ECONOMIC INTELLIGENCE WEEKLY REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80T00702A000800050004-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 49
• Document Creation Date: December 15, 2016
• Document Release Date: July 6, 2004
• Sequence Number: 4
• Publication Date: September 14, 1978
• Content Type: REPORT

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Agriculture release instructions
On file Department of
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ECONOMIC INTELLIGENCE WEEKLY REVIEW
European Joint Float: Renewed Pressures ..........
.....................................
Tension within the six-member snake-largely attributable to the contin-
ued strength of the West German mark-is disconcerting to advocates of
a broader European Monetary System.
USSR: Grain Imports High Despite Record Crop Prospects ......................... 9
Even with a crop of more than 224 million tons likely this year, grain
imports should total 15 million to 20 million tons in the 1978/79 marketing
year.
USSR: Long-Term Outlook for Grain Imports ............................................ If the Soviet leadership is serious about boosting meat supplies, it cannot
get along without substantial quantities of foreign grain.
Iran: New Government Maintains Low Economic Profile .......................... 12
Like his predecessor, Prime Minister Sharif-Ernami probably will stretch
out industrial development programs and focus on immediate agricultural
and inflation problems.
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Vietnam: Lag in Postwar Reconstruction ...........
......................................
The largely agricultural south is only slowly being integrated into the more
industrialized Communist system of the north.
Notes ................... .
Japan Plans Quiet.STOL Civil Aircraft 21
Australia Debates Severe Anti-Inflation Budget
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EUROPEAN JOINT FLOAT: RENEWED PRESSURES
The continued strength of the West German mark is creating pressure on the
European currency Moat or "snake,"* illustrating some of the hurdles on the path of
the broader European Monetary System.
The movement of funds Dut of US dollars this summer, coupled with a continuing
divergence in economic trends among snake participants, has given rise to uncertainty
about the future of the weaker snake currencies. Float members intervened heavily in
the market last month to keep the deutsche mark from exceeding the upper
intervention limits against other snake currencies. Tension within the six-member
snake is disconcerting to European political leaders who are pushing for the
establishment of a monetary sytem that would include all EC currencies in a
supersnake.
? The joint float is a monetary arrangement under which Belgium/Luxembourg, Denmark, the Netherlands, Norway,
and West Germany have agreed to maintain their exchange rates within a fixed band of 2.25 percent while floating
against other major currencies.
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The Belgium, Danish, Dutch, and Norwegian currencies have failed to keep up
with the recent surge in the deutsche mark, which appreciated nearly 7 percent
against the dollar from the end of June to its record high in mid-August. In the past
few weeks, the Bundesbank has stepped up purchases of dollars in the exchange
markets, in part to keep the West German mark from exceeding the upper snake
European Snake Countries: Exchange Rate
Changes Against the US Dollar
-5
Mar II III IV I II III IV I II III IV I II III IV I II III IV 1 II
limits. At the same time, the Belgian, Danish, and West German central banks have
been buying substantial amounts of Danish and Norwegian kroner for deutsche marks
to keep the two weaker currencies from falling through the snake floor. In early
August, bank discount rates were changed in Belgium and the Netherlands in a
coordinated effort to encourage more favorable capital flows.
The low West German inflation rate is the most significant factor producing
pressure for another realignment in snake currency parities. The Dutch guilder and
the Belgian franc were last devalued against the mark in October 1976, by 2 percent.
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European Snake Countries: Wholesale Manufactures Prices
II III IV I II III IV I II III IV I II III IV I II III IV I II
1973 1974 1975 1976 1977 1978
Since then, wholesale prices in the Netherlands have risen 8.1 percent, compared with
4.0 percent in West Germany. The Belgian wholesale price index, which has risen only
slightly faster than the, West German. index, is suspect. The more accurate Belgian
consumer price index has risen 12 percent, compared with a 6.6-percent rise in the
West German index. [he much higher rates of inflation in Denmark and Norway
have been offset by more freot.ent devaluations. In the last realignment in February
of this year, the Danish and Norwegian currencies were devalued by 4 and 8 percent,
respectively. Even though the Danish wholesale inflation rate has slowed this year, it is
still high relative to thy, West German rate. Norway's inflation rate is the highest of the
snake countries, now running about 8 percent annually (wholesale prices).
Despite strong public pronouncements of support for the joint float from all
participants, chances of avoiding a realignment within the next few months depend to
a large extent on the desire and ability of snake members to intervene in the market.
Prospects for a reasonable degree of parallel economic performance are poor.
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The West German economy is the benchmark for judging the economic health
of the smaller snake countries. Even though Chancellor Schmidt's latest economic
plans call for higher growth through fiscal stimulation, German inflation rates will
remain appreciably below the rates of its snake partners. Exchange market interven-
tion in support of weak snake currencies carries a substantial economic cost; in
European Snake Countries: Exchange Rate
Changes Against the Deutsche Mark
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Mar II III IV I II III IV I II III IV I II III IV 1 II III IV I 11
1973 1974 1975 1976 1977 1978
particular, Bonn has repeatedly claimed that the domestic money supply effects of
past interventions have complicated inflation control efforts. Despite a strong political
and philosophical commitment to the stability of the joint float, Bonn may prefer
realignment of parities if funds continue to shift out of dollars and the cost of
preserving present parities continues to escalate.
Belgium/Luxembourg are supporting current exchange rate parities because, in
the governments' view, the drop in inflation resulting from a strong Belgian franc has
more than offset the loss in trade competitiveness. On the other hand, a senior
Luxembourg Government adviser claims that nearly 30 percent of Luxembourg iron
and steel exports outside the snake is being priced out of the market. In any case,
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Belgium/ Luxembourg will try to postpone descisions on realignment of the franc for
at least a few months.
The Netherlands has a high economic stake in maintaining the joint float since
more than two-fifths of its tirade is with snake partners. At the same time, snake
membership has increased apFreciation of the guilder against nonsnake currencies,
thus reducing the competitiveness of Dutch products and contributing to the swing in
the trade account from a surplus in 1976 to a $2 billion deficit in 1977. Minister of
Finance Andriessen stated in a recent public letter his government's intention to
support present parities while urging snake partners to come to grips with the problem
of inflation disparities.
Denmark has recently made some progress in slowing inflation and improving
the trade balance. The Danish krone, nevertheless, has dropped from the top of the
snake earlier this year to near the bottom, probably as a result of uncertainty
surrounding the recent government shakeup. Danish officials would like to avoid
further devaluation in hopes tl:.at a strong krone will buttress the domestic incomes
policy. Prime Minister Jorgenson's recent decision to broaden his minority government
to include members of the moderate Liberal Party should permit headway on a sorely
needed austerity program, thus establishing the underpinning for a stronger currency.
On 1 September, Danish Foreign Minister Christophersen publicly announced that the
new coalition government is not planning an imminent devaluation of the krone.
Norway gains the least from the joint float. Since neighboring Sweden dropped
out, less than one-fourth of Norwegian trade is with snake members. Norway's
relatively high inflation rate is partly tied to the North Sea oil bonanza. Unless the rise
in wage costs is moderated, the improvement in Norway's competitive position
stemming from the 8-percent devaluation in February will vanish, and profit margins
in nonenergy export sectors will again narrow.
Implications of Further Realignment
The ability to limit flucuations among the few currencies now participating in the
joint float will influence plans for organizing the broader European Monetary System
envisioned by Schmidt and Giscard d'Estaing. The West Germans will play the pivotal
role in determining tht- timing of any interim realignment. All of the participants un-
doubtedly would prefer to maintain present snake parities until after the EC
ministerial meetings scheduled for this fall, to demonstrate that narrow intervention
limits are feasible.
The United Kingdom, France, and Italy, will be close observers of the snake's
stability over the next few months. Italy and the United Kingdom abandoned the
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original float in 1972 largely because of their inability to stay within narrow margins.
France withdrew from the float in 1974, reentered in 1975, and withdrew again in
1976. As a condition for their joining a supersnake, the major nonsnake EC members
generally favor a more flexible system for exchange rate realignment than that
advocated by West Germany and the Benelux countries.
The USSR is likely to harvest a record grain crop of more than 224 million tons
this year, at least 15 percent more than in 1977 and somewhat more than in the
previous record year. The US Department of Agriculture expects that its estimate of
Soviet grain production of 220 million tons could be exceeded if weather for
harvesting the remaining crop is favorable. Unless the Soviet crop is considerably in
excess of 224 million tons, we expect Moscow to purchase 15 million to 20 million tons
of grain for delivery during the 1978/79 marketing year (beginning 1 October).
Crop Details
Most Soviet crop regions have done well this year; in most years, one part of the
country experiences a good harvest while another part suffers from adverse weather
conditions. We now anticipate average or above-average yields in most areas, the
result of this season's ample soil moisture.
Roughly two-thirds of the Soviet grain area, and an even larger portion of the
total grain output, has been harvested. Rainy weath