WESTERN EUROPE BRANCH OFFICE OF REPORTS AND ESTIMATES WORKING PAPER BRANCH WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01090A000400020001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 7
• Document Creation Date: November 9, 2016
• Document Release Date: July 27, 1998
• Sequence Number: 1
• Publication Date: October 4, 1949
• Content Type: PAPER

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WORKI. G PAPE1
WESTERN EUROPE BRANCH
OFFICE OF REPORTS AND BSl.' MT} S
C$NTRAL INTELLIGENCE AUNCY
BRANCH WEIMU
P79-04kA000400020001
NOTICEg This document is a working papers
Fan official CIA issuance. It has been
co-ordinated within ORE. but not with the
$AC Agencies* It represents current think.
ing by specialists in CIA, and is designed
for use by others engaged in similar or
overlapping studios. The opinions expressed
herein may be revised before final and offi-
offal publication4 It is intended solely for
the information of the addressee and not for
further disaeminatione
DATE ; 4 October 1949
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USTM ]x EUROPE BRANCH
W Kr.Z 3U HY
VOL. V - No. 12
25X6A
For week ending
4 October 1949
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FRANCE
A A considerable reassessment in France of the country's
ol? In the building of e Atlantic :fommuni ty , ith mere, nce
upon the Atlantic Pact will take place as a result of recent US-
UK trade and monetary decisions and President Trumants announce-
ment of the Soviet atomic explosion, Within Government circles
and among the population a conviction is growing that the US and
UK are tending to act bilaterally in economic matters without
due consideration for the interests of continental European
nations, Apprehension has resulted from the exclusion of France
from the Washington monetary talks, the reported US economic
concessions to the UK, the UK's unilateral, and drastic devalua-
tion of the pound, and, finally, US pressure to devalue the
German mark to a degree which would,, the French claim, unduly
favor German interests at the eapenae of France,
French concern for the possible adverse effects of
this trend upon the national security will probably be increased
by the implied Soviet possession of the atomic bomb, Two days
following the announcement of the explosion, General De Gaulle
stated publicly that the military significance of the Atlantic
Pact was now lost, and hence a Franco-German bloc for mutual
defense was necessary. The moderate, semi-offioial Le Monde
went further and expressed pessimistically that "Rurope has
lost its strategic value to both the West and the East" and
that "there is no longer good reason to rearm Europe or to set
and fortify a defense line on the Elbee." All these developments
will reInforce French convictions that the US must give firm
guarantees of I mzediate and large-scale military intervention in
case of war with the USSR, and may also tend to make France less
tractable in future negotiations with the western powers,
$ Now French illamcnta measures to cover the 1049
budgetary deficit W111 probably be found necessary by the
Queuille Government, and will aggravate the political difficulties
that will arise in October because of the Cabinet's wage-price
policies* The deficit.. previously estimated at nearly 500 billion
francs, will be increased because the Government has reportedly
decided on price subsidies, and workers in the nationalized
industries will share In the greater allowances the Government is
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giving to workers. The Cabinet, therefore, in order to keep Its
commitments to Parliamment and ECA to avoid inflationary financing,,
must devise and propose in Parliament now tax revenues or curtail-
=at of over-all expenditures, or both. This will be a difficult
task becauset (1) even the existing surtax on gasoline la highly
unpopular, and pressure against it is developing among parlia-
mentarians; (2) the Government is in a weak position to win political
support of any now taxes or economies; and (3) business is exert-
ing ooneiderably heavier pressure upon the Government to modify
its anti-inflationary policy (and provide a greater volume of
credit) In view of the effects of the drought, devaluation, and.,
prospectively,, of wage increases,
Despite the laborious revision in May and June of this
yearts budget along the lines of Finance Minister Petsohe'a plan
which featured a special, gasoline surtax, the Treasury was rescued
from critical operating difficulties in July and August only by
two extraordinary ECA authorizations of releases from the counter,-
part fund. The second of these releases, amounting to 30 billion
francs, was granted with the mutual understanding that it would
be paid back into the counterpart fund in November, as heavier
revenue oolleotions were made in the fallo The Government was
still optimistic prior to 1 October that there would be suf-
ficient improvement In collections to overcome its budgetary
difficulties. The decision of 1 October regarding price
subsidies and increased worker allowance wa.s accompanied by an
admission that higher taxes on profits would be neoessarye
Even before this month? however,, optimism concerning
the economic and financial situation was not justified. The
Treasuryta operating situation has continued to be extremely
tight. On the revenue side,, June and July returns from the
special gasoline surtax reached only about one-tenth of the
average rate anticipated, although other budgetary receipts
have held up well. On the expenditure side, previous efforts to
curb the nationalized railroads? operating deficit finally bore
fruit In August,, but the drain that month on the Treasury a
investment, reconstruction, and special accounts was severe,, and
is likely to be increasingly Heavy. In addition, there is little
prospect of turning as a last resort to the counterpart fund for
substantial further relief, inasmuch as it stood at only about
5 billion franca after the regular September and October releases.
F CE AND SPANISH NORTH AND VI1ST AFRICA
B A rehonsion lest the US abandon its a vial treatq
Position in Tocca to oou r .As ng to the scuts aa~agement
off leaders g1al (the principal Moroccan nationalist move-
ment), who are beginning to fear that the only means of furthering
their independence aims is through collaboration with the
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Conmaxnists, US iaaiatence upon maintaining in sill force its
1858 treaty with the Sultan of Morocco is recognized by the
nationalists as the last and principal obstacle to conplete
French domination over the area,, Iatiglal leaders also recog-
nize realistically that US relations with France must take
precedence over those with Moroccoo ltevertheleaa, they see
that,, they can hardly hope to compete with the Moroccan
Oommuniet Party, which is also now espousing independence for
lbroaco,, and which has a program for -dressing social in-
Justices that appeals to both rural and urban groups TMste
nationalist social program is severely handicapped by the pro-
scription on their organization as a political party and their
right to organize labor, and by the drastic 1'renoh censorship.
rationalist leaders are convinced that Cosztunietss have in-
filtrited Isstiglale Pressure from some sectors within the
moves, zit for collaboration with the Communists is becoming
more acutep, although Istiglal's devotion to the Sultan probab';;
prevents any formal combinations Should the Sultan be persuaded
to accept the French invitations to visit Paris., however,, his
standing among nationalists might deteriorate to such an extent
that his influence would be nullified,
Of all the nationalist groupings in French North
Africa, Istigial has been the most. consistently anti-Communiat
as well as the most pro-'US,, Although limited nationalist
collaboration with the Communist Parties of Algeria and Tunisia
has not produced an active joint organization, it does not
follow that such a combination in Morocco would be equally
innocuouse
TTAI
B Italian reaction to news of the atomic explosion in
the USSR generally shows continue a In the superior
potential of the US, but at the same time reflects increased
pessimism over the prospects for peaces Non-Comm nisst labor in
the northern industrial area etas,, by and large,, not surprised by
the announcement and seems to feel that the US stockpile, plus
the inferiority of Soviet technical and industrial capacity? will
serve to deter Soviet aggression. The small industrialists
maintain their faith in US strength, but believe that the Soviets
have more to gain and less to lose by war than the US. The
announcement has engendered considerable pessimism among the
intellectuals; many of them had hoped that the US monopoly would
continue for some time& The extreme left (Communists and Left-
Socialists), apparently without a directive as to what line to
take, are rather mildly claiming that the USSR has had an atom
bomb for some time,, but has shown its love of peace by refraining
from "threats" such as those allegedly made by the US0
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Press references to the possibility of a US-USSR
agreemortt suggest that the Comsauniat "peace" campaign will now
become awe popular with war-weary Italians, The Italian
Government, however, will be stimulated to accelerate its
preventive measures for internal security, particularly with
reference to Communiatso Furthermore, the Italian Government
will undoubtedly stress the increased strength of the Soviet
war potential as a reason why Italy should receive substantial
aid under the Military Assistance Program.
as t dioations t Italian Government will
pursue a oau ous and moderate course through devaluation problems.
Abandonment of the ,roam-rate agreement with the British, and
eventual establishment of a dollar-lira rate at 650 or slightly
above appear to be the major financial moves by moans of which
Italy will seek to adjust to sterling devaluation,
Smarting under the suddenness and extent of the British
action, the Italian Government will probably seek to release
sterling from its dollar peg (which has resulted in an appreoib
ation of the lira against the pound) and have it traded inde-
pendently so as to insure some degree of protection to important
Italian exports to the sterling area (fruits and vegetables,
cotton textiles, eto.) which would otherwise be overpriced on
the British market,
Baoouraged by the relative stability with which the
lire met the first shook of sterling devaluation, the Italian
Government asserts its determination to keep the lire-dollar
rate below the present 650 maximum, It is likely, however,, that
strong pressures from exporters and other interests may force the
Government to some moderate compromise between the present 50%
~e last rate of roted black market rate maintained 6 poy Sthe uch Government,,
may be achieved at the 650 level or slightly above, If a thepGo compromise proves able to hold this rate, the danger of rising coats of
living and wage demands may be held to manageable proportions,
A sign of its confidence in its ability to do so is evidenced in
the Government's politically-timely move to reduce bread prices*
VATICAN
B The Catholic-Socialist conflict in Austria is symptoa
matic of the growing avers on of e RomanCatholi Church to
collaboration with the Socialists in western Europe, Vatican
attempts to enlist Catholic support for the (Catholic) People's
Ply in the forthcoming Austrian elections are evidenced in the
recent proclamation issued by Austrian Catholic Action "In accord
with the Episcopates, and published in the People's Party press,
The proclamation announoea that this year's elections will deter-
mine not only "the freedom and welfare of the nation, but also
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the fate of the Church", and lists the points which must'be
included in any political platform supported by Catholic-voters,
Although the Austrian hierarchy has so far avoided antagonizing
the Socialists by referring to the People's Party by name, it has
recently become increasingly assertive,
Should the local hierarchy come out in direct support
of the People's Party, the Socialists, who have attempted to
avoid clashes on religious and social issues, might be moved to
abandon their conciliatory positions While sharp controversy
over these issues would promote antagonism between the coalition
partners, it would probably not affect materially the outcome of
the elections, which presumably will result in a People's Party
pluarality in any case; and it probably would not prevent eontinu.
ation of a coalition Government. It would, however, make the task
of forming a coalition more difficult, and, in combination wit'-iii
other points of difference, would jeopardize the stability of the
coalition, the maintenance of which is important to US interesmss,
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