Confidential report from Michael MacWhite to Joseph P. Walshe (Dublin)¹
(Confidential)

With the fall of Catalonia to the Nationalist forces one of the main danger spots in Europe seems to have been eliminated. The civil war in Spain is nearing its end and the granting of belligerent rights to Franco cannot be much longer delayed, after which the Republican forces may not count on further supplies from the outside world. This will not, however, mean the withdrawal of the Italian forces as was promised Chamberlain during his recent visit to Rome. The Duce now insists on a political as well as a military victory.

With the internment of some 200,000 of the Republican army in France the political situation has changed. In any future Franco-Italian negotiations these forces may play an important role. Unless they are returned to their native soil, they can always be held, like the sword of Damocles, over Franco's head, so it is necessary that their destiny be decided before the Italian Legion returns. This is how one awkward situation leads to another. It is also an indication that the Duce has not been satisfied by the results obtained from Chamberlain's visit. Something of a practical nature was expected that evidently has not materialised.

The internal situation in Italy is a cause of some concern at the moment. The factories in the big industrial centres of Milan and Turin are said to be working at little more than one-third capacity and the munition factories are barely marking time due mainly to the lack of raw materials. The workers are said by visitors from Northern Italy to be giving expression to their grievance more openly than has been the case since the march on Rome. The popularity of the Duce is, however, much higher than that of the Fascist Administrators.

I learned from a usually well informed source yesterday that during discussions preliminary to the renewal of Italian contracts for petrol with American, British and Dutch concerns, the Minister for Exchanges and Currency said he would only give his consent and signature for the purpose, on condition that the companies concerned placed credits for five million pounds sterling at his disposal immediately. Italy could get all her petrol requirements from Mexico and Venezuela in exchange for machinery and manufactured articles, but for these raw material is necessary and that has to be paid for in cash.

It was generally expected that at the meeting of the Fascist Grand Council on Saturday night the Duce would make a pronouncement on International questions, but to everybody's surprise he maintained silence. A diplomatic colleague assures me that earlier in the day he had a telephone conversation with the Fuhrer who advised prudence especially in regard to France. Roosevelt's supposed reference to the American frontier being on the Rhine has impressed the German leaders more than they would care to admit. They appeared to be convinced that American intervention in European affairs was absolutely impossible and were suddenly brought to a sense of the reality of the situation by the secret meeting of the Military Committee of the United States Senate.

Germany is coming closer to Russia in the hope, perhaps, that she could obtain some territorial concessions by negotiation, and it is noticeable that the Italian papers today say an Italo-Russian trade agreement is to be signed one of these days. This has been hanging fire for the last two years. On the other hand Russia knows that sooner or later she will have to fight Japan and when that time comes she wants her Western frontier free from embarrassments.

It is well within the scheme of things that Rumania will be the next victim of German drang nach Osten. The Iron Guard ², which is subsidised by German funds, is not dead notwithstanding the official killing of its leaders a few weeks ago. Its operations at the moment are said to be beneath the surface and therefore, all the more dangerous. Poland has got an assurance from Ribbentrop that her borders and the city of Danzig are safe for some time to come, at all events, and Ciano is to carry further consolation to Warsaw where he is expected towards the end of the month. His visit to Belgrade a few weeks ago was not very happy as it resulted in the overthrow of the Conservative Premier, Stoyadinovitch, and his replacement by another with Leftist tendencies. The former had come to some tentative agreements with Count Ciano which evidently displeased public opinion and provoked his downfall. It would seem the only East European country that has been avoided by the Rome-Berlin diplomats is Rumania. A part of Ukraine by a friendly arrangement with Russia and a part of Bessarabia by friendly or forceful methods, as the case may be, would make an excellent State, bounded by the Dneiper and the Danube, under German tutelage, and then there is the possibility that no shot need be fired in bringing it into existence. The danger of war is not so imminent as appeared some weeks ago.