The International Monetary Fund is being pulled deeply into the quagmire of domestic politics in Southern Europe's most financially troubled nations.
Critics of the fund's actions as threatening human rights and the survival of some democratic goverments in the region.
But West Germany's orthodox financial managers see the fund's rules good economic conducts as the only salvation for their cash-strapped southern neighbors. Bonn increasingly is conditioning new financial aid on its neighbors' willingness to accept IMF policing of their economic performances.
Those rules generally means sharp cuts in consumption and public spending, accepting the risk of even higher unemployment rates and other unpopular austerity measures that the politically fragile governments of Italy, Portugal and Spain may have trouble in imposing.
Europe's North-South conflict over the IMF provides the Carter administration with a dilemma that it so far has tried to avoid. Less enthusiastic than Bonn about the bitter medicine called for by IMF experts, Washington nonetheless still is emphasizing multilateral aid approaches through the fund over bilateral deals.
"There can be a very dicey situation during the negotiation of those loans," Vice President Watler Mondale told reporters ofter visiting Libson and Madrid this week.
"Many countries have said that many times those terms are very, very tough on them and make it difficult to keep a popular democracy in place."
But, Mondale added, the long-term IMF "reforms are nevertheless crucial to the meaningfulness of a loan."
The three countries most directly affected - Spain, Portugal and Italy - all were hit hard and early by the huge balance of payments deficits that followed the sharp rises in world crude oil prices. Each still has an inflation rate of 20 per cent or more and growing unemployment.
But rather than impose austerity programs that really pinch consumers, the three countries have found short-term ways of living with the balance of payments problems which have begun to show up elsewhere in forms just as severe.
The IMF's approach implies tossing out the quick fixes and painful reorganizations of the economy.
Spain is trying to avoid confronting those conditions by raisisng the billion dollars it wants this year from private American banks or through bilateral aid. But American officials ascknowledged the Carter administration is forcefully nudging Prime Minister Adolfo Suarez's government toward the IMF it wants new aid infusions.
Portugal is deep into the IMF already. Portuguese officials brought their concern over the fund's demands for cutbakes in public consumption to Mondale's attention this week and appear to have received a sympathetic hearing. He dispatched a message to Washington asking for special consideration of the Portuguese case.
The U.S. also has taken a softer position on a $700 to $800 million consortium loan vital to the survival of Portugal's Prime Minister Mario Soares than has Bonn, which wants stiff IMF monitoring of the loan at an early stage. Talks on the loans in Paris failed to make progress Monday, but Mondale remains personally involved in the effort.
The fund's deepest involvement is in Italy, where the IMF in effect has helped hold the shaky conservative government together for the past nine months by stretching out negotiations on a $522 million loan, which it granted now that Italy probably does not need it.
Premier Giulio Andreotti has been able to use the fund's reluctance to part with the comparatively small, but symbolically important, standby credit to argue at home that only his minority, American-backed Christian Democratic government could extract the loan from the IMF.
Andreotti also has been able to use the fund's demands for economic changes here to warn the Communist-and Socialist-dominated labor unions that international credit would be shut off and that financial catastrophe lies ahead unless they slash wage demands.
In fact, figures published this month by the Bank of italy show that the economy has bounced back sharply during the past year. American and European private banks loaned $3 billion to Italian clients while the fund was haggling over the $522 million, credit. There are signs, however, that the economic surge is beginning to slow.
Although the fund agreed in principle last month to provide the credit, the money is being divided into three paypments spread over 18 months. Italy drew its first slice of the loan this week, but payments can be halted if Italy does not carry out some painful austerity measures that will test the powers and intentions of the government and the unions.
"The function of the IMF loan really is to focus attention and public opinion on what has to be done," said Guido Carli, former head of the Bank of Italy and now director of Confindustria, the Italian industrialists' organization. "What is being talked about, and openly now, is the restricting of incomes in real terms, and that is always a difficult political matter."
A blunter analysis comes from Luciano Barka, the Communist Party's top economic expert, who says:
"We did not need the loan. But once the government asked for it, it became extremely important. If the fund had said no, it would have greatly damaged our ability to get other international credits."
While agreeing to keep ANdreotti's government in power by abstaining in parliamentary votes of confidence, the Communists, Italy's second largest party, so far have muted their criticism of the government's handling of the loan. It appears to have been a useful tool for them a times in justifying their cooperation with Andreoti.
Now, however, there are signs that the Communists are worried about how hard the fund will push for major changes in automatic cost-of-living escalator that protects union members against Italy's roaring 20 per cent rate of inflation at a cost of feeding that inflation.
The government has given the IMF a letter of intent in which it promises to reduce inflation to 16 per cent by the end of the year and cut the public deficit. It also expresses the belief that "further change is desirable" in the cost-of-living escalator, which is calculated quarterly in an agreed basket of goods and services.
After they agreed to discuss cost-of-living changes, the Communist Party and its allies in the leadership of the unions were denounced angrily by the rank and file in the first serious test of strength for the Communists among the workers the party claims to represent.
"The unions say that the escalator should never be touched," Barka said. "We are more realistic. We believe that it is not possible to talk about a big reform in the escalator mechanism today. It would take two to three years before we are ready for abig reform."
The Christian Democrats are seeking agreement from the Communists and other parties on an economic emergency package that will include steps to carry out their commitments to the IMF.
The greater problem is going to be keeping government expenditure within agreed limits," Carli said.
Italy's import-and transformation-based economy has erased the economic gains made last year. Inflation has caught up with the lira devaluation, and Italian goods are becoming less competitive. Moreover, the 5.6 per cent industrial surge in 1976 caused a sharp spurt in imports that has resulted in another large balance of payments deficit for Italy.
Much of the $3 to $3.5 billion in private credits and loans over the past year were advanced to pay for the imports, so that Italy's reserves have not been affected by the payments deficit.
"Italy was in the avant garde of countries whose balance of payments problems were made to look horrible by the 1973 oil price increases and the recession," one economic diplomat explained."Now other countries are in equally bad condition, and bankers have lost their fear of Italy as the awful example. The market in Europe is very liquid and they needed some place to put the money."
Italian foreign debt stands at a staggering $18 billion. The IMF loan will free another half a billion dollars due from the Common Market, which has also attached conditions to its loan.
"Italy probably won't need any other official borrowing this year, beyond a rescheduling of West Germany's loans," the diplomat added. "Andreotti's lask now will be to keep the pressure up inside now that some of the reinforcing pressure from outside been eased."