EUROPEAN REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00289R000301150001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 22, 2016
• Document Release Date: July 8, 2011
• Sequence Number: 1
• Publication Date: August 1, 1986
• Content Type: REPORT

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Directorate of
Intelligence
M MUM FILE COPY
DO HOT GIVE OUT
OR MARK ON
European Review
1 August 1986
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European Review
United Kingdom: Maintaining the 50-Ship Commitment to
NATOF__1
Austria: Green Party Formed
San Marino: New Governing Coalition
Turkey-Bulgaria: Minority Dispute Persists =
East Germany: Strengthening Nuclear Safety=
Romania: Further Reshuffling in the Foreign Ministry
Yugoslavia: Considering the MIG-29 F_~
Articles Socialist International: The Lima Conference
The 17th Socialist International Congress in Lima last month-its
first in Latin America-was only a partial success, and its
deliberations were overshadowed by terrorist violence and the
suppression of prison riots in Peru. The congress focused on Third
World economic problems, disarmament, protection of the
environment, and regional conflicts. Several leaders departed early,
and the congress ended in confusion without formally approving the
Greece: An Update on Military Modernization
Much of Greece's modest but steady program of military
improvements over the last 15 years has been directed toward
strengthening its capabilities against Turkey. Although these
improvements also have increased Greece's capabilities to meet the
Warsaw Pact threat, its forces will fall short of NATO standards
and would need substantial Allied assistance to perform wartime
NATO missions
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STAT
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Viewpoint
Looking Ahead
France: Modernizing the Financial MarketsF___1 13
closely in tune with that of the United States.
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The French Government over the past two years has engineered a
near revolution of French financial markets. These reforms should
also better equip France to compete in the face of worldwide capital
market integration and bring the French financial system more
Poland: The 10th Party Congress
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political and economic success.
The recent Communist Party Congress strongly endorsed party
leader Jaruzelski's contention that Poland is fast returning to
normal despite continuing economic problems, an active
underground opposition, and a hostile but resigned populace.
Despite the superficial calm at the congress, Jaruzelski still has a
long way to go in implementing policies that will make his regime a
Western Europe-United States: Differences Over Policy Toward
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Libya Reveal Deeper Splits Within the Alliance
Some articles are preliminary views of a subject or speculative, but
the contents normally will be coordinated as appropriate with other
offices within CIA. Occasionally an article will represent the views
of a single analyst; these items will be designated as uncoordinated
views. Comments may be directed to the authors
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European Review
Maintaining the 50-Ship Commitment to NATO
Defense Secretary George Younger has announced that the Royal Navy will
receive three new Duke-class, Type-23 antisubmarine frigates to help maintain its
50-warship commitment to NATO, according to the US Embassy. The ships will
be fitted with the new Type-2048 towed array sonar, which will improve the
Navy's passive-detection operations against Soviet nuclear submarines. The
frigates will also carry a medium ASW helicopter, replacing the light helicopter on
earlier ships, the new one having a greater combat radius and an independent
search and attack capability. Although Younger has stated that the government
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problem.
Younger was under considerable pressure from Cabinet colleagues to order three
ships to help ease the severe unemployment problem plaguing Britain's
shipbuilding industry. Two ships will be built at the Yarrow shipyard on the Clyde
River and a third at the recently "privatized" Swan Hunter Yard on Tyneside.
This is the first new order for British warships in nearly 18 months. Each frigate
will cost about $175 million, and the total order will provide about 10,000 jobs for
the depressed shipbuilding industry. While the contracts will not materially arrest
the industry's declining fortunes, it may temporarily counter the opposition Labor
Party's criticism that the Thatcher government is insensitive to the unemployment
service of its aging fleet to carry out its NATO commitments.
intends to maintain a fleet of about 50 warships, the number of frigates to be
ordered in any one year will continue to depend on the Defense Ministry's
financial resources. As Britain's defense budget continues to decline, the Royal
Navy will probably be forced to rely even more heavily on programs to extend the
Green Party Formed
spelling the end of the current coalition government.
If the Green ticket holds together, it could play the spoiler in next April's federal
election. Some Green votes almost certainly would come from the left wing of the
ruling Socialist Party, which is already suffering from voter alienation after 16
years in office. Others would probably come from the junior coalition partner, the
Freedom Party (FPO). The FPO, which traditionally has benefited from protest
votes directed against the two larger parties, is already losing popular support
through discontent with the leadership, internal division, and dissatisfaction with
the party's current role in the government. Further defections could drop the
Freedom Party below the minimum required for entry into the Nationalrat,
percent of the vote in the first ballot in May.
Past efforts at cooperation have foundered over profound personal animosities
among factional leaders, as well as the ideological differences between the more
conservative Greens, who wish to concentrate on environmental issues, and the
more radical Alternatives, who want to represent all sorts of fringe and minority
groups. The presidential candidacy of Freda Meissner-Blau demonstrated that a
substantial protest vote is available to an ecological ticket when she polled 5.5
at the national level, largely because of its inability to form a united front.
at a convention in October in Hainburg. Although nearly 300 environmentalists
and alternatives already sit on municiple councils, and one even has entered
Voralberg's provincial parliament, the ecological movement has had little impact
Austria appears likely to see a united environmentalist ticket in the federal election
next April. Three of the country's fledgling ecological groups-the Alternative
List, the Green Alternative Assembly, and the Citizens' Parliamentary
Initiative-have agreed to terms for a joint party, which they will ratify formally
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San Marino New Governing Coalition
Agreement to form a governing alliance between the Christian Democratic and
Communist Parties in the tiny, ancient, landlocked Republic of San Marino (one-
third the size of the District of Columbia) is sending political tremors into the
surrounding Italian polity. The outgoing leftist governing coalition formed by the
Communist Party, the Socialist Party, and the Unitary Socialist Party fell on 11
June when the Communists withdrew over the involvement of some members of
both socialist parties in kickback scandals and evasion of Italy's currency export
controls and value-added tax provisions.
The US Consulate in Florence reports that the San Marino Christian Democrats
(who hold 26 of 60 seats) have been out of power since 1978 and appear determined
to forge the unprecedented governing alliance with the Communists (who hold 15
seats) to the point of giving the Communists five of 10 cabinet posts. No party is
prepared for immediate elections, and rancor between the Christian Democrats
and the two socialist parties precludes a coalition among them. The Consulate also
reports that the San Marino Christian Democrats have received the blessing of the
Italian Christian Democratic Party to pursue the alliance. This alarms some
Italian political observers who worry that events in San Marino may augur
increased willingness on the part of Christian Democrats to consider governing
arrangements with the Communists in Italy.
Turkey-Bulgaria Minority Dispute Persists
Prime Minister Ozal's public complaints in mid-July about Bulgarian treatment of
its ethnic Turkish minority-and Bulgarian retaliations-have heightened the
visibility of Turkish-Bulgarian differences but probably do not reflect a major
increase in tensions. Other developments also have highlighted the dispute. These
include emotional statements by Turks of Bulgarian origin before a Council of
Europe meeting in Istanbul in early July and Bulgarian Embassy harassment of
Bulgarian Turkish demonstrators in Ankara. As a result, Turkish officials and
politicians, as well as several Western ambassadors, boycotted farewell ceremonies
for the outgoing Bulgarian Ambassador to Ankara.
Ozal's recent outspokenness partly arises from posturing in preparation for 11
parliamentary byelections this fall. It also reflects public outrage at Bulgaria's
actions and Sofia's continued refusal to allow outside observers any access to the
ethnic Turkish areas. Relying on active US support, Turkey will continue to raise
the issue in appropriate international forums as opportunities arise. Ankara,
however, has not yet devised any comprehensive plan for resolving the issue in the
face of Bulgarian denials that any minority problem exists.
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East Germany Strengthening Nuclear Safety ~
East Germany appears increasingly committed to improving nuclear power plant
safety since the Chernobyl accident. East Berlin agreed in May to cooperate with
West Germany on safety and accident-reporting procedures
provided 11 percent of the country's electricity in 1984.
East Berlin's concerns go beyond offsetting the domestic reaction to its clumsy
handling of the Soviet accident. Its four main operating reactors are of an early
Soviet design different from those at the Chernobyl plant, but they are not
designed to contain a radioactive release. A Finnish firm-I.V.O.-that operates
and markets Soviet reactors modified with Western safety technology will offer
the best solution to improving the safety at existing plants. East Germany remains
committed to reducing its dependence on increasingly expensive and highly
polluting lignite and has six advanced reactors under construction.
Romania Further Reshuffling in the Foreign Ministry
A major shakeup in the Foreign Ministry begun several years ago reportedly is
continuing with the replacement of experienced diplomats with party apparatchiks
and security officials less friendly toward the West. the
changes-symbolized by the replacement of longtime Foreign Minister Andrei by
the relatively inexperienced Vaduva last year-are accelerating. They suggest that
President Ceausescu's wife, who appears to be assuming increasing authority over
both policy and personnel matters, is behind the shifts.
The changes in the Foreign Minister mirror Ceausescu's tendency in recent years
to replace experienced administrators with party hacks loyal to the President and
his family. He has become less tolerant of officials willing to bring him bad news
or to recommend policies at odds with his own preferences. Mrs. Ceausescu
probably is exploiting her husband's increased suspiciousness and xenophobia by
recommending officials whose careers were shaped by the party apparatus she
controls. This has abetted erratic domestic policies and now probably will lead to
less adroit foreign policies as well.
The new officials appear committed to maintaining Bucharest's nonconformist
stance in foreign policy, but they deeply resent Western criticism of Romania's
human rights record and may be more sympathetic to Soviet perspectives on world
affairs. They probably will be less capable of explaining Western concerns to
President Ceausescu and are likely to recommend less responsive policies. The
USSR almost certainly will try to take advantage of any cooling in Romania's
relations with the West to nudge Bucharest back into greater conformity with the
Warsaw Pact.
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Yugoslavia Considering the MIG-29
The Yugoslavs are moving toward a decision on what could be their first major
weapons purchase in several years as they eye some 20 to 40 Soviet MIG-29
fighters. Belgrade is weighing the MIG-29 as a stopgap until it begins serial
production of its own advanced fighter in the mid-1990s. While the Yugoslavs
need a fighter like the MIG-29 to replace some of their aging MIG-21s, they are
almost certainly bargaining hard to minimize Soviet influence and extract the best
financial terms possible. The negotiations coincide with talks with the West over
joint production of an advanced fighter and reflect Belgrade's interest in balancing
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The Yugoslavs are looking to the West for their longer term needs. Belgrade hopes
to incorporate sophisticated Western technology in the production of their own
planned fighter-designated the Novi Avion-and have been negotiating for a
year exclusively with Western firms and governments over the terms of a
ai %,
hoping that a British firm will design the airframe and a US companyy will s
upply
the engine. Negotiations have bogged down recently over restrictions on
technology transfer and control over exports, and an agreement seems unlikely any
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Socialist International:
The Lima Congress
The 17th Socialist International (SI) Congress in
Lima in June-its first in Latin America-was only a
partial success, and its deliberations were
overshadowed by terrorist violence and the
suppression of prison riots in Peru. The congress
focused on Third World economic problems,
disarmament, protection of the environment, and
regional conflicts. Willy Brandt of West Germany
and Pentti Vaananen of Finland were reelected
President and General Secretary, respectively. A
number of prominent SI leaders such as Felipe
Gonzalez of Spain did not attend, and security
concerns led the prime ministers of Israel, Sweden,
Norway, and Italy to cancel planned appearances.
Other leaders departed early, and the congress ended
in confusion without formally approving the "Lima
working group on debt, however, such as the creation
of a new international debt organization to resolve
debt servicing problems and limiting debt payments to
a percentage of export earnings did not appear in the
final document. SI President Brandt has said the debt
issue will remain the central theme of future SI
to the wealth of the rich nations." Particular blame
for the Third World debt crunch is placed on private
bank financing exacerbated by the "monetarist
assault on inflation in the United States." It claims
that nothing has been done to deal with underlying
causes of the crisis. Proposals recommended by the
The Socialist International and Its Congresses
The Socialist International dates from a congress
held in Frankfurt in 1951. Originally consisting
mainly of European parties, the SI has expanded its
membership in the Third World, notably since Willy
Brandt became president in 1976. The main
policymaking body is the congress, which meets every
three years. In the period between congresses policy is
determined by a bureau that meets twice a year. The
next bureau meeting will be held in May 1987 in
Italy.
SI congresses are primarily public relations
operations, but they do provide an occasion for
members to make contacts, exchange views, and 25X1
promote special interests. Members are often quick to
blame the United States for world tensions, and
congress resolutions often have an anti-US tone. In
the past year or two, however, SI positions on arms
control and Latin America have become less one
sided.
of the debt crisis since the 1973 oil-price increases and
warns that "the debts of the poor nations are a threat
Foreign Debt
Peru's President Garcia made the debt problem the
central focus of his welcoming speech, and this issue
dominated much of the congress. About a third of the
concluding manifesto is devoted to a lengthy analysis
meetings, but, given the divergent interests of the
membership, any agreement on specific measures is
unlikely.
Arms Control
Arms control fits in well with the desire of SI leaders
to deal with important problems, and over the years
delegations from the SI's Advisory Council on
Disarmament and Arms Control (SIDAC) have
traveled back and forth between Washington and
Moscow to discuss security issues and arms control.
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The positions of the group are shaped heavily by
representatives from Austria, Japan, and the
Scandinavian countries, which have an especially
keen interest in arms control. The Lima Manifesto
echoes the most recent draft of SIDAC's
disarmament report in opposing SDI and in appealing
to Washington to abandon its negative stand on a
comprehensive test ban treaty. It calls for the United
States and the Soviet Union to eliminate nuclear
arsenals, beginning with a 50-percent cut. SIDAC
intends to continue to exert pressure on Washington
and Moscow to negotiate binding agreements at the
Geneva talks.
Regional Issues
Central America. The SI has been shifting its stance
toward the problems of Central America. A more
critical attitude toward Nicaragua has emerged since
an SI factfinding trip in February. The mission
returned highly disturbed about Sandinista internal
policies, especially on human rights, and made its
dissatisfaction with the situation public. The
resolution on Latin America approved by the congress
noted that the Sandinista government "has not yet
fulfilled its objectives of achieving nonalignment,
pluralism, and a mixed economy," but continues to
take the United States to task for supporting the
Contras and other "destabilizing" actions. In El
Salvador the SI has come to view the election of Jose
Napoleon Duarte as part of a genuine democratic
process there, and criticism of the US role has
decreased markedly.
Southern Africa. The SI congress reiterated Brandt's
call for an end to apartheid and for tougher economic
sanctions against South Africa. The linkage between
Cuban troop withdrawal in Angola and Namibian
independence is termed "unjustified," and the
manifesto calls for support for the African National
Congress, the South-West Africa People's
Organization, and the United Democratic Front.
Other Issues. In taking note of other world trouble
spots, the declaration expressed concern over the
protracted Iran-Iraq war, welcomed "people power"
in the Philippines and the pressure for democratic
reform in South Korea, and reaffirmed SI solidarity
with democratic forces in Chile and Paraguay. It also
condemned the Soviet occupation of Afghanistan and
the deteriorating situation of Soviet Jews. The
document mentioned the Chernobyl nuclear reactor
disaster in the context of the SI position that all states
have the right to be informed about nuclear accidents.
Outlook
SI members believe they can play a useful role in
promoting peace and stability worldwide, but the
organization is likely to remain ineffectual in helping
to resolve specific international problems. It tends to
seize upon issues, only to move on to something else if
they prove difficult to resolve. Terrorism currently is
attracting members' attention, and an Italian socialist
party representative has been charged with the task of
forming a new committee on the Mediterranean and
terrorism.
In pursuit of its goal of building a worldwide
organization, the SI intends to develop relations with
the socialist parties of the small island states of the
South Pacific, where it previously has not been active.
Expanded membership over the past decade has come
primarily from Latin America, and the three new
parties admitted at the congress were from Brazil,
Bolivia, and Panama. European members, however,
are making an effort to be more selective about
offering membership because of past difficulties
created by smaller, extremist groups. General
Secretary Vaananen cited the Grenada New Jewel
Movement as an example of an SI "mistake."
A future problem on the horizon for the Socialist
International will be the search for a successor to
Brandt, who has been an active and influential
president during the past decade. The assassination of
Swedish Prime Minister Palme earlier this year
removed the leading candidate for the position. SI
meetings will continue to generate media coverage,
but without increased funding for its limited budget,
improved organizational efficiency, and continued
strong leadership, little can be expected in the way of
concrete accomplishments.
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Greece: An Update on
Military Modernization
Greece's "new defense dogma," announced in
December 1984 and identifying Turkey as the main
threat to Greek security, essentially has formalized
Athens's traditional anti-Turkish policy and shifts in
Greek military deployments that have occurred over
the past 10 years. The Papandreou government is
giving higher priority to this orientation than its
predecessors by channeling manpower increases and
equipment modernization to Greek forces in Thrace
and on the Aegean islands. The focus on Turkey has
limited Greece's cooperation with NATO and the
United States. Athens continues to refuse to
participate in NATO military exercises, has stymied
NATO's attempts to establish an Alliance command
and control structure in the Aegean region, and
presses its case against Turkey fervently in both
Alliance and US-Greek forums.
Table 1
The Greek Armed Forces
350
1,300
(750 pilots)
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Reconnaissance aircraft 34
Force Improvements Combat-capable trainers 85
As seen by Athens, Greece's long-term military Transport aircraft 75
planning is driven by two imperatives: the need to Navy
improve its capabilities against Turkey and the need Active manpower
to respond to NATO Force Goals in support of Destroyers/ frigates
NATO missions. A modest but steady program of Submarines
18,000
20
10
improvements over the past 10 years-particularly in Patrol boats/combatants 32
the Air Force and Navy-has substantially enhanced Amphibious ships 22
Greek capabilities against Turkey to the point where Mine warfare ships 16
we believe a rough strategic balance now exists
between the two:
? Turkey clearly remains superior on Cyprus where
its ground forces are better equipped and
outnumber Greek and Greek Cypriot forces by
2-to- 1. Greece, however, appears to have a
qualitative air and naval edge,
The Greek Navy is slightly smaller than the
Turkish Navy, but its ships and submarines
generally are newer and its large surface 9F X1
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? In Thrace, the numerically superior Turkish ground
forces
Force.
e Key Ureek
advantage lies in the quality and readiness of its Air
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The Greeks have ambitious modernization plans to
meet many of their NATO Force Goals, but we
believe the gap between their capabilities and those of
their Warsaw Pact neighbors is not likely to diminish.
Even with continued US military aid, Greek forces
will remain plagued by aging equipment
the Air Force will complete its
modernization program with the delivery of US Funding Problems and the US Aid Issue
F-16 and French Mirage 2000 aircraft starting in The major constraint on the scope and pace of Greek
? By 1990, most of the Navy's major surface ships
will have exceeded their service lives by 25 to 30
years.
military modernization will continue to be availability
of funds. The government's new austerity program is
likely to limit severely the availability of additional
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the primary Warsaw Pact threat to Greece would be
posed by Bulgarian ground and air forces, possibly
supported by Soviet forces from the Odessa and Kiev
military districts. Although the Romanians are
capable of supporting Pact combat operations in the
region, it is not clear what role they would play in
wartime.
The principal task of these forces in offensive
operations would be to penetrate Greek (and Turkish)
defenses in Thrace and to seize the ports and coast
along the Aegean Sea. They probably would also
assist in attempts to capture the Dardanelles.
the Bulgarian front, if not
reinforced by either Soviet or Romanian forces,
would probably concentrate on capturing and holding
positions in Thrace. If Soviet forces were moved in
strength to Bulgaria before the outbreak of
hostilities, the Soviets probably would have primary
responsibility for the straits area while Bulgarian
forces would concentrate on Thrace.
national funding to support military programs,
making the level of outside assistance even more
important. Aid from the United States in 1985 was
equivalent to more than 20 percent of the defense
budget. Despite US assistance of some $1.75 billion
over the last five years, Greek defense spending has
declined in real terms by over 1 percent since the
Socialists came to power in 1981. Defense spending
constituted 23 percent of the national budget in 1981
but only 15 to 17 percent in 1985.
The United States can expect continued strong Greek
pressure to increase its military assistance program.
Athens's request for FY 1987 totals some $1.5
billion-far in excess of the US proposal of $500
million-and encompasses the bulk of the programs
needed to implement Greece's NATO Force Goals.
At a minimum, the Papandreou government will press
for maintenance of the 7-to-10 ratio in aid to Greece
and Turkey. We believe Athens may try to gain more
by threatening to delay implementation of its
US base arrangements.
obligations under the Defense and Economic
Cooperation Agreement with the United States and
Continued Limited Role in NATO
Despite some recent positive signs-increased air and
naval force commitments to NATO's integrated
military forces, participation in the NATO early
warning aircraft program, and agreement to
participate in a noncombat merchant shipping map
exercise-the Greek relationship with NATO will
continue to be clouded by the Greek-Turkish dispute.
We believe Athens will hold firm in its boycott of
NATO combat exercises, on Aegean command and
control issues, and on other Alliance projects and
programs affecting both Greece and Turkey.
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France: Modernizing the
Financial Markets
The French Government over the past two years has
engineered a near revolution of French financial
markets. The final 18 months of the Socialist
government-ending in March-saw an
unprecedented freeing and rationalization of the
markets that should improve their efficiency and the
allocation of capital. These reforms will allow Paris to
control the money supply through open market
operations rather than quantitative credit controls.
They should also better equip France to compete in
worldwide capital market integration and bring the
French financial system more closely in tune with that
of the United States.
The Previous System
The French financial system traditionally has been
heavily regulated and rigidly compartmentalized.
Three distinct submarkets-a money market, a
mortgage market, and a securities market-operated
under different rules and the rates charged different
borrowers varied greatly. In addition, credit controls,
fixed fees, and regulated interest rates destroyed
competition among banks and brokers, raising the
cost of financial operations and reducing options for
The absence of a unified financial system responsive
to market forces also made monetary policy less
effective. Because, at most, one-half of all credit was
sensitive to market interest rates, large rate increases
were required to stem the demand for credit-
increases that threatened the solvency of many small
and medium-sized firms. Consequently, monetary
policy after 1972 relied mainly on quantitative credit
controls imposed on a monthly, bank-by-bank basis
with substantial penalties for banks exceeding the
limit. The controls were inefficient, however, because
some financial institutions were practically exempt,
some forms of credit were only partially controlled,
and the Bank of France was obliged to supply funds to
refinance export credits at fixed rates, guaranteeing
banks easy access to liquidity.
The Socialist Reforms
After decades of study and inaction by the right, it
was ironic that a Socialist government began
liberalizing the financial system. Under the direction
of Finance Minister Beregovoy, the government in
late 1984 began a series of financial reforms that
together constitute an almost revolutionary change.
Most of the impetus for reform came from economic
factors, although the desire to curb the monopoly
powers and privileged position of banks also played a
role. In addition to seeking greater capital market
efficiency, the government recognized that without
modernization France would be left far behind in the
competition for international financial business.
Moreover, the Socialists realized that streamlining
French financial markets would aid in the fight
against inflation and might also lower the
government's own substantial financing costs.
New Financial Instruments. One of the focal points of
the Beregovoy reforms was the creation of new
financial instruments, particularly in the short-term
market, to better suit the needs of both investors and
borrowers. This also tended to unify the market by
allowing capital to flow more freely and efficiently.
The chief reforms include:
? Opening a market in negotiable short-term
government bills-initially with maturities of 2 to 6
years-and the creation of certificates of deposit for
6-month to 2-year terms, with negotiable interest
rates for amounts greater than $750,000. Both
measures will provide firms, mutual funds, and
individuals with an important alternative to bank
deposits, and the competition should help lower the
cost of financing.
? Authorizing firms to issue commercial paper for 10-
to 180-day terms, thus giving them direct access to
capital markets and reducing their costs. A private
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credit rating agency, set up to evaluate the risks in
this market, should help provide the public with
more information about traditionally tightlipped
French firms.
? Allowing bond issues of less than $150 million
without prior authorization to improve bond market
access for small and medium-sized firms.
? Creating long-term, government-guaranteed,
mortgage-backed bonds similar to Ginnie Maes.
This should make more mortgage money available
and increase the liquidity of financial institutions by
allowing them to sell their real-estate-backed assets.
It will probably also give a boost to the beleagured
French construction industry.
Deregulating Financial Markets. A second goal has
been to relieve financial institutions of burdensome
regulations, allowing them to operate more efficiently
and respond more easily to competition. Among the
major reforms in this area are:
? Easing foreign exchange controls to permit more
French foreign investment, to give French firms
more flexibility in their international operations,
and to allow them more leeway to hedge against
foreign exchange risks.
? The creation of a financial futures market that will
enable companies to protect themselves against
changes in interest rates.
? The introduction of negotiable bank fees and
brokerage commissions to increase competition and
reduce charges to customers.
? The opening of a limited morning trading session on
the Paris stock exchange, as a step toward a system
of continuous trading. Related stock exchange
reforms include authorizing brokers to become
market makers by trading on their own accounts
and holding inventories and the creation of an
unlisted securities market.
? Treating interest, dividends, and capital gains
equally for tax purposes.
? Reducing the volume of government-subsidized
loans-from $40 billion in 1984 to just over $30
billion in 1986.
Improving Monetary Control. Beregovoy loosened the
so-called Encadrement du Credit, or system of credit
ceilings, and moved toward replacing it with a
regulatory mechanism based on depositing reserves
with the Bank of France. The object was to allow a
greater leeway in lending and to permit more effective
central bank control of the credit base. In addition,
the government imposed the same reserve schedule on
all banks. Eventually, the Bank of France hopes to be
able to transmit interest rate signals through its open
market operations to control credit growth more
quickly and effectively, although this may come at the
cost of more short-term interest rate volatility.
Outlook Under the New Government
The conservative Chirac government has taken some
steps to continue the reforms begun under Beregovoy,
notably the further easing of exchange controls. It has
also abolished the much maligned devise titre system
under which investors wishing to purchase foreign
securities had to pay a premium for the necessary
foreign exchange. Meanwhile, the Finance Ministry
has announced that, barring an unexpected increase
in inflation, it will abandon all quantitative credit
controls by 1 January 1987. It has also expanded the
maturities permitted for some bonds, commercial
paper, and certificates of deposit, and has permitted
banks to set their own hours.
Despite these initial steps and the free market rhetoric
of the Chirac government, the continuation of the
reform process is not assured, in our view. The
controlled financial system in France was, after all,
largely the ad hoc creation of previous conservative
governments. Although we believe the conservatives
will try to press ahead with financial deregulation,
they may backtrack in the event of resurgent inflation
or an otherwise deteriorating economic situation. A
key indicator of the government's commitment to
reform will be the speed with which it pushes
denationalization and the extent to which it
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Prereform Barriers to a
Dynamic Financial Market
? About one-half of all French credits were subsidized
through numerous channels at greatly varying rates.
Housing and exporters, rather than industry, were
the main beneficiaries.
? The medium- and long-term bond markets were
regulated to keep interest rates low, and credit was
rationed by a system favoring official or quasi-
official borrowers. Since small- and medium-sized
borrowers had little direct access to long-term
credit, they were heavily dependent on bank loans.
? Monetary policy relied primarily on credit controls
rather than reserve requirements and interest rates.
Controls generally heavily penalized any bank
growing faster than its allowed norm, preventing
more efficient banks from growing relative to their
competitors.
? The system created special deposit-taking
institutions-the Post and National Savings
Banks-that collected deposits and were required to
lend them to special borrowers or to retail banks.
This limited the access of some retail banks to low-
interest funds and made them vulnerable to small
interest rate changes.
? Most interest rates on deposits as well as banking
and brokerage fees were regulated.
? Firms and individuals did not have direct access to
the money market, but rather had to go through
banks.
? Short-term government liabilities could be held only
by banks. Financial markets were not innovative,
and savings instruments for small savers were
particularly limited.
? The Paris stock exchange was anachronistic, with
prices being fixed once a day in a brief afternoon
session, during which brokers matched buy and sell
orders. In addition, brokers did not buy for
themselves or keep inventories to make markets but
only engaged in pure brokerage, which meant the
encourages the denationalized banks to take full
advantage of the less restrictive operating
environment. In addition, by further reducing
subsidized credits and by announcing continued
increases in reserve requirements, the Bank of France
can signal its intentions to move toward a full
dismantling of credit controls.
Ultimately, the new monetary control system will
require greater day-to-day involvement by the Bank
of France in managing the price of money through
open market operations. The conservatives have
already proposed a new charter for the Bank of
France to grant it greater autonomy, and the issue is
likely to be taken up by the National Assembly this
Finally, for the modernization to continue and for
Paris to compete internationally, the most pressing
need now is for the locus of innovation to move from
the government to the private sector. The financial
sector has been so tightly controlled in the past that
most bankers and brokers no longer think in terms of
innovation, assuming the government will not allow it.
The recent reforms and the election of a government
committed to the free market may have brought a
suitable environment for private initiative. If the new
government reaffirms its commitment to reform and
does not discourage innovation by excessive
regulation, it will be a healthy sign for continued
modernization and the emergence of Paris as a world-
class financial center.
market was thin and clumsy.
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Overall, the financial reforms are likely to have a
positive impact on the French economy. Although the
French financial market is likely to experience
growing pains as it adjusts to a more open regulatory
environment, the reforms should lead to more
efficient investment decisions and facilitate a more
effective monetary policy. They will also make the
French financial system more closely resemble that of
the United States, and should help further capital
market integration in the European Community. Over
the long run, the reforms should help open the French
economy to foreign investment and boost Paris's
standing as an international financial center.
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Secret
Poland:
The 10th Party Congress
The recent 10th Congress of the Polish Communist
Party strongly endorsed party leader Jaruzelski's
contention that Poland is fast returning to normal
despite continuing economic problems, an active
underground opposition, and a hostile but resigned
populace. It also provided an opportunity for
Jaruzelski to strengthen his hold over party leadership
at both the central and local levels. The highlight of
the congress was the warm personal endorsement
Jaruzelski received from Soviet General Secretary
Gorbachev. Despite the apparent free rein given by
Gorbachev and the superficial calm at the congress,
Jaruzelski still has a long way to go in implementing
policies that will make his regime a political and
economic success
"Normalization" the Keynote
Jaruzelski set the tone of the proceedings with the
assertion in his four-hour opening speech on 29 June
that, unlike the sometime chaotic Extraordinary 9th
Congress in July 1981, this was to be an ordinary
congress. The major themes he outlined were clearly
aimed at achieving further "normalization": the
absence of popular unrest and modest steps toward
meeting the political expectations of the people when
necessary for economic progress. He held out the
prospect of a limited fourth amnesty of political
prisoners in the interests of national reconciliation. As
for Solidarity, Jaruzelski claimed that "the great
majority" of its former members actively participate
in public life and warned that the government will not
tolerate foreign sponsored, antistate activities. He
professed a desire to mend fences with the church and
invited its participation in an advisory group to the
Council of State. Jaruzelski refrained from launching
any vituperative attacks against the United States and
expressed a willingness to normalize relations-
without, however, making any goodwill gesture.
The congress also signaled normalization through
changes in party rules and precedures. Unlike former
First Secretary Kania-who faced several challengers
at the stormy congress in 1981-Jaruzelski, according
to the US Embassy, was elected by acclamation.
Some of the liberal party rules passed in 1981 were
brought into line with standard East European
practice. The limit on the terms of locally elected
party officials was increased from two and one-half to
five years. Likewise, the two-term restriction on
officials was kept, but procedures were adopted for
clearing the way for election to a third term.
Leadership Changes
The new, enlarged Politburo is packed with
Jaruzelski's closest collaborators and appears free of
extremists of both the right and left who could oppose
his policies. Among the seven casualties were the last
prominent liberal, Hieronim Kubiak, and the last
notable hardliner, outspoken Warsaw construction
foreman Albin Siwak. Another victim, Tadeusz
Czechowicz, was an ambitious challenger to
Jaruzelski's authority, according to a former Central
Committee member. The remaining token workers
predictable were replaced and reduced in number.
The inclusion of the chief of the national trade union
organization, Alfred Miodowicz, will probably
undermine any confidence workers have in the
ostensibly independent unions.
Jaruzelski's political strength is particularly evident in
the promotion of more close military comrades despite
longstanding criticism of the military's role in the
party leadership. In addition to the elevation to full
voting status of former candidate members General
Florian Siwicki, the Defense Minister, and General
Czeslaw Kiszczak, the Interior Minister, Jaruzelski
gave a seat to General Jozef Baryla, the party
secretary who oversees security. He probably
convinced Gorbachev and party ideologues that he
needs trusted advisers of his own choosing if he is to
achieve his political and economic goals.
The 11-member Central Committee Secretariat also
was revamped but retains its generally moderate cast.
The only significant addition appears to be writer
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Andrzej Wasilewski, who, according to the US
Embassy, will be responsible for culture. A former
director of the state's largest publishing house, where
he presided over the publication of contemporary
Western literary works, Wasilewski may liberalize
somewhat the regime's cultural policy.
The most sweeping change took place in the Central
Committee. More than 70 percent of the members
were replaced and the institution of candidate
membership abolished, reducing the committee's
overall size from 283 to 230. In addition, the two top
watchdog groups, the Central Party Control and
Auditing Commissions, were merged. According to
published party documents, these changes were
intended to reflect the decline in party membership
and fulfill the need for more effective control organs.
More likely, however, Jaruzelski hopes to strengthen
his personal grip over a leadership body that
reportedly gave him trouble in the past.
Jaruzelski, however, is still likely to face problems
with his new Central Committee. The roster contains
several outspoken regime critics, including four
provincial party chiefs-Zenon Czech of Przemysl,
Czeslaw Staszczak of Biala Podlaska, Jerzy Swiderski
of Siedlce, and Alojzy Zielinski of Chelm-who
reportedly withstood Jaruzelski's efforts to purge
them last January. A returning member, Jozef
Smolarz, accused Jaruzelski of being an ineffective
party leader at a Central Committee session in
November 1983, and called upon him to give up his
government posts,
Other aspects of the congress
also did not go as smoothly as Jaruzelski planned. The
US Embassy reports persistent rumors in Warsaw
that hardliner Albin Siwak fought tenaciously to keep
his Politburo seat. Perhaps giving credence to the
rumors, the election of the Politburo took longer than
planned, and Jaruzelski observed afterward that
"democratic procedures" are time consuming. The
regime's failure to publish the ratified party program
after the closing of the congress also suggests that
consensus was difficult to achieve.
A persistent theme of the congress was the impending
implementation of a new personnel policy that will
give basic party organizations greater oversight over
party and government bureaucrats and ensure that
apparatchiks regularly change jobs. Jaruzelski
appears intent on purging officials who have blocked
implementation of policies they consider threats to
their power and positions.
STAT
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Economic Issues
Speeches at the congress echoed familiar East
European economic policy themes without
introducing any new initiatives. Economic reform,
scientific and technological progress, energy and raw
material conservation, closer integration within
CEMA, and the need for better management were
dominant topics. The draft five-year plan for 1986-90
projects modest growth similar to that in the scaled-
back plans of other East Bloc countries and the
USSR. The final version of the plan, still not
available, may have been revised to reflect criticism of
its unambitious targets voiced at precongress
conferences and in the media.
Both Jaruzelski and Premier Zbigniew Messner
reaffirmed their commitment to the government's
four-year-old economic reform plan but, like top
Soviet leaders at the CPSU congress, failed to provide
details of how they intend to ensure implementation.
Instead, Jaruzelski announced the creation of a party-
government commission. to review organization and
management. Both Jaruzelski and Messner leveled
harsh criticism at private-sector "profiteers" and
suggested that tighter central control over private
enterprise was in the works. This may include
restrictions on Poland's successful but controversial
foreign-owned Polonia firms.
Messner's speech concentrated on restoring balanced
economic development and market equilibrium,
implying that the government would impose tighter
controls over wages while continuing to raise retail
prices to reduce budget subsidies. He cited rent
increases as a means of financing additional housing
but called for cutbacks in subsidies for medicine.
Although he promised better supplies of consumer
goods-including food-he also noted that Poland's
long-term development requires that investment be
given priority over consumption. The premier
conceded that any belt-tightening measures would be
unpopular and might heighten social tensions. F_
While Messner acknowledged "enormous pressure" to
meet investment needs throughout the economy,
competing demands for resources do not appear to
have been resolved at the congress. The draft five-
year plan gives priority to the completion of outdated
50
1977 1978
Cost of
'IMng
Nomind
/income
Red
Income
dcft
Alu~
investment projects that are unlikely to bring
sustained growth in either production or efficiency.
Discussion of investment plans at the congress focused
on energy and raw material conservation. In fact,
Messner stated that nearly one-third of industrial
investment is earmarked for achieving badly needed
reductions in consumption in these areas.
The congress replayed lukewarm rhetoric about
science and technology-with an emphasis on
industrial applications-as the engine for economic
progress. Congress speakers identified closer CEMA
cooperation, especially with the USSR, rather than
expanded ties to the West, as the best source for S&T
advancements. This may be making virtue out of
necessity because Warsaw's financial problems will
limit imports of Western technology. Development of
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Secret
new homegrown technology also will be hampered by
tight central control and inadequate funding, even
though Messner claimed that outlays for S&T will
double by 1990, with an emphasis on electronics,
robotics, industrial automation, and new material
technologies.
The speeches emphasized that Poland's foreign trade
orientation will be primarily toward CEMA,
especially the USSR. Both Messner and Jaruzelski
lauded recent steps toward closer cooperation between
Polish and Soviet enterprises. Several speakers
pointed to Poland's desire for normalized trade and
financial relations with the West and reassured
Western creditors that Poland intends to repay its
debt. But they cautioned that debt repayments would
not be made at the expense of economic development
or living standards-a particularly ominous warning
in light of Poland's poor trade performance so far this
year. This suggests that the regime will continue to
require debt relief and to miss payments. It may also
have been intended as a warning to Western creditors
and the IMF that Warsaw will not accept Western-
imposed austerity measures as a condition for new
loans.
Gorbachev's Presence
The accolades Jaruzelski received from Gorbachev-
more flattering than those accorded to East German
party chief Honecker in April-indicate that Poland
has returned to good graces. Gorbachev appeared
satisfied with Warsaw's current policies and seemed
willing to adopt the normalization theme of the
congress. Predictably, he emphasized the
steadfastness of Soviet support-especially in light of
continuing Western economic sanctions-and the
value of economic integration and the bilateral
military alliance. He obliquely admitted to the deep
enmity felt by many Poles for the Soviet Union but
blamed class exploitation for the problem. He also
thanked the Poles for their "solidarity" over the
Chernobyl incident and acknowledged that the
accident had its effects on Poland, too. In practical
terms, Gorbachev's personal support gives Jaruzelski
some leeway to implement his economic reforms and
new personnel policy.
Outlook
Breaking the stalemate between a hostile populace
and the Communist regime depends, we believe, on
both economic improvement and national
reconciliation. Reconciliation in particular rests on
Jaruzelski's ability to create more efficient and
accountable government and party structures, a goal
that has been consistently blocked by deeply
entrenched bureaucrats. Jaruzelski undoubtedly
expects the power and prestige he gained at the
congress to help him break the hold of the
apparatchiks. His first opportunity will come at
regional and local party elections this fall. The
institutional apparatus, however, has a strong record
of surviving and may well resist yet another purge.
Repetition of familiar economic themes at the
congress suggests that the Jaruzelski regime still lacks
a comprehensive strategy for dealing with Poland's
serious economic problems. Deep-seated bureaucratic
opposition will continue to frustrate the
implementation of reforms. While the regime is likely
to impose some belt-tightening measures such as price
hikes and controls on income growth, its sensitivity to
the popular mood, as in the past, may restrain any
inclination to enforce harsh austerity.
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Secret
Western Europe-United States:
Differences Over Policy
Toward Libya Highlight Deeper Splits
This article does not represent a DI or CIA position;
it is solely the view of the author. It has not been
coordinated or reviewed.
The US airstrike against Libya in mid-April sparked
as much disapproval in Western Europe as it did
support in the United States-highlighting not only a
tactical difference in perspective on the two sides of
the Atlantic toward the terrorist problem but also a
slowly growing divergence of views on the
fundamental nature of the Alliance. West European
leaders agree, of course, that NATO's core purpose is
to defend against the Soviets, and they generally
recognize that they get far more from the United
States than they give in pursuit of that goal. Their
slowness to help Washington in the fight against
Libyan terrorism suggests, however, that they tend to
accept that asymmetry without feeling a strong
corresponding obligation to stand behind the leader of
the Alliance when it attempts to uphold Western
interests outside of the NATO area.
Introduction
Alliance solidarity fostered by the threats of a Soviet
military attack in Central Europe is weakening as
that threat recedes in West European eyes-a
perception the new Soviet leadership is trying to
reenforce. Although the Soviets have continued
directly and by proxy to challenge Western interests
in other parts of the world, the West Europeans have
not reacted strongly to threats that do not involve
them directly. As a result, Washington's efforts to
defend US and Western interests against challenges
from outside the NATO area have attracted little
support across the Atlantic; rather, they have tended
to feed West European fears that needless US
activism could lead them into dangerous conflicts.
These fears, along with the West Europeans'
perception that they are entitled to continue
benefiting from an unbalanced security relationship,
are likely to increase strains within the Alliance.
Already, it is fashionable among many educated West
Europeans, for example, to see their continent caught
between two "superpowers" which, if not morally
equivalent, at least pose nearly equal threats to their
peace and well-being. This situation provides the
Soviets with a standing opportunity to fan
transatlantic estrangement by promoting future out-
Although each out-of-area crisis will have different
implications, we believe that the Libyan episode
provided glimpses into a developing split within the
Alliance that could reappear more and more
frequently. The full dimension and ultimate potential
of the problem was only briefly in view because West
European leaders-alarmed by the strong anti-
American upsurge and parallel anti-European
upsurge in the United States after the airstrike-tried
to smooth over differences with Washington about
how to respond to Libyan support for terrorism. We
believe that the limited measures taken by the EC and
endorsed at the Economic Summit in Tokyo should be
seen more as an attempt to close the transatlantic
breach and deter Washington from further military
action than as an acknowledgement that Western
Europe has a responsibility to fight the international
menace of state-sponsored terrorism.
The Alliance has been shaken by disagreements many
times before, but we believe the recent transatlantic
tensions highlight some basic differences that have
evolved slowly over the years. In the first section of
this article, we address the process of transatlantic
estrangement that has been brought to light by the
Libyan affair and assess the divergence in interests
and world views between the United States and
Western Europe. In the second part, we examine how
this divergence in basic outlook reinforced the more
specific tactical reservations that West Europeans had
concerning US policy toward Libya and what this
may mean for their willingness to cooperate with the
United States on terrorism and other issues.
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Differences in Perception and Analysis of the
Terrorist Problem
As masters of former colonial empires, the West
Europeans believe they have a privileged insight into
the interaction between relatively developed and less
developed societies, and they see at least the surge in
Islamic fundamentalist terrorism-especially that
flowing from Hizballah and Iran-in this light. This
perspective inclines them to take a long view and to
believe that they can do little about some aspects of
international terrorism. As they see it, the West can
only wait until the most atavistic parts of the Middle
East have made their peace psychologically with the
modern world.
There is also some tendency to see Arab support for
Palestinian terrorism in "anticolonialist" terms-as
the continuing rebellion of relatively backward Arab
masses against Israel, the West's most salient
geopolitical intrusion into the Arab world. This article
of faith among a number of West European
intellectuals may not be held as such by many average
citizens. Nonetheless, both leaders and voters share
the conviction that there can be no peace in the
Middle East and no solution to the terrorist problem
until the Palestinian issue is resolved. West European
leaders are not so naive as to believe that Qadhafi or
Khomeini would be any less revolutionary or that
Assad would be any less treacherous if there were a
Palestinian homeland. They are convinced, however,
that such a solution would sharply reduce the
numbers of radically aggrieved Palestinians who now
float around the Middle East providing radical Arab
leaders with too many ready tools.
We believe it is the West Europeans' optimistic view
of the short-term impact of a Palestinian state on
Middle Eastern terrorism that leads them to conclude
that the US focus on terrorism is myopic. They argue
that Washington is only attacking the symptom and
that the United States must turn its attention to the
Palestinian origins of the problem if it is to succeed.
By this, West Europeans mean that Washington must
persuade or coerce Israel into accepting the formation
of a Palestinian state in which the PLO would play a
leading role. Indeed, some West Europeans almost
certainly worry that Washington's new activism in
combating Middle Eastern terrorism has made it an
unwitting instrument of Israeli foreign policy-which
they see as essentially inimical to a Middle Eastern
settlement. They probably believe that joining in US
military or economic pressure on terrorist-supporting
states would actually make it harder over the long
term to deal with what they regard as one of the
principal roots of the terrorist problem.
A final factor in Western Europe's different
perception of terrorism is its own experience with
homegrown revolutionaries and urban guerrillas in
the 1970s and early 1980s. The domestic terrorist
problem persists, but most West Europeans are
convinced that the worst is behind them. They credit
their success to effective police action, public safety
precautions, and the terrorists' own growing sense of
futility with their causes, and they believe that the
same path could be followed in fighting Middle
Eastern terrorism. In our opinion, however, they fail
to recognize that they did not make much progress
against their domestic terrorists until they effectively
declared war on them and that lapse of memory
prevents them from drawing a parallel conclusion in
the West's confrontation with state-sponsored
terrorism today.
Differences in International Roles: Western Europe's
Insularity Versus Washington's Global View
A still more basic ingredient in European reluctance
to support US policy toward Libya is the growth in
Eurocentrism. Since the loss of overseas empire, many
of the separate West European states have turned
inward and lost much of their former sense of global
mission. This basic shift in world position has led to
an equally basic shift in their perception of the
Atlantic Alliance. In the 1940s and 1950s, the West
Europeans sought Washington's help in beating back
indigenous challenges to their overseas colonies. Now,
more than two decades after the loss of their last
important imperial holdings, the West Europeans
insist that the Alliance's objective is to safeguard
Western Europe's security-not to stand up for
democratic values and Western interests in other
parts of the world. Insularity in the EC and EFTA
has been highly profitable, moreover, giving rise to the
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paradox that Western Europe has become more
parochial at the same time that it has grown richer
and stronger-and less deferential to the United
States.
This insularity and the frustrations of no longer
dominating the world stage have combined to breed a
resentment among some Europeans toward
Washington's active international role. In some cases,
this takes the form of a kind of moral arrogance that
portrays Europe as the only true guardian of
civilization and the United States as a trigger-happy
naive superpower that overreacts to the Qadhafis and
Castros of the world.
Indeed, Western Europe has become the most self-
satisfied of continents. As long as only a few innocent
people are killed in terrorist incidents here this time or
there next time, West European governments are
unlikely to become upset over state-sponsored
terrorism as a matter of principle even if their
growing concern has led them to take limited
antiterrorist measures. Indeed, some of the
governments would clearly prefer to continue to strike
quiet deals with the terrorists to leave their countries
alone.
In this respect, many of the factors influencing
Western Europe's response to terrorism are reflected
in European attitudes on East-West issues. West
Europeans have grown complacent about the threat of
Communism-either the domestic or the Soviet
varieties-and have been generally content to pursue
detente with the East Bloc without worrying about
Soviet subversion in other parts of the world. Their
relatively mild reaction to all but the most bloody
terrorist attacks contrasts with their strong
condemnation of the US raid in much the same way
as their muted responses to Soviet interventions in
Afghanistan and Poland differed from their resistance
to US pressure to reduce their dependence on the
Soviet pipeline. Unless West Europeans are directly
threatened themselves, they are far more likely to be
unsettled by US calls for collective action against
terrorist or Communist wrongs than they are by those
wrongs themselves.
Changing perceptions of the Alliance are a final
factor explaining why the West Europeans take so
narrow a view of their responsibilities as members of
the Atlantic Alliance. Many in the older generation
have lived under the umbrella of US protection for so
long that they have come to see it as theirs by right
without any corollary responsibilities on their part.
The ever expanding majority of West European voters
born since 1945 have no first-hand experience of the
circumstances that contributed to NATO's birth;
many in this group doubt that the Soviets pose a
threat. Others in the group believe that the real
danger to their welfare is what they call the arms race
between Washington and Moscow and that US 25X1
determination to resist Soviet global pretensions could
drag Western Europe into an East-West
conflagration. A small but growing number of
younger voters has even come to accept Soviet
propaganda that US pursuit of Western military
preparedness is the principal threat to peace.
All of these concerns are heightened because two 25X1
World Wars fought on European soil this century and
numerous colonial struggles lost after 1945 have made
West Europeans skeptical about the costs and efficacy
of military action and cynical about the role of
morality in international affairs. The upheavals of the
20th century have also given their political life a
strong pacifist undertow. These negative attitudes
have already combined to scupper Allied support for
US military action beyond Western Europe's borders.
Over time, they could undermine support for
collective security in Western Europe itself.
Current Differences over Tactics
Despite these underlying fundamental differences of
view, the dispute between Western Europe and the
United States over policy toward Libya has been
argued out so far on a tactical level, focusing on
whether military force is an effective means of
combating terrorism and whether economic sanctions
are workable. Many European leaders almost
certainly also shared the perception of their
constituents that the raid would be
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counterproductive-that it would provoke a bloodbath
of terrorist retaliation, force the moderate Arabs to
rally around Qadhafi, drive all of them closer to the
Soviet Union, and jeopardize West European
economic interests in the Middle East. Fear that
striking Qadhafi's hive would only stir up terrorist
wasps to sting the nearest bystanders-Western
Europe, not the United States-probably
overwhelmed any recognition of how much West
European passivity might encourage Qadhafi and
other state sponsors of terrorism to continue their
efforts
West European leaders continue to worry that
military retaliation against Libya will escalate if
Washington becomes embroiled in a mounting cycle
of violence with Tripoli. Indeed, US accusations
against Syria sparked fears that a military campaign
against Libyan terrorism will expand into conflict
with Syria and Iran, drawing in both the Soviet Union
and the rest of the Arab world. If this did occur, the
West Europeans would then face an extremely
difficult choice-either fall in behind the United
States and alienate their own voters or stand aloof and
jeopardize US support for the defense of Western
Europe.
West Europeans also worry that participation in
economic sanctions against Libya will invite Libyan
retaliation. In any case, they oppose sanctions as a
matter of principle, contending that history shows
they do not work and arguing that there are always
countries that will take advantage of boycotts to beat
others out of lucrative commercial ties. By and large,
the Europeans have found quiet diplomatic efforts
to be more
effective than public threats-which in their mind,
expose them to humiliation if they fail.'
' Some, most notably the French, are leery of signing on to any
international effort that they cannot control-fearing that it will
drag them willy nilly into action inimical to their own interests. The
Italians, with more economic exposure in Libya than any other
West European country, worry that abrupt moves will kill their
chances of recouping some of their investments, while the British
are especially anxious to avoid any precedent that might be applied
to South Africa, where Britain has invested heavily.[
Implications for the United States
Given these disagreements, Washington is likely to
continue meeting resistance when it presses for
military action or economic sanctions against Middle
Eastern terrorism. We believe, however, that the
Europeans may be amenable to some arguments for
enhanced cooperation. Most fundamentally, West
European leaders are still too unsure of their ability to
stand alone to risk a major break with Washington,
and they will probably remain so for some years to
come. Moreover, there are signs that the wide
disparity in public opinion on each side of the Atlantic
toward the US strike worried many Europeans and
probably increased public backing for the limited
anti-Libyan measures their leaders adopted to placate
Washington.
For the medium term at least, we believe Washington
will be able to continue squeezing a modicum of
support from West European leaders partly with
reminders that the alternative may be further military
strikes and partly with hints of how much Alliance
solidarity on this or that particular point means to
Washington. The West Germans, in particular, are
anxious to maintain the US military commitment in
West European defense, and they might be especially
susceptible to appeals made on this basis. West
Germany's leverage with other Allies, in turn, is
considerable, and this makes Bonn an important
starting place for any future US diplomatic logrolling.
West Europeans are likely to look more favorably on
economic and diplomatic measures against Libya now
that they know the alternative may be further
military strikes. Several leaders have already
expressed willingness to expand on the tentative steps
already taken, especially if Libya is implicated in
further terrorist attacks. Appeals to West European
leaders for support, however, are likely to wear less
and less well if public opinion continues its long-term
drift in the other direction and if little progress is
made toward resolving key West European concerns
about relations with moderate Arabs.
25X6
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West European leaders have papered over some of the
chasm between their countries and Washington with
the antiterrorist measures they implemented after the
raid on Libya, and West European voters, too, may be
looking at US antiterrorist policy a little more
dispassionately than they did during their first
negative kneejerk reaction. The fact remains that
differences persist over how to deal with Middle
Eastern terrorism and that, more seriously, these
tactical differences overlay more basic and growing
divisions of international perspective and interest
between the Allies and the United States. This larger
process of deterioration can still be stopped, but not
unless West European political leaders speak out with
courage and conviction on the reasons their countries
should continue to support both the Atlantic Alliance
and the United States
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Economic News in Brief
Western Europe
UK tourism officials are now projecting US tourism
this year only slightly below the 1985 record ... if
widely publicized, could reduce anti-American
sentiment ... Tories still want official US
encouragement of travel to Britain.
West Germany promised $22 million in project-related
aid to the Philippines during Vice President Laurel's
recent visit to Bonn ... team visiting Philippines to
assess prospects for additional assistance.
France has announced $300,000 in humanitarian aid
to Afghan rebels ... may pave way for more covert
military assistance ... Chirac seeking to underscore
toughness with Soviets and foreign policy clout.
Portuguese parliament approved supplemental budget
for 1986... increases expenditures for armed forces,
civil service pensions, and health care benefits ...
anticipates higher revenues from recently
implemented VAT and savings from lower
agricultural prices ... budget deficit still expected to
be 11 percent of GDP.
Secret
EUR ER 86-018
1 August 1986
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Looking Ahead
August
Western Europe Nordic Council foreign ministers will hold next meeting 13-14 August in
Copenhagen ... will probably coordinate on stricter measures against South
Africa ... may establish Nordic working group to study nuclear-weapons-free
Secret
EUR ER 86-018
1 August 1986
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Secret
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