EASTERN EUROPE: SHRINKING MARKET FOR WEST EUROPEAN EXPORTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83-00857R000100040004-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: December 20, 2016
• Document Release Date: January 23, 2007
• Sequence Number: 4
• Publication Date: July 1, 1982
• Content Type: REPORT

Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Directorate of Secret
Eastern Europe:
Shrinking Market for
West European Exports
An Intelligence Memorandum
Secret
EUR 82-10070
July 1982
Copy 3 6 [-
r c r=.R leases: C 1 23 .~A~ pP8 0857gR0QQ: `- , 12
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Q
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Directorate of S pet
Intelligence
o
Ez t 1rl Eap?peShirHo n lung Mz rkke ir?T
W t Euiro m E7p?i t
This memorandum was pre ared by0
Office of European
Analysis. Comments and queries are welcome and
may be directed to the Chief, East-West Regional
Issues Branch, Eastern Europe Division, EURA, on
This paper was coordinated with the National
Secret
EUR 82-10070
July 1982
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Secret
Summary
Eastern Europe:
Shrinking Market for
West European Exports
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.
Although Eastern Europe's share of West European exports has fallen
since 1975, the region remains a more important market than does the
USSR. Of the major West European countries, West Germany has the
largest stake in trade with Eastern Europe. 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.
Information available as of 16 July 1982
has been used in the preparation of this report.
Secret
EUR 82-10070
July 1982
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Figure 1
Imports From Western Europe
Billion US$
(Note change in scale)
Eastern Europe
Hungary
I I I I I I I I I I I I I I I I I I I I I I
0 1970 71 72 73 74 '15 76 77 78 79 80 81 0 1970 71 72 73 74 75 76 77 78 79 80 81
3.0
1.5
1.5
I I I I I I I I I
0 1970 71 72 73 74 75 76 77 78 79 80 81
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Secret
Eastern Europe:
Shrinking Market for
West European Exports
ackground 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 (figure 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 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 on a treadmill of needing more and more credit to cover persistent
trade deficits and increasing debt service obligations (table 1)
25X1
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 (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 weaknesses-depressed
growth after 1978 to postwar lows. Only East Germany held to a growth
policy based on rising hard currency imports and debt. In 1981, Poland's
economic collapse, Romania's financial chaos, and mounting concern
among Western lenders over creditworthiness of the Council for Mutual
Economic Assistance (CEMA) forced all countries except Bulgaria to cut
hard currency imports. Purchases from Western Europe declined for the
first time in more than 20 years. 25X1
The East European Eastern Europe's share of total West European exports peaked at 3.6
Market percent in 1975 and fell to 2.2 percent in 1981 (figure 2). By comparison
the USSR received 1.9 percent of Western Europe's exports last year while
the United States accounted for 6.5 percent. West Germany has the largest
stake in trade with Eastern Europe among the major West European
economies. Its sales to the region fell from 5.6 percent of total exports in
1975 to 3.7 percent in 1981. The shares for Italy also declined sharply over
this period-from 3.3 percent to 1.6 percent-while the falloff was less
severe for France and the United Kingdom. Because of the slowdown in
sales to Eastern Europe in recent years, Western Europe's surplus with the
region fell from $3.7 billion in 1975 to $700 million last year.)
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Table I Billion US $
Except Where Noted
Eastern Europe: Balance of Payments
With Non-Communist Countries
Trade balance
0.1
-2.7
-1.7
-0.7
-0.4
Current account balance
0.2
-3.2
-2.9
-2.6
-2.2
End-year net debt
1
8
21
24
24
Debt service ratio (percent) b
20
30
92
101
193
Romania
Trade balance
-0.2
-0.1
-1.1
-1.5
0.6
Current account balance
-0.3
-0.3
-1.6
-2.4
-0.4
End-year net debt
1
3
7
9
10
Debt service ratio (percent) b
33
23
22
25
32
East Germany
Trade balance
-0.2
-1.1
-2.0
-1.7
-1.4
Current account balance
-0.3
-1.2
-2.0
-1.7
-1.9
End-year net debt
1
5
10
12
13
Debt service ratio (percent) b
18
25
54
55
64
Trade balance
-0.3
-0.7
-0.2
0.3
0.4
Current account balance
-0.3
-1.0
-0.8
-0.4
-0.9
End-year net debt
1
3
6
7
7
Debt service ratio (percent) b
15
19
37
30
40
Czechoslovakia
Trade balance
0
-0.4
-0.4
0
0.3
Current account balance
-0.2
-0.6
-0.5
-0.4
-0.2
End-year net debt
0
1
4
4
4
Debt service ratio (percent) b
9
14
22
18
22
Bulgaria
-0.1
-0.6
0.7
1.0
0.7
0.1
-0.7
0.5
0.9
0.6
End-year net debt
1
3
4
3
2
Debt service ratio (percent) b
45
33
38
32
36
a Preliminary estimates.
b Repayments of medium- and long-term debt plus interest on net
debt as a share of exports to non-Communist countries.
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Secret
Eastern Europe: Growth in Aggregate Indicators a
GNP
3.5
-1.7
Private consumption
0.5
0.9
Investment and other outlays
2.8
-8.3
Private consumption
4.9
4.8
Investment and other outlays
4.9
2.6
East Germany
Private consumption
2.1
2.1
Investment and other outlays
-4.8
-1.4
Hungary
GNP
2.7
0.6
Private consumption
3.3
1.3
Investment and other outlays
13.7
-14.8
Czechoslovakia
GNP
1.7
0.9
Private consumption
2.8
-0.1
Investment and other outlays
-3.2
-2.3
-3.9 -6.6
-0.5 -0.5
-12.4 -19.6
2.7 1.0
-7.8 1.1
1.5 1.5
6.4 4.8
0.5 0.6
1.4 2.1
-3.2 -6.2
1.7 0.1
-0.4 1.0
3.9 -2.6
2.7
2.3
a GNP growth is based on Western reconstructions of officially
published data in order to conform to generally accepted standards
of national income accounting and product valuations according to
factor cost. "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 invest-
ment, research and development, defense, and other elements of
government consumption.
-0.6
0.7
-0.9
0.8
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Figure 2
Western Europe: Share of Exports
Going to Eastern ]Europe
1970 75 78 81 82 1970 75 78 81 82
I I
82 1970 75 78 81 82
78 81 82
I
Sales to Poland led both the strong growth of West European exports in
the early 1970s and the decline in recent years. Warsaw's spending spree in
1970-75 moved Poland ahead of East Germany as the leading East
European importer from Western Europe, and by 1975 the Poles accounted
for over one-third of East European purchases. Tightening financial
stringencies and the economic slide reduced Poland's share of imports from
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Secret
Figure 3
25X1
Western Europe to under 20 percent by the end of 1981. As a result, East
Germany has again become the leading purchaser of West European oods,
accounting for over one-fourth of imports
From 1970 to 1978, Hungary trailed only Poland in the rate of growth of
imports from Western Europe. Although Budapest moved to slow import
growth after 1978 in order to stabilize its hard currency debt, its share in
East European imports has risen steadily and now equals that of Poland.
Czechoslovakia, because of its conservative policy toward debt accumula-
tion, has shown the slowest growth of imports from Western Europe.
Romania, after following a generally conservative policy toward hard
currency imports through the mid-1970s, accelerated purchases of West
European goods in the late 1970s until financial problems forced a cutback
over the past two years. After a sharp upswing in hard currency imports in
1974-75 led to a dangerous increase in its debt service costs, Bulgaria
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Eastern Europe: Composition of Imports
From Western Europe in 1980 a
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Eastern Poland East Hungary Romania Czecho- Bulgaria
Europe Germany slovakia
tightened up on purchases from Western Europe. A stronger financial
position has permitted Sofia to increase imports in recent years
Western Europe's exports of grain in recent years
More than three-fourths of Western Europe's shipments to Eastern Europe
are manufactured goods: primarily machinery, semifinished products
(mainly steel and textiles), and chemicals (figure 3). In the early 1970s,
manufactured goods dominated exports even more; as the East Europeans
began cutting back on investment, however, foodstuffs and consumer goods
grew in importance and now account for 15 percent of West European
shipments versus 9 percent in 1975 (table 3). Exports of steel, plastics and
other chemicals, machine tools, and textiles to Eastern Europe accounted
for 10 to 15 percent of sales outside of Western Europe in 1980 (table 4).
Similarly, Eastern Europe has consistently received some 20 percent of
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Secret
Western Europe: Share of Major Exports
Going to Eastern Europe in 1980 a
Western
Europe
West United France
Germany Kingdom
Italy
Chemicals
12
6
2
3
4
Plastics
13
4
3
2
3
Semifinished products
9
5
1
2
2
Steel
13
6
1
2
3
Textiles
12
6
2
2
3
Machinery
7
4
1
3
3
Machine tools
11
5
3
15
8
Electrical machinery
3
3
1
2
2
Transportation equipment
2
1
1
1
1
Consumer goods
4
2
1
1
0
Foodstuffs
Grain
a Shares for Western Europe exclude intra-West European sales.
Shares for the individual countries include sales to other West
European countries.
Current Trends Last year's falloff in imports is accelerating. East European purchases
from Western Europe are down 10 percent in the first quarter of 1982 25X1
compared with the same period a year ago. Poland and Romania have
reduced imports by nearly 30 percent while the cutbacks for Czechoslova-
kia, East Germany, and Bulgaria amount to roughly 5 percent. Hungary,
however, has stepped up imports by more than 15 percent
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: 25X1
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.
Even with rescheduling
terms similar to last year, we estimate that Warsaw will still have a
financial gap of $2 billion to cover, with little prospect for obtaining the
imports needed to support economic recovery. 25X1
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Western governments have announced that preliminary agreement was
reached in early July on rescheduling 80 percent of Romania's overdue
1981 payments and 1982 debt service due on its official debt. Final
agreement is expected by the end of July. Bucharest has proposed similar
terms to Western banks for rescheduling its rivate credits and has
requested a response by the end of July.
Romania's major problem 25X1
is to restore the confidence of creditors by demonstrating its ability to
manage its external finances more wisely and to take overdue steps to
deal with domestic economic problems.
Although East Germany so far has managed to cover its financing needs
through drawdowns of unused credit lines and short-term trade credits, 25X1
sharply rising debt repay ments could
_
25X1
provoke a cash-flow crisis
by late 1982 or early 1983J
1
25X1
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,
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
The reductions in Soviet oil deliveries will have to be 25X1
offset by stricter conservation and cutbacks in transportation and industrial
activity because of inability to pay for purchases on the world market.
Moreover, an expected deterioration in Eastern Europe's terms of trade
with the USSR and growing Soviet impatience over Eastern Europe's trade
deficits will force these countries to divert more goods to the Soviet market.
We believe that the USSR will demand more imports of goods otherwise
saleable in the West further reducing Eastern Europe's hard currency 25X1
import capacity.
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
Secret
Adjustment Measures Tightening external constraints 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 im-
prove the efficiency and export competitiveness of their economies. Thus,
more of the adjustment burden will probably fall on consumers, but these
regimes will be on guard for signs of popular unrest: 25X1
Hungarian Government will cut domestic purchasing power through
price increases for meat and other food items as well as tighter domestic
credit.
In order to free up goods for export, the
Prague plans
reductions in hard currency imports for at least the next two years to
counter the Western credit freeze.
25X1
o East German party chief Honecker has announced reductions in grain
Prospects
freer access to West European markets.
Because of continuing debt servicing 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
major Western markets would strengthen Eastern Europe's sales, export
growth undoubtedly will be slow. Eastern Europe's major hard currency
exports-chemicals, metals, textiles, and clothing-confront hardening
protectionist sentiment as well as stiff competition from developing coun-
tries. The East Europeans already have had to negotiate export restraint
agreements with the European Community for most of these commodities
while the EC's Common Agricultural Policy discriminates against their
sales of foodstuffs. Only Romania, which has negotiated a bilateral trade
pact with the EC, and East Germany, which enjoys valuable advantages
through its special trade relationship with West Germany, have somewhat
Several of these regimes have taken some minor steps to improve export
performance, but only Hungary is prepared to institute the fundamental
reforms needed to improve competitiveness. Without an improvement in
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
borrowing conditions or in export performance, the East Europeans will try
to secure imports of needed Western goods by pressing for more counter-
trade deals. This option has limited prospect for success due to continued
resistance on the part of West European trading partners to the East
European goods offered in these barter arrangements.
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4
 Secret
r` r? ele se k 1
'itj = . D P8 3-00857R00010004,00 4
-4
Approved For Release 2007/01/23: CIA-RDP83-00857R000100040004-4