WESTERN EUROPE AND POST-TITO YUGOSLAVIA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000501700001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: December 22, 2011
• Sequence Number: 1
• Publication Date: July 12, 1983
• Content Type: MEMO

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Memorandum for:
The Honorable Lawrence Eagleburger
Under Secretary for Political Affairs,
7th Fl, State
Subject: Western Europe and Post-Tito Yugoslavia
Attached, for your information, is a typescript
memorandum on West European policies toward
Yugoslavia. It examines West European views of
Belgrade's political and economic prospects as well as
West European efforts to bolster the Yugoslav
regime. Please let us know if we may be of further
help.
? 12 July 1983
Director,
E U A
Office of European Analysis
.Identical Note sent to all. external recipients
c ~ X-/O/i3
Attachment:
As stated
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SUBJECT: Western Europe and Post-Tito Yugoslavia
Distribution
1 - Ambassador"Jack F. Matlock, Senior Director of West European Affairs &
Special Assistant to the President, White House
1 - Donald Gregg, Assistant to the Vice President for National Security
Affairs, White House
1 - Paula Dobriansky, NSC
1 - Peter Scarcer, NSC
1 - John Bargeron, Office of the Deputy Secretary, State
1 - Lawrence Eagleburger, Under Secretary for Political Affairs, State
1 - Darryl Johnson, Special Assistant to Under Secretary for Political
Affairs, State
1 - Wilson Allen Wallis, Under Secretary for Economic Affairs, State
1 - Stephen Bosworth, Director, Policy Planning Staff, State
1 - Robert E. Osgood, Planning Policy Staff, State
1 - Stephen Sestanovich, Planning Policy Staff, State
1 - Richard Burt, Assistant Secretary, Bureau of European Affairs, State
1 - Mark Palmer, Acting Deputy Assistant Secretary for European Affairs, State
1 - Thcenas M.T. Niles, Deputy Assistant Secretary for Bureau of European
Affairs, State
1 - James Dobbins, Deputy Assistant Secretary for Bureau of European Affairs,
State
1 - Jack R. Binns, Director of Northern European Affairs, Bureau of European
Affairs, State
1 - John W. Holmes, Director of Regional Political-Economic Affairs, Bureau
of European Affairs, State
1 - Robert Gelbard, Director of Western European Affairs, Bureau of European
Affairs, State
1 - Charles H. Thomas, Director of European Security & Political Affairs,
Bureau of European Affairs, State
1 - John R. Davis, Jr., Director of Eastern European and Yugoslavia Affairs,
Bureau of European Affairs, State
1 - Robert W. Farrard, Deputy Director of Eastern European and Yugoslavia
Affairs, Bureau of European Affairs, State
1 - William Warren, Office of Eastern European and Yugoslavia Affairs, State
1 - Henry L. Clarke, Deputy Director of East-West Trade, Bureau of Economic &
Business Affairs, State
1 - William Milam, Director of Monetary Affairs, Bureau of Economic & Business
Affairs, State
1 - Paul McGonagle, Deputy Director of Monetary Affairs, Bureau of Economic &
Business Affairs, State
1 - Robert Baraz, Director of Analysis for the Soviet Union & Eastern Europe,
State
1 - Paul Costolanski, Office of Analysis for the Soviet Union & Eastern
Europe, State
1 - Allan Lukens, Director of Analysis for Western Europe, State
1 - Robert Dean, Deputy Director, Politico-Military Affairs, State
1 - Jeremy Azrael, Office of Politico-Military Affairs, State
1 - Richard L. Armitage, Assistant Secretary of Defense, International
Security Affairs, Pentagon
1 - Ronald S. Lauder, Deputy Assistant Secretary, European & NATO Policy,
Pentagon
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SUBJECT: Western Europe and Post-Tito Yugoslavia
Distribution (continued)
1 - B. Gen. John R. Lasater, Principal Director for European & NATO Affairs,
International Security Policy, Pentagon
1 - Joints Chiefs of Staff, Director, European Division, Pentagon
1 - DIO for European & Soviet Political/Military Affairs, DIA
1 - B. Gen. Roy tram, Deputy Assistant Chief of Staff, Intelligence, Army
1 - Stephen Canner, Director of East-West Econcanic Policy, Treasury
1 - David Peterson, Director of Intelligence Liaison, Commerce
1 - Lionel Olmer, Under Secretary/ADDI, Ccmmerce
1-WI
1 - ADDI
1 - DDI Registry
1 - ExDir
4 - IN-/CB
1-OCR
1 - ILS
1 - EURA
2 - EURA Production
3 - EURA/EI
2 - EURA/EI/PS
1 - Author
DDI/EURA/EI/PS 11Jul83)
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Central Intelligence Agency
Washington, D. C. 20505
DIRECTORATE OF INTELLIGENCE
8 July 1983
Western Europe and Post-Tito Yugoslavia
Summary
While expressing concern about Yugoslavia's
long-run domestic stability and nonaligned foreign
policy, West European governments see little
danger to the country in the near term.
Reflecting this assessment, they have formed no
comprehensive strategy for dealing with Belgrade
and tend--both in bilateral relations and in the
EC context--to react in ad hoc fashion to
developments there. Along with domestic budget
problems, their somewhat sanguine view of
Yugoslavia's political fortunes also explains the
hardnosed attitude of the West Europeans toward
Belgrade's financial problems--including a likely
refusal to go along with another financial bailout
in 1984.
A review of several NATO documents, as well
as numerous discussions with West European
officials, indicates that the West Europeans--
correctly, in our view--do not discern any shift
This memorandum was prepared by
the Office 25X1
of European Analysis. It was coordinated with the Office of
Soviet Analysis and the Office of Global Issues. Research was
completed on 7 July 1983. Questions and comments may be
addressed to the Chief of the European Issues Division j
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in Yugoslav foreign policy under the post-Tito
collective leadership and do not foresee any
reinterpretation of the Yugoslav version of
nonalignment. The West Germans and British argue
that Moscow hesitates to push Belgrade too far,
and they and other European governments clearly
seem to believe that Moscow has no plans to
reintegrate Yugoslavia into the eastern bloc)
While sanguine about Soviet intentions, the
West Europeans are more fearful of threats to
Yugoslavia from economically or ethnically
inspired domestic instability. They are promoting
bilateral consultations to demonstrate support for
the Belgrade regime, but face irritants involving
trade, emigres, and national minorities. In the
multilateral context, the West Germans only
grudgingly agreed this year to US urgings that
they assume the lead in putting together a
financial aid package to prevent rescheduling of
Belgrade's foreign debts, crossing their fingers
that this and a 1980 preferential trade agreement
would help turn the economy around.
If Yugoslavia's financial difficulties
continue unabated into 1984, as seems likely to
us, we believe that virtually all West European
governments and private banks will urge a formal
debt rescheduling. The four major West European
governments, which each face budget deficits and
demands for higher domestic spending, will be
adverse to increasing aid. In our judgment, only
unforeseen political upheaval in Yugoslavia, the
emergence of manifest Soviet designs on
Yugoslavia, or strong pressure from the United
States will induce them to agree to a bailout.
And the first two scenarios by themselves will
almost certainly induce commercial banks to refuse
West European Views of Yugoslavia
West European governments have long held a major stake in
Yugoslavia's political stability and in its version of
international nonalignment since Yugoslavia acts as a buffer that
denies the Soviet Union ready access to the Adriatic and Eastern
Mediterranean. Western Europe also benefits from Yugoslavia's
'')ZV-I
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role as a counter to pro-Soviet forces in the nonaligned
movement. At the time of Tito's death in May 1980, the four
major West European governments--the United Kingdom, France, West
Germany, and Italy--expressed to US officials concern about the
fragility of Belgrade's new collective leadership. According to
a US Embassy official in Belgrade, most West European diplomats
in Yugoslavia believed that the system bequeathed by Tito was
based on political realities, but defied economic rationality and
impeded sound economic planning.
In view of their misgivings, the West Europeans were
undoubtedly somewhat relieved at the smooth transition after
Tito's death. West German delegates to NATO's Expert Working
Group on Eastern Europe, for instance, reported in February 1981
that in reducing Yugoslavia's foreign trade and balance of
payments deficits, Tito's successors had achieved their initial
economic goals. The West German delegates also pointed out that
the system of collective leadership was functioning successfully
and that the prospects for regime stability were good.
This upbeat mood proved transitory as economic difficulties
and ethnic tensions appeared and Belgrade's economic ties shifted
further toward the East. As early as August 1981, for example,
the West German NATO Political Advisers reported that rampant
inflation, unemployment, and falling real incomes were severely
straining Yugoslavia's social cohesion. The West Germans also
noted that the ethnic violence in Kosovo in March and April of
that year portended worsening relations among Yugoslavia's
republics and nationalities.
The West Europeans have not, however, acted as if they are
seriously alarmed at the Yugoslav situation. While the Big Four
countries and smaller ones such as Greece are generally
supportive of the new Yugoslav leaders, they have not undertaken
any major new bilateral initiatives toward Belgrade. In the
multilateral context, the EC signed a preferential trade
agreement with Yugoslavia, and some West European governments
this year have grudgingly agreed to US urgings to take the lead
in putting together a financial aid package to prevent a formal
rescheduling of Belgrade's debts that should be ready for
Economic and Ethnic Problems. The prevailing West European
view--which in our judgment may be too optimistic--seems to be
that Yugoslavia will "muddle through" its economic problems
without serious political re ercussions.
w ile the
economic crisis presents Belgrade with its most serious test
since 1948, the leadership remains essentially united. A report
on the Yugoslav political situation approved by the European
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Parliament in February concludes that the worsening economy is
unlikely to call into question the country's political
institutions. This optimism, in our judgment, may reflect
satisfaction with the smooth operation last year of the first
rotation of party and government positions and with the success
of the first post-Tito congress of the League of Yugoslav
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Several key West European governments also believe that
while Yugoslavia's ethnic tensions pose a serious long-term
danger, Belgrade has the sit nder control. A report 0 25X1
in March notes that the LOAI
strong national reaction in Serbia to the Albanian disturbances
in Kosovo has intensified fears of Serbian domination on the part
of the other nationalities. ambassador, however, 25X1
noted in January that security forces have kept a lid on
persistent small-scale outbursts of Albanian nationalism in
Kosovo. He also stated that nationalist unrest in other areas is
minor--a view that conflicts with State Department and CIA
re ortin 7 repression April, 25X1
repression had tailed to settle the province's 25X1
fundamental problems, particularly its lack of republic status
and the widespread separatism among its Albanian youth. It
added, however, that renewed unrest in Kosovo probably would not
result in large-scale violence. 25X1
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Foreign Relations. West European officials have repeatedly
told US counterparts their governments detect no shift in
Yugoslavia's foreign policy since Tito's death.
in February its view that
Belgrade was continuing ettorts to reunite the nonaligned
movement at a position of equidistance between the superpowers,
seeking to isolate the pro-Soviet faction led by Cuba, Ethiopia,
and Vietnam. In numerous contacts with the United States,
officials from all Big Four governments have contended that
recent meetings between Belgrade and Moscow--including Soviet
Foreign Minister Gromyko's visit to Yugoslavia in April 1982 and
Soviet Prime Minister Tikhonov's consultations in Belgrade this
March--have in. no way weakened Belgrade's independent stance.F_
The West German and British governments argue that Moscow
hesitates to push Belgrade too far--a view the other key West
European countries probably share.
o In January, (concluded in
t at Moscow has pursued a policy of
restraint toward post-Tito Yugoslavia. The Soviets,
according to the West Germans, have avoided open
confrontation on foreign policy disagreements and
refrained from testing the collective leadership's
political endurance.
o In February,) argued
that the Soviets nad not allowed their overtures to
Albania and trade differences with Belgrade to become
serious obstacles to good political relations with
Yugoslavia.
The West Germans--and probably the British, Italians, and
French--believe that Moscow has no plans to reintegrate
Yugoslavia in the eastern bloc.
in January, for 'instance, concluded that the
Kremlin strongly desires stability rather than instability in
Yugoslavia. The West Germans state, however, that Moscow has no
intention of claiming that the Brezhnev Doctrine applies to
Yugoslavia. In Bonn's view, Moscow knows that any military
intervention would pose incalculable risks, including new
financial burdens, diplomatic setbacks in Europe and the Third
World, strong resistance by the Yugoslavs, and possible
confrontation with the United States.
High officials in several West European governments are more
concerned that internal weaknesses, rather than direct Soviet
pressure, could gradually force a shift in Yugoslavia's foreign
policy orientation. In May 1982, for instance, Secretary General
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of the Italian Foreign Ministry Malfatti stressed to a US
official the weakness of the collective leadership in the face of
ethnic tensions, economic problems, and "increasing pressure"
from the Soviets. In November 1982, then-British Foreign
Secretary Pym asserted to US officials that Yugoslavia's economic
instability was beginning to have major political implications.
Most West European governments, however, voice no alarm
about a Yugoslav shift away from its policy of nonalignment. The
British ambassador to Belgrade even argued in early 1983 that
increased assistance could further tilt Yugoslav foreign policy
in favor of the West. The European Parliament's report on
Yugoslavia of this February concluded that advocates of a pro-
Western policy still retain the upper hand.
Bilateral Relations
Despite concerns about Yugoslavia's political balance, West
European countries, including the Big Four and smaller ones such
as Greece, have only halfheartedly sought to broaden their
bilateral ties with post-Tito Yugoslavia. The results of this
political and economic cooperation--and in the case of Italy and
Greece, military cooperation as well--have been modest largely
because of frictions over issues such as trade, emigres,
Workers from Yugoslavia, by Country of Employment
Number
Number
Host Country
in 1977
Percent
in 1981 Per
cent
Austria
140,000
19.9
130,000
18.7
France
55,000
7.8
58,000
8.4
Netherlands
10,000
1.4
10,000
1.4
West Germany
405,000
57.5
403,000
58.2
Sweden
26,000
3.7
25,000
3.6
Switzerland
34,000
4.8
31,000
4.5
Other European
countries
35,000
4.9
36,000
5.2
705,000
100.0
693,000 1
00.0
Italy. Italy, of the four major West European countries,
has the warmest ties with Yugoslavia. Rome's policies reflect a
shared border and a mutual interest in Mediterranean stability.
In order to bolster the successive Yugoslav regimes, the Italian
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government has consistently played down bilateral disputes over
boundaries, trade, and national minorities and is the only major
West European country to engage in limited military cooperation
with Belgrade. The outstanding example of their bilateral
cooperation is the Osimo Treaty of 1975 which definitively
settled the contentious Trieste frontier issue, reaffirmed the
rights of national minorities, and also led to increased
consultations and economic cooperation.
Rome has intensified its diplomatic and military
consultations with Yugoslavia since Tito's death. According to
press accounts, the Italians pledged continued economic and
political support during Yugoslav President Mijatovic's visit to
Yugoslavia received a tirst o icia foreign visit of the
present Italian Army Chief of Staff in November 1981, and the two
countries' army staffs 7nducted periodic consultations.
the Italian Army last year agreed
to conduct research and development programs as well as limited
information pooling with the Yugoslavs.
In order not to damage the spirit of cooperation, Italy has
reacted mildly to recent Yugoslav restrictions on trade and
travel. Belgrade's austerity measures last October, which inter
alia required cash deposits from all Yugoslavs before crossing
borders and restricted private imports, severely curtailed retail
commerce in Trieste. Foreign Minister Colombo, however, publicly
supported Belgrade's actions, and Italian officials stressed to
US counterparts the Yugoslavs' purely economic motives for
restricting travel. According to the US Embassy in Rome, during
Yugoslav Foreign Minister Mojsov's mid-February talks in Italy,
Colombo urged an easing of the measures but denied any serious
West Germany. West Germany's economic importance to
Yugoslavia--it is Belgrade's most important trading partner in
the West--has helped Bonn to advance Western interests in
Belgrade. At the same time, Bonn has used its influence in the
EC to prod other Community members to be helpful to the
Yugoslavs. According to various press and US Embassy reporting,
Foreign Minister Genscher and other West German leaders have
offered both economic cooperation and encouragement for
Belgrade's independent political course in periodic discussions
with the Yugoslavs. At the same time, the West Germans in 1980
successfully urged their EC partners to accelerate negotiations
on the EC-Yugoslav Trade and Economic Agreement in order to
strengthen Belgrade's links to Western Europe. Earlier this
year, West German Foreign ministry officials supported the United
States by stressing to their West European counterparts the
necessity of addressing Belgrade's financial crisis.
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Overshadowing these positive contacts at times are
Belgrade's protests that Bonn tolerates nationalist and
anticommunist emigre groups which have committed numerous acts of
violence against Yugoslav diplomats and installations. Bonn has
established a special bureau to counter terrorist acts among and
against Yugoslav nationals in the Federal Republic but is
unwilling to curtail non-violent political activity.
The 640,000 Yugoslav workers and dependents in West Germany,
which represent the Federal Republic's second-largest foreign
population and well over half of all Yugoslavs employed abroad,
are a second source of tension. The difficulty stems from Bonn's
refusal, at a time when Yugoslav unemployment is growing and
Belgrade needs more foreign exchange, to allow Yugoslav workers
to seek other work in West Germany after the expiration of
specific contracts.
France likewise attaches prime importance to Belgrade's
independence. As in the case of British-Yugoslav relations,
disputes concerning emigres have remained subdued in recent
years, and French diplomatic sources state that the socialist-led
government in Paris wants to strengthen ties with Yugoslavia.
Quai Secretary General Gutmann visited Belgrade last December,
and Yugoslav Foreign Minister Mojsov met with Mitterrand and
Cheysson in Paris in January 1982. According to the US Embassy
in Paris, the French emphasized agreement with the Yugoslavs on
most world issues and Cheysson praised Belgrade's independent
stance. According to press accounts, Prime Minister Mauroy told
a visiting delegation from the Yugoslav Federal Assembly in April
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that France desired closer political and economic ties. Aside
from periodic consultations, however, France--like the other
major West European countries--has not undertaken any major
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Greece. Among the smaller NATO and EC states, neighboring
Greece has taken the strongest interest in Yugoslav
developments. Reflecting their common interest in Balkan
stability, the two governments hold regular consultations at
ministerial and higher levels. Like the Italians, moreover, the
Greeks consult with the Yugoslavs on military matters as
indicated by the exchange of visits by their defense ministers
and service chiefs. 25X1
Athens and Belgrade agree on most world issues, but
ironically the Yugoslavs find some of Greek Socialist Prime
Minister Papandreou's views too "progressive." According to the
US Embassy in Belgrade, Yugoslav leaders are particularly
skeptical of Papandreou's notion of a nuclear-free zone in the
Balkans.
The Macedonian question is the only major recurring irritant
in Greek-Yugoslav relations. Belgrade views the Yugoslav
Macedonian Republic as the homeland of a distinct nationality
with kinsmen in both Bulgaria and Greece. Athens vehemently
denies the existence of such a minority within its borders and
rejects Yugoslavia's occasional protests about alleged
maltreatment of Macedonians as interference in Greek internal
affairs. Both sides have generally played down the Macedonian
question in recent years, but the issue continues to cast a pall
Multilateral Relations
Although West European governments have done little to
strengthen their bilateral ties with Belgrade since Tito's death,
they have been more forthcoming when dealing jointly with the
Yugoslavs. In particular, Yugoslavia's recent economic problems
have elicited coordinated responses by Western Europe. The
European Community is attempting to strengthen commercial ties by
means of the 1980 preferential trade agreement, while a more
informal grouping of Yugoslavia's government and private Western
creditors--at US urging--is implementing a package of financial
The 1980 Trade Agreement. The European Community concluded
its first preferential trade agreement with Belgrade in April
1980 in order to bolster Yugoslavia's new collective leadership.
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Exports
Imports
Table 2
Yugoslav Trade with EC-10a
1975
1979 1980
1981
(Million US $)
971
1,846
2,368
2,531
3,236
4,922
5,257
5,648
1982
2,140
4,436
Table 3
Yugoslavia:
Trade Balance
1975
1979
1980
1981
1982
(Million US $)
World
Of which:
-3,624
-6,370
-6,125
-4,889
-3,116
EC a
-2,265
-3,076
-2,889
-3,117
-2,295
USSR
b
206
-392
-209
678
613
Eastern Europe
-178
-396
-229
-166
-68
United States
-151
-679
-622
-573
-435
Table 4
Yugoslavia: Shares of Foreign Trade
(Percent)
1975
1979
1980
1981
1982
Import Shares
ECa
42.0
38.3
34.8
35.7
33.1
USSR
b
10.5
13.9
17.9
18.8
20.3
Eastern Europe
13.5
12.9
11.4
11.8
13.9
United States
Export Shares
5.4
8.2
6.7
6.1
11.2
ECa
23.8
28.4
26.4
23.2
20.8
USSR
b
24.9
21.6
27.7
33.3
32.4
Eastern Europe
21.1
19.4
16.5
15.6
17.5
United States
6.5
5.7
4.4
3.5
10.0
a Includes Greece for entire period.
b Includes Bulgaria, Czechoslovakia, East Germany, Hungary, Poland
and Romania.
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The agreement aimed to reduce Yugoslavia's growing trade deficit with the
Community, which by 1979 accounted for nearly half of its total deficit on
foreign trade. Reporting by the US Mission to the BC indicates that the
Community also hoped to increase its share of Yugoslavia's total trade, which
had fallen from 43 percent in 1970 to under 35 percent in 1979, and to lessen
Belgrade's growing economic dependence on the East. More important than
economic aims, in our judgment, was the Community's desire to demonstrate its
political support to Belgrade at a time of Yugoslav nervousness over the
Soviet invasion of Afghanistan and Tito's impending death.
The 1980 Trade and Cooperation Agreement provided limited nonreciprocal
concessions on most Yugoslav merchandise exports to Western Europe. The
accord assured free access to EC markets for over 70 percent of Yugoslavia's
industrial products and reduced quotas and tariffs on a list of so-called
sensitive items such as textiles and nonferrous metals. Agricultural sales,
Yugoslavia's leading source of export earnings, remain strictly limited. The
Community pledged infrastructure loans to Belgrade and non-discrimination in
working conditions and social security, though not in employment itself, for
the 800,000 Yugoslav guestworkers in Western Europe
Although the trade provisions of the agreement took effect in 1980, foot-
dragging by the West German Bundestag prevented formal ratification until
February 1983. Yugoslav and West European leaders called the agreement's
entry into force a milestone in Yugoslav-EC relations. The EC-Yugoslav
Cooperation Council established by the agreement met for the first time in May
to discuss joint ventures in science, technology, and industry. In addition,
the EC Commission last February brought approximately 600 West European
business people to Belgrade for a week of consultations with Yugoslav
counterparts. According to an EC publication, the meetings resulted in about
fifty cooperation contracts, primarily in the fields of automotive parts and
Thus far, however, the agreement has generally been unsuccessful in
achieving its economic objectives. The trade concessions have failed to
reverse the downward trend of EC participation in Yugoslav foreign trade. In
1982, BC shares of Yugoslav exports and imports were significantly lower than
in 1979. In the same period, trade with CEMA grew to one-third of
Yugoslavia's imports and half of its foreign sales. The Soviet Union
increased its share of both Yugoslav exports and imports while East European
shares generally held steady. The East European countries have been major
purchasers of Yugoslavia's manufactures, which are generally too expensive and
too low in quality to compete successfully in West European markets. Higher
Soviet oil prices account for much of the dollar increase in Soviet sales to
Yugoslavia.
While Yugoslavia's trade deficit with Western Europe declined in 1982,
this was due largely to lower imports from the Community. The recession in
the West and inflation in Yugoslavia held Yugoslav exports to modest levels.
In addition, with its accession to the Common Market, Greece has diverted its
purchases of beef, traditionally a major Yugoslav export item, from Yugoslavia
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The Financial Aid Package. Political motives pranpted the West European
decision to join in multilateral assistance in lieu of a rescheduling of
Yugoslavia's debts. The Yugoslav Government has adamantly rejected a formal
debt rescheduling and enacted austerity measures to balance its foreign
accounts. According to US Embassy officials, Belgrade feared a rescheduling
would advertise the failure of its economic policies and create irresistible
danestic pressures for reform. While many officials in the Big Four finance
ministries regard rescheduling as inevitable in the longer term, the West
European governments have accepted US arguments that Belgrade's present
austerity program will achieve econanic progress while limiting the political
On 19 January, Yugoslavia's leading government creditors adopted a
package of emergency assistance. A majority of the EC and EFTA member states,
along with Canada, Japan, and the United States, pledged a total of $1.3
billion in credits. The package is part of a broader program that includes an
IMF standby arrangement and loans from the Bank for International Settlements
and the World Bank. In addition, the program calls for private bankers to
roll over maturing credits and to grant further loans, a course that would
avoid the necessity for a formal debt rescheduling.
Disagreements between the Western governments and the commercial banks
delayed implementation of the assistance package.
the banks insist that government-guaranteed loans to Yugoslavia be refinanced
on the same terms as unguaranteed credits in order to ensure a fair
apportionment of risk between governments and private lenders. The
governments, however, argue that the January agreement already provides for
burdensharing and that altering its terms could unravel the entire assistance
The commercial lenders are unlikely to torpedo the entire assistance
effort by rejecting the governments' proposal.[
Outlook
We believe that the major West European governments are unlikely to
develop a comprehensive joint approach to Yugoslavia. The West Europeans see
little cause to change their present policies toward Belgrade because most
believe that Yugoslavia can "muddle through" with only limited assistance from
the West. The West Europeans probably will continue to take ad hoc policy
responses to discrete Yugoslav developments, and probably will continue to
look to the United States to assume the lead in formulating Western policy
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In the near term, the West Europeans probably will continue to focus
their attention on Yugoslavia's econanic problems. West European governments
and private bankers doubt that the assistance package will enable Yugoslavia
to solve its financial problems.
for several years.
Yugoslavia will probably continue to require debt relief
Nonetheless, the major West European governments probably will remain
reluctant to increase trade concessions or economic assistance significantly
to Yugoslavia next year. All face budget deficits and demands for higher
domestic spending. West European foreign ministries, which stress Belgrade's
political importance, will continue to work for good relations, but finance
and econanics ministries will emphasize the domestic costs of economic aid.
In addition, we believe that West European governments will continue to urge
Belgrade to adopt structural econanic changes as a basis for closer commercial
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Implications for US Policy. If Yugoslavia's financial problems continue
unabated in 1984, the West Europeans, in our judgment, would almost certainly
urge a formal debt rescheduling. virtually all 25X1
bankers and government leaders in the major West European countries believe
that a rescheduling in 1984 would both ease the burden on Western lenders and
give Yugoslavia more time to put its financial house in order.
In our judgment, it would take strong pressure from the United States to
induce the West European governments to accept another financial bailout in
early 1984. In addition, unforeseen threats to Yugoslavia's political
stability--such as major outbreaks of ethnic violence, open feuding among the
collective leadership, or increased Soviet meddling-might induce the West
European governments to drop their preference for a formal debt
rescheduling. But political crises, especially if Yugoslavia appears near
insolvency next year, would scarcely incline commercial banks to make new
We believe the West European governments are unlikely to insist publicly
on structural reforms, which the Yugoslav authorities would view as threats to
their political legitimacy and to Yugoslavia's independence and
nonalignment. Western insistence probably will be private, and both
governments and banks will almost certainly also insist on Yugoslav
fulfillment of IMF performance criteria, including reductions in credit growth
and inflation, positive real interest rates, and improvements in the current
account. The banks may also demand access to economic data Belgrade provides
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to the IMF. Yugoslav leaders probably will resent such increased pressure
from West European banks and governments, but Belgrade is unlikely to sever
its Western ties as long as Western assistance remains essential to the
Yugoslav econceny.
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