Part I

Expanded from an earlier answer of mine

Both Spain and Portugal posed a set of problems for the Western democracies and the US at the onset of the Cold War. On one hand both Franco and Salazar represented a type of illiberal politics that was at odds with the claim of supporting democracy. Adding to this, both Iberian dictators were far from hostile to fascism in the interwar and war periods and their wartime dealings with Italy and Germany were far from spotless. Yet, Iberia and the overseas dominions were militarily useful for the emerging Cold War. Portugal's ceding of base rights for the Azores during the Battle of the Atlantic not only underscored their potential for military use these territories, but also showed the dangers of leaving them up for grabs. The anti-communist ideologies of both Estado Novo and the Falange were impeccable and both Salazar and Franco were more than amenable to be drafted into an anti-communist bloc. This utility for the Cold War gradually overshadowed the past misdeeds and these states' illiberalism in Western diplomacy.

Portugal was the easiest to welcome back into the fold of the West. The Western-Portuguese relationship had evolved over the course of the war on terms that made a rapprochement possible. When war instead of openly supporting one side, Salazar instead opted for what Portuguese historians have called "geometric neutrality" between 1940 and 1942. Portugal sought to appease German demands for access to Portuguese markets, and Portugal acceded in such a manner that it did not alter its relationship with Britain. Gradually, soft economic pressure and Anglo-American contacts with Portuguese elites led to a shifting of the geometric balance on terms clearly favorable to the Allies. Although Portugal did not join in like other neutrals in a belated declaration of war against the Axis, it did allow basing in the Azores as well as other policies that helped the Allied war effort.

Allied planners and statesmen generally began to see the Portuguese as tractable partners in Iberia and the wartime diplomacy set a pattern in which constructive engagement would lead to a favorable outcome. Portugal was included in the round of countries to receive American economic aid under the aegis of the European Recovery Program (ERP- also known as the Marshall Plan). The general consensus within both the American State Department as well as in Paris and London was that Portugal could be brought into the Western fold much as it did during the war. Soft power of economic aid would induce a gradual integration of Portugal into a Western European framework that would suit immediate needs as well as taming the dictatorship. For its part, the Salazar regime welcomed Western aid as well as the possibility that being in the Western geopolitical orbit would lead to the preservation of its overseas colonies in Africa and Asia.

Spain presented a much more thorny problem in the postwar years. While Salazar did not owe his rise to Hitler or Mussolini, the same could not be said of Franco. Moreover, Franco's actions during the war carried little that could be construed as a geometric neutrality; Spain was much more pro-German in its policies than Portugal. Thus the immediate stance of the Allied powers towards Spain at the end of the Second World War was diplomatic isolation and pressure for internal regime change. The origin of this strategy evolved out of two interrelated factors: Spain's diplomacy in the last two years of the war, and the geopolitics of the nascent Cold War.

Franco's attitude towards the war was complex and evolved over time. He initially saw the Molotov-Ribbentrop Pact as a betrayal of the ideological new order and an alliance with the enemy, communism. The Fall of France modified his view somewhat as it presented Spain an opportunity to expand at the expense of defeated France and a weakened Britain. Hitler though was relatively inflexible to Franco's demands for belligerency and Spain took on the stance of a friendly neutral. Spanish neutrality actually benefited German interests as it was a supplier of raw materials, especially the crucial industrial element tungsten, and Spain's friendly government aided the German war effort in the Atlantic and the Abwehr's espionage rings. The Allies looked askance at Spain's friendly stance to the Third Reich and developed two tools which to pressure Spain to return to actual neutrality. Firstly, there was the hard pressure of economic blockade and threats of further sanctions against the weakened economy. Secondly, the Allied intelligence networks fostered contacts amongst Spanish elites, especially within the army to push Spanish towards a pro-Allied stance. The Allies maintained a fine balancing act between these two stratagems; they did not want to push Spain into a situation in which Germany would invade, which would divert military forces of the Western Allies to defend its new-found ally. Franco reluctantly began to see the writing on the wall and withdrew the Blue Division from the Eastern Front in 1943 and announced a shift from nonbelligerency to neutrality in October of that year. Yet, Franco only really began to cut Spain's ties with Germany in a concrete fashion around D-Day. Although Spain almost declared war on Japan in 1945 over its treatment of Spanish nationals in the Philippines and even offered to allow Spanish volunteers to fight Japan, Franco's inconsistent stance towards Germany had turned Spain a pariah state by the time of the Potsdam Conference.

Spain posed a quandary for the diplomats at Potsdam and each pursued their own agenda with regards to Spain. The Western Allies had little stomach for a military intervention in Spain, which they perceived as militarily weak, but with geographic advantages that would make a resistance long and protracted. Spain also had given no real pretext for invasion beyond its ideological sympathies for fascism. Here is where the covert attempts to win Spanish elites intersected with high diplomacy.The British desired a relatively stable and friendly Spain that would act as guarantor of Gibraltar and thus provide one less headache for the ultimately futile effort to reestablish a strong British empire in the Mediterranean. This meant maintaining a cold reserve towards Franco and the Falangists, but strengthening ties with conservative monarchists which would hopefully lead to a monarchic revolution and depose Franco. The American position was like Britain’s, but more preoccupied with a communist resurgence in Spain that might result from too of a precipitous fall of Franco. The British Ambassador in Washington summed up the State Department's attitude in a May 1945 report:

that whilst in full agreement with our policy in principle, State Department feel in practice, if we are too stiff with Franco we may give undue encouragement to Communist elements. In the present mood of Moscow they might well turn out to be as inimical to our long term interests as the Falange itself. Mr Armour [the new US ambassador in Madrid] apparently has an instruction to hasten the demise of the regime. The State Department are now thinking of telling him to ease any pressure he may have been exerting and, while doing nothing to encourage Franco to believe that anything less than drastic reforms are necessary if his Government is to gain the confidence of the democratic world, at least to desist for the time being from giving active encouragement to the opposition elements.

For the Americans, a stable Spain to prevent communism meant at least in the short-term a guarded acceptance of Franco and his diplomatic isolation to nudge him towards reforms.

The Soviets perceived the Western Allies' reluctance to deal with Franco directly and decided to capitalize it. Molotov's brief on Spain at Potsdam stressed that the current Spanish government was an artificial imposition upon the Spanish people by the fascist powers. Although his brief did not call for a direct invasion of Spain, it called for the United Nations "to break off all relations with the Government of Franco; 2. To render support to the democratic forces in Spain and to enable the Spanish people to establish such a regime as will respond to their will." This was a more radical stance than the Western Allies, but it also served as a justification for the creation of the satellite states in Eastern Europe. The Soviet's public diplomacy stressed that the Red Army acted as a liberator of artificial regimes propped up by fascism such as Bulgaria, Romania, and Hungary and the new communist-led regimes were the true manifestations of the people's will that fascism had dampened. A harsher stance against Spain would be a legitimation of the Soviet's actions within Eastern Europe. The Allies' rejection of the harsher tone also became a victory for Soviet diplomacy in that it opened the Western Allies up to charges of hypocrisy when they critiqued the lack of freedom in Eastern Europe by their toleration of an actual fascist government in their backyard. The Western Allies recognized this and sought to soften the Potsdam's declaration on Spain and not give the Soviets an issue. The resulting declaration was somewhat mild: