INTERNATIONAL ECONOMIC & ENERGY WEEKLY 20 MAY 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000200070002-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 45
• Document Creation Date: December 22, 2016
• Document Release Date: January 3, 2011
• Sequence Number: 2
• Publication Date: May 20, 1983
• Content Type: REPORT

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Intelligence
International
Economic & Energy
Weekly
-seecec_
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20 May 1983
977
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Secret
Weekly
International
Economic & Energy
20 May 1983
1 Perspective-Williamsburg Summit
Energy
International Trade, Technology, and Finance
National Developments
17 Western Europe: Caught in a Fiscal Squeeze
25 OECD: Slow Recovery in 1983
31 Japan: No Resurgence in Growth This Year
Western Europe: Implications of Energy Import Dependence
directed tol Directorate of Intelligence
Comments and queries regarding this publication are welcome. They may be
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International
Economic & Energy
Synopsis
Weekly
Perspective- Williamsburg Summit) 25X1
Prospects for the ninth economic summit have changed considerably in recent
weeks. Foreign participants see greater opportunities to turn attention to US
economic policies. Also, many see improved opportunities to raise North-South
issues.
Western Europe: Caught in a Fiscal Squeeze
West European governments face the dilemma of big budget deficits and slow
growth. At the same time, reducing budget deficits implies additional
economic, political, and social strains on top of those generated by three years
of stagnant economic activity.
OECD: Slow Recovery in 19831 25X1
The OECD economies appear to be pulling out of the recession, but not
uniformly or rapidly. If, as we expect, the recovery continues to develop
throughout 1983, the stage should be set for more rapid growth in 1984.
Japan: No Resurgence in Growth This Year 25X1
Domestic policy choices, a poor investment climate, and voluntary restraints
on exports will prevent Japan's economy from staging a strong recovery this
year. Nonetheless, we do expect a significant increase in the current account
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20 May 1983
surplus
Western Europe: Implications of Energy Import Dependence
Our analysis of recent industry forecasts indicates that Western Europe will
continue to rely on imports for 40 to 50 percent of total energy supplies
through the end of the century. As a result, Western Europe will remain
extremely vulnerable to energy supply disruptions, especially if the energy
market begins to tighten in the early 1990s as most of these forecasts project.
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Secret
International
Economic & Energy
Weekly
20 May 1983
Perspective Williamsburg Summit
Prospects for the ninth economic summit, at Williamsburg on 28-30 May,
have changed considerably in recent weeks. The East-West controversy
appears to have been put on the back burner as studies in IEA, COCOM,
OECD, and NATO have generally proceeded without major conflicts. Foreign
participants, however, in addition to feeling relief, may now see greater
opportunities to turn attention to the US budget deficit, high interest rates,
and reluctance to intervene actively on foreign exchange markets. Also, many
participants see improved opportunities to raise North-South issues.
Most other participants believe the United States is placing too much reliance
on industrial country recovery to solve the world's problems, including those of
the less developed:
? The French argue that debt-burdened countries will not be able to repay
unless they have immediate large-scale financial help and much greater
access to developed-country markets.
? Italian Foreign Minister Colombo is urging that Italy make an initiative
similar to Spadolini's "world campaign against hunger" proposed last year.
On trade in general, most other participants, led by the French, fear that
lifting protectionist barriers among industrial countries may not be the major
spur to growth Washington claims. Indeed, some argue that, with unemploy-
ment expected to remain high, the nascent economic recovery may actually
encourage protectionist pressure as import demand picks up.
As usual, the leaders will be bringing to Williamsburg a wide range of
interests:
? West German Chancellor Helmut Kohl is attending his first summit.
Relieved by US assurances that East-West trade issues will not be pushed
aggressively and hoping for a harmonious summit, Kohl is unlikely to spring
any surprises.
? French President Francois Mitterrand, at his third summit, is arriving in the
wake of troublesome demonstrations against his policies at home and several
weeks of intense press play on both sides of the Atlantic on the deterioration
in Franco-American relations. The French have long found it convenient to
blame US economic policy for a large share of their own ills, and their
rhetoric has increased as the dollar's strength threatens their hopes for
reducing their trade deficit this year.
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? British Prime Minister Margaret Thatcher will be making a whistlestop in
Williamsburg, her fifth summit, and will then rush back to campaign for the
9 June national elections. Thatcher is looking for an optimistic summit
statement on economic recovery to augment growing signs of recovery at
home.
? Italian caretaker Prime Minister Amintore Fanfani is attending his first
summit. His government fell last month, and national legislative elections
are to be held less than a month after his return to Rome.
? Japanese Prime Minister Yasuhiro Nakasone, also attending his first
summit, has been in some political hot water at home ever since he took over,
largely because of his independent views and his perceived tendency to be too
pro-United States.
? Canadian Prime Minister Pierre Trudeau is now the senior summiteer (his
seventh) following the exit of Chancellor Schmidt. Domestic dissatisfaction
with Trudeau's government is the highest it has ever been; Trudeau appears
somewhat tired both of governing and of summits.
Factors encouraging summit harmony include pressure to maintain Western
unity. Mitterrand, for example, a general hardliner on noneconomic East-West
relations, wants to avoid any display of serious Western disunity during the
"year of the missiles." Another strong argument for harmony is to provide the
proper psychological climate for economic recovery.
There are, of course, several factors-not all of them substantive-that may
push the summit toward disharmony:
? Thousands of journalists will be on hand, and their primary focus will be
finding-and perhaps encouraging-controversy.
? Past summits have sometimes run into difficulties when delegates have
attempted to "make points" or claim victories, aided by the press's tenden-
cy-not always discouraged by official delegations-to name summit win-
ners and losers.
The major question mark-not for the first time-is the position of the
French. President Mitterrand's 9 May speech to OECD ministers called for a
new Bretton Woods-type conference to revamp the international monetary
system, took relatively mild and indirect swipes at US economic policies, and
called for a better deal for LDCs. The speech also contained hints that French
participation in future economic summits could depend on how his positions
fared at Williamsburg.
The French may simply be blowing presummit smoke, in an attempt to divert
attention from their domestic problems. Mitterrand would perhaps be satisfied
if the Williamsburg participants could agree to study the idea of an interna-
tional monetary conference, for example, following up on the intervention
study issued last month. He, however, is looking for some way out of his
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international payments problems and is somewhat bitter that his ideas have
received so little support from other summit participants. How this works out
at Williamsburg will depend on the real extent of his frustration with US
policy, his judgment of the need for Western unity, how seriously he takes his
own initiative (which, indeed, is largely a dusted-off version of Giscard
"initiatives" promised but only half delivered over several years), and, of
course, on the US rhetorical and substantive response.
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 Williamsburg Summit Positions
Debt and Wants increased IMF resources
Finance and temporary "bridge loans";
solutions to LDC problems,
however, lie in (1) private bank
lending to countries adopting
sound adjustment policies, (2)
Western economic recovery, and
(3) maintaining open markets
for LDC products.
Growth/ Advocates noninflationary
Inflation growth-low inflation, low in-
terest rates, and low budget
deficits; one country alone can-
not serve as "locomotive."
Wants follow up multilateral
surveillance as agreed at Ver-
sailles, aimed at greater ex-
change rate stability and period-
ic evaluations of each country's
economic policies.
Trade Proposes unified stand against
protectionism; more interchange
between trade and finance poli-
cymakers; and more frequent
meetings of trade officials, in-
cluding GATT ministerials,
looking toward eventual trade
negotiations with LDCs.
East-West Desires agreement that trade
with East not like trade among
Western partners; wants discus-
sion on security implications of
East-West economic relations;
seeks statement welcoming
work already accomplished on
the series of East-West studies
in OECD, IEA, COCOM, and
NATO, and urging further ef-
forts.
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Will resist unproven new solu-
tions to LDC debt problems;
long-term rescheduling with
LDCs should proceed on case-
by-case basis. Will encourage
export earnings stabilization
fund for LDCs.
Primary focus should be clarifi-
cation of overall growth strate-
gy; but will resist detailed plans
to adjust country policies and
opposes US multilateral surveil-
lance suggestions. US budget
deficit needs immediate reduc-
tion. Strongly opposes French
ideas on intervention and a new
Bretton Woods.
Wants general commitment
from Seven to lower trade barri-
ers. US-EC dispute will have to
be addressed. Will resist de-
tailed discussion of North-South
issues.
Supports East-West trade. Con-
siders US plans for expanding
COCOM list too far-reaching;
will agree to include only direct
military items. If compromise
unavoidable, is more likely to
accept US views on COCOM
than on East-West trade.
Wants more resources for IMF
and IBRD and closer coopera-
tion between them. Special ef-
fort required for neediest LDCs,
especially Africa. Supports ac-
tion to stabilize raw materials
prices. Will argue that stronger
aid programs, featuring multi-
year commitments, are not only
moral imperative but support
Western economic recovery.
Acknowledges need to fight in-
flation but fears recovery will
sputter out in absence of coordi-
nated Western strategy to pro-
mote growth. Advocates care-
fully prepared, IMF-sponsored
conference to revamp interna-
tional monetary system. Wants
coordinated intervention along
lines of Versailles-mandated re-
port. Sees current strong dollar
as hurting efforts to reduce bal-
ance-of-payments deficit.
Agrees in general on dangers of
protectionism. Will emphasize
need for LDC access to markets
but sees protectionism affecting
LDC earnings much less than
slow growth, insufficient aid,
low commodity prices, and rise
in interest rates. May argue
need for rules of conduct on
industrial policy and strategies.
Strongly supports East-West
trade in industrial goods. Favors
tough measures to prevent ille-
gal Soviet acquisition of military
technology but will insist on
reserving final decisions for na-
tional level. Also defines mili-
tary technology more narrowly
than United States.
Recognizes need for action to cor-
rect LDC debt problems; should
support US proposals. Sees reduc-
ing US deficit as a means of spur-
ring Third World growth. Will sup-
port increased market access for
LDC products.
Believes primary Summit objective
is agreement on cooperative eco-
nomic policies. Will not welcome
suggestions that British pursue
more reflationary posture to quick-
en recovery. Will express concern
about US budget deficit and inter-
est rates. Favors IMF reform but
opposes French calls for new Bret-
ton Woods to revamp exchange rate
system.
Will support stand against protec-
tionism; will urge liberalization of
trade in services and reductions in
barriers to British goods but refuses
to reduce subsidies to British indus-
try. Willing to discuss North-South
trade but wants reciprocity. Con-
cerned about growing differences
on farm subsidies between EC and
US.
Regards extraterritoriality as key
problem between the US and Brit-
ain. Sees Soviet trade as necessary
to survival of some British firms and
to improve trade balance. Hopes for
conciliatory US stance but is open
to tightening COCOM controls on
high technology items. Will urge
completion of East-West trade
studies.
Wants assurance of minimum
net credit flows, especially
through multilateral agencies
(IDA, IMF), and including the
possibility of subsidized interest
rates on new loans. Supports
bridging loans and wants great-
er attention to balance of pay-
ments and external debt prob-
lems of LDCs. Endorses
commodity revenue stabiliza-
tion programs to alleviate debt
problems.
Supports multilateral surveil-
lance system as agreed at Ver-
sailles; wants more expansion-
ary policies in countries such as
US where inflation has moder-
ated. Will support push for
greater exchange market inter-
vention to smooth erratic short-
run currency fluctuations. Sees
need for increased technological
cooperation.
Opposes protectionism generally
but may endorse import mea-
sures in exceptional circum-
stances. Supports US objectives
in North-South round of trade
negotiations. Wants more inter-
change between trade and fi-
nance officials at all levels and
more frequent GATT minister-
ials and meetings of summit
country trade ministers.
Generally sees East-West trade
as beneficial to both sides. Be-
lieves high technology trade
should be subject to tighter con-
trols and Soviets denied subsi-
dized interest rates; favors coor-
dinated system of trade
guidelines that serves common
security interests while preserv-
ing trade levels.
MITI stud ing possible changes
in internal nal financial insti-
tutions. Go ernment insists offi-
cial aid must accompany in-
creased tra a if LDC debt
problems a e to be solved, but
aides doub Nakasone will push
idea of $50 billion Global In-
vestment F nil.
Believes path to noninflationary
growth will'be main Summit
topic. Fearful of pressure on
Japan to reflate. May try to
rally support for coordinated
exchange rite intervention. To-
kyo supports US proposal for
multilateral surveillance sys-
tem, but Mnistry of Finance
favors limi ing to G-5.
Generally supports call for 1985
GATT ministerial. Foreign
Ministry o poses establishment
of Summit country ministerial
group to di:,cuss trade issues on
regular basis.
Foreign Mi istry contends US
attaching a cessive importance
to East-Wet economic rela-
tions.
To
kyo likely t adopt low profile
during Eas -West discussions to
avoid siding with Washington or
EC. I
Will seek $82 billion in funds-
$20 billion from private bank
loans and the rest from the
IMF-to prevent LDC bank-
ruptcies. Opposes major over-
haul of international financial
system. May again criticize US
for not contributing its fair
share toward international
development.
Believes primary objective
should be ensuring strong and
lasting global recovery through
the coordination of economic
policies. Will caution that needs
of LDCs must be kept in mind.
Is likely to criticize US for high
real interest rates.
Has stated that free trade is the
keystone of economic recovery
and will call for the removal of
temporary protectionist mea-
sures installed during the period
of recession. However, will con-
tinue to pursue own nationalistic
economic policies.
Wishes to keep East-West issues
quiet. Does not believe that eco-
nomic pressure on the Soviet
Union is effective but does sup-
port restrictions on exports of
sensitive technology. May push
for greater US-USSR dialogue.
Is pleased with progress of East-
West trade studies.
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Energy
Possible Iranian Oil Press reports that Tehran has granted Japanese oil customers discounts
Price Discounts ranging from $0.20 to $2.00 per barrel on contract renewals remain uncon-
firmed
New Iraqi Refinery
for about 90,000 b/d expire by July.
Before March,
Tehran had sold about 250,000 b/d of crude to Japan. Remaining contracts
With Iranian production in April at 2.1 million b/d, Tehran may feel it needs
to make some concession to customers in order to reach its 2.4-million-b/d
OPEC quota. With spot prices close to its official price of $28, however, the
discount is unlikely to be more than $0.50 per barrel. Moreover, Tehran is un-
likely to grant large discounts in light of its recent agreement with Tokyo to
pay Japanese construction firms about $500 million to complete the remaining
construction of the $3.5 billion Bandar Khomeini petrochemical plant. Japa-
nese oil buyers nevertheless will continue to press for discounts. Other OPEC
members probably would not object to a small discount as long as Iranian
production does not exceed its ceiling.
aghdad completed a 200,000-b/d refinery 25X1
ing deals and apparently spurred Baghdad to accelerate construction of the
Japanese-built Baiji refinery, orginally planned to be finished at yearend 1983.
expansion project last month at Baiji in northern Iraq. The expansion could en-
able Baghdad to raise crude production and exports because the added
capacity reduces the need to ship crude outside the country for processing and
reimport. War damage to the Basrah refinery had forced Baghdad to use
about 100,000 b/d of the Turkish pipeline's 700,000-b/d capacity for process-
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ven with new sales,
however, limits on the capacity of the Turkish export line will keep Iraqi
production at least 200,000 b/d below its output quota of 1.2 million b/d
under the March OPEC accord.
Chinese Offshore The most promising areas for oil exploration in the South China Sea remain to
Oil Contracts be leased as US companies continue to have difficulty coming to terms with
Beijing. A consortium led by British Petroleum was awarded four blocks in the
South China Sea last week, after competitive bidding.
Chinese officials have told the US
Embassy, however, that three major US firms are out of the running because
their bids are not competitive.
The British Petroleum contract comes after years of negotiations between
Western firms and China and is the first time China has opened its most
promising offshore oil basin to Western exploration. The main issue has been
the portion of oil that the companies may retain as their share. British
Petroleum probably settled on between 5 and 10 percent.
International Trade, Technology, and Finance
EC Approves Loan EC finance ministers on Monday approved a $3.7 billion loan to help France
to France finance its large balance-of-payments deficit. No conditions are attached to
the loan, and France probably will have five to seven years to repay the loan.
The EC ministers apparently are satisfied that the Mitterrand government's
austerity program announced last March is sufficient proof of Paris's determi-
nation to turn the economy around. This is the first loan to be made under the
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EC's so-called oil facility after it was revamped in 1981 to provide up to a total
of $5.5 billion to EC members suffering from severe payments difficulties.
Unlike other EC funds available to member countries-which are project
specific, approved by the Commission, and administered through the European
Investment Bank-oil facility loans require the unanimous approval of the 10
members. The Mitterrand government, therefore, probably will portray the
loan as proof of international acceptance and support for its austerity program.
The Community bailout probably will make it more difficult for Mitterrand to
pursue economic policies independent of France's EC partners, although he
may continue to promote his ideas for a new Bretton Woods system at the
Williamsburg summit later this month.
IMF Loan for Panama An agreement with the IMF for an 18-month $165 million standby loan,
reached in principle last week and scheduled for signing in early June, should
substantially help Panama meet its foreign financing needs. In return for the
funds, the Panamanian Government-which has one of the highest foreign
debt-GDP ratios in the world-will be obliged to restrict its public-sector
deficit to $270 million and sharply limit its further recourse to foreign
borrowing.
Panama has estimated that it will need $120 million in foreign bank loans this
year to meet debt amortization payments and, together with IMF drawings
and a World Bank loan, to cover its public-sector deficit. Panama's large
international banking community this year so far has been unwilling to extend
sizable amounts of new loans to the government because:
? Panama's economic stagnation, coupled with its extremely large debt, has
made further loans increasingly risky.
? The financial crises in Mexico, Brazil, and elsewhere have soured interna-
tional banks on lending to the entire Latin American region.
? International bankers worry that, with an election campaign approaching,
the government will become unwilling to undertake needed economic
adjustment measures.
Now that the IMF has endorsed Panama's economic program, however,
foreign bankers are expected to be more receptive to Panama's request for
$120 million Without these new bank
loans, Panama will probably be forced to reschedule its existing foreign debt.
Algeria Returns to The Algerian Exterior Bank agreed last month to guarantee a $500 million
Euromarket loan for the Algerian state energy company, SONATRACH, ending Algeria's
four-year absence from the Eurocurrency market. The loan will provide
financing to complete SONATRACH's $1 billion liquid petroleum gas plant
at Arzew-the first phase is scheduled to be finished in 1984. The loan has re-
ceived a very favorable response from international banks and is expected to be
signed in early June. The credit will carry an eight-year maturity and be
priced at 0.5 percentage point above LIBOR for the first two years and 0.625
thereafter. These terms reflect Algeria's cautious financial management in
recent years, including limits on capital intensive projects
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Sudan Wavering on Sudanese President Nimeiri informed the US Ambassador last week that he
Economic Reform was determined to build a new international airport in Khartoum despite his
Program country's other economic needs. Sudan's willingness to abandon the airport
project was an important condition in the IMF-inspired economic reform
package that Khartoum accepted last year. Nimeiri justified his decision by
claiming that a $100 million grant from the United Arab Emirates is
earmarked for the airport. Nonetheless, construction of the facility will alarm
the country's Western donors and creditors who believe Sudan must use its
scarce investment funds for improving infrastructure and rehabilitating exist-
ing agricultural projects. The airport almost certainly will become an issue
between Khartoum and the IMF, which was due to being its midterm review
of Sudan's economic performance this week.
National Developments
Developed Countries
Increasing Pressure on Finance Minister Aridor is coming under increasing pressure to alter his
Israeli Finance economic policies. The most recent in a spate of bad economic news was the
Minister announcement on Sunday that prices rose a record 13.3 percent in April;
inflation since last year is running at an annual rate of 161 percent. In
Israel: Monthly Consumer Price Increases
? 1981
1982
-1983
I I I I I I I I I I I I
J F M A M J J A S 0 N D
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addition, export receipts during the first four months of the year were 9.4
percent below the same period in 1982, and the trade deficit increased by $275
million. Recent polls indicate that a majority of Israelis believe the country's
economy has worsened in the last year and that Aridor's popularity is at a re-
cord low. While grumbling about the economy is nothing new, we believe
preliminary indications that unemployment is rising are probably heightening
public concern.
The April price rise provides the Histadrut, the large labor organization, with
ammunition in its call for higher wages. The Manufacturers' Association will
point to the export decline to push for an increase in the pace of the shekel de-
preciation in order to increase the competitiveness of Israeli exports. Both
moves, however, would only exacerbate inflationary pressures. The US
Embassy reports that the Finance Ministry cited the April increase in support
of its efforts to hold down government spending and fight what it views are ex-
cessive wage demands; we believe this was a warning to doctors, who have been
on strike for three months demanding wage increases in excess of the 22
percent awarded in the public-sector wage agreement signed late last year.
Several opposition leaders called for Aridor to resign, according to press
reports, and one cabinet member said Aridor would have to change his policies.
The opposition Labor Party has submitted a no-confidence motion on the
government's handling of the economy that will be voted on next week. Two
polls show Labor's popularity rising, with one of them suggesting that Labor
would defeat Begin's Likud bloc in an election. Despite unhappiness over the
economy, however, we believe the Begin government is not in any immediate
danger. Polls continue to indicate that the big losers in an early election would
be the minor parties on which Begin depends for his majority, and they appear
unwilling to break with the government. Begin's personal popularity, more-
over, remains much higher than that of any Labor leader. If current economic
trends continue, however, as seems likely, the Begin government will find it in-
creasingly difficult to turn back similar challenges.
Less Developed Countries
Mexican Economy Still Industrial production plunged at an annual rate of 12 percent in the first
Plummeting quarter of this year, according to data released by the Mexican treasury. The
decline was most d in investment goods, consumer durables, bever-
ages, and metals.ronounce the pharmaceutical
and automotive industries are currently operating at about 50 percent
capacity, while as many as 25 percent of their workers have been laid off. Con-
tinuing shortages of imported raw materials, intermediate goods, and spare
parts and price controls have eliminated profits for many firms and have led to
a stoppage or pronounced slowdown in production
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Normal foreign trade lines have been disrupted since the debt moratorium was
announced last August. New official trade data indicate Mexican imports in
February and March remained 70 percent below the import level during the
same period a year earlier. As local supplies dwindle, the national consumer
price index in the first four months of this year rose at an annualized rate of
120 percent.
Mexico Announces New Mexico City last week announced the first stage of a new export development
Export Development plan aimed at quadrupling nonoil exports by 1988. According to Embassy
Plan reporting, the plan will reduce redtape and provide short-term financial
support for export-related activities. Export permits will no longer be required
on 94 percent of exports, and most export tariffs are being reduced or
eliminated. Moreover, most export regulations and incentive programs will
now be administered by the expanded Foreign Trade Institute rather than the
five or more agencies with which exporters previously had to contend.
Financial efforts to assist firms in developing exports include a 400 billion peso
($2.7 billion) credit program that will be administered by Bancomex, the
government foreign trade bank. A credit program now being negotiated with
the World Bank will provide funds to exporters at preferred rates through
several existing government trust funds, and government export guarantees
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will be raised from 109 million pesos ($2.0 million) in 1982 to 12.5 billion pesos
($84 million) this year. The full export development plan will be released later
this month as part of President de la Madrid's National Development Plan.F_
Although we believe such a program will help exporters, its effectiveness in the
short run will be hampered by the scarcity of foreign exchange and the
expected slow recovery in industrial country imports. Indeed, according to a
Mexican treasury report, merchandise exports fell by 14 percent in the first
quarter. The new export financing schemes may, however, complicate US-
Mexican trade treaty negotiations that are scheduled to resume this year. Even
though the government will try to fine tune its
programs to avoid conflicts with US policy on export subsidies, in the past pub-
lic financial supports have caused the United States to impose countervailing
Mexican Strike The government probably will try to avert possible strikes by granting workers
Threats a larger wage increase than currently promised. Labor leader Velazquez is
threatening strikes against some 11,000 companies, including the government
oil monopoly, to persuade the government to allow a more favorable wage
settlement. One opposition party is calling for a general strike, but Velazquez
stresses that his demands are nonpolitical.
President de la Madrid recognizes that organized labor's loyalty is important
to continued political stability, and he is likely to agree to a small concession
on wages. The Minimum Wage Commission probably will add about 5
percentage points to the promised 12.5-percent hike and could make it
effective several weeks sooner than its scheduled start in July. Although labor
leaders understand the necessity for maintaining austerity, they are likely to
continue to urge the government and business to accept still higher minimum
wages to deflect complaints from the rank and file that their interests are
being ignored.
Possible Brazilian
Debt Moratorium
Secret
20 May 1983
Brazil may suspend servicing its foreign debt in the next month or so. ~
Discussions that began on Monday with the IMF may bring the issue to a
head. The US Embassy reports that Brasilia has been unable to comply with
the IMF's targets and is seeking a waiver. If a waiver cannot be negotiated
promptly, Brasilia will have little hope of restoring short-term credits or
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Secret
raising new money. Although a debt moratorium might help halt the loss of
deposits from Brazilian banks, West European, Japanese, and small US banks
probably would demand even tougher austerity measures by Brasilia in return
for new money. Moreover, suspensions of payments would become increasingly
attractive to other debtors in Latin America.
Colombian Payments Colombia faces a record $2 billion current account deficit this year and may
Problems Worsen not be able to avoid a debt financing crisis despite corrective measures already
in effect. To improve the trade accounts, the Betancur administration recently
hiked tariffs, accelerated the depreciation of the peso, and increased export
subsidies. Bogota also has cut in half the annual foreign travel allowance and
declared illegal private transfers to bank accounts abroad to halt capital flight.
Although import growth may be checked, export earnings will improve only
modestly in the face of declines in coffee, sugar, banana, and cotton sales.
Moreover, forecasted declines in interest earnings, tourism receipts, and
remittances from Colombians living abroad, as well as a 10-percent increase in
interest payments will double Colombia's services deficit to $1.3 billion this
year.
Bankers probably will be unwilling to substantially finance Colombia's 1983
payments deficit. Bogota already has encountered difficulties in raising an $80
million balance-of-payments loan because creditors were reluctant to increase
their exposure in the face of unattractive lending terms. Banco Commerical
Antioqueno-a Colombian commercial bank-had to underwrite $12 million
to complete the syndication. To finance the payments deficit, however, Bogota
will have to pay more for credit later in the year. If Colombia is unable to at-
tract new international lending, it could soon encounter debt servicing
problems. Reserves have fallen nearly $750 million during the first quarter of
1983, exceeding the loss for 1982 as a whole. If this rate of depletion continues,
Colombia's $3 billion cushion of liquid reserves will be cut in half by midyear.
Natural Disasters Hurt A series of natural disasters is adding to Lima's financial problems. Flooding
Peru's Recovery Efforts in the north and drought in the south have caused nearly $190 million in food
crop and livestock losses, according to Peru's National Planning Institute.
Resulting food shortages will boost prices and require increased imports that
will erode a planned $300 million trade surplus. Finance Minister Rodriguez
Pastor set the cost of recovery, including rehabilitation of roads, housing, and
agricultural infrastructure, at $500 million. Peru plans to seek an additional
$200 million in new foreign loans to help fund reconstruction. Lima is already
struggling to line up bank support for a $770 million medium-term loan,
however, and we expect commercial banks will be reluctant to offer more
15 Secret
20 May 1983
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Moroccan Labor Strife A railway strike, which began on 3 May, could pose serious problems for the
Increases economy, particularly if it is allowed to interrupt the transport of phosphates,
Morocco's primary export. The already weak economy and the country's
severe foreign financial crunch limit Rabat's ability to meet worker demands
for higher pay and benefits. There have already been several incidents of
sabotage'and fighting between union members and military personnel attempt-
ing to maintain services. The strike, organized by the centrist Moroccan
Worker's Union, is the largest labor dispute since the Casablanca riots in June
1981.
China To Invest in Beijing has decided to invest part of its record foreign-exchange surplus in
Foreign Raw Materials major overseas projects to acquire scarce raw materials. Earlier this year, the
State Council authorized the China International Trust and Investment
Corporation (CITIC) to develop several model projects, some of which had
been under negotiation since 1980. A paper pulp mill in Canada is currently
the front-running project, but Beijing has been examining similar investment
opportunities in the United States, Australia, New Zealand, Brazil, and Chile.
The Chinese require that such ventures be profitable and allow China access to
both products and technology.
Natural Disasters Hit The Chinese press reports that recent storms in Hunan Province have killed
Central China 339 people, injured at least 6,000, and destroyed 500,000 hectares of crops. An
unusual pattern of cool, wet weather and hailstorms over the past month has
destroyed crops on nearly 10 percent of the province's sown area, and crops
have been affected over a much wider area. Hunan is one of China's major
crop-growing regions and produces roughly 14 percent of the nation's rice
crop. If the weather clears in the next few days, peasants still may be able to
plant some of the early rice crop.
China Seeking New China faces increasingly restrictive markets for textiles and apparel, which
Markets for Textiles accounted for 25 percent of China's export earnings last year. Canada already
has requested a downward revision of quotas.on Chinese-origin textiles, and
the European Community is now pressing for a new agreement that will
protect its textile firms. Sino-US talks on textile quotas will probably resume
next month. Beijing, meanwhile, already is looking for new markets and has
arranged for additional sales to Eastern Europe and the Soviet Union. These
markets, however, are unlikely to absorb the volume of goods China hoped to
sell in North America and Western Europe and will not generate hard
currency earnings.
Secret . 16
20 May 1983
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Western Euro e? Caught in a Fiscal
Squeeze
West European governments face the dilemma of they fear that existing deficits-now totaling $150
big budget deficits and slow growth. They are billion, 5 percent of West European GDP-are
constrained from employing fiscal stimulus because putting upward pressure on interest rates and re-
tarding economic growth. At the same time, reduc-
ing budget deficits implies additional economic,
Western Europe: Government-Sector Spending Percent
as a Share of GDP a
Western Europe
30.3
36.4
38.4
40.5
43.9
45.3
46.8
48.6
50.0
Big Four
32.5
37.8
39.6
41.9
45.4
45.5
46.5
48.5
49.8
West Germany
32.0
37.6
40.5
43.4
47.1
47.6
48.1
49.0
49.5
France
34.6
38.9
38.5
39.7
43.5
45.5
46.4
48.9
52.2
United Kingdom
32.6
39.3
41.1
45.2
46.9
42.0
44.0
45.1
44.2
Italy
30.1
34.2
37.8
37.9
43.2
45.6
46.4
51.1
53.6
Small Fifteen
25.4
33.6
36.1
37.5
40.7
44.7
47.3
49.0
50.4
Austria
32.1
39.2
41.3
41.9
46.1
48.8
48.5
49.7
53.2
Belgium
30.3
36.5
39.1
39.4
44.5
49.5
51.7
56.6
57.5
Denmark
24.8
40.2
40.2
44.3
47.5
51.4
55.3
56.3
57.5
Finland
26.7
31.3
31.9
32.9
37.1
38.5
38.2
39.0
40.8
Greece
23.8
29.1
28.9
31.7
32.5
35.2
35.8
39.8
42.2
Iceland
28.2
29.6
35.5
36.6
38.7
NA
NA
NA
NA
Ireland
28.0
39.6
38.9
43.1
47.2
49.0
53.1
55.8
56.6
Luxembourg
30.5
33.1
35.7
35.3
47.9
51.8
55.1
57.6
57.9
Netherlands
33.7
45.5
48.7
50.8
55.9
59.5
62.5
64.0
64.8
Norway
29.9
41.0
44.6
44.6
46.6
51.4
49.4
49.0
48.2
Portugal
17.0
21.6
21.3
24.6
30.2
30.4
33.6
36.5
39.2
Spain
13.7
22.2
23.0
23.1
24.7
30.5
32.4
34.5
35.8
Sweden
31.1
43.7
44.9
48.1
49.0
65.1
65.7
66.7
68.9
Switzerland
17.2
21.3
24.2
25.5
28.7
30.2
29.7
28.4
30.4
Turkey
NA
21.9
NA
NA
NA
23.4
NA
NA
NA
alncludes central and local governments and autonomous social
security agencies and excludes government-owned enterprises.
17 Secret
DI IEEW 83-020
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Western Europe: Domestic Economic Indicators
Government Sector Spending
and Revenues
Billion 1975 $
? Spending
Revenues
Government Sector Budget Balances Unemployment Rate a
Billion 1975 $ Percent
-100
I I I I
1970 75 80 -1201970
I
I I I I I I I I I I I I I I I I I I 1 I I 1 1
75 80 0 1970 75 80
political, and social strains on top of those generat-
ed by three years of stagnant economic activity._
Most West European efforts to reduce deficits will
be blocked by rising unemployment and high debt
service costs. The economic upturn expected this
year probably will only retard the rise in jobless
rates, already in double digits in most West Euro-
pean countries. The falloff in interest rates that
began in 1982 should ease part of the debt servicing
burden, but financing the additional debt from last
year's deficits should offset the savings from lower
rates in several countries.
The Magnitude and Causes of the Deficits
To a large extent, Western Europe's fiscal difficul-
ties stem from the depressive effects of the OPEC
oil price rises over the last decade. During that
Secret
20 May 1983
period, Western Europe's commitment to maintain-
ing social programs kept total spending rising more
rapidly than GDP. From 1973 to 1981, government
spending as a share of GDP increased by 10
percentage points, rising to nearly 50 percent.
About one-half of the increase in the EC went to
higher outlays for social benefits, one-fourth for
government salaries, and one-fifth for interest on
public debt.
Government revenues grew at a slower pace. By
1981, total revenues of the West European govern-
ments amounted to about 44 percent of their
combined GDP, up 6 points from the 1973 level.
For most countries, the tax bracket creep that
accompanies inflation provided the largest share of
additional revenues. In a few countries like West
Germany, the United Kingdom, and Sweden, some
tax rates were increased, particularly for value-
added taxes (VAT).
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Secret
Unemployment Costs
The single largest factor contributing to the bur-
geoning deficits in Western Europe has been
mounting unemployment. Unemployment has an
even greater impact on West European budgets
than on US budgets because West European bene-
fits generally replace a greater share of the unem-
ployed workers' previous income for a longer peri-
od. In West Germany, benefits replace 68 percent
of income for the first two years of unemployment
and 50 percent thereafter; in Belgium, the Nether-
lands, and Denmark, unemployment compensation
and related welfare payments can provide up to 90
percent of previous income with no time limit.
According to estimates by the Netherlands Central
Bank, some jobless Dutch workers have more after-
tax income than they earned while working. In the
United States, unemployment compensation aver-
ages 25 percent of previous income for less than a
year.
By using a combination of national government
data on the costs of unemployment benefits and
OECD estimates of the revenue losses caused by a
1-percentage-point change in unemployment rates,
we estimate that the average government sector
deficit of the Big Four 2 would disappear if roughly
one-half of the unemployed found private-sector
jobs. Most of the budgetary improvement would
result from the additional taxes that the newly
employed would pay. General government budgets
would be balanced for West Germany if the unem-
ployment rate fell 7 percentage points to 3 percent,
for France if the rate dropped 3 points to 6 percent,
and for the United Kingdom if the rate slipped only
2.5 points to 10.5 percent. Italy's government sector
deficit, on the other hand, would fall by only about
one-third if all the unemployed found jobs.
'The Big Four economies are West Germany, France, the United
Kingdom, and Italy; together they account for two-thirds of
Interest payments on public debt also have ac-
counted for a large share of government deficits.
The runup in interest rates, particularly during
1979-81, boosted the costs for new or rolled-over
government borrowing as well as for loans based on
floating rates. The Italian, Belgian, and Irish bud-
gets were the most severely affected because of the
size of their deficits and their relatively poor credit
ratings. As each country's ability to borrow deterio-
rated, the governments turned more to short-term
maturities for financing. As a result, interest costs
for the three countries rose faster with each in-
crease in interest rates than for other West Europe-
an governments who still held long-term loans at
lower rates. By 1981, Italian, Belgian, and Irish
interest payments on government debt had reached
7.5 percent, 7.9 percent, and 8.4 percent of GDP,
respectively.
Although the falloff in interest rates that began in
1982 should ease part of the burden, the additional
debt from last year's deficits will offset the gain
from lower rates in these countries. The strong US
dollar also is hurting countries like Belgium, Den-
mark, and Ireland that rely heavily on foreign
debt-usually dollar-denominated-to finance
budget deficits.
West European governments are making a greater
effort than in previous years to put a brake on
spending while raising taxes modestly. Paris wants
to limit central government borrowing this year to
3 percent of GDP-the same as last year. London
plans to hold the public-sector borrowing require- 25X1
ment 3 to 2.75 percent of GDP in fiscal year M
' Includes the deficits of the central government, local governments,
and social security programs as well as borrowing by government-
Secret
20 May 1983
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Western Europe: General Government Budget Balances
as a Share of GDP a
Western Europe
0.9
0.4
-0.6
-1.6
-4.2
-3.2
-3.1
-4.5
-5.0
-5.1
Big Four
0.9
0.1
-1.5
-2.5
- 5.6
-3.4
-3.1
-4.3
-4.6
-4.5
West Germany
3.1
0.3
1.2
-1.4
- 5.8
-2.9
-3.5
-4.0
-3.9
-3.6
France
0.9
0.9
0.9
0.6
- 2.2
-0.6
0.6
-1.5
-3.0
-3.1
United Kingdom
-1.0
2.6
-3.5
-3.8
- 4.9
-3.1
-3.2
-2.4
-2.0
-2.0
Italy
-0.9
-5.0
-8.5
-8.1
-11.7
-9.4
-8.4
-11.9
-12.0
-12.3
Small Fifteen
0.8
1.1
1.7
0.7
-0.6
-2.6
-3.1
-5.1
-6.0
-6.2
Austria
-0.4
1.0
1.3
1.3
-2.5
-2.5
-2.0
-1.8
-2.2
-2.4
Belgium
-2.9
-1.1
-2.7
-1.8
-4.1
-6.9
-9.3
-13.4
-12.8
-12.1
Denmark
3.1
2.1
5.9
4.5
-1.7
-1.6
-3.2
-7.1
-9.5
-9.6
Finland
3.9
4.4
5.8
4.7
2.7
0.5
0.8
1.3
-0.4
-0.8
Greece
-3.7
-2.3
-3.5
-4.7
-5.1
-4.6
0.4
-10.1
-9.2
-8.6
Iceland
8.2
2.2
0.9
-2.4
-3.1
-2.2
-1.4
0.1
0.2
0.2
Ireland
-1.3
-4.0
-4.1
-7.5
-11.6
-12.8
-15.4
-15.4
-14.7
-14.4
Luxembourg
3.0
2.9
3.5
5.1
1.2
0.1
-1.8
-0.8
-0.9
-1.0
Netherlands
0.8
-0.8
1.1
-0.1
-2.7
-3.7
-4.1
-7.4
-8.4
-8.2
Norway
3.8
3.2
5.7
4.7
3.8
1.8
5.7
5.1
5.2
3.9
Portugal
0.6
2.7
1.4
-1.6
-5.5
-8.1
-8.8
-10.2
-10.3
-10.2
Spain
NA
0.7
1.1
0.2
NEGL
-1.8
-3.3
-4.0
-6.0
-6.3
Sweden
2.0
4.4
4.1
2.0
5.1
-3.0
-3.8
-5.3
-6.6
-8.0
Switzerland
NA
NA
NA
NA
NA
-0.5
NEGL
-0.2
-0.5
-0.8
Turkey
NA
2.1
NA
NA
NA
NA
NA
NA
NA
NA
a Includes central and local governments and autonomous social
security agencies and excludes government-owned enterprises.
b Estimated.
1983/84, down from the 3.25-percent target in 6 percent in Belgium. Both France and Italy plan to
fiscal year 1982/83. Brussels hopes to trim central hold government raises to projected increases in
government borrowing from 1982's 12.8 percent of consumer prices. In general, real spending on pub-
GDP to about 12.0 percent this year.) lic salaries is to be perhaps $3 billion less than if
Public-sector salaries, which average more than 25
salaries had risen as rapidly as inflation.
percent of government spending, are a prime target A number of West European governments also are
of budget cutters. Several governments are trying beginning to tackle what they believe is the more
to keep the nominal increase in total public-sector fundamental-and certainly more politically sensi-
pay at or below the expected inflation rate in 1983. tive-problem of social welfare spending, which
The new Dutch Government is freezing pay, in-
creases are being limited to 3.5 percent in the
United Kingdom, 4 percent in Denmark, and
Secret 20
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Secret
Selected West European Countries: General Government
Debt as a Share of GDP a
France b
United Kingdom
Italy d
Other
64.2
63.6
0.6
-13.6
-17.9
4.3
19.5
14.4
5.1
53.0
48.3
4.7
France b
United Kingdom
Italy d
Other
21.5
41.4
17.3 16.8 0.5 12.2 5.1
Belgium 88.6 77.7
Denmark 16.3 2.5
Greece b 40.4 32.6
Ireland b 98.4 62.7
Luxembourg b 22.1 20.1
16.2
60.9
0.7
10.9
10.9 24.9 63.7
13.8 7.2 36.1
7.8 14.1 26.3
35.7 NA NA
2.0 0.8 21.3
a Data may understate total government debt in cases where d Excludes central government debt owed by autonomous central
government-owned banks borrow in their own names for the state. government bodies,the postal savings system, and local governments.
b Central government. e Minus sign represents net creditor position; maturity data show
e Public sector. Data on maturities do not add to the total shown gross borrowing.
because some British public debt has no maturity date. r Data are for 1974.
ments; and Denmark is freezing benefits. Paris not
only is looking for ways to cut spending on old-age
accounts for almost one-half of government spend- benefits, but also wants to reduce unemployment
ing in the European Community. West Germany compensation. For its part, the government of West
and France are delaying cost-of-living increases on German Chancellor Helmut Kohl has changed the
social security benefits; the Netherlands and Bel- formula for calculating unemployment benefits to
gium are placing a cap on social security adjust- make the allowances less costly to the government.
21 Secret
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Governments are looking for fixes on the revenue
side as well. Increases in the VAT and other
indirect taxes such as those on gasoline, tobacco,
and liquor are slated to go into effect this year in
West Germany, France, the United Kingdom,
Italy, Sweden, Belgium, Norway, Finland, Greece,
Portugal, and Ireland. Oslo and London, however,
are offsetting some of the indirect tax increases by
trimming income tax rates. Several countries are
also raising social security taxes.
Results of the Budget-Cutting Exercise
We believe that the changes in spending and tax
policies approved this year are generally too small
to overcome the impact of mounting unemployment
benefits and related revenue losses, and increasing
debt servicing costs. Sweeping budget cuts have
been ruled out because strong public support for
existing social programs has encouraged politicians
to defend current spending policies. The changes,
however, should keep government deficits from
expanding significantly in 1983 and lay the ground-
work for substantial improvement next year, when
the economic recovery is expected to pick up steam.
Paris probably will keep the central government
deficit from rising, but the deficits of local govern-
ments and the social security and unemployment
funds are likely to grow. After running a smaller
deficit than planned in 1982, the British govern-
ment sector deficit will increase somewhat this year
as tax cuts take effect. Nonetheless, the United
Kingdom will still have proportionally the smallest
government sector deficit of the Big Four. The
Italian government sector budget is likely to slip
further into deficit because of relatively slow GDP
growth and Rome's inability to control spending.
The spending cuts and tax changes put in place by
the Kohl government should lower the West Ger-
man deficit this year, and similar measures should
bring down deficits in Belgium, the Netherlands,
and Ireland, as well.
Secret
20 May 1983
Prospects for Future Budget Balancing
We believe that most West European governments
will put more emphasis on reducing budget deficits
over the next few years than using government
spending as an economic booster. Only the United
Kingdom, where the deficit has already been
trimmed significantly, and perhaps the Scandina-
vian countries are likely to provide more fiscal
stimulus. Leaders in countries running large budget
deficits appear convinced that the negative impact
of high interest rates aggravated by the deficits
more than offsets the gains from fiscal stimulus.
West German Economics Minister Lambsdorff's
unhappiness with the budget deficit contributed to
his Free Democrats' defection from Helmut
Schmidt's coalition
Moreover, we believe that a groundswell of public
support for major spending programs is unlikely to
develop soon. The surprising public quiescence
results from a number of factors:
? Generous government benefits have reduced
much of the economic deprivation caused by
unemployment.
? The steady rise in joblessness over the last 10
years may have made the public less sensitive to
this problem.
? Earlier unsuccessful efforts by the Mitterrand
government to stimulate the French economy
may have convinced many West Europeans of the
futility of unilateral action.
Nonetheless, public concern over the economy re-
mains high, even where other political issues have
been in the forefront. According to West German
Finance Minister Gerhard Stoltenberg and other
observers, West German voters-as well as other
West Europeans-want stable, noninflationary
economic growth, and they increasingly doubt the
ability of higher government spending to provide it.
Since the recession began in 1979, West Europeans
have turned more often to political parties that
promised restraint in government spending than to
those offering new government programs.
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Secret
Implications for the United States
Efforts to reduce budget deficits significantly
through politically acceptable domestic measures
will prove unsuccessful this year and will lead the
West Europeans to rely increasingly on the US
economy to pull the region out of its economic
malaise. In effect, West Europeans expect the
United States to become the "locomotive" for
industrial country growth.
With additional fiscal stimulus ruled out in most
West European countries, we believe that govern-
ments will try to ease their own monetary policies
in an effort to prompt economic growth. These
efforts will lead to further West European demands
for lower US interest rates. Several West European
central bankers, such as Bundesbank President
Karl Otto Poehl and Swiss National Bank Presi-
dent Fritz Leutwiler, have publicly blamed the mix
of tight US monetary policies and growing budget
deficits for the continuation of high real interest
rates in Western Europe.
The West Europeans also argue that, without a
comparable reduction in US rates, West European
currencies would weaken against the US dollar and
lead to increased inflation from rising import
prices. More expensive imports would lead to a
drop in total West European purchasing power at a
time of slow economic growth. Although a strong
dollar would increase West European exports and
reduce the competitiveness of US products, West
European leaders appear convinced that a further
strengthening of the dollar is not in their countries'
best interests.
Even if West European governments reduce their
deficits and US interest rates come down, pressure
will continue to build on West European govern-
ments to protect jobs through trade restrictions.
We believe that West European economies are
unlikely to improve enough over the next year or
two to reduce unemployment substantially. Politi-
cal pressure to erect trade barriers probably will
mount even faster once the West European eco-
nomic recovery is clearly under way and unemploy-
ment remains high.
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OECD: Slow Recovery in 1983
The OECD economies appear to be pulling out of
the recession, but not uniformly or rapidly. Growth
in the United States and Japan, for example, is
expected to outpace growth in most of Western
Europe. While most OECD governments are at-
tempting to relax their monetary policies, most
also are trying to cut budget deficits. Consumer
spending will be held back by the depressed labor
market, and investment for machinery and equip-
ment will be slack because unused capacity and
real interest rates are high. Although increased
trade among OECD countries will help recovery,
exports to non-OECD countries probably will slip
in real terms. With overall OECD economic
growth likely to advance only 2.0 percent this year,
unemployment will continue rising, particularly in
Western Europe. Inflation, on the other hand,
should slow, perhaps to only 5 to 6 percent-the
smallest price rise since 1972. If, as we expect, the
recovery continues to develop throughout 1983, the
stage should be set for more rapid growth in 1984.
The Upturn
prove.
We expect economic growth in the OECD to gather
speed through the year, but in most countries
growth will be comparatively weaker than in previ-
ous recoveries. For the non-US OECD countries,
we expect real economic growth to average 1.7
percent, with the Big Six expanding 1.9 percent
and the smaller countries growing at 1.0 percent.
The recession appears to have bottomed out in most
major countries by the end of 1982 or the first
quarter of 1983. Leading indicators have been
rising in most countries for the past six months, and
industrial production recently has begun to im-
OECD: GNP, for Selected Countries
The recent fall in interest rates, the decline in oil
prices, the end of inventory destocking, and lower
inflationary expectations are all factors which
should help promote the economic recovery. In-
deed, economic sentiment, as measured by surveys
of industrialists and by stock exchange prices, has
been improving since the beginning of the year.
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Unlike previous rebounds, however, no individual
country or economic sector will be sufficiently
dynamic to lead the OECD economies out of
recession.
In most of the Big Six countries, consumer spend-
ing will remain weak this year. Although recent
surveys in the European Community indicate that
consumers have adopted a less pessimistic view of
the economic and financial situation, the surveys
also show that consumers remain unwilling to
purchase big ticket items. We believe continued
high unemployment rates and expected low wage
gains will inhibit a pickup in spending by the
Europeans. Consumers are expected to reduce real
spending in France as higher taxes and utility rates
cut into other consumption. Consumer spending in
the United Kingdom and Japan will be relatively
buoyant; London reduced personal income taxes
this year, and Japanese consumers are trimming
savings to maintain spending.
The outlook for private investment in the OECD is
also mixed. Japan, West Germany, and the United
Kingdom will likely show 2- to 3-percent real
growth in investment, while Canada, France, and
Italy will show a decline of 2 to 4 percent. Lower
nominal interest rates probably will lead to in-
creased housing starts in most countries. Between
January 1982 and March 1983, interest rates in
West Germany and the United Kingdom dropped 4
and 3 percentage points to 6 and 11 percent,
respectively, while interest rates in Japan have
remained a low 7 percent. Continuing high real
interest rates, however, will likely impede business
investment in most countries. Long-term interest
rates are running about 4 percentage points higher
than inflation in each of the Big Six countries. In
addition, the high level of excess industrial capaci-
ty, about 24 percent in the European Community,
will impede new investment.
Unlike the situation following the 1974/75 reces-
sion, exports will not be a major driving force in the
recovery. While export growth in some OECD
countries may exceed real GNP growth, most of
the advance will come from increased sales to other
developed countries. Of the Big Six, only Japanese
OECD
-0.2
2.0
3.7
United States b
-1.8
2.5
4.9
Non-US OECD
0.7
1.7
2.9
Big Six
0.8
1.9
3.1
Japan
3.0
3.8
3.7
West Germany
-1.1
1.0
2.9
France
1.6
0.2
2.7
United Kingdom
1.4
2.3
3.0
Italy
-0.3
0.4
2.9
Canada
-4.8
1.4
3.1
Smaller countries
0.6
1.0
2.2
Australia
1.1
-1.0
3.0
1.0
0.8
2.3
-1.0
1.1
1.8
2.5
1.4
2.2
Greece
0.5
1.4
2.6
Iceland
-3.9
-2.3
3.6
Ireland
1.9
1.3
3.1
-0.5
1.4
2.1
-0.1
-0.6
1.9
0.1
0.6
2.4
-0.1
1.1
2.1
Portugal
1.0
1.2
2.3
Spain
1.2
0.8
2.2
Sweden
-0.7
1.8
2.1
a CIA forecast.
b Data Resources, Inc. forecast.
export growth is likely to grow by a considerable
amount-exports of goods and services should ad-
vance by more than 5 percent. Export growth in the
other five countries should range from about 1.5
percent in Canada to 2.7 percent in West Germany.
Relatively high US growth along with continued
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strength in the dollar will help exports in the other
OECD countries.
The LDC market-which accounts for 25 percent
of OECD exports-probably will shrink by 1 to 2
percent in 1983. OPEC countries are scaling back
their imports because of the decline in oil revenues.
The financial difficulties of many nonoil LDCs and
continuing weak demand for raw materials and
other commodities will curb nonoil LDC imports as
well.
On balance, the overall government policy mix this
year should have a slightly positive impact on
economic growth. Although most governments are
tightening fiscal policies, monetary policies gener-
ally are being relaxed. In Western Europe, the
attempt to tighten budgetary policy is not likely to
succeed in 1983 because mounting unemployment
and automatic spending increases should hold bud-
get deficits to about the same size as last year. F_
Because of budgetary difficulties, we believe most
OECD governments will rely on monetary policy to
help pull their economies out of the economic
slump. Foreign governments, however, are unwill-
ing to push down interest rates further without a
comparable reduction in US rates. West European
leaders argue that unilaterally lowering their rates
would lead to capital outflows and depreciated
currency, which in turn boosts import costs and
raises inflation. The Japanese are also concerned
about defending their currency.
Implications of Slow Growth
Worsening Unemployment. Despite the improved
economic outlook, the OECD economies will not
grow rapidly enough in 1983 to prevent unemploy-
ment from rising because increases in the labor
force will outpace the creation of new jobs. For
1983, unemployment in the Big Six is expected to
average 13 million-25 percent above the average
1982 level. The United Kingdom will continue to
OECD: Unemployment Rates for
Selected Countries
I I I i I I I I I
1970 75 80
have the highest unemployment rate of the Big
Six-probably averaging 13 percent for the year.
With the exception of Japan, the rest of the Big Six
countries likely will see unemployment rates grow
to an average 10 percent in 1983. Unemployment
in Japan should hover around 2.5 percent this year
and next.
Although unemployment rates are lower in many of
the smaller OECD countries than in the Big Six,
the number of jobless still should top 9 million this
year. Extensive government employment programs
in the Scandinavian countries, a high number of
self-employed workers in Greece, and the expulsion
of foreign workers from Switzerland account for
the lower rates in those countries. In both Turkey
and Spain nearly 20 percent of the labor force will
be jobless.
Slowing Inflation. Economic recovery is not likely
to be vigorous enough to cause a renewed upsurge
in inflation. We expect inflation rates to continue to
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OECD
8.3
5.3
6.0
United States b
6.2
3.0
4.6
Non-US OECD
9.6
6.8
6.8
Big Six
7.6
5.9
6.2
Japan
3.0
3.7
4.5
West Germany
5.2
2.9
3.0
France
11.6
9.5
8.6
United Kingdom
8.5
5.4
7.6
Italy
16.6
13.1
11.7
Canada
10.8
6.9
6.3
Smaller countries
15.1
9.2
8.8
Australia
11.0
8.0
6.7
Austria
5.3
3.4
4.2
Belgium
9.0
8.1
6.4
Denmark
10.0
7.0
7.3
Finland
10.3
8.2
6.9
Greece
21.0
19.2
19.7
Iceland
60.0
57.0
49.3
Ireland
16.3
13.0
11.7
Luxembourg
9.4
8.0
6.2
Netherlands
6.0
3.6
3.0
New Zealand
17.4
13.7
14.2
Norway
12.2
11.5
10.0
Portugal
22.4
22.2
20.7
Spain
14.4
13.5
13.7
Sweden
10.0
10.7
7.7
Switzerland
4.0
3.2
3.2
Turkey
30.0
24.2
19.7
a CIA forecast.
b Data Resources, Inc. forecast.
decline this year-to an average 5.3 percent for the
OECD countries, less than one-half the 1981 rate.
For the Big Six, inflation will drop to below 6
percent, with rates of less than 4 percent for West
Germany and Japan. Inflation in France and Italy
should continue to be high, although improving.
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20 May 1983
Paris's austerity package will help to contain infla-
tion in France. Nevertheless, prices will rise at near
double-digit rates, in part because of the 21 March
realignment of the European Monetary System
(EMS). While the franc was devalued only 2.5
percent against the European Currency Unit, it was
effectively devalued 8 percent against the West
German mark; the Federal Republic is France's
largest source of imports. For other major OECD
countries, improvements on the price front will
stem mainly from weak consumer spending, moder-
ating wage demands, weak oil and nonoil commod-
ity prices, tight fiscal policies, and high but declin-
ing interest rates.
The smaller OECD countries also should experi-
ence a significant drop in inflation-from 15 per-
cent in 1982 to 9 percent this year. Switzerland,
Austria, and the Netherlands will be at the low end
with inflation between 3 and 4 percent. Greece and
Turkey will continue to improve but should still be
coping with price rises of over 20 percent.
An Improving Current Account. Lackluster recov-
ery in many OECD countries, coupled with lower
oil prices, should help improve the current account
position of the OECD as a whole this year. We
expect the OECD deficit to shrink to $4 billion-a
$27 billion improvement over last year. If, as we
expect, the price of crude oil averages about $5 less
per barrel this year than last, this decline alone
would improve the aggregate OECD current ac-
count by as much as $30 billion-assuming no
change in the volume of oil imports-and thus
lower average OECD import prices. Moreover, we
believe continued weak consumer demand will hold
down other commodity import prices at least until
the second half of the year.
The lower oil prices and faster US import growth
should be a boon to the current accounts of other
OECD countries. For the Big Six, the balance
should swing into a strong surplus-$27 billion-
for the first time since 1978. Japan's surplus of $24
billion will far outpace the others. West Germany
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OECD
-30.9
-3.8
-9.4
United States b
-8.1
-17.3
-20.8
Non-US OECD
-22.8
13.5
11.4
Big Six
-0.2
27.4
26.3
7.6
23.5
24.3
3.1
10.5
12.5
France
-13.0
- 7.1
- 5.4
United Kingdom
7.2
3.0
-1.0
Italy
-7.1
-4.1
-3.8
Canada
2.0
1.6
-0.3
-23.0
-13.9
-14.9
-8.6
-7.5
-8.0
-0.1
0.8
1.0
Belgium-Luxembourg
-4.0
-2.4
-3.3
Denmark
-2.0
-1.5
-1.5
Finland
0.2
0.4
0.3
-2.1
-2.2
-2.6
-0.2
-0.2
-0.2
-1.6
- 1.1
-1.3
Netherlands
5.4
7.7
8.8
New Zealand
-1.7
-1.0
-1.4
Norway
0.4
-2.5
-2.4
Portugal
-3.3
-2.8
-2.7
Spain
-4.1
-3.5
-3.8
Sweden
-3.6
-2.2
-1.1
Switzerland
3.5
4.6
4.2
a CIA forecast.
b Data Resources, Inc. forecast.
should come in second with an estimated $10
billion surplus. The French and Italian current
account deficits will improve to $7 billion and $4
billion, respectively. Declining oil prices, however,
will hurt the British and Canadian surpluses. The
aggregate current account position of the smaller
countries will show substantial improvement but
icant surpluses.
still will register about a $14 billion deficit. Only
the Netherlands and Switzerland will record signif-
Prospects for 1984
We expect OECD economic growth to pick up
speed next year as a self-sustaining recovery takes
hold. For the non-US OECD, GNP growth should
average 3 percent in 1984, with the Big Six grow-
ing faster than the smaller OECD countries. On
the policy front, measured relaxation in monetary
policies should help bring down real interest rates
which in turn should stimulate business and con-
sumer spending without rekindling inflation. The
pace of economic growth also should be sufficient
to halt the climb in unemployment.
We expect inflation to continue at about the same
rate as this year in non-US OECD countries de-
spite faster GNP growth. As recovery continues,
unused capacity will be reemployed and businesses
may attempt to rebuild profit margins; these
events, however, should not increase inflation until
late 1984 or early 1985. Moreover, we expect
nonoil commodity prices to rise only slightly and oil
prices to remain stable at around $29 per barrel. Of
the Big Six, only Italy will continue to have double-
digit inflation in 1984. Japanese and West German
inflation rates should remain about 3 to 4 percent.
Some of the smaller OECD countries will make
progress in lowering inflation, but Greece, Iceland,
Portugal, and Turkey are expected to be coping
with inflation still above 20 percent.
The OECD current account balance probably will
deteriorate somewhat in 1984. Most of the worsen-
ing in the balance is likely to occur where economic
growth is relatively stronger, such as the United
Kingdom, Canada, and the United States. In these
countries import growth is expected to outpace
export growth. Improved price competitiveness and
less-than-average real GNP growth should enable
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West Germany to boost its current account surplus
again in 1984, perhaps reaching $12 billion. Ja-
pan's enormous surplus is likely to level off at about
$24 billion. 25X1
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Japan: No Resurgence
in Growth This Year
Domestic policy choices, a poor investment climate,
and voluntary restraints on exports will prevent
Japan's economy from staging a strong recovery
this year. Even now there are only tentative signs
that the economic stagnation that has plagued
Japan since mid-1981 may be coming to an end.
We foresee 3.4-percent real GNP growth in FY
1983 (1 April 1983-31 March 1984), almost the
same as last year. We also expect a significant
increase in the current account surplus.
Two Years of Stagnation
The Japanese economy initially looked as though it
would rebound quickly after the oil price hikes of
1979/80, but the promising signs disappeared
rapidly:
? In late 1979 the growth of government spending
began to decelerate as the Ohira administration
embarked on a "fiscal reconstruction" campaign
to curtail the government deficit.
? With industrial production lagging, labor had to
swallow real wage cuts and private consumption
weakened.
? By the time consumption revived in 1982, declin-
ing world trade and rising protectionism had
crippled export performance-the previous main-
stay of growth.
? Large manufacturing firms also scaled back in-
vestment plans, further dampening economic
growth.
The decline in exports did not prevent an improve-
ment in the current account in 1982. The surplus
rose from $4.8 billion in 1981 to $7.6 billion, in
part because higher interest rates abroad boosted
investment income. Imports declined as firms drew
down raw material inventories built up in 1980
when forecasters were optimistic about growth
Signs of Recovery Prove Elusive
So far, the indicators have not given a clear view of
whether economic growth is being rekindled.
Japan's Economic Planning Agency's (EPA) index
of leading indicators edged upward in January,
only to tumble in February. Individual components
of the series also reveal a mixed economic picture:
? New orders for machinery and construction re-
main well below year-earlier levels.
? The ratio of producers' inventories to shipments
has declined from the peak reached in May 1982,
but still remains above 1980 levels.
? One positive sign is that the index of hours of
overtime worked in the manufacturing sector
registered moderate increases in the first two
months of the year.
Reflecting the level of uncertainty, most Japanese
officials are reluctant to declare the recession over.
In an economic assessment issued in April, the
EPA indicated labor conditions-such as the ratio
of job openings to applicants-are likely to worsen
and investment to remain weak in coming months.
The Bank of Japan, focusing on a recent pickup in
exports and on the progress made in inventory
adjustment, is more confident that the worst is over
and recovery is at hand. However, they caution that
the upturn is likely to be moderate.
Policy Constraints
Japanese officials cite several obstacles blocking
efforts to hasten the recovery. Bank of Japan
officials have been reluctant to ease monetary
policy because such a move might lead to a resur-
gence of long-term capital outflows. Last year's
prospects.
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IVA
- I JA At
I 6q
I
1 11 In a 88 88 New orders for
machinery
86 86 tA, (private sector)
84 1980 1981 1982 1983 84 1980 1981 1982 1983
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13-percent depreciation of the yen against the
dollar resulted in part from the net outflow of
$15 billion in long-term capital.
Fiscal stimulus has also been ruled out because of
uneasiness over the rapid growth of the government
deficit during the last decade and qualms about
mounting refinancing needs.' General account ex-
penditures by the central government in FY 1983
are budgeted to be only 6 percent above the austere
FY 1982 spending levels.
We are bearish about the short-term growth pros-
pects for the Japanese economy. Our 3.4-percent
real GNP growth forecast for FY 1983 matches the
official Japanese projection. Like theirs, our fore-
cast assumes that government investment spending
will be concentrated in the first half of the year and
that the discount rate will be lowered; we have
assumed a 0.5-percentage point cut in midsummer.
Even with these assumptions, the FY 1983 growth
rate will be little changed from the rate in FY 1982
of 3.5 percent. The US Embassy in Tokyo, fore-
casting on a calendar year basis, has reached the
same conclusion. A forecast made in March by
Japan's EPA displays
slightly greater pessimism-they predict the
growth rate in FY 1983 will be 3.3 percent.
Prospects for Private Sector Mixed
On the positive side, falling energy prices and an
expected upturn in trading partners' economies
should benefit Japan this year, although not as
much as might be expected. The drop in oil prices
will reduce Japan's import bill by an estimated
$7-8 billion this year. MITI bureaucrats, however,
GNP (percent change)
3.4
3.4
3.3
Consumption (percent change)
3.7
3.9
4.4
Contribution of foreign demand
to GNP (percentage points)
0.7
NA
0.5
Current account balances
(billion US $)
23.5
9.0
17.0
Consumer prices (percent change)
3.4
3.3
2.6
Yen per dollar
227
255 b
235 b
a Calendar year.
b Exchange rate prevailing when forecasts made; forecasters made
rates.
remain reluctant to pass these savings along to
industry and households in the form of lower utility
Negative developments in the private sector seem
to outweigh the positive ones. The recent record-
low wage settlements, although a positive develop-
ment as far as prices are concerned, will hold down
personal consumption. Businessmen, aware of con-
straints on domestic growth and concerned by 25X1
spending, conducted by a variety of banks and 25X1
rising protectionism, are wary of investing in plant
and equipment. Surveys of anticipated capital
government agencies, are uniformly pessimistic. If
these surveys prove accurate, FY 1983 growth in
private investment will be the lowest in six years.
For all forecasters, the current account proved the
most difficult item to predict last year for Japan;
the same will likely be true for 1983. In 1982 overly
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optimistic assumptions about the growth of world
import volume led to inflated estimates:
? Our forecast made in January 1982 assumed
4.5-percent world import growth (excluding Ja-
pan) and predicted an $18.5 billion surplus-$11
billion above the actual outcome. Measured in
1975 dollars, world trade increased only 1.5
percent last year.
? An OECD forecast made at the same time and
positing 3-percent world import growth predicted
a $14.5 billion surplus.
? In January 1982, Data Resources (DRI) was'
projecting a $19 billion surplus
Our projection of a $24 billion current account
surplus in 1983 assumes 2.4-percent world import
volume growth. If trade picks up more rapidly than
we have assumed-say by an additional percentage
point-Japan's current account surplus could ap-
proach $27 billion. The current weakness of the yen
and the relative strength of the dollar put Japanese
exporters in a good position to garner an increasing
share of world exports. We have also assumed a
moderate appreciation of the yen-especially in the
second half of 1983. Our best guess is that the yen
will end the year around 220 to the dollar, reflect-
ing the increase in the current account surplus and
some decline in capital outflows because of lower
US interest rates compared with 1982. Even with
this appreciation, however, the yen would still be
below its 1981 level on a trade-weighted, price-
adjusted basis.
The existence of numerous export restraints, how-
ever, raises the alternative risk-that our current
account forecast is too high. Estimates on the share
of Japanese exports affected by restrictions range
from 15 percent to 65 percent of the total. Howev-
er, it is not clear that restrictions significantly alter
the dollar volume of sales. In cases where restric-
tions limit export volume, such as Japanese auto
shipments to the United States, Japanese firms are
raising prices and shipping more costly cars.
Secret
20 May 1983
While the size of the current account surplus is
debatable, it is certain that it will exceed last year's
level. The other major forecasters-including the
US Treasury, DRI, and the EPA-are all calling
for an increase. In first-quarter 1983, Japan posted
a $14 billion surplus, seasonally adjusted at an
annual rate.
Expansionary Fiscal Policy?
Another area of uncertainty in our forecast con-
cerns fiscal policy. We have assumed that the
Nakasone administration will stick with its
conservative, budget-cutting policies. But a poor
showing in the upper house elections scheduled for
26 June might prompt the government to change
course if leading indicators do not improve by
midsummer.
We believe, however, that any likely fiscal policy
stimulus would not add significantly to Japanese
growth. A spending increase of 500 billion yen ($2
billion) in the second half of the fiscal year would,
according to our calculations, add only 0.2 percent-
age point to the real growth rate and would cut the
current account surplus by $300 million. If Tokyo
opts to cut personal income taxes by this amount
rather than boost spending, the impact is even
smaller because of the high propensity to save out
of windfall income. We estimate that 75 percent of
a tax cut would be saved, permitting less than a
0.1-percentage-point gain in real GNP growth
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Western Europe: Implications of Energy
Import Dependence
Our analysis of recent industry forecasts indicates
that Western Europe will continue to rely on
imports for 40 to 50 percent of total energy supplies
through the end of the century. Imports are expect-
ed to account for three-fourths of total oil demand
throughout the period and as much as 50 percent of
total gas requirements. As a result, Western
Europe will remain extremely vulnerable to energy
supply disruptions, especially if the energy market
begins to tighten in the early 1990s as most of these
forecasts project.
European Dependence
Despite lower energy use and increased production
of oil and nuclear power, Western Europe still
relied on imported energy for more than 40 percent
of its energy in 1982. This compares with about a
60-percent reliance on imported energy in 1973:
? Net oil imports of about 9 million b/d supplied
about 75 percent of oil requirements in 1982 and
35 percent of energy consumption.
? Natural gas imports accounted for about 15
percent of European gas use.
? Coal imports in 1982 amounted to about 1 mil-
lion b/doe or nearly 20 percent of coal consump-
Energy Market Outlook
We examined an array of projections
com-
pleted in the past five months to assess energy
requirements in Western Europe through the year
2000. Most forecasters expect soft market condi-
tions to continue through the 1980s with gradually
Western Europe: Energy Supply Million b/doe
and Demand Projections a
Energy consumption
25.5
27.7-28.4
30.8-34.2
Net imports
12.9
11.0-12.7
13.9-17.4
Oil consumption
13.5
10.7-12.8
8.4-13.4
Oil production
2.4
2.7-3.3
2.4-2.9
Net imports
11.2
7.9-9.8
6.0-11.0
Natural gas consumption
3.6
3.9-4.5
4.6-5.1
Natural gas production
3.2
2.9-3.3
2.5-3.3
Net imports
0.5
0.8-1.5
1.3-2.5
Coal consumption
5.6
6.0-7.8
7.1-11.3
Coal production
4.5
4.4-4.6
4.4-5.2
Net imports
1.2
1.8-3.2
4.0-6.1
Hydro-Nuclear
2.8
5.3-5.9
6.6-7.8
rising oil demand beginning to tighten the oil and
energy markets around 1990. Under these condi-
tions, surplus production capacity will be sufficient
to handle a moderate oil supply interruption 25X1
through most of the 1980s. As the oil supply
cushion erodes around the end of the decade,
Western Europe will become increasingly vulnera-
ble to supply disruptions.
These forecasts indicate that the decline in energy
consumption in recent years is expected to bottom
out this year, and West European energy consump-
tion is projected to rise 31-34 million b/doe by
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2000. Most of the increase in energy demand is
expected to be met by nonoil fuels:
? Almost all forecasts argue that West European
oil consumption will hold fairly steady or decline
over the balance of the century. Forecasts of
West European oil consumption in 1990 are 11-
13 million b/d. Oil consumption in 2000 is
projected to be 8-13 million b/d.
? Recent forecasts project that the region's gas
demand will rise from 3.6 million b/doe in 1980
to about 3.9-4.5 million b/doe in 1990 and range
between 4.6 and 5.1 million b/doe by 2000. Most
of this growth in demand probably will occur in
the residential/commercial sector.
? Forecasts of West European coal consumption
range from 6 to 8 million b/doe in 1990 and from
7 to 11 million b/doe in 2000.
? Nuclear and hydro production combined are ex-
pected to rise sharply and approximate 7-8 mil-
France: Energy Supply and
Demand Projections a
Energy consumption
4.0
4.4-4.9
4.8-5.6
Net imports
3.0
Oil consumption
2.3
1.7-2.2
1.8-2.4
Oil production
Net imports
2.3
1.7-2.0
Natural gas consumption
0.4
0.5-0.7
0.5-0.8
Natural gas production
0.1
0.1
Net imports
0.3
0.4-0.6
Coal consumption
0.7
0.3-0.8
0.5-0.9
Coal production
0.3
0.2-0.3
Net imports
0.4
0.1-0.5
Hydro-Nuclear
0.6
1.3-1.8
1.5-2.4
lion b/doe by 2000.
Implications for Energy Trade
United Kingdom: Energy Supply
and Demand Projections a
Most forecasts expect Western Europe to depend
on imported energy for 40 to 50 percent of total
requirements in 2000. Reliance on imported energy
in individual West European countries will vary
widely. The United Kingdom, Norway, and the
Netherlands will remain self-sufficient, while de-
pendence on imported energy in West Germany
and France is expected to approximate 50 to 60
percent. Reliance on imports in Italy is projected to
exceed 80 percent through 2000.
Oil. West European reliance on imported oil is
expected to fall to 8-10 million b/d in 1990 and 6-
11 million b/d by 2000, or roughly 20 to 30 percent
of energy requirements. Nevertheless, because
Persian Gulf OPEC countries account for nearly 60
percent of Free World oil reserves, Western
Europe's reliance on this region will remain sub-
stantial.
Secret
20 May 1983
Energy consumption
4.1
4.1-4.4
4.3-5.0
Net imports
0.2
-0.1- -0.5
Oil consumption
1.7
1.4-1.6
1.3-1.7
Oil production
1.6
1.4-2.1
Net imports
NEGL
-0.4- -0.5
Natural gas consumption
0.8
0.9-1.0
0.9-1.1
Natural gas production
0.6
0.7-0.8
Net imports
0.2
0.1-0.2
Coal consumption
1.4
1.4-1.7
1.5-1.7
Coal production
1.5
1.5-1.7
Net imports
NEGL
NEGL
,.25X1
25X1
25X1
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Secret
Italy: Energy Supply and
Demand Projections a
Million b/doe
West Germany: Energy Supply
and Demand Projections a
Million b/doe
Energy consumption
2.9
3.2-3.6
3.7-5.1
Energy consumption
5.5
5.4-6.0
5.7-6.8
Net imports
2.4
2.7-3.1
Net imports
3.1
3.0-3.2
Oil consumption
2.0
1.5-2.0
1.6-2.3
Oil consumption
2.7
2.0-2.6
1.9-2.7
Oil production
NEGL
NEGL
Oil production
0.1
0.1
Net imports
1.9
1.5-2.0
Net imports
2.7
1.9-2.5
Natural gas consumption
0.5
0.6-0.7
0.8
Natural gas consumption
0.9
0.8-1.1
0.9-1.1
Natural gas production
0.2
0.1-0.2
Natural gas production
0.3
0.2-0.3
Net imports
0.2
0.4-0.5
Net imports
0.6
0.6-0.8
Coal consumption
0.3
0.5-0.7
0.8-1.4
Coal consumption
1.7
1.7-2.1
2.0
Coal production
NEGL
NEGL
Coal production
1.8
1.8
Net imports
0.2
0.7
Net imports
-0.1
0.1-0.3
Hydro-Nuclear
0.2
0.3-0.4
0.5-0.6
Hydro-Nuclear
0.3
0.5-0.7
0.8-1.0
Natural Gas. Recent forecasts project that West
European gas import needs will approximate 1.4
million b/doe in 1990, or about one-third of antici-
pated total requirements. The USSR is expected to
supply about 800,000 to 900,000 b/doe with the
bulk of remaining supplies coming from Algeria
and Libya. Based on existing contracts and esti-
mates of indigenous production, total gas availabil-
ity in Western Europe will approximate 3.5-3.6
million b/doe in 2000. Given demand estimates
from recent forecasts, Western Europe will need to
contract for an additional 1.3-1.4 million b/doe for
the 1990s to balance gas needs.
Several gas producers, including Norway, Canada,
Iran, Nigeria, Algeria, and the Soviet Union, are in
a position to meet these gas needs in the 1990s:
? Norway has two major natural gas fields avail-
able for development in the 1990s, the Sleipner
and Troll fields, whose combined production is
expected to approximate 1 million b/doe by 2000.
Gas from neither of these fields is currently
contracted for, however, and development is like-
ly to be quite costly compared to supplies avail-
able from other sources.
? Although committed to exports of only about
460,000 b/doe in 2000, Algeria's gas reserves
could permit an additional 460,000 to 580,000
b/doe of natural gas exports by the end of the
century.
? Libya could potentially export an additional
180,000 b/doe by either increasing LNG export
facilities or constructing a pipeline to Europe.
? Vast natural gas reserves in West Siberia indicate
that potential natural gas supplies from the
USSR are probably limited only by European
demand for Soviet gas. Given Moscow's willing-
ness to price competitively because of its hard
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Western Europe: Gas Flows From the Netherlands, 1980
f
I
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20 May 1983
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Secret
currency needs and its ability to step up deliveries
in a relatively short period, the Soviet Union is
capable of delivering gas to Western Europe at
prices which are competitive with all other fuels.
? The Netherlands could be Europe's most reliable
and economical source of additional gas. Under
current government policies designed to conserve
gas resources, Dutch gas for export will dwindle
to zero by 2000, but contract flexibility and
Dutch revenue needs could alter this situation.
Even without new export contracts, the Nether-
lands could act as a surge supplier in the event of
a disruption, but we believe the Dutch would
likely demand compensation to hold strategic
reserves for other countries.
Coal. Rising consumption is expected to increase
West European dependence on imported coal to 4-6
million b/doe by 2000-about 15 percent of total
energy requirements.
Impact of Lower Oil Prices
Should oil prices continue to fall, future energy
supply/demand patterns could be considerably dif-
ferent from current projections. The improved com-
petitiveness of oil initially would dampen nonoil
energy demand and increase West European de-
pendence on imported oil supplies. If oil prices fell
to $25 per barrel, we believe nearly all of the
increase in energy demand would be met by oil. F
Lower oil prices could also lead to the delay of
major new North Sea gas projects because low
returns would make these large capital investment
projects highly uneconomic. Such a development
would enhance the Soviet Union's ability to capture
a greater share of the West European gas market,
especially given the surplus capacity in existing
Soviet pipelines.
Policies To Increase Energy Security
To reduce reliance on imported energy-particu-
larly oil-most West European governments have
encouraged conservation, substitution, increased in-
digenous production, and diversification of import
sources, as well as increased requirements for oil
stockpiling. In response to the large and increasing
share of gas imports in total gas consumption, some
European countries have also begun to implement
policies to minimize the impact of an interruption
in gas supplies:
? In West Germany, most new industrial customers
are now offered only interruptible contracts, and
20 to 25 percent of German industry now has the
capability to switch from natural gas to alterna-
tive fuels-primarily oil. In the event of a gas
supply disruption, utilities would require these
customers to switch to alternative sources of
energy. We estimate this could amount to rough-
ly 120,000 b/doe by 1990.
? French Government plans call for doubling gas
storage capacity to 66 million barrels oil equiva-
lent (boe) by 1990. Gaz de France intends to
increase the amount of gas it sells under inter-
ruptible contracts from 15 percent of sales to 20
percent in 1990 or about 100,000 b/doe.
? Italy plans to increase gas imports in this decade
and shut in about 80,000 to 100,000 b/doe of
domestic production for use in an emergency.
Storage capacity is expected to approach 47
million boe in 1990; half of this is committed to
meet seasonal needs.
Impact of Oil Disruptions
Because a large proportion of the oil used by
Western Europe will continue to be imported, the
region will remain vulnerable to disruptions in the
oil market. There have been 14 separate oil supply
disruptions since 1950, most of which have had
little impact. Nonetheless, based on our survey of
recent forecasts, the gradual erosion of excess
productive capacity later in this decade will leave
the oil market increasingly vulnerable to supply
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25X1 I
25X1
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cutoffs around 1990 and beyond. We have exam-
ined two possible oil disruptions in 1990, each
lasting six months:
? Case I-a 13-million-b/d net loss in supplies; for
example, a supply cutoff from the Middle East.
? Case II-a 2-million-b/d net loss in capacity in
one or more countries for technical or political
reasons.
The precise economic impacts of these hypothetical
supply disruptions are difficult to gauge because of
structural changes that have occurred in the rela-
tionship between energy use and economic growth
and the inability to estimate psychological impacts
such as consumer stockbuilding behavior. We have
attempted to measure the order of magnitude of the
economic impacts using the CIA's linked econo-
metric model and the midrange of projected sup-
ply/demand levels for 1990:
? Case I-GNP loss amounts to 3.8 percentage
points, and oil prices rise 52 percent above the
base case level.
? Case II-GNP is reduced by 0.6 percentage
point, and oil prices rise 7 percent above the base
case level.
Gas Supply Disruptions
Greater dependence on gas imports will increase
Western Europe's vulnerability to a gas supply
cutoff, especially since gas transmission systems are
fixed and supplies are less flexible. Based on the
forecasted levels of gas consumption and imports,
we examined a hypothetical, six-month supply dis-
ruption from the Soviet Union and Algeria during
the winter. By 1990, gas supplies from these coun-
tries could supply one-third of overall gas demand
in Western Europe and a higher share in France
and Italy. Further, the seasonal nature of gas
requirements would tend to magnify the potential
impact if a disruption occurred in the winter. West
European gas consumption in the winter of 1981,
for example, averaged about 720 million cubic
meters per day, double the level of summer require-
ments. Because most of the growth in gas use is
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20 May 1983
expected in the residential sector, fluctuation in
seasonal demand will likely be even more pro-
nounced in the future.
To assess the impact of disruptions, we estimated
the following possible supply offsets to determine
the vulnerability:
? The level of potential surge capacity from indige-
nous production.
? The volume of gas available from cutting off
interruptible contracts.
? Surge capacity from the Netherlands.
? Stock draws from gas storage.
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Western Europe: Natural Gas
Supply and Demand Projections
Billion cubic meters
1980 a
1990 2000
(midrange) (midrange)
Demand
218
258 297
Production
194
171 134
Netherlands b
85
57
32
Norway b
29
29
17
United Kingdom
39
47
49
Other Europe
41
38
36
Import demand
32
87
163
Non-OECD contracted
supplies
32
78-86
78-86
Soviet c
49-55
49-55
0
26
26
0
24
24
0
30
30
0
4
4
5
5
25
25
0
27
27
1
77
Potential supplies
Algeria
28-35
Norway
4
50-60
Netherlands
19
17
LNG
23
USSR f
10-15
10-15
a 1980 data are actual trade. Discrepancy between supply versus
consumption is stocks and losses in transformation.
b Export contracts plus domestic consumption. Netherlands con-
sumption assumed to be 36 billion cubic meters in 1990 and 24
billion cubic meters in 2000.
c Soviet contract estimates include Italy.
d Algerian contract estimates do not include Spain, as contracts are
being renegotiated.
e Norway potential includes Sleipner, Troll, and several other small
fields.
f USSR supply potential is for existing export capacity only.
The amount of supply offsets were estimated based
on government plans and/or industry projections.
In the case of additional supplies from the Nether-
lands, we assumed export capacity is approximately
equal to the historical peak in deliveries of 223
million cubic meters/day during the winter of
On balance, the emergency supplies appear ade-
quate to offset a total Soviet gas disruption in 1990,
but this does not preclude some upward pressure on
energy prices. Fuel switching could add upward
pressure on oil prices, and, because of the linkage
between oil and gas prices, the latter would in-
crease as well. Energy prices could also be bid up
because of the uncertainties regarding the length of
a disruption.
A simultaneous cutoff in Soviet and Algerian sup-
plies would cut total gas availability in Europe by
almost 25 percent and pose serious problems. Our
analysis indicates that Italy would have a more
difficult time than France and West Germany in
coping with such a disruption because Italy's flexi-
bility is limited by the lack of opportunity to
increase Dutch imports during a disruption. Even
France and West Germany would require a cut-
back in supplies to some customers and sharp
inventory drawdowns, and both would also have to
rely on incremental Dutch production to offset
interrupted supplies.
Geopolitics of Dependence
High dependence on imported energy, particularly
oil and natural gas, will leave West European
countries susceptible to political pressures both
from within as well as outside their national bor-
ders. As demonstrated during previous major sup-
ply disruptions, West European countries tend to
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respond to intense domestic pressures by active
market intervention to secure adequate oil supplies
through government-to-government deals, restric-
tions on oil trade, and stepped-up spot purchases.
As energy markets tighten, the amount of political
leverage oil exporters can exert during a supply
disruption would increase. Increased West Europe-
an dependence on non-OECD natural gas supplies
will leave European countries increasingly vulnera-
ble to political pressure from countries like the
Soviet Union and Algeria.
Future Policy Options
In addition to measures already in place, West
European countries have several other options
available to them to help lessen the potential
dangers of energy supply disruptions:
? To the extent possible, diversify oil supplies away
from the volatile Middle Eastern region.
? Undertake a political commitment to guarantee
development of indigenous gas reserves in the
North Sea.
? Pay a premium to the Netherlands to extend gas
contracts in the early 1990s in exchange for an
equal volume of Norwegian gas later in the
decade.
? European gas importers might also pay a premi-
um to the Netherlands to maintain strategic gas
reserves to be used in the event of a disruption.
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