Foreign Relations of the United States, 1951, European Security and the German Question, Volume III, Part 2

ECA message files, lot 53 A 278, box 27, Frankfurt Toeca: Telegram

The United States High Commissioner for Germany (McCloy) to the Administrator for Economic Cooperation (Foster)¹

secret
priority

Frankfurt, July 28, 1951—3 p. m.

Toeca 759. Ref Toeca 737, Paris Torep 724, London Sigto 51 July 23.² Allied and Ger specialists held joint examination of draft Federal 51–52 budget at Bonn July 23 and 24. Ascertained that budget funds will be exhausted about 15 Sept earliest and 15 Oct latest rather than Nov reported reftel. Utilization BDL credit ceiling 31 July expected DM 1000–1100 million leaving DM 400–500 million. Fund deficit Aug-Oct expected DM 200–250 million per month.

After detailed examination draft budget appears Well estimated. Wld amend fund deficit estimate from reftel DM 2.2–3.3 billion to DM 2.8–3.6 billion based on likelihoods under present circumstances for enactment no tax increase legislation, more Berlin funds required, disinclination Bundesrat give FedRep more than 25 percent of income, corporation tax revenues. New calculation of inflationary deficit (as distinguished from Federal budget fund deficit) awaits agreement with German technicians on laender budgetary prospects.

Our previous estimate (Fin/P (51) 21³) combined deficit DM 4.4 Trillion US fiscal 51–52 assuming DM 9 billion contribution now seems too conservative. New calculation for Ger fiscal 51–52 assuming DM 8 billion occupation and related costs likely in range DM 4–5 billion.

Schaeffer’s draft budget provides only DM 7.4 billion occupation and related costs including DM 800 million non-recognized. DM 1.6 billion recognized shown uncovered in extraordinary budget. This presentation apparently preliminary attempt to inform Allies that occupation costs cannot be met without assistance. When Schaeffer meets FinCom second week in Aug we intend offering nothing except promise to use influence with BDL to raise debt limit. Then Schaeffer will probably make clear whether or not FedRep intends pay occupation costs in full. If not, sub] will then go before AHC and Chancellor as major political issue.

If Council is faced in late Aug with FedRep intention not to pay occupation costs in full as appears likely, believe approach shld under no circumstances be restricted to reminding FedRep of unchanged occupation status and mandatory nature occupation costs. Fact is that while FedRep was willing to finance occupation costs, Bundestag including coalition party factions wld not go along, claiming occupation costs contain substantial non-defense categories and that Ger occupation status is incompatible with a voluntary defense contribution. FedRep was forced principally by coalition defection to abandon previous tax increase position and press Allies for reduction occupation costs. Position now is that FedRep, even if willing, cannot force Bundestag to accept new taxes or elevation BDL credit ceiling for purpose of financing increased occupation costs. Legalistic arguments based on occupation statute therefore cannot be successful and wld not be conductive to producing the relationship with FedRep we desire after entry West defense partnership. Such an approach wld indicate crude insensitivity to FedRep’s current dilemma.

Reduction occupation costs by 10 percent or more only as last resort. While postpones crisis for few months it (1) makes Allies overall position appear weak and (2) gives Gers impression their future defense contribution will be lower than present level occupation costs. May produce reaction other countries on level their defense contributions. Also produce Ger attempts bargain in other reserved fields. Only other approach based on (1) importance future defense role and assurances equality status which must be tangible to enable FedRep convince Bundestag and public. (2) Someone has to pay these costs, and only when Ger assumes defense burden shld Allies increase their present expense of defending Ger. Point out so-called “frills” are minor amount.

To take this approach governmental pressure must be applied UK and France since their reps here cling tenaciously to occupation status and consider defense contribution financing premature. Pls comment soonest as Council may be faced with crisis if issue arises in late Aug or, at latest, end of Sept when funds availability becomes critical. Failure solve this problem cld result in serious deterioration our position.

McCloy

1. Repeated to Paris and London.
2. Not printed. It reported that at a meeting between representatives of the Federal Republic and the Allied High Commission on July 18, Schaeffer had divulged the draft budget for 1951–1952, and had in effect appealed to the High Commission to request its governments to relieve the Federal Republic of part of the burden of occupation costs. (ECA message files, lot 53 A 278, box 27, Frankfurt Toeca)
3. Not printed.