40 Coombs to Dunk
Cablegram 520 CANBERRA, 29 July 1946
MOST IMMEDIATE SECRET
It is impossible with the information available to make a judgment about the economic consequences of the reparations proposed to be extracted from Italy and other European countries. For instance, the severity of the burden placed on Italy will depend on how much of the reparations can be met from munitions plant and equipment unsuitable for civilian purposes, how much from Italian external assets and how much must be met from current production. So far as the external assets are concerned it would be important to know whether these are income producing assets and how far Italy's capacity to buy essential imports is dependent on them. So far as the proportion which has been met from current production is concerned it would be essential to know the proportion of the national income which would be taken in this way and since the reparations are to be paid in kind the nature of the goods to be required and the ease with which Italy could part with the particular classes of goods demanded without impairing her own capacity to import.
Furthermore, Italy's future economic conditions cannot be isolated from the effects of the general European settlement or from the effects of any general international economic arrangements. For instance, the economies of South-East and Southern Europe have in the past been closely integrated with the German economy, particularly in relation to the exchange of manufactured goods for foodstuffs and raw materials. These industries may well be the subject of decisions by the Allied powers in the German Peace Treaty. Similarly, if it were proposed to divide Germany, with various parts of the country being integrated with the economies of larger unions, this may well break established economic relationships and have profound effects on the economies of the more dependent European countries.
The most important conclusion concerning reparations which can be drawn seems, therefore, to be that whatever figure may be fixed for reparations payable by the lesser European countries there should be provision made for a review in the light of changed circumstances and machinery established whereby this review can be carried out.
B. PEACE TREATIES GENERALLY
Apart from the uncertainty as to the burden which reparations will place upon the countries concerned, the draft treaties in their economic aspects might be criticised from the following points of view:-
(a) They ignore economic issues which will arise from the German settlement.
(b) No standards are laid down to which the economic policy of defeated countries must conform in their relations with the rest of the world. For instance, Australia would be interested in seeing that the defeated countries of Europe adhered to the general lines of food and agricultural policy laid down initially at the Hot Springs Conference.  Such a policy would be in the interests of the main food-producing countries and also in the people of Europe themselves. Similarly, it is important to know how far defeated countries will be expected to accept the obligations which the United Nations themselves are accepting in relation to exchange, commercial policy and the like. It would appear important that the economic policy adopted by the defeated nations should be such as will not lead to a restoration of pre- war economic nationalism, will conform broadly to the economic interests of the allied powers, and will be based upon any general principles of international economic behaviour accepted by the United Nations.
(c) The treaties in their present form are concerned solely with negative factors in the economic settlement, and make [no] positive provision for the future development of the economies of the defeated countries as part of a general European economy. It seems undesirable that reconstruction in Europe should proceed on the narrowly nationalistic basis of pre-war Europe. Furthermore, any plans for reconstruction, even in individual countries, will be profoundly influenced by the nature of the German settlement.
Long term plans should provide for the development of the relatively under-developed areas particularly in the East and South and for the consequent improvement of living standards in those areas. Furthermore, there are many problems, partly economic and partly administrative, e.g. the organisation of transport, which are essentially European in scope.
It is clearly difficult, if not impossible to deal with these criticisms by the modification of treaties dealing with individual countries. Indeed, since the data necessary for the solution of many of the problems mentioned cannot at present be available, it may well be impossible to meet them adequately at present at all.
However, it seems logical that consideration should be given to- (a) The need for a general economic settlement for Europe as a whole which involves the major problem of Germany;
(b) The establishment of some form of machinery designed to modify the economic clauses of particular treaties if subsequent economic conditions warrant such a modification.
The Minister may wish, therefore, to give consideration to the possibility of recommending some regional European economic organisation. This organisation could be established at the political level but might at the outset be most easily set up at the official level. Geographically this organisation should function for the whole of Europe including the Western Republics of the Soviet Union who should, therefore, have independent representation. It must also include representatives of the defeated countries although at the outset they might have to accept a lower status.
Such an economic organisation should be linked with the United Nations Organisation and with the special financial, agricultural, employment and trade international organisations. Its functions at the outset might be solely advisory. For instance, it could advise:-
(a) The allied powers on the necessity for variation in the economic terms of any peace treaty with a European country;
(b) The allied powers on the economic consequences in any European country of decisions reached as part of the peace settlement with enemy countries and on measures which should be taken to deal with such consequences;
(c) The United Nations and its specialised agencies on the nature of the economic policy which should be followed by the defeated countries, the manner in which any obligations imposed on them were being carried out, and any modification of such obligations as the special circumstances of Europe may warrant;
(d) The allied powers and other Governments concerned on measures necessary to deal with economic and administrative problems, e.g.
transport, common to a number of European countries;
(c) The Government concerned, the Bank for Reconstruction and Development, International Trade Organisation, Food and Agriculture Organisation and other relevant parties on measures necessary to effect economic reconstruction, to promote economic development and to improve levels of productivity and living standards.
In view of the present relations of the powers, these proposals may be politically unacceptable but they appear to offer three definite advantages in that they provide a means of.- (a) working out progressively the solutions of the problems of the European settlement, many of which appear incapable of immediate solution;
(b) possible co-operation in Europe between the Soviet Union and the Western powers;
(c) gradually increasing participation by the defeated countries in the economic government of Europe.
These notes have been prepared very hurriedly. Please let me know whether anything further is desired.