West grows wary of bailing out economically troubled East bloc

American policy toward the $10 billion Soviet-West European gas pipeline deal is the key issue just now for both American-Soviet relations and American-European relations. It pits conservatives against conservatives.

On the one side, are the hardline conservatives who want to destroy this biggest-ever East-West deal as punishment of the Russians for repression in Poland -- and don't mind risking an irreparable US-European split in the process.

On the other side, are the conservatives who are worried about consequences for the international economic system - and don't want to destroy the NATO alliance.

Their proposed alternative is an impeccably conservative policy that is simple, nonpolitical, and doesn't roil US-European relations.

It consists of relying on the common sense of overextended private Western banks to shrink Western financing for Soviet bloc economies in the 1980s. In this scheme the role of Western governments would be only the peripheral (if important) one of not rushing in where the free market feared to tread.

It is not yet clear if the Reagan administration will in fact adopt this policy. Continued tussling over the issue was apparently responsible for the delay in the European visit by US Undersecretary of State James Buckley scheduled for the week of Feb. 22.

Certainly powerful voices within the administration have been calling for tougher Poland sanctions -- and particularly for blocking the Soviet pipeline by extending Washington's embargo on American companies' participation to also cover participation by European companies holding American licenses. The strongest public advocate of such a course, at least implicitly, has been Defense Secretary Caspar Weinberger.

No such decision has been reached in more than six weeks of internal Reagan administration debate, however, and what might have been the first hardline step -- a formal declaration of Polish bankruptcy -- was deliberately averted by the Reagan administration.

A prime reason for such hesitancy, is Washington's search for a way to have its cake and eat it too. The White House would like to find a policy alternative that would preclude any Western bailing out of the Soviet bloc from its economic troubles -- but would also avoid splitting the Western alliance. The strongest public advocate of what might be called the bankers' option has been Secretary of State Alexander M. Haig Jr.

Highly interested Europeans viewing the contest between the rival policies within the Reagan administration tend to define it as the lingering schizophrenia in the Reagan administration between traditional internationalist conservatives and California unilateralist conservatives.

The latter, they think, would be ready to sacrifice the European alliance if the Europeans don't jump up and salute whatever Washington's ideas are. The former, they think, value the European alliance as a bastion against the expansion of Soviet influence -- and eschew a feud over the pipeline that could end in US-European divorce.

In this analysis the internationalist conservatives have therefore come up with the bankers' option. They asked three crucial questions -- and answered them rather differently than the hardline school that favors what might be called industrial warfare against the Soviet Union.

The first question is: What Western course of action would most help the Polish people in the present situation?

The bankers' option answers agnostically: we simply do not know if aiding the Polish government economically or refusing to aid it would be more beneficial to the hard-pressed Polish people.

Assisting the Polish economy might ease the plight of the Polish man in the line -- but it might also prolong the repression. Refusing to assist the economy could prolong food and other shortages - but it could also speed the day when the Polish government would have to resume a dialogue with the Roman Catholic Church and the workers to get the economy functioning again.

The first question and answer thus offer no useful guidance about what American policy should be.

The second question is: What Western course of action would most effectively limit the Soviet capacity for troublemaking abroad?

Here both the bankers' option and the industrial warfare option would like to see the West stop rescuing the Soviet Union financially from its economic difficulties, thus releasing Soviet domestic resources for military investment. The Soviet bloc has by now borrowed an incredible $70 billion from the West, much of it for large scale development projects.

The industrial warfare school would ban new Western credits for the Soviet bloc by government fiat, and would also force European companies to renege on the pipeline contracts they had signed prior (with the exception of France) to the Polish declaration of martial law.

The bankers' school, by contrast, would let market forces dry up new loans. It would also follow the conservative American axioms of sanctity of law, of not abrogating contracts or forcing others to do so, and of not undermining confidence in American reliability.

The free-enterprise route, the bankers' option holds, would incidentally avoid provoking the Kremlin at what could soon be a sensitive and dangerous period of succession struggle, economic duress, and challenges to empire -- but also a period of unprecedented Soviet military power.

In this analysis, since the Kremlin has no inherent right to Western loans, it could hardly charge interference in any dearth of credits resulting from marketplace decisions by bank managers. The Kremlin could very easily take offense, however, at a policy of industrial boycott and confrontation steered by Washington, and could retaliate bitterly.

The third question is: What course of action would least damage Western alliance relations and the international economic system?

Here the bankers' option answers that extending Washington's embargo on the perhaps 1 percent of American equipment for the Soviet gas pipeline to spoil the whole project would anger the Europeans and create a schism in the NATO alliance. Such an outcome would be inevitable if the US -- which exports few industrial goods to the Soviet Union anyway and is not about to reembargo its lucrative grain exports to the Soviet Union -- insists that Western European nations embargo their lucrative industrial exports to the Soviet Union. Such an outcome would benefit only Moscow.

By contrast, simply letting prudent bankers curb high-risk loans -- as they have already started to do -- would hardly rupture the alliance.The West German government -- which is the most dogged in regarding East-West trade as a virtue conducive of political moderation in the East -- might require some persuading not to step in with government guarantees for credits that cautious German bankers would not otherwise offer the East.

And the French government-owned banks -- which very recently utilized government subsidies to grant Moscow credits for purchase of French pipeline equipment at 7.5 percent interest or half the French market rate -- might be slow in joining the trend.

But budgetary constraints severely limit the amount of risk the Bonn government can underwrite. And French domestic politics should eventually bring the French around too, as taxpayer revolt against having their money go to subsidize Soviet rather than French industry in a time of unemployment and soaring interest rates.

Looking to the international economic order as a whole, the bankers' option says that a deliberate East-West economic confrontation could cripple both the international banking system and third-world economies. Expert analysis suggests that Western banks became seriously overextended in their loans to Soviet bloc and lesser developed countries in late '70s.

Analogies are made with reckless extension of credit to real estate interests and real estate investment trusts in America in the early '70s -- and even with reckless lending abroad by American investment banks in the 1920s.

Under these circumstances an abrupt crash of the Soviet-bloc market (which might have been triggered by declaring Poland bankrupt, for example) could have administered a severe shock not only to the international financial system but also to the international economic system, and especially to third world nations.

A free-market tapering off of net new credits, by contrast, would spread itself out over two to five years and would let losses be absorbed without sabotaging the whole international economic system.

Beyond these basic questions and answers, several premises underlie the bankers' option.

The first two -- which are shared by the industrial warfare option -- are that the Soviet bloc is in economic crisis and that Western economic restraint in rescuing Moscow might encourage Soviet military and political restraint.

Signs of chronic crisis may be seen in the slowing of growth rates to a crawl in the inefficient Soviet and Eastern European economies; in the Soviet labor and capital shortage and consequent allocation squeeze; and in stagnation in the Soviet standard of living (an especially crucial phenomenon because of the increasing weight accorded to rising living standards as ideological justification of the regime).

Signs of acute crisis may be seen in the current Soviet depletion of hard currency holdings in banks in the West, Soviet offloading of gold and fuel oil despite soft Western markets, and unexpected Soviet requests for short-term Western credits.

In this context the Soviet subsidizing of the Eastern European economies and the Soviet commitment of 12 to 15 percent of its gross national product to military production strain the Soviet economy. Western parsimony with credits could help maintain the pressure of Soviet subsidies for Eastern Europe which Western economists figure have been a drain on the Soviet economy since the mid- 70s.

Poland is the most spectacular case, the Congressional Joint Economic Committee estimates, absorbing $1.9 billion of Soviet help last year, but Romania, Czechoslovakia, East Germany, Hungary, and Bulgaria also absorbed an estimated $1.4 billion.

And cumulative Soviet subsidies since Moscow deliberately postponed applying world prices to Soviet oil exports to Eastern Europe in the mid-70s are estimated by Washington's Wharton Econometrics Forecasting Associates at over $ 20 billion; Moscow seems to have decided that the burden was worth it to keep Eastern Europe closely linked to the Soviet Union.

Under these circumstances the bankers' option believes that holding back on Western credits would exert at least marginal pressure on Moscow to free military funds for economic use. They think this a more probable effect than -- or at least worth the cost of -- any pushing of Eastern Europe back into greater dependence on the Soviet Union.

Here the industrial warfare school would part company with the bankers' school. Hardliners would argue that permitting implementation of the gas pipeline deal -- the biggest East-West deal ever - would ease rather than increase pressure on the Soviet military budget by allowing Moscow to divert to military production those domestic resources that would otherwise be needed for energy development.

A third premise of the bankers' school is that Western bankers have in fact been so scared by the de facto Polish bankruptcy that -- despite their current surfeit of liquidity -- they will taper off net new credits to the Soviet bloc of their own accord.

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