Trade

European trade has shown striking improvement. The total volume of exports has increased 50 percent since 1947 and with the exception of the dollar area, western Europe's payments are almost in balance. Dollar earnings are rising. The drastic devaluation of currencies last September brought the price levels of the participating countries more closely into line with world prices.

12. PROGRESS IN THE PARTICIPATING COUNTRIES

This improvement, gratifying as it has been, must be oriented toward the postwar position of Europe in the world. Populations have increased 10 percent since 1938. A reduced supply of raw materials from the Far East and particularly from eastern Europe has forced buying into the dollar area. Invisible income has been sharply reduced since assets held abroad were liquidated to pay for the war effort. Therefore, even though production levels of 1938 have been attained in almost all fields and exceeded in many, even greater increases are required if Europe is to become securely self-supporting. United Kingdom

Even though Great Britain maintained a balanced budget in sterling in both 1948 and 1949, her dollar problem remains serious. The great effort to achieve a self-sustaining economy is reflected in the export and import figures. Exports were 138 percent of 1938 whereas imports have been maintained at 90 percent of 1938. Due to heavy pressures against sterling in the spring and summer of 1949, Britain's gold and dollar reserves fell about $500,000,000. Devaluation has reversed this dangerous trend. Reserves are now up to 1.688 million dollars from 1.340 million dollars, the lowest figure reached, but are still uncomfortably low.

The general level of economic activity reached an all-time high in the past year. Manufacturing was 40 percent above 1938 and agricultural production 35 percent. Labor productivity in manufacturing industries increased 7 to 9 percent per year over the last 2 years. The cost-of-living index rose 3 points in 1949 and the wholesale-price index about 6 percent after devaluation.

France

Progress toward financial stability has been an outstanding achievement of the last year. The spiraling postwar inflation was stopped in 1949. December wholesale prices were only 1 percent above the December 1948 level whereas in each other postwar year the increase had ranged from 44 to 80 percent. A comprehensive program in the budgetary, credit, and price fields brought with it new confidence in the French franc.

Industrial production reached 123 percent of 1938, 10 percent more than 1948, and approached the highest level in French history. Agricultural production, on the other hand, has been slower to come back. Nevertheless, despite a severe drought last summer, it is anticipated that it will reach 96 percent of 1938 levels in 1949-50.

The progress in trade has been good. Exports in 1949 covered 75 percent of the imports. In 1948 they covered only 45 percent. For the first time since the war, France has had a trade surplus with nondollar areas. Her exports to the United States, however, suffered a slight decline from 1948 and tourist receipts were below expectation. France must more than double her dollar earnings by 1952 to obtain even the minimum requirements of petroleum, cotton, copper, and some machinery.

Italy

For the past 2 years, Italy's financial and monetary situation has been stable. Prices and wages have held the line. Eighty-five percent of Government expenditures are now covered by revenue, compared with 52 percent in 1947-48, and 68 percent in 1948-49. In spite of a rise in total exports of 7 percent over 1948, Italy's exports to the United States dropped from $90,000,000 in 1948 to around $45,000,000 in 1949, a drop of 50 percent. Since imports are expected to continue at about present levels, a strenuous effort is necessary to improve Italy's dollar earning position.

Industrial production rose 6 percent in both 1948 and 1949. Major increases took place in mining (18 percent over 1948), textiles (14 percent), petroleum refining (40 percent), and building materials (13 percent). Agricultural production was approaching prewar levels. Industrial production, however, was severely hampered by a dry summer as a result of which hydroelectric power was reduced by 17 percent under 1948. Despite these increases, unemployment continues at about double the prewar level. Total emigration remained at 1948 level and the problem of surplus population continues to be one of the most difficult with which Italy has to deal.

Western Germany

Western Germany's production index in May 1948 stood at 47 percent of 1936 and in November 1949 had reached 98 percent. In the last 2 years, steel production more than doubled, textile production almost trebled, and the output of motor vehicles increased five times. Grain production was up from 6.8 million tons in 1947 to 10.3 million tons in 1949. Since the currency reform in 1948, prices have been stabilized.

But unemployment has risen sharply despite increased economic activity because of the return of prisoners of war and the large influx of refugees from eastern Europe. Both exports and imports have risen, but only one-tenth of German dollar imports are covered by exports to hard-currency areas. The difference is financed by American aid. Thus it will be seen that in spite of the advances already made, much more remains to be done. A painful deflation has taken the place of the earlier inflation. The dollar gap still remains a most critical matter.

The problem of dismantling and the removal of industrial plants from Germany has been largely resolved. The Humphrey committee appointed by Mr. Hoffman, recommended the retention of 167 plants which had been scheduled for dismantlement. Of these all but three are being retained. It is the position of ECA that the "loss" represented by the continued dismantlement of these three plants is more than compensated for by (1) the retention of three other plants of equal if not greater importance, (2) the retention of equipment from 7 plants in Berlin, (3) the retention of 11 synthetic fuel and rubber.

Other participating countries

A few figures illustrate the progress in other participating countries. Austria's industrial production index in October 1949 stood at 132 of 1937; Belgium-Luxemburg's was 116 of 1938; the Netherlands, at 125; Norway's at 132; and Sweden's at 158. However, in Greece, as a result of civil war, industrial production was only 89 percent of prewar and in Portugal industry was suffering from underinvestment. Agricultural recovery was uneven. In Belgium-Luxemburg it reached 118 percent of 1938; in Greece it was 102 percent; in the Netherlands 112 percent; and in Sweden 106 percent of 1938. Agricultural production in Ireland and Denmark recovered also; but in Austria, Portugal, and Turkey, this type of recovery lagged. Greece and Turkey, because of high military expenditures, suffered from heavy deficits, and all participating countries still have a dollar deficit of varying seriousness to overcome before they reach trade equilibrium with the United States.

13. DECLINE OF COMMUNIST STRENGTH

European progress is reflected in the constantly increasing political stability of the participating countries. Despite the Cominform's campaign of vilification and despite its efforts to destroy ERP, the Communist parties in western Europe have steadily declined in strength since the inception of the program. In the Norwegian elections of October 1949, the Communists lost all 11 seats they had previously held; in the August elections in Germany Communists captured only 15 out of 402 seats; and in the elections in Belgium, Austria, and Great Britain the results were much the same.

Real progress has also been made in wresting from the Communists their control of labor movements, particularly in France and Italy. Non-Communist labor movements are rapidly gaining strength as Communist power declines. Thus the free labor organizations have walked out of the once powerful Communist -dominated World Federation of Trade Unions and have created a new International Confederation of Free Trade Unions, which has endorsed the Marshall plan. It is true that not once since the institution of the Marshall plan has there been a Communist victory in the polls in western Europe. It should not be forgotten, however, that the Communist victory in China has led to renewed confidence among Communists in western Europe. Thus far, this resurgence of Communist hopes has not taken on menacing proportions. It does, however, underscore the necessity for resolute continuation of the Marshall plan with appropriations adequate for the purpose.

14. EUROPEAN INTEGRATION

Traditionally Europe has been divided into many nationalistic states. The recovery and subsequent economic stability of Europe depend upon the participating countries being able to work closely together. One of the objectives of the OEEC and of the United States is to achieve a greater unity among the participating countries. The Foreign Assistance Act of 1948, as amended, carries the provision that it is "the policy of the people of the United States to encourage the unification of Europe

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The ECA and OEEC have believed that a substantial degree of recovery was needed before the economic integration of Europe could be pressed; but the progress of recovery had been such that on October 31, 1949, Administrator Hoffman urged upon the OEEC the need for urgent and vigorous steps toward economic integration. Integration was defined to mean the creation of a single, large market, to be brought about by (1) the removal of all quantitative restrictions on the movement of goods, (2) the elimination of monetary barriers to intra-European trade, and (3) the progressive reduction of tariffs among the participating countries. As a result the OEEC countries adopted a resolution in November: (1) To remove by December 1949, the last quantitative restrictions on at least 50 percent of their imports in private trade; (2) to decide on further steps toward trade liberalization by the end of January 1950; (3) to devise far-reaching new measures to bring about the mutual transferability of their currencies; and (4) to report at the earliest possible date on ways and means to eliminate dual pricing.

In his testimony on February 21, Mr. Hoffman reported that,

The OEEC countries have now removed quota restrictions from 50 percent of trade which had previously been restricted. They are now working to decrease these restrictions still further. Some progress is being made toward ending dual pricing. The OEEC countries are now negotiating a new European Payments Union which, with our help, will further remove monetary barriers to intraEuropean trade and make possible the next steps in eliminating quota restrictions.

The committee is impressed with the very great urgency of successful and rapid progress toward economic integration if the objectives of the European recovery program are to be achieved. It has in the present bill strengthened the hand of the ECA for this purpose by authorizing the transfer of funds to the proposed Payments Union. The committee also approves ECA's plans for reserving additional funds for the promotion of trade liberalization and similar unifying objectives.

In order to give further emphasis to this important objective, the committee approved an additional amendment, expressing the sense of Congress that as much as possible of the local currency counterpart is to be used to promote liberalization of trade and transferability of currencies. This provision encourages the use of local currency for measures designed to foster a closer integration of the European economy, and it enables the Administrator to increase the functions and prestige of a European central institution by permitting it to participate in decisions on uses of counterpart funds.

D. PROBLEMS OF SPECIAL INTEREST

15. THE DOLLAR GAP

Western Europe will not achieve a viable economy and lasting stability until its dollar trade and payments account is brought into balance. At present the value of western European dollar imports exceeds the value of exports and services in a very substantial amount. This difference between the value of dollar exports and services as against the value of dollar imports and services is the dollar gap, which it is the purpose of the recovery program to bring into manageable proportions by 1952.

In fiscal 1947, the dollar gap was 7.4 billion dollars; in 1948, it was 5,538.6 million dollars; and for this fiscal year it is expected to be 4.9 billion dollars. During fiscal 1950-51 it is expected that aid in the amount of 3.1 billion dollars will cover the gap. By 1952 the gap must be further reduced so that western Europe can meet its own needs without extraordinary outside assistance. On the assumption that this will occur the ECA expects to conclude its 4-year program of assistance by 1952.

Only two ways exist of closing the dollar gap on a permanent basis. One is for western Europe to build up its sources of supply in Europe itself and in nondollar areas. The other is by increasing western Europe's dollar earnings through direct and triangular trade. Both methods are being vigorously pressed. ECA estimates for fiscal 1951 are based on what they regard as the maximum possible dollar earnings and savings. Hence any sizable cut in the aid requested would mean a cut in dollar imports of the participating countries. Such a reduction in dollar imports would have a direct and adverse effect upon the already low European consumption standards and upon industrial activity, and capacity to earn dollars in the future. It would be well to keep in mind as stated in an ECA report that:

(1) the volume of exports to the dollar area is not likely to exceed that in the ECA-revised forecasts, and, without energetic European efforts, may well fall short of it; (2) the volume of imports, as revised, is tight but sufficient within narrow limits to achieve the targets of increased production, investment, levels of trade, and a residual but still positive change in the levels of consumption; and (3) the invisible and capital accounts are relatively fixed and where there is room for improvement (as in earnings from United States tourists) optimistic assumptions have been made.

The committee fully recognizes the desirability of closing the dollar gap so that the participating countries may become independent of extraordinary outside assistance by 1952. It also agrees that every effort should be made to save the American taxpayer any unnecessary expenditures in connection with European recovery. To this end purchases made by the participating countries should be made for soft currencies from nondollar areas whenever the goods needed for recovery purposes can be obtained in those markets. In order to reemphasize these basic principles which reflect the present operating policy of ECA-the committee approved an amendment which requires the Administrator to provide for procurements in such a way as to

(3) minimize the burden of the European recovery program on the American taxpayer by reducing the amount of dollar purchases by the participating countries to the greatest extent possible, consistent with maintaining an adequate supply of the essentials for the functioning of their economies and for their continued recovery.

Effect of competition in the United States. It is apparent that one of the best ways of closing the dollar gap is for Europe to increase its dollar earnings through direct and triangular trade. When Mr. Hoffman testified before the committee he observed that "Europe can earn dollars only by selling goods and services directly to the United States or by selling its goods and services to another country which has already earned those dollars."

The Secretary of State in discussing the same matter stated that "In the long run, the only reliable and desirable way" to enable the free world to obtain dollars so that it can continue purchasing American goods "is to increase our imports."