONOMIC RECOVERY NOT IN SIGHT
Eight months after the Turks invaded Cyprus, the once-prosperous island is
still reeling from the war and the resulting unbalanced disposition of resources.
Both the Creek and Turkish sectors face at least another year of' economic
dislocation, which will further destabilize the political situation.
On the Eve of the invasion
The Cypriot economy was already under stress before the war. Drought had
reduced agricultural output by 201', in 1973 and had helped cut economic growth
to only 2%, compared with the hefty 7% average of th previous 10 years. The
grain shortage had aggravated inflation and stimulated imports, causing a rare
balance-of-payments deficit. Economic strains had worsened in early 1974 under
the impact of sharp price increases for oil and other commodities. By midyear,
inflation was running at :% and unemployment was double the u.,ual low level.
Effects of the War
The invasion Of July-A,)gust 1974 drastically worsened the situation. Although
damage to structures was small, half' the livestock and much standing timber were
destroyed. More than 200,000 persons, out of a nopuiation of 660,000, were
displaced. The Greek popul ition lost half' of its agricultural land, most of its tourist
facilities, some iron and copper processing plants, and several large ports. In effect,
the bulk of the island's resources was transferred to the Turkish Cypriots.
Situation in the Creek Sector
At yearen~-', the truncated Greek Cypriot economy still was staggering from
the effects of the invasion. Production in the petroleum refining, brewing, bottling,
and clothing plants still in Greek hands was down severely from midyear levels.
Inflation had accelerated to a 157 annual rate, earnings from tourism and the
British bases at Dhekelia and Akrotiri had tumbled, and the unemployment rate
remained at roughly 30%. Foreign exchange reserves continued at the island's prewar
level only because the contraction and disruption of the economy caused imports
to fall even more than exports.
Starting last October, the Greek Cypriot government took its first steps toward
rebuilding the economy, including
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? a 30'%% deduction from wages and profits to support the refugee relief'
fund established soon a;'ter the invasion;
? temporary restrictions ui the dismissal of' workers in Hie private sector;
? earmarking of $4 million in government funds to create jobs; and
? prompt ontpletion of the deepwatcr port at Limassol, the building of
an airport at Larnaca, and the cons ruction of several new roads.
The short-term outlook is grim because the government is constrained by
inadequate revenues and an unwillingness to accept the reality of partition.
Although reconstruction work, government financial aid For business, and
emigration should reduce unemployment by two-thirds this year, at least 20,000
people will remain on the government dole. The sector's budget could go into
the red by 0250 million in 1975 since reconstruction and relief needs are substantial
and Athens is providing little assistance. The financing of such a deficit - twice
the deficit of the whole island last year -- practically guarantees that inflation will
continue in the two-digit range.
To meet essential needs of consumers and enterprises, the Makarios government
will have to dip into Cypriot I'oriegn reserves, which remain under its control.
Import volume will increase as reconstruction proceeds and employment expands.
export volume will remain low because production of citrus fruits -- the main
export -- has passed into Turkish hands. The area probably will suffer deterioration
in terms of trade; prices arc generally weakening for'its exports of foodstuffs and
raw materials. With tourist earnings wiped out and revenues from the British bases
down (most dependents have departed), foreign reserves could fall $135 million,
or 50'/%, this year.
Situation in the Turkish Sector
The new Turkish Cypriot state is experiencing economic paralysis despite
considerable aid from Turkey. Ankara, which dominates the interim administration
of' Rauf Denktash, has begun to lay down the institutional prerequisites for g; owtl
by developing a live-year plan, making the Turkish lira the common currency, and
?nstalling the Turkish Agricultural Bank as the Sector's central bank,. Turkish
military and civilian engineers already have restored basic services.
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CYPRUS
Southern Limit
of Turkish Control
Si~C1t0,1' ,t, hekeliel CITRIJI\
CITRUS UK. Bes%
Refinery
l1685SOI
(l Uf11 Port/Tourism
K tleSe/ (\l
io
Statnf. W..
The labor shortage nonetheless has kept most industrial firms from resuming
operations. Commercial activity has slipped badly because ninny former Greek
Cypriot businesses have been given to untrained Turkish Cypriot migrants from
the south. While the citrus- crop has been gathered and marketed, other agricultural
activity continues at a depressed level, with many farms still unoccupied.
Little economic expansion is likely this year, because the Turkish Cypriots
lack the numbers, skills, and money needed to marshal their resources. Economic
problems at home have induced Ankara to reduce its assistance and to offer loans
Instead of grants. Efforts to attract private Turkish investment are having scant
success. Unless Ankara pours in more money and persuades more mainland residents
to migrate, recovery promises to be slow. (Unclassifie(I)^
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CONFIDENTIAL
GREECE MOVES SLOWLY TOWARD REFLATION
The government of Constantine Karamanlis, installed last July and confirmed
in office by the November election, is cautiously trying to get the economy moving
again. The military government in its last year had slowed inflation and contained
the trade deficit at the cost of declining output. Economic activity has picked
up under the new regime; further progress seems likely in 1975.
Reviving Growth
Both industrial production and GNP declined in 1974 by about 2%,, after
six consecutive years of r?.tpid growth. Although still hamstrung by inflation and
trade problems, the economy began to recover after midyear. By October, industrial
production had recouped three-fifths of the 16`%, drop from the February 1974
peak.
Tight fiscal and monetary policies adopted in late 1973 started the slowdown;
mobilization for the Cyprus crisis in July 1974 carried it to its nadir. The economy
was further depressed last year by a $380 million jump in net oil imports, to
$720 million. Tourism -- a major industry - was hit hard by the worldwide
economic slowdown and a spurt of anti-Americanism following Turkey's invasion
of Cyprus.
The Karamanlis government has continued the moderately expansionary line
initiated by the military government just before its ouster. It quickly abolished
a special tax on construction and has now eased credit restraints. The 1975 budget
calls for spending to rise by one-third, an increase that almost certainly will exceed
the rise :n tax collections. To spur consumption, the government is providing tax
concessions to low-income groups.
Fear of rekindling inflation will act as a brake on government stimulative
efforts. The austerity program held the rise in consumer prices to 14% in 1974
following the 30% jump of 1973. Although inflation has lessened, strong
expansionary measures could send prices soaring again.
GNP should post a small gain in 1975, perhaps exceeding the 1973 level by
a percentage point or so. Recent announcements of major investment projects
suggest that the new regime has won the confidence of domestic and foreign
businessmen. Unemployment nevertheless is likely to worsen because of the scarcity
of jobs for migrant workers in recession-plagued Western Europe.
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CONFIDENTIAL
GREECE: ECONOMIC INDICATORS
Index: 1970 annual average =190
100
Industrial Production
(seasonally adjusted)
d`
l
n~
`
h
100
90
Wage and Price Trends
Average
monthly earnings in i
ndustry
1
" Consumer Prices
Ronl earnings
_Unemployment 1
(three-month moving average, sea
sonally adjusted)
_
d
N-if
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Balance-of-Payments Constraints
Balance-of-payments problems will keep Athens from moving vigorously to
spur growth. The trade deficit amounted to $2.4 billion in 1974 - about the same
as in 1973 - even though import volume 1'ell, export volume rose substantially,
and export prices increased i:early as much as import prices. 'T'his somber arithmetic
reflects the fact that export earnings in 1973 were only one-third as large as import
expenditures.
Financing problems would have been more severe if an increase in receipts
from transport services had not almost olTset the decline in tourist earnings and
workers' remittances. An increase in receipts of long-term capital - mostly loans
from Bonn, the IMF oil facility, and a consortium of private banks - merely
compensated for the drying up of short-term capital inflows. Athens consequently
drew down foreign reserves by about $110 million.
To improve the trade balance in 1975, the government intends to expand
its export incentive prograni and maintain. import restraints. Athens will rely on
quantitative controls on non-oil items and heavy taxes on petroleum product
Tourism will remain depressed by high air fares, Greek-Turkish tension, and the
anti-American atmosphere. Earnings from shipping services will rise little, at best.
Greece: Hal--ice of Payments
Million US $
1974
1972
1973
Estimated
Exports
836
1,230
1,774
Imports, f.e.b.
2,197
3,642
4,194
Trade balance
-1,361
-2,412
-2
412
-2
420
Tourism
297
,
,
306
Transportation
358
474
663
Remitt, nccs
572
732
624
Other invisibles
-270
-384
-413
Current account balance
404
-1,188
-1,240
Long-term capital
477
688
Basic balance
73
-500
1,130
Other capital
263
405
Payments balance
336
-95
-110
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In 1975, the current account deficit again will approximate $1.2 billion,
forcing continued heavy borrowing abroad. Prospective lenders include Paris, the
EC, said several OPEC countries. Athens will try to protect foreign reserves, which
now hover about the $900 million mark. (Confidential).
With output down, unemployment rising, and inflation maintaining a torrid
pace, the Christian Democratic Party of Prime Minister Aldo Moro prob.,ibly will
suffer further setbacks in the regional and local elections this June. The major
bright spot -- a sharp drop in the current account deficit - is not apt to impress
the voters. Workers increasingly are expressing discontent through strikes for more
generous fringe benefits, pensions, and unemployment compensation. Another
center-left coalition probably will be put together after the elections, following
lengthy negotiations.
In 1974, Italy once again muddled through, escaping the economic and
politicLli disaster widely predicted in the Western press. After tortuous compromises,
the coalition government came up with an austerity program in July that greatly
improved the trade account. The quadrupling of' oil prices caused a $2.1 billion
deficit in the first quarter; the fourth quarter deficit had narrowed to $1.3 billion.
More important, the austerity measures enabled Italy to scrape together $6 billion
in credits from foreign official sources. This was enough, along with some private
borrowing, to avoid dissipation of reserves despite the $8 billion current account
deficit.
The credit squeeze and tax hikes, principal features of the austerity program,
led to a precipitous drop in industrial output in the second half. While other sectors
were less seriously affected, GNP began to slide after midyear. As a result, growth
for the year was held to 3.610 - still one of the highest rates in Western Europe -
compared with a 5% long-term average. The number of workers on short hours
or without jobs rose in the second half, adding to already substantial labor unrest
and straining the union-government truce arranged in early 1973. In spite of
weakening demand and slower growth in wholesale prices, inflation of consumer
prices accelerated to a 28% annual rate in the second half because of sizable
increases in wages, indirect taxes, and prices of petroleum products.
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Dispiriting Growth Prospects
Italy probably will be the only country among the Big Six to suffer a drop
in output in 1975. We anticipate a 1"/? decline in real GNI' because Italy's shaky
credit rating will encourage Rome to move very cautiously toward reflation. Even
the Communist opposition is advocating fiscal moderation. The Socialists, likely
to gain in the June elections, may demand economic stimulation as the price of
their continued participation in the government. Measures taken after midyear
probably would have little effect on economic growth in 1975.
In recent months, the government has acted more to check the decline in
output than to stimulate an upswing. Preferential central bank rediscounting for
banks that reduce interest rates and the removal of the import deposit scheme
last month should help hold the drop in fixed investment in 1975 to about 57(%.
Recent increases in appropriations for public construction, subsidies to agriculture
and exports, and worker income supplements do not make the 1975 budget much
more expansionary than originally planned. The added spending is supposed to
be covered by increases in postal rates and by tax receipts beyond the amount
initially forecast. As a result of the tax reform implemented at the start of 1974,
which featured income tax withholding and better enforcement, collections have
improved considerably.
Ministering to Labor
Although displeased with the government's hesitant reaction to the recession,
workers probably will fare better than business this year. Union grumblings already
have induced the national fcdcration of industries and the government to g eatly
improve cost-of-living adjustments, family allowances, and income main, +nance
payments. Renegotiation this coming autumn of triennial labor contracts affecting
half the industrial labor force is sure to give an added push to wages.
Concessions to labor will force up industrial costs and keep inflation boiling
in 1975. We anticipate a 20% rise in consumer prices, about the same as in 1974.
Even Britain, which has equally contentious labor relatit,,,s, will probably not do
that badly.
Wanted: $6 Billion in Foreign Capital
Barring a protracted political crisis, particularly one that led to increased
Communist influence in the government, Italy should be able to finance another
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ITALY: Economic Indicators
Index: 1910 monthly average 100 (seasonally adjusted) Thousand Persons
130 1,200
Industrial Production I Unemployment
74
Index: 1970 monthly average= 100
220r-
Domestic Prices
Billion USS (seasonally adjusted)
4.6
Foreign Trade, f.o.b.
1973 74 75 1973 74
75
Est.
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large current account deficit this year. We expect a deficit of $i billion, down
$2 billion front I974. Lower international cununodily prices should improve Italy's
terms of* trade, and the recession probably will cause a slight decline in import
vOllllne. We assuu1C Brat the lira will be allowed to depreciate cnougli to keep
c'(porls competitive despite the lofty inflation rate.
Political turmoil could upset alt already shaky financial situation by
? drying up credit From private and official sources abroad,
? provoking a massive flight of domestic capital, and
? cutting off the repatriation of capital, which began in the second half
of 1974 because of Italy's credit restrictions and high interest rates.
In any event, prospects of obtaining large to fns directly from OWE(' states are
poor. President Leone's credit-seeking trip to Saudi Arabia in March was a disaster,
and negotiations with Iran appear to be hopelessly tangled. Financing of the current
account deficit thus will require large receipts From such petrodollar recycling
mechanisms as the IMF facility and the prospective E(' and OI?('I) facilities. II'
such assistance is not forthcoming - or if' a shift to the left scares off capital --
Rome will have to curb imports and dip into its $3 billion foreign exchange
reserves. (Confidential No Foreign Uisscm)s
PORTUGAL: ECONOMIC PROBLEMS, UNCERTAIN SOLUTIONS
Political turmoil has been the single most important factor affecting Portuguese
economic developments since a military-led coup ended 50 years of' authoritarian
rule in April 1974. Efforts to grapple with economic problems will be ineffectual
until the political direction in Lisbon steadies.
Recent Developments
Production data are sparse, a reflection of the new government's inability to
cope with administrative detail amid continuing political upheavcal. As best we
can determine, industrial production recovered incompletely from the estimated
35'/o plunge in the six weeks following the coup. Strikes have subsided since last
summer, partly because workers have been pacified by huge wage increases. At
the same time, tourism and other important activities remain depressed.
CONFIDENTIAL
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Portugal: Ilalance of I'aynrenls
Million US $
1974
1971
I1;72
1973 listimaled
Exporls
955
1,353
1,927 2,470
Imports (f.o.b.)
1,584
1,947
2,642 4,070
'Trade balance
'
'
-629
-594
-721 -1,600
T
ourism
212
261
320 300
Other services
'
'
'
-73
-56
?I57 -100
ransl
l
Crs
664
873
1,097 1.000
Current account balance
174
484
539 -400
Long-term capital, private
76
62
_37
Long-term capital, public
-12
-191
-I04
Short-term capital
-6
-137
... -100
L;rrors and omissions
35
60
5
Surplus or deficit
267
278
342 -500
t)nentplovnrent is now the most critical economic problem. H'he growing hody
oI* jobless workers, mostly unskilled and uneducated, can titutes a particularly
volatile element in the political tinderbox. At least 200,000 people - 7';; of the
labor force - are idle. The sharp increase in unemployment is the result of a
combination of, factors: industrial slowdown and political turmoil at home,
worldwide recession, return of soldiers and settlers from the African provinces,
and the diminishing ability of North European countries to absorb surplus
Portuguese laborers.
Itrl1ation continues to be worse than in most Western countries: consumer
prices went tap about 25;5, last year despite a temporary price freeze following
the coup. Wages lagged behind the price spiral until April. The drop in real wages
was especially pronounced in the half year preceding the coup. This situation has
changed sharply. The official wage index for the third quarter showed a 39';5, gain
over the year-earlier level - more than offsetting the rise in prices. We estimate
an even greater increase in wages in the quarter - an average of 751,'5, in the 12
largest industries.
The trade deficit more than doubled in 1974, to an estimated $1.0 billion.
The rise in oil Costs accounted for hall of- this increase. Net food and agricultural
imports jumped by $340 million because of higher consumption by low-income
groups. A one-third increase in the traditional net earnings from paper, textile,
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PORTUGAL: Economic Indicators
GNP and Industrial Production
12, 5 r- Index! 1970 -100
Real GNP,/
1971 1972 1973 1974 Est
sansnnnl)y adjusted
701 t I t t I I I
Jon 1974 Feb Mar Apr May Jun Jul Aug
1tum.tn at Im olhu bard on pltyucd oulpn dolt Irlr JO mdudtbt
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and wood products, to $450 million, offset only a small part of file rise in inupc>rts.
Willi invisible earring's also declining, the current account shifted from a $540
million surplus to a deficit of about $400 million.
Will] the political Left ascendant, private enterprise has lost ground fast since
the abortive Rightist coup of I I March. Moreover, moderates have little chance
to redress the situation in the constitutional assembly election scheduled for
25 April. The Left-leaning Armed Forces Move;ne::t has institutionalized itself' in
a Revolutionary Council that is to dormnate the government for 3 to 5 years.
Among the Council's first acts was nationalization of the banks and insurance
companies in March, an action that wear beyond the socialization program
published in February. On 16 April, the Council also nationalized electric utilities,
oil companies, railways, the national airline., two shipping companies, and the steel
industry and began a program of agrarian reform by limiting the size of individual
land holdings. At the same time, Lisbon announced it was considering
nationalization of' a number of other large-scale firms. Prices of staple foods were
Frozen, but a Revolutionary Council guideline calling for wage controls has not
yet been implemented.
In view Af the unsettled conditions, Portuguese GNP probably will not rise
at all this year and may decline. The jobless rate is likely to reach 10`7o as more
soldiers return, a new group of young people enter the labor force, and jobs for
migrant workers in the European Community remain scarce. Private investment
will continue to be depressed, particularly in industries threatened with
nationalizLtion. The ability of government officials to operate the newly
nationalized firms efficiently is a question mark. Potential foreign investors will
remain wary despite government assurances.
The trade deficit probably will grow this year, and earnings from tourism
and workers' remittances will be down. Lisbon will have to draw further on its
reserves, which still mount to some $2 billion ($6 billion if' the gold is valued
at the current market price). (Confidential).
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CONFIDENTIAL
SPAIN: STRESSING GROWTH, ACCEPTING INFLATION
Prime Minister Arias is trying to maintain economic expansion in the face
of international recession. He is in trouble: output has risen at a slower pace since
last summer, inflation has approached a 20% annual rate, a drop in real wages
has spawned strikes and demonstrations, and a big current account deficit has
opened up. We expect Arias to continue to stress growth while accepting inflation
and a sizable current account deficit.
Recent Developments
The Spanish economy lost momentum in the second half' of 1974. T;ie higher
cost of oil and other imports drained away huge suns at the very time that tourism
was faltering and worker remittances were falling off. A moderately expansionary
fiscal package enacted in March 1974 was insufficient to offset the impact of these
external forces. Furthermore, consumer demand was eroded by accelerating
inflation, and business confidence was undermined by General Franco's illness and
uncertain ties surrounding the succession.
Spain: Balance of Payments
1974
1971
1972
1973
Estimated
Exports
2,980
3,920
5,340
7,100
Imports (f.o.b.)
4,580
6,240
8,840
14,400
Trade balance
-1,600
.2,320
-3,500
-7,300
Services, net
1,690
2,020
2,650
3,000
Of which:
Tourism
1,880
2,230
?." .,1
2,800
Transfers, net
770
870
1,400
1,100
Current account balance
860
570
550
-3,200
Long-term capital, net
500
930
760
1,500
Basic balance
1,360
1,500
1,310
?1,700
Errors and omissions
-100
40
30
-100
Short-term capital
??..
-50
200
800
Other
180
10
-320
200
Change in .'serves
1,440
1,500
1,220
-800
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SPAIN: Economic Indicators
Index: 1070 monthly average-100 (nnsonnlly odjustod)
200
Wage and
Price Trends
(.1111'.111111'1 ~1I II 1!;'.
Fixed
Investment
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ICipid expansion of investment early in 1974 helped keeps GNP growth to
5% for the year as a whole. Although this was not too far below the 7`% annual
average of' the preceding decade, by yearend the economy was expanding at an
annual rate of only 217,,-3%.
As economic growth slowed, unemployment rose -- officially to 1.91/o of the
labor force in December -- tip from 1.211o a year earlier. In reality, unemployment
probably was double the admitted rate. Worker unrest, heightened by inflation,
increasing job insecurity, and return of workers from abroad has brought a wave
of strikes and demonstrations. Although strikes still are illegal, Madrid initially
reacted with moderation, reportedly advising enployc..c it would tolerate wage
increases as high as 30`7f%. As disorders intensified in January and hebruary, the
authorities cracked down.
Con-miner prices rose 18% in 1974 - about 4 percentage points more than
in the OECD countries as a whole. Prices had begun to soar in the second quarter
of 1973. As elsewhere, higher prices on imported oil, foodstuffs, and raw materials
were a major influence. Madrid's reluctance to dampen economic activity allowed
inflation to go unfettered.
The balance of payments deteriorated throughout 1974. The higher prices
paid for oil and other imports were a major factor. Outlays for crude oil jumped
$2.3 billion. Drought hurt trade in agricultural products on both the import and
export sides. Continued industrial growth in the first hall' of 1974, combined with
domestic inflation, brought a substantial increase in import volume. Declines in
tourist receipts and workers' remittances contributed to the $3.2 billion current
account deficit. Government-controlled corporations helped protect the country's
reserves by borrowing on the Eurocurrency market instead of obtaining funds from
the usual domestic sources. Private short-term borrowing abroad drew in additional
money. Foreign reserves nevertheless fell by $800 million to about $6 billion.
The Arias government will continue to tolerate it big current account deficit
and rapid inflation rather than impose austerity measures. We expect real GNI'
to grow by 2`I,3`70 in 1975, not enough to offset the natural increase.. in 1.ne labor
force, the drying tip of foreign jobs, and the continuing improvement in labor
productivity. Inflation will ebb only slightly and will continue to erode recent
wage gains. Further labor unrest seems guaranteed. (Confidential) o
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TURKEY FACES SLOWDOWN N GROWTH
't'urkey n-aintained rapid economic growth in :Hoch of 1974 despite troubles
at home and abroad. The overall growth rate of' 7.0'/x, two percentage points short
of' plan, ranked among the highest in the LUCs. Performance weakened as the
year wore on; furl her slowdown is likely in 1975 because trade deficits and inflation
will inhibit stimulative efforts. The costly Cyprus operation has brought pressure
to trim military expenditures. The cutoff in US aid will further complicate the
problems of defense budgeting. Ankara will try to protect its economic development
prograin, partially at the expense of its NA'1?O commitments.
Balance:-of-Payn-enls Uifficullics
The most urgent problem facing Prime Minister Demirel's coalition government
is the deteriorating balance of payments. Sparked by rising oil prices, imports
jumped in 1974 to $3.8 billion - 80'/,% above flee 1973 level. Export earnings rose
by only 15'%,, to $1.5 billion, as the result of a small decline in volume. The record
trade deficit pushed the current account into the red by $700 million in spite
of' continued large remittances from Turks working abroad. A flight of' short-term
capital apparently contributed to the $355 million foreign exchange lees:; in 1974.
Part of the downturn in export volume can be laid indirectly to Ankara's
high support prices for agricultural products. Lacking an adequate export subsidy
scheme, Turkey attempted without much success to move these commodities at
prices above the world level. Cotton sales - normally the top dollar-earner - were
further crippled by a worldwide slump in textile output. Rapid domestic inflation
and growing world recession reduced the markets for many industrial exports.
Turkish officials are considering import controls and export promotion
programs to keep the trade deficit from rising above $2 billion in 1975. To hold
the rise in imports to $500 million, Ankara proposes to restrict purchases of oil
and consumer goods to last year's level. It intends to offer credit incentives to
industry in an effort to generate an offsetting rise in export earnings. This goal
probably is beyond reach, since Turkey depends heavily on exports of raw materials
that will continue to suffer from slack foreign demand.
Ankara can no longer count on worker remitt? ices to cover its trade deficit.
The steady decline in the number of 'Turks employed in West Germany and other
European countries will probably push remittances below the $1.4 billion received in
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TURKEY: Economic Indicators
Unemployment Rate
Annual Average In Percent
Real GNP Growth
Percent
7.fi
5. 5
Inflation
Percent
Dec over Dec 34.0
18.0
Imports and Exports Trade Deficit million Uss
Million US$ 3000
Imports (c. i. I)
Exports (I. o. b.)
Current Account Balance
Million USS
471
Net Foreign Reserves
Million USS 2025
at year end .
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CONFIDENTIAL
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CONFIDENTIAL
1974. Government efforts to place returning workers in new jobs in oil producing
countries will not compensate for losses in l wopean employment.
Dealing with Inflation
Spiraling inflation is pressuring Ankara to rein in spending, despite the cost
in economic growth. The inflation rate has about doubled in the last two yeais
to 34% because of sharp wage hik'.s, food shortages, and soaring prices for imports,
particularly oil. The proposed national budget for the fiscal year beginning in March
calls for no increase in outlays in real terms. To boost revenues, Ankara is
considering taxes on agricultural income and a progressive in?:ome tax system.
(Confi(lential No Foreign i)issem)^
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