Foreign Relations of the United States, 1964–1968, Volume XV, Germany and Berlin

160. Telegram From the Embassy in Germany to the Department of State¹

Bonn, August 12, 1966, 1821Z.

1834. For Under Secretary from Hillenbrand. Ref: State 26106.²

1. In terms of any realistic assessment, I must judge the offset prospects to be bleak. The base statistics available at this time indicate an estimated German need for funds in the amount of $705 million during the first six months of 1967 if the payments part of the current offset agreement is to be met. This is on the assumption that the Federal Government, with the assistance of the Bundesbank, will be able to borrow $250 million on a short or medium term basis, to make the special payment before the end of 1966 to which the Germans are committed. Present German thinking is that the defense budget for fiscal year 1967 will be between 18.0 and 18.5 billion DM, although there will be heavy pressure on Erhard to pare this down further in the process of squeezing the overall budget down to the DM 74 billion which the Cabinet has fixed as the maximum permissible (the squeeze will be even more intense if the Federal Government loses a further billion DM or so in the tussle with the Laender over the percentage of income tax revenue to be retained by Bonn).

2. Our best guess is that, given a DM 19 billion defense budget for 1967, the Federal Government could probably not raise more than DM 1.6 billion ($400 million) for offset payments in 1967. (This would essentially represent re-payment against anticipated orders. The recorded total of orders through June 30, 1966 for the two-year orders period ending December 31, 1966 is only $630 million.) Even after such a payment the Germans would be some $300 million short of the offset total of $1350 for the two-year payments period ending June 30, 1967. There would be nothing left for payments on any new offset agreement during the last six months of 1967. Although there are clearly political and financial limits to borrowing from the market through the Bundesbank, this source might be used to raise further amounts on a short or medium term loan basis during 1967 (Bundesbank approval would have to be obtained), to meet the $300 million shortfall and possibly to provide some funds for a new agreement.

3. The essential problem, as I see it, is not the general state of the German economy which appears to be taking a turn for the better (Bonn 1812)³ but the built-in rigidities of the German revenue and budgetary systems. It is, of course, of great political importance to Chancellor Erhard that he successfully steer through the legislature his economic stabilization bill, and concern about the overheated German economy and pockets of distress such as the Ruhr is strongly influencing the general atmosphere within which the budget is being discussed. The fact remains that even without this concern the budgetary possibilities of the government would be severely limited. The only immediate real solution would lie in a tax increase (including income tax), but Erhard’s weakened political position makes this seem impracticable. Over a longer period a reduction of subsidies and strict control over increases in social programs would permit rising revenues again to provide more for defense.

4. It is clear that even a vigorous Presidential message plus follow-through would not change this basic situation. It might however help protect the defense budget from further cuts—perhaps on a scale of $100 million. What we had in mind in Bonn 1600⁴ was the desirability of getting something on the record before the late-August Cabinet discussions at which the Defense Ministry share of the overall budget total will be fixed. The language which we suggested seemed calculated to make our point while causing minimum irritation and expressing confidence in German good intentions about the offset.

5. There is no doubt that the offset issue, in the context of prevailing confusion here about U.S. intentions on troop presence, has become politically highly sensitive. The Chancellor will find it difficult to be accommodating to us without laying himself open to the charge of his enemies that he is proving intolerably weak in the face of U.S. pressure. Public and private discussion of U.S. policy towards Germany has become heated, with Secretary McNamara the prime object of attack. For the first time in my recollection, we are hearing irrational reactions from some important politicians to the effect that if the Americans are going to be so penny-pinching and unreasonable in their demands, ignoring their own security interests in Europe, than let them take their troops out. Needless to say, this is a line of argument which plays directly into de Gaulle’s hands. Fortunately, it is not by any means a prevailing sentiment, but the climate of discussion is not healthy and is greatly complicated by the daily rash of stories in the press reporting alleged Washington plans for unilateral troop reductions, denuclearization of the Bundeswehr, and a general turning of our back on Europe. There is some evidence that the Chancellor himself feels bruised, and is nursing a certain sense of grievance because of what he considers to have been a series of disappointments with the U.S.

6. I would conclude, therefore, that a major effort which would inevitably become public [toward?] the Germans on the offset would, at this point, be likely to backfire. It would further weaken Erhard’s position and seriously and negatively affect U.S.-German relations. It would certainly strengthen the position of those who feel that de Gaulle is basically right about the future of Europe. Our desire to avoid these results would not be incompatible with a private reminder to the Chancellor, of the kind we had suggested, that he should try to avoid coming to Washington with a completely frozen position. I definitely do not believe however that we should clobber the Germans, publicly or in private, at this point, or make threats. We should also try to refrain from public statements or backgrounding of a type which does not persuade the Germans but merely hardens their resistance. The general posture suggested in Bonn 286⁵ still appears relevant.

7. We are obviously going to have to move soon towards some fairly basic decisions which will affect our future relations with the Federal Republic. We will need to establish some priorities among the various objectives we seek to achieve in Europe, not all of which may be completely compatible with each other. This will require some hard thinking about the kind of offset we can realistically expect to achieve for the period after June 30, 1967, and above all how much pressure we can apply to achieve our objectives both within the present and projected new offset agreements without jeopardizing other major policy goals.

Hillenbrand

1. Source: Johnson Library, National Security File, Country File, Germany, Nodis. Secret; Immediate; Nodis. Passed to the White House.
2. Telegram 26106 to Bonn, August 12, requested “your latest personal estimate of the problems of the 1967 German defense budget and offset.” (Ibid.)
3. Dated August 11. (Department of State, Central Files, E 2 GER W)
4. Dated August 5. (Ibid., FN 15 GER W)
5. Document 156.