SOME POLITICAL IMPLICATIONS OF PERSISTENT INFLATION IN WESTERN EUROPE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00608R000600170033-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 28
• Document Creation Date: December 14, 2016
• Document Release Date: March 25, 1999
• Sequence Number: 33
• Publication Date: September 1, 1975
• Content Type: REPORT

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anN111.19,REININNEN?
NO FOREIGN OISSEM
CENTRAL INTELLIGENCE AGENCY
DIRECTORATE OF INTELLIGENCE
OFFICE OF POLITICAL RESEARCH
September 1975
SOME POLITICAL IMPLICATIONS OF PERSISTENT INFLATION
IN WESTERN EUROPE
by
25X1A9a
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NOTE
This paper addresses the question "What if rapid inflation con-
tinues in Western Europe?" It is not a systematic study of the
causes of the economic difficulties Europe has been experiencing,
nor does it attempt to forecast economic trends. The paper explores
certain social and Political implications which might come from a
continuance of the economic malaise that Europe has been experiencing.
The purpose of the paper is to provoke thought and discussion
about possible and Plausible developments which would impinge on US
interests and have serious consequences for them. Readers familiar
with economic developments in Europe may prefer to begin with Section
III on page 11.
The author consulted other offices of the Central Intelligence
Agency in preparing this study. OPR acknowledges many helpful
suggestions and criticism, but there was no attempt to seek formal
coordination. Comments are welcomed by Code
143, Ext. 5441.
25X1A9a
Subject to General Declassification
Schedule of E.O. 11652. Automatically
Declassified in December 1981.
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It is possible, many would say likely, that Western Europe
will emerge from the current period of high inflation and pro-
longed recession with the help of standard economic policies
designed to temper the effects of the business cycle and without
any major changes in the social and political fabric. But it is
also possible that the economic malaise will prove to be intrac-
table -- that inflation will persist and even rise, resulting in
stagflation of a particularly virulent sort. If this happens,
substantial Lupcovement would t Dbably require Profound change
in social and political as well as in economic policies.
In some countries (especially the U.K.), organized labor and
other Powerful interest groups would be likely to resist paying
the costs of such basic changes. Resistance would result not
only in a worsening of economic problems but in a rise in political
and social tensions as well. Over time, the inability of popularly-
elected governments to promote economic well-being and to maintain
domestic peace would raise serious challenges to existing insti-
tutions and Practices -- from either the left or the right,
depending upon ci=stances. The resolution of such challenges
would vary from country to country. And those (such as Germany)
with a high degree of social cohesion would be relatively immune
at first. Nonetheless, and again over time, some countries would
either suffer increased national debility or resort to authori-
tarian solutions with marked overtones of economic nationalism.
The purpose of this paper is not to predict either a gloomy
economic future for Europe or dramatic political departures, but
rather to assess the implications should such events indeed take
place. Cr!rtainly a profound preoccupation with domestic turbu-
lence and/or the advent of authoritarian and autarkic regimes
would place European economic cooperation under severe strain.
Interest in and support for mutual defense, including NATO, would
probably greatly diminish. The current economic palaise has al-
ready produced some movement in this direction -- protectionist
measures re traue, investment, and foreign workers, and cutbacks
in defense spending. Though the intensification and prolongation
of the malaise might at some future point give rise to renewed
emphasis on European unity (with or without a prominent US rola),
it seems more likely to develop momentum in the o:2posite direction.
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If developments in Europe are of the "worst case" nature,
the US would face a ranoe of unfamiliar problems not only in
lations with individual countries but also (and probably especially)
with the region as a whole. Semi-Fascist or leftist reyoluticnarv
regimes in the major capitals of Western Europe would likely rove
a nasty as well as unfamiliar experience. Efforts to gain su000rt
on what are now generally viewed as common interests -- in d-:fiense,
in economic cooperation, and in relations with the Third Word ?
would be greatly complicated if not totally stymied. Such change
in Europe could have incalculable effect on international 7,olitical
relations, esPecially on US-Soviet detente.
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SOME POLITICAL IMPLICATIONS OF PERSISTENT INFLATION
IN WESTERN EUROPE
I. THE CURRENT MALAISE
There is widespread concern in practically all the nations
of Western Europe about the political and social imolications
of the current economic problems. Some fear a recurrence of the
Great Deoression as unemployment continues to rise. Others see
a Great Inflation just around the corner if efforts to promote
recovery prove too strong. Still others fear a prolonged stagflation
if renewed inflation prevents full recovery from the present reces-
sion.
Severe economic problems -- whether rapid inflation or
prolonged recession -- do rot necessarily lead to major social un-
heaval or radical political change. But history does suggest
that such situations tend to weaken popular confidence in the
existing political and social systems. Hence, many observers are
concerned about the political and social repercussions of Western
Europe's economic problems. For example, SOMe fear the rise of
militart leftist coalitions bent on protecting the workers from
the full effect of recession; others worry about a major shift
to the right, including the rise of authoritarian governments
bent on correcting inflation and preserving order at almost
any cost.
The underlying concern is that the continued inability
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of democratic governments to facilitate relatively steady growth
without massive inflation and/or deep recession would pose a serious
challenge to democratic Lnstitutions, and lead to the erosion of
free market economic policies.
In short, the concerns are widespread and sometimes
mutually contradictory, but in one way or another they reflect a
feeling that the political-economic situation of Western Europe
has gone beyond the comfortable Parameters of the oast several de-
cades. The foundations of governments, financial systems, industrial
and intergovernmental relations are seen to be shaken. Confidence
in a serene future seems extraordinarily low.
II. ONE INTERPRETATION OF THE ROOT OF THE MALAISE*
The Great Depression of the 1930s was something of a water-
shed in public perception of the role of government in economic
affairs. Before then, in most European countries, government's role
was largely confined to promoting political order and protecting
national interests (including economic interests). Government's
role in internal economic affairs usually was the relatively restricted
one of raising revenue for its own purposes and mediating some of
the conflicts between competing interest groups. But the length
*It Is recognized that this analysis is oversimplified and omits a
number of contributing factors, but this is dors deliberately in the
interest of brevity. It is further recognized that there are
almost as many interpretations as there are students of the world
scene, and that many will not agree in whole or in part with this
one.
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and severity of the Great Depression, combined with the enormity
of the conflict which ended it, led most of the democratic and
not-so-democratic governments of the post-war period to change
their perceptions of the necessary economic role they should play.
Almost everywhere in Europe and in other developed areas, -full
employment" became a prime concern of post-war economic policy,
because many feared another depression above all else.
Along with the popularly accepted need for governments
to manage economic policy to ensure "full emoloyment" came an
expanding role for government in terms of Promoting and ensuring
social welfare -- i.e., not only jobs, but health, housing, and
the care of the poor, aged, or helpless. And in almost all the
countries of Western Europe, such policies seemed to work better
than most peoole had ever hoped. Real incomes rose markedly and
fairly steadily for most groups; general welfare improved and
unemployment stayed low. The swings of the business cycle weie
muted and in most countries social conflict, though eliminate,.?,
also was assuaged by the fact that the economic ID,1 ue
enough so that practicalll, every group benefited.
Since practically everyone came to anticipate and eoe:c2
on further gains, European governments could not be elected or
hold onto power unless they could promise continued substantial
improvements in popular well-being. In the process, the governments'
scope and shereof total expenditures grew. So die the public's
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expectation that government could ameliorate social injustice
or inequity if only it adopted the orooer oolicy. Thus, in effect,
the orocess of resource allocation became highly politicized.
There were, however, several other significant changes.
Before the Depression, employment, output, and =ices in a given
country generally rose or fell together and at least one or more
of the major economies were usually in the upswing part of the
business cycle while one or more of the others were in the downswing.
Hence, international trade and financial ties tended to mitigate
the effects of the cycle. Since World War II, however, the
general price level has rarely if ever fallen in any major country
even in a recession (although it did rise more slowly in recession
than in boom). And over the years the business cycles of many
countries began to coincide.
The general Prosperity enjoyed since the 1950s was
accompanied by a marked increase in international economic inter-
dependence on the part of practically every European country and
much of the rest of the world. Formation of the EC both reflected
and promoted this interdeoendence which further served to stimulate
economic growth, and to create in effect a real "world economy"
where events in any major country had an impact on the others.
By the early 1970s, many had come to fear it was vir-
tually impossible for a developed country to enjoy low unemployment
levels (as popularly defined), high levels of plant use and output,
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and relatively stable price levels. Many came to see an unavoid-
able connection between inflation and full employment. Efforts
to dam b inflation caused a rise in unenrbloyment and few governments
could keep such "stabilization measures in effect lona enough
to end either inflation or the expectation of inflation. None
could survive if it held on until it became the poc...lar belief
that the government itself was prolonging the ensuing recession
and with it, politically unacceptable unemployment. Moreover,
social welfare payments accounted for a growing share of government
spending, even in time:: of shrinking revenues.
Thus the expectation of chronic inflation grew -- as
did the acceptance of such inflation as a necessary concomitant
to substantial improvements in consumption levels and general
economic well being. In recent years, this pooui=r anticipation,
combined with the practically simultaneous upswing in the business
cycle in much of the industrial world, helped to cause inflation
rates to rise.
With the qualified exception of Germany, unemployment
was still more feared than inflation, although rates of inflation
were unprecedented in many European countries. And so long as
inflation was considered the lesser ot these evils in countries
where powerful social groups had come to expect ane act on
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the anticipated further inflation, the phenomenon fed on itself.*
Then camP the "oil chocks of 1973-1974 -- when in the
space of months, the cost of oil quadrupled. This had both an in-
flationary and deflationary imact -- inflationary in terms of
domestic costs and prices and deflationary in terms of economic
activity and the balance of payments since it drained purchasing
power out of an economy. That shock increased the need for 1-ro-
found change in most European economies, and indeed the whole
irdustrlal world was suddenly faced with high-cost energy. But
structural change** is always difficult politically- because the
burden fails unevenly or different social and economic groups.
Now, with the added problem of recycling tl.a oil-producers' surplus
revenues, of the vastly greater degree of nternational inter-
dependence, and of the suddenness of the shift in costs of
energy, structural changes arc-, likeiv to be even more difficult
and divisive.
CPYRGHT
-1*--T'In modern cost - push
upward even before emolm,
utilized. To clamo down
such inflation will only r
But not to ,act is to accer
into a canter or galloo."
McGraw-Hill 1973, p. 837.
CPYRGHT
inflation, Prices and wages begin to cree
nt is full and industrial capacity fully
I monetary an..: fiscal ?olicy to fight
?suit in unemployment and stagnation.
: creeping inflation that may accelpro
rata A. :lamuelson - Economics, 9th Ed.,
** For purposes of this paper, structural change means basic or
fundamental change in political, economic, or social patterns of
activity to adjust to or to overcome a major problem or bottleneck --
e.g., a shift away from high energy cona.vption per unit of output.
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Moreover, in the past, necessary structural adjustments
took place largely in the private sector and governments were
not called upon to manage thum directly and in detail. Now the
role of government in the economy is considerably greater: not
only is it expected to mitigate hardship and provide for social
welf7.1re, but in many cases governments Elso control policy towards
natural resources and food. Moreover, the nascent confrontation be-
tween industrialized countries and the producers of many important
raw materials is likely co make it much more difficult to exnand the
suPply of such comnodities or ensure orderly markets for them.
Thus, Western Europe as a major part of the indus-
trial world is confronted with the need for 7tructural change
while exPeriencing high inflation rates and the deepest recessior.
since the Great Depression. A number of observers fear that national
efforz3 to end the recession will result in a Great Inflation
by tIA: late 1970s, which will, in turn, have enormous impact on
European society and polity in terms of national entities and
as a community.
The scenario for thic fear goes sometning like this. The
current recession was caused largely by the previous world-wide
boom and its accompanying inflation which in turn caused severe
bottl-necks in critical supplies, rising costs especially in wages,
and reduced growth of real consumer income despite pay increases.
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Governments also imposed restraining policies in varying degrees
i.e., fiscal and monetary measures designed to slow the boom. E'Lnce
practically the whole world was booming at the same time, when
the turnaround came, it too was widespread and severe. Now
practically all the major countries are trying to reduce the
resultant unemployment which, however each nation measui it, has
risen alarmingly nearly everywhere. Reflation, already begun in
some countries, starts from still high rates of orice inflation,
and unless handled with great skill, it will cause even greater
inflation throughout most if not all the industrial world by 1977
or 1978.*
Some fear the next round will be hyper-inflation --
rates far higher than those which seemed so shocking in 1974.
They argue that the economic policies which seemed so successful
over the past two decades can no longer work because expectations
have changed. Such policies have lost credibility; individuals
and businesses act on the assumption that inflation is inevitable
and thereby help make it so. Moreover, they argue, no popularly
* Simultaneous upturn means that most countries find their domestic
boom reinforced by rising demand for their exports from others in the
same position. This could quickly strain capacity enough to cause
rapid inflation.
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elected government in Western Europe can long survive if it de-
liberately imposes a cut in the real income of a politically
powerful segment of the society.
Thus, for these pessimists, the future offers only
rising inflation or stagflation as governments make ineffectual
attempts to control inflation which result in the stop-go syndrome
25X6 Prolonged stagnation of real
income, in countries which have become thoroughly accustomed to
rising consumption levels and imoroving social welfare, would pose
a threat to democratic political institutions. The system would
no longer be able to deliver on its promises -- in frustration voters
might turn to chose who promised economic health but at the expense
of democratic traditions, especially if real popular concern fcr
and commitment to familiar institutions had waned.
III. IF THE PESSIMISTS ARE RIGHT?
How would rising inflation be likely to affect Western
Europe if it should persist over a long period? Or if it should
turn into a stop-go syndrome that resulted in prolonged stagnation
of output combined with persistent inflation? Such questions seem
worth exploring even though this paper does not predict the answers
with any certainty.
Traditionally, inflation has had considerable social,
economic, and political impact on individual countries. Not all
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of it bad, however. The industrial world has experienced in-
flation at greater or lEsser cates for most of its history.
(The pound sterling was once worth exactly that.) Socially: the
helpless -- those who cannot increase their money income for either
personal or political reasons -- are the worst hurt. They will
usually include the aged or others living on fixed in-mes, the
very poor, and those employed in declining sectors of the economy.
Economically, holders of assets fixed in money terms suffer much
from persistent inflation because the purchasing power of their
money earnings declines. Small businesses and middle-income groups
are likely to be badly affected. Where taxes are progressive and
efficiently collected, the real tax bite rises as money incomes
rise. Both business and consumers suffer a decline in real buying
power or profits. But not everyone or every sector of the economy
is equally affected and some will gain: e.g., those who correctly
anticipate inflation, those who are in the gaining sectors of
the economy, those who speculate successfully.
In short, rapid inflation produces both social and eco-
nomic inequities and imbalances as the lucky or clever gain and
others lcse. It also tends to produce the seeds of recession as
business options become less and less constructive while investment
capital flows towards speculative opportunities not all of which
will be productive.
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The worst case is when faith in money begins to be lost.
Unless checked, anticipation of rising money costs becomes
self-fulfilling: no one is willing to save or hold money or debt.
This change is Psychological as well as economic. With it comes
total distrust of money (and of the issuing government) and demand
for quick change. People. !replace government money with something
else ? cigarettes, potatoes, paintings, etc. ? and there is a
large re-distribution of real wealth. Faith in government and other
social institutions is lessened or, in some cases, totaily lost.
It may be, however, that the industrialized countri,--:4 are
learning to adjust to high inflation rates. Ten years ago, few in
Western Euroce would have thought 1974 inflation rates would have
been possible in pe:-,:etime without major social and political upheavals.
British and Italian rates -- 20 percent or more ? would have seemed
intolerable. Yet, Western Europe has coped with the economic malaise
of the past few years without major soc: :1 or political upheaval.
But no one can be sure that chronic high rates of inflation can
continue to be accommodated if they persist.
The most critical factors appear also to be the most
elusive ? that is, individuals' attitudes and perceptions. These
psycho-cultural factors include social cohesion and faith in
institutions, especially in the ability of government to manage.
On this hypothesis, the outlook for the major West European
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countries if they experience continued high rates of inflation or
stagflation differs considerably: the most endangered would be
those which have the deepest social cleavages and antagonisms
and in which the most is expected of government.*
If, as postulated, social cohesion is critical for
political stability in a democratic country confronted with pro-
longed inflation or stagnation, then the United Kingdom would
seem to be running grave risks. Its economic performance has
been poor to dreadful for years -- very slow growth, low levels
of investment, and high rates of inflation. Its economy is in
great need of structural change which can only be obtained through
high levels of investment in competitive sectors -- yet mud. of
the investable funds are spent by government in shoring up ob-
solescent firms to preserve the jobs they provide, e.g., in steel
and automobiles.
Not only has organized labor been aggressive and power-
ful in pushing its case for higher wages (wage rates have risen
by about one-third in the past year), but it has stressed re-
distribution of income and been almost totally uninterested in
raising output. In effect, the focus has been on the status of
class or group, with little or no concern for the society as a
whole. Long-standing class divisions and antagonisms run deep,
* It is not the purpose of this paper to assess prospects in
individual European countries but only to suggest what the
critical factors in a few may be.
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though this is often denied or discounted.* There is little or
no national consensus on what needs to be done, yet widespread
concern about what ccmtinued inflation (now over 20 percent a
year), low productivity, and rising government spending may bring.
Paradoxically, the more ineffective government becomes
(in terms of achieving even economic stability let alone growth)
the more seems to be demanded of it (in terms of jobs, welfare,
and social equity) and the less confidence is placed on it. Public
apathy concerning parties, elections, and leadership seems to have
deepened over the past few years.
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Soeculation about the consequences of prolonged infla-
tion :)r stagflation elsewhere in Europe is even more difficult.
Major social strains persist, although they have largely been
held in check by the rising prosperity of recent decades.
The still numerous French peasantry and petite bourgeoisie
have not enjoyed a full share of the economic giinE since the war,
and large numbers of skilled and unskilled workers still see themselves
engaged in a class struggle with major embloyess. Moreover, farmers
an'z:ma3.1 shopkeepers have been badly hurt by the current infla-
tion. Prolonged stagflation would deeply affect the whole middle
class. Nevertheless, the Fren-h economy is in far better shape,
and the French government far more effective, than is the case for
the U.K. or Italy.
Should high inflation or prolonged stagflation occur, how-
ever, then the frustration of popular expectations for full em-
ployment, improved living standards and gradual amelioration of social
stresses raises the chances for another outbreak of mass violence
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and disaffection like those of 1958 and 1968. Discontent among
the military would probably add a further disconcerting element.
In such a situation, France might be strongly tempted to seek
a charismatic strongman (another deGaulle?) who could cope.
For all its pressing economic and political problems,
Italy at least has the advantage of great cynicism about its
government. Italians have achieved considerable economic growth
and social modernization in the past two decades in spite of govern-
mental ineptitude, rather than because of any central direction
by a succession of governments.
The Italian economy is, however, in deep trouble. The
rise in oil prices hit it very hard, output has dropped, un-
employment is rising rapidly. Inflation has been severe. Labor
has recently insisted on and obtained sizeable cost of living and
other payments which will strain industry's and the government's
ability to cover. Thus, the outlook is for both continued high
inflation and unemployment for a considerable period. And, if the
rest of Europe is slow to climb out of the recession, as seems likely,
returning migrant workers will continue to add to the unemployment
problem.
Such returning migrants wo..ld add to the persistent social
strains in the more prosperous northern areas of Italy. There, the
millions of southerners who have moved to the cities have never
really been integrated into the northern society. Worsening economic
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troubles would seriously hurt such groups and be translated into
political malaise.
Italy may be on the verge of a general political crisis
of a graver order than the many governmental crises of the past..
Massive armunist gains in the last elections threaten the political
arrangements that have existed since 1948. Lnleos, Communist concerns
are at least partially accommodated, Italy may become totally un-
governable. Prolonged inflation or stac7flation would greatly
complicate any attempts to sort out the new political alignments
and develop workable governing mechanisms.
The more southern European countries -- Spain, Portugal,
Greece, and Turkey -- will probably experience worse economic
troubles than the more industrialized north if high rates of in-
flation persist. Their economies are already weaker and they will
have the additional burden of reduced remittances from migrant workers
and the return of some of these redundant workers from the north.
But they have long faced severe political 4nd social prob-
lems. Prolonged inflation and economic malaise, while heightening
other difficulties, would be less likely to cause new problems for
these societies than it would in the more stable and prosperous
north of Europe.
In sum, it is impossible to predict how individual coun-
tries would weather prolonged inflation or stagflation. Too
much depends on unknowable social and political interactions and
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circumstances. Suffice it to say that such economic malaise would
worsen whatever social strains existed and, at least in some cases,
increase the chances of drastic political change as well.
Ty. WHAT OF EUROPE AS AN ENTITY?
Assuming prolonged inflation or stagflation that led to
serious domestic political and social problems, most (perhaps
almost all) of the European countries would probably turn inward
to concentrate on internal problems. Whether or not individual
countries moved left or right, there would be strong pressures under-
mining European unity, and probably a rapid decline in willingness
to spend money on mutual defense. Each would be tempted to
resort to nationalistic attitudes of sauve aui Peut including
import controls, competitive devaluations, etc. There have been
a few signs of such protectionist attitudes already -- Italy imposed
a form of import control in 1974, he U.K. has considered fairly stiff
measures to help protect its balance of payments. Several countries
have strongly discouraged migrant workers as unemployment rose,
and one or L.1.40 have cut their military budgets. In the face of
economic nationalism, por.tical loyalty to the concept of Europe
as a community would be very hard to maintain. Support for NATO
could be an early casualty.
In some countries, a decline in national cohesion would
reinforce ethnic or regional or class demands, e.g., Scottish
and Welsh separatism, unrest in Brittany. The whole political
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focus could shift away from the nation-state which some in these
societies see as designed more for developing empires than for
promoting socio-economic equity. The process may already have
begun: the present strength of Scottish separatism would have
seemed an unbelievable joke to most observers of the U.K. as recently
as five years ago. In the face of prolonged popular frustration
and/or stagnant living standards such movements could get stronger
as faith in central governments diminished and smaller entities
seemed to promise more political and cultural, if not economic,
rewards.
Perhaps the worst case, from the point of view of
European cooperation, would be a breakdown of social and economic
order. For example, organized labor digs in and refuses to accept
reductic,ns in real purchasing power. Mass strikes and mutual labor
support across national boundaries produce severe disruption of
essential services. The resulting chaos could then lead to the
suspension of parliamentary rule in favor of temporary rule by a
charismatic strongman, calling out the troops to restore essential
services etc. The new technocrats or managers might be attracted
to some form of authoritarian rule in which private consumption
and social welfare would be considered important but subordinate
to stability and order. The same sort of technocratic fascism
could result from a bad case of hyper-inflation leading to economic
chaos. Under such circumstances, pressures for economic and even
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political autarky would be high. In any case, national problems
would eclipse interest in regional cooperation and mutual defense.
The most favorable possible course for a Western Europe
faced with severe and prolonged economic stress would be a Prompt
appreciation of the common danger that engendered cooperative efforts
led by the US be...ause of its size and Germany because of its relative
economic health. It is possible that the 1974-75 inflation and
recession will mark another turning point in the way people and
governments view inflation and consumerism -- just as the Great
Depression marked a shift in the attitudes towards unemployment.
Control of inflation may come to be the primary goal of govern-
ment economic policy (supplanting that of full employment). At the
same time, emphasis on economic growth and constantly rising real
incomes might be at least partially replaced by concern for equity
and stability. Such shifts in public attitudes might then ease
the difficult process of adjusting to global economic realities --
helping to slow inflation and cope with focd and raw material
scarcities by reducing demand. Such basic changes in social and
economic attitudes, however, are unlikely to come about without
a period of severe stress.
What happens to Europe over the next 5-10 years will, of
course, depend heavily on what happens in the rest of the world
:economy. If the US and Japan recover from their recessions without
reverting to rapid inflation, for example, it will be much easier
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for Europe to follow suit. If the Third World demands for a new
economic order more to its liking remain largely unmet, then the
structural economic chal,ge needed in Europe will be smaller and
less difficult for its governments to achieve.
By the same token, what Europe did in response to per-
sistent inflation would affect the rest of the world. European
countries might try to strengthen their unity in the face of severe
economic problems. There is some talk of a Euro-Mediterranean
-egion that would include a number of OPEC oil producers and might
become relatively independent of the rest of the world. Europe
would employ the oil-producers' surplus revenues to make the invest-
ments necessary for structural change, and then repay its debts
with the additional product such investment engendered by helping
the LDCs in the group to industrialize and modernize their economies.
If successful, a relatively closed economic region like this would
tend to push the US and Japan to form similar regional groupings --
say North and South America in the first case, and Greater I a in
the second. The breakdown of the current interdependent world
economy into such regional economies would have enormous impact on
existing financial and trade problems, with a generally detrimental
effect on economic well being, as well as on internattaal polit-
ical relations. While such a scenario seems unlikely, it is
at least thinkable.
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V. SOME IMPLICATIONS FOR THE US
This paper does not Predict either a gloomy or a san-
guine future for Western Europe. Nonetheless, there are troubling
possibilities for the rion with potentially serious implications
for US interests. A prolongation of rapid inflation or stagflation
in a given countr: would probably seriously challenge political
and social cohesion and make it even more difficult to deal with
the economic problem. The resultant weakening of the political
and social fabric could lead either to national debility or to
relatively authoritarian attempts to cope. In either case, the
affected countries would probably turn inward, at considerable cost
to European cooperation, to the functioning of NATO, and to the
well being of the industrial nations as a group.
If developments in Europe are of a worst case nature,
the familiar arrangements to which tha US ha. become accustomed
will disappear. This would be highly troublesome tor US policy-
makers used to decades of stability and inherent predictability in
so much of Europe.
Analogous questions or problems could be anticipated for other
major countries.
Under such circumstances, the US would have to
deal with a whole new Europe. The proliferation of deeply
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troubled, highly nationalistic, or provincially centered govern-
ments would not only be individually different and difficult for
the US to deal with, but intensified economic and political ma-
petition among states would cause additional problems. US efforts
to gain comeration on what are now joint interests -- in economic
coordination and general internat:Lonal issues like relations
with the Third World and nuclear proliferation -- would be greatly
complicated. Moreover, the whole basis and rationale for NATO
could be eroded, with incalculable effects on US-Soviet detente
and on East-West relations within Europe.
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