EASTERN EUROPE: SHRINKING MARKET FOR WEST EUROPEAN EXPORTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R000300570043-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 10
• Document Creation Date: December 19, 2016
• Document Release Date: April 11, 2006
• Sequence Number: 43
• Publication Date: July 7, 1982
• Content Type: MEMO

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j
Memorandum for:
CM, ef Aura
This is our draft for the DCI
for the NSC meeting on Eastern Europe: The
Shrinking Market for West European Exports.
(
I . A ,
7 July 82
Mary Ann
EUR.A
Office of European Analysis
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Eastern Europe: Shrinking Market for West European Exports
Summary
Eastern Europe holds very little promise as a market for
West European exports. Severe financial problems are forcing
these regimes to slash investment and hard currency imports,
resulting in reduced economic growth and stagnating--if not
falling--levels of consumption. Most East European countries
began to slow the growth of hard currency imports in the late
1970s as debt servicing problems mounted; the collapse of Western
bank-lending to the region has forced steeper cuts in imports
over the past year. Since the financial pressures show no sign
of easing and other constraints on economic growth are
tightening, East European demand for Western goods will likely
continue to slump over the next few years.
Background
West European exports to Eastern Europe surged during the
early to mid-1970s as the East Europeans looked to Western goods
to modernize their economies and upgrade living standards (See
Table 1). The rising tide of Western imports financed largely by
credits supported reasonably rapid rates of economic growth
through high levels of investment and rising consumption. The
East Europeans had planned to repay credits through improved
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export performance, but systemic inefficiencies coupled with
recession and rising protectionism in the West dashed their hopes
for strong growth of hard currency sales. Moreover, the East
Europeans were caught in a treadmill of needing more and more
credit to cover persistent trade deficits and increasing debt
service obligations.
As a result, most East European countries began to retrench
in the late 1970s and slowed growth largely through steep cuts in
investment. Some tried to sustain or slightly increase
consumption levels because of concern over popular unrest (see
Table 2). In the cases of Poland and Romania, restraint measures
came too late to prevent insolvency and were applied so ineptly
that they seriously damaged economic performance. While
Bulgaria, Hungary, and Czechoslovakia managed to stabilize their
debt positions, the cutbacks--coupled with fundamental economic
weaknessess--depressed growth after 1978 to postwar lows. Only
East Germany held to a growth policy based on rising hard
currency imports and debt.
Recent Trends
Poland's economic collapse, Romania's financial chaos, and
mounting concern among Western lenders over CEMA's
creditworthiness resulted last year in declines in hard currency
imports for each East European country except Bulgaria.
Purchases from Western Europe fell for the first time in more
than 20 years. Reflecting the East Europeans' decision to pare
investment, the import cutbacks were most severe for machinery,
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equipment, and industrial materials. The decline in imports has
accelerated this year compared with the same period a year ago:
Czechoslovakia's hard currency imports are down by 26 percent,
Poland's by 43 percent, and Hungary's by 3 percent.
Financial Crisis Continues
The decline in hard currency imports will almost certainly
continue through 1982 and into next year since Eastern Europe's
financial crisis shows few signs of easing:
Poland's debt rescheduling problems appear even more
formidable this year than last. Western governments have
suspended talks on debt relief for 1982 and are unwilling
to extend further credits. Warsaw is beginning talks with
private creditors, but negotiations will be complicated by
disorganization, disputes among banks, and disagreement
over the amount of debt relief. Even with rescheduling
terms similar to last year, Warsaw will still have a
financial gap of $2 billion to cover, with little prospect
for obtaining the imports needed to support economic
recovery.
Romania started rescheduling talks with Western banks this
January after accumulating some $1 billion in arrearages
by the end of 1981. Negotations on rescheduling its
official debt also have just gotten underway. Numerous
obstacles still must be overcome before any final
agreements can be reached. Bucharest's financing
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requirements, however, are less than half of Warsaw's, and
it has the benefit of IMF credits and support. Romania's
major problem is to restore the confidence of creditors by
demonstrating its ability to manage its external finances
more wisely and to take long overdue steps to deal with
domestic economic problems.
-- Hungary has nearly exhausted its hard currency reserves
and is presently searching desperately for credits from
Western banks, governments,-the Bank for International
Settlements, and the IMF in order to avoid rescheduling
this year. Even if Budapest can raise enough funds to
meet this year's obligations, some Western bankers fear
that a Hungarian rescheduling could prove inevitable next
year.
-- Although East Germany has covered its need for trade
financing so far through short-term credits, many Western
bankers predict that sharply rising debt repayments could
provoke Ia cash-flow crisis by late 1982 or early 1983.
Trade with the USSR
In addition to the cutbacks in Western credits, Eastern
Europe's growth prospects are dimmed by slowing deliveries of
energy and raw materials from the USSR. Moscow has already
reduced 1982 concessionary oil deliveries to Czechoslovakia, East
Germany and Hungary by 10 percent and a further 5 percent
reduction appears to be in train. Eastern Europe will be forced
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to divert more goods to the Soviet market as a result of
deterioration in its terms of trade with the USSR and growing
Soviet impatience over Eastern Europe's trade deficits. In all
likelihood, the USSR will demand more imports of goods otherwise
saleable in the West, further reducing Eastern Europe's hard
currency import capacity.
Adjustment Measures
Tightening external constraints from both the West and the
USSR leave the East European-regimes little choice but to impose
more severe austerity programs. More cuts in investment and in
imports of Western capital goods seem likely, but the scope for
such cuts is increasingly limited if the East Europeans are to
improve the efficiency and export competitiveness of their
economies. Thus, more of the adjustment burden will probably be
placed on consumers, but these regimes will be on guard for signs
of popular unrest.
-- According to a senior Hungarian banker, Budapest will soon
unveil tough measures for improving its trade surplus by a
margin large enough to-achieve a current account surplus
in 1983. In order to free up goods for export, the
Hungarian government will cut domestic purchasing power
through a 3 percent decline in real wages and reductions
in government expenditures;
-- A senior Czechoslovakian trade official has stated that
Prague plans reductions in hard currency imports for at
least the next two years to counter the Western credit
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freeze;
-- East Germany is cutting back grain imports and diverting
meat from domestic supply to hard currency markets;
-- The East Europeans must offset reduced Soviet oil
deliveries through stricter conservation and cutbacks in
transportation and industrial activity since they cannot
afford large purchases on the world market.
Prospects
Because of continuing financial problems at least through
the mid-1980s, the East Europeans will be unable to increase hard
currency imports unless they can boost their exports. Although an
economic rebound in Western Europe would strengthen Eastern
Europe's sales, export growth undoubtedly will be slow. Eastern
Europe's major export commodities--chemicals, metals, textiles,
and clothing--confront hardening protectionist sentiment in
Western Europe and stiff competition from developing countries.
Moreover, very few of these regimes are prepared to institute the
fundamental reforms needed to improve competitiveness. Without
an improvement in borrowing conditions or in export performance,
the East Europeans will try to secure imports of needed Western
goods by pressing for more countertrade deals. This option has
little prospect for success due to continued resistance on the
part of West European trading partners to these barter
arrangements.
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EASTERN EUROPE: IMPORTS FROM WESTERN EUROPE
Percentage Change
in Current Prices
1970-1975
1976-1978
1979
1980
1981
Eastern Europe
24.5
7.6
12.6
5.4
-14.6
Poland
35.3
-1.0
7.4.
8.7
-36.0
Romania
18.6
13.0
29.2
-4.4
-20.7
East Germany
17.4
13.6
18.8
2.2
-1.3
Hungary
26.7
17.6
0.7
7.7
-1.0
Czechoslovakia
20.2
7.0
9.5
6.6
-16.5
Bulgaria
26.7
-0.8
13.7
21.9
6.4
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EASTERN EUROPE: PERCE7TAGE CHANGE
IN AGGREGATE INDICATORSa
1978
1979
1980
1981
Poland
GNP
3.5
-1.7
-3.9
-6.6
Private Consumption
0.5
0.9
-0.5
-0.5
Investment and other outlays
2.8
-8.3
-12.4
-19.6
Romania
GNP
4.7
3.8
-1.7
1.0
Private Consumption
4.9-
4.8
2.7
1.0
Investment and other outlays
4.9
2.6
-7.8
1.1
East Germany
GNP
1.8
2.7
2.4
2.4
Private Consumption
2.1
2.1
1.5
1.5
Investment and other outlays
-4.8
-1.4
6.4
4.8
Hungary
GNP
2.7
0.6
0.5
0.6
Private Consumption
3.3
1.3
1.4
2.1
Investment and other outlays
13.7
-14.8
-3.2
-6.2
Czechoslovakia.
GNP
1.7
3.7
1.7
0.1
Private Consumption
2.8
-0.1
-0.4
1.0
Investment and other outlays
-3.2
-2.3
3.9
-2.6
Bulgaria
GNP
2.1
3.6
-2.8
3.0
Private Consumption
1.7
1.9
0.8
1.3
Investment and other outlays
-9.6
-1.1
-8.0
-8.9
Eastern Europe
GNP
2.7
1.0
-0.6
-0.9
Private Consumption
NA
NA
NA
NA
Investment and other outlays
NA
NA
NA
a Western estimates. "Investment and other outlays" is a residual value
calculated by subtracting from the value of GNP the values of private and
government consumption, and the export surplus (or adding the import
surplus). The residual encompasses gross investment, science, defense, and
other elements of government consumption.
UNCZASSIFIED
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EASTERN EUROPE: BALANCE OF PA METS
WITH NCI-CCNIMUNIST COUNTRIES
Billions of Current Dollars
1971
1975
1979
1980
Poland
Trade Account
0.1
-2.7
-1.7
-0.7
Current Account
0.2
-3.2
-2.9
-2.6
End-Year Net Debt
1
8
21
24
Debt Service Ratio (Percent) b
20
30
92
101
Romania
Trade Account
-0.2'
--0.1
-1.2
-1.5
Current Account
-0.3
-0.3 .,
-1.7
-2.4
End-Year Net Debt
1
3
7
9
Debt Service Ratio (Percent) b
33
.23
22
:25
East Germany
Trade Account
-0.2
-1.1
-1.5
-1.7
Current Account
-0.3
-1.2
-1.5
-1.7
End-Year Net Debt
1
5
10
12
Debt Service Ratio (Percent) b
18
25
54
55
Hungary-,_-
Trade Account
-0.3
-0.7
-0.2
0.3
Current Account
-0.3
-1.0
-0.8
-0.4
End-Year Net Debt
1
3
6
7
Debt Service Ratio (Percent)b
15
19
37
30
Czechoslovakia
Trade Account
0.0
?-0.1
-0.8
0.0
Current Account
-0.2
-0.3
-0.9
-0.4
End-Year Net Debt
0
1
4
4
Debt Service Ratio (Percent)b
9
14
22
18
Bulgaria
Trade Account
-0.1
-0.6
0.7
1.0
Current Account
0.1
-0.7
0.5
0.9
End-Year Net Debt
1
3
4
3
Debt Service Ratio (Percent)b
45
33
38
32
198la
0.4
-2.2-
24
193
-0.6
-0.4
10
32
-1.4
-1.9
13
64
0.4
-0.9
7
40
0.3
-0.2
4
22
0.7
0.6
2
36
a Preliminary estimates.
b Repayments of medium and long-term debt plus interest on net debt as a
share of exports to noncommunist countries.
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