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156. Memorandum to President Carter 1

FROM

  • Cyrus R. Vance
  • W. Michael Blumenthal
  • Charlie Schultze
  • Zbigniew Brzezinski
  • Henry Owen

SUBJECT

  • Energy and the Summit

1. All the heads of government at Bonn will want to know whether US oil imports will go down. They don’t care whether this happens by legislative actions, or administrative action, or by using your existing authority to allow domestic prices to increase gradually to world price levels (which is probably their preferred course of action). You will remember that when Callaghan came in March and Fukuda in May,2 both stressed their concerns on this issue; you said to Callaghan that you would respond to these concerns at the Summit.

All believe that large US oil imports increase the US external deficit, weaken the dollar, and thus damage their economies. Schmidt has said that any German expansion would only make sense if he could be sure that it would not be offset by the currency disorders that he believes would attend US failure to limit oil imports more drastically. He and the others also fear that continuing large US oil imports will drive up the world price. They, their peoples, and the foreign exchange markets have not digested the progress that has already been made by the US; they exaggerate, moreover, the significance of COET or equivalent administrative action, relative to the rest of the energy bill, in reducing oil imports.

2. Our tactical situation at the Summit is made easier by the fact that other heads of government are being asked to take action in other areas: All want Germany and Japan to grow faster, and all want Britain and France to be as forthcoming in MTN as the rest of us. Some of the countries being asked to take these actions have linked them to US action on energy. But this linkage works both ways. Other heads of government face the same kinds of political constraints—the Germans and [Page 495]Japanese on growth, and the British and French on trade—that you do on energy. There is no reason why you should be more forthcoming or specific in talking about energy than they are prepared to be on growth and trade.

3. At your Friday meeting with Schmidt,3 you will be able to sound out his intentions about growth—which is the key to triggering other Summit countries’ actions. As of this date, we only know what Schmidt said to Callaghan and in a recent Business Week interview: that he would be willing to take expansion measures as part of a package deal. He evidently implied the same thing at the recent Bremen EC meeting.4 In Bonn last week, German officials were talking of a 12 billion DM package (1% of GNP), which seemed to include some water, i.e., measures that would have been taken in any event.

A July 6 telegram just in from Embassy Bonn5 indicates that “the poor May economic data as well as the internal debate on tax reductions have increased the chances of a German 1979 program of fiscal stimulus going beyond the one percent of GNP or DM 12 billion recently mentioned by German officials. A larger rather than a smaller package of tax reductions and expenditure increases may in some ways actually be more easy to put together politically. But it is as yet far from a sure thing, as aversion to higher public deficits remains a significant counterbalance throughout the political spectrum.” The matter will be decided at a German cabinet meeting twelve days after the Summit; any resulting proposals would be put to Parliament in September.

4. One can envisage three alternative positions that Schmidt might take in your meeting with him:

a. He may be willing to make a statement that, however general, would clearly envisage a substantial growth package in the 1979 budget—on the order of 1% GNP. In this case, we would recommend, if this proves necessary, a US statement on energy (Tab A)6 that, while less specific than the one you discussed recently with members of the Congress and therefore less welcome to allies and more troubling to foreign exchange markets, might still be sufficiently forthcoming to meet Schmidt’s concerns and thus elicit his firm growth pledge, without being unnecessarily offensive to the Congress. This statement would also describe the progress that we have achieved to date in strong terms.

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b. Alternatively, he may be willing to make a statement that would pledge action in the 1979 budget but would not make clear the amount of new growth action we could expect. In this case, we would recommend that you fall back to the weaker statement at Tab B. This statement, by referring explicitly to “working with Congress” and to the possibility of “legislative action”, is weaker in its commitment to administrative action than your April statement to the American Society of Newspaper Editors7 (Tab C). This evident difference would probably trigger adverse comment and renewed pressure on the dollar.

c. He may be willing to make only a general policy statement on growth, which pledges nothing. In this unlikely case we will have to decide what to say on energy in light of other factors.

7. In choosing among options, the situation at home is relevant:

a. Political: The stronger your statement the greater the likelihood that the Dole amendment8 will be passed by a large majority. Stu Eizenstat attaches a memo on these dangers. (Annex I)9 (We wonder whether the outcome would be affected by whether you brought back an evident success, including important growth and trade pledges, from the Summit?)

b. Economic: A question has been raised as to whether it would be in the US interest in 1979 to take administrative action to restrain oil imports, in view of current economic prospects. Charlie Schultze attaches a memo indicating the pluses and minuses, and concluding that it would still be in our interest to do so, if we can get something substantial in return. (Annex II)10

8. Tactics: In your conversation with Schmidt, you may want to:

a. find out what he has in mind saying and doing about growth, in as specific terms as possible;

b. repeat your determination to act vigorously to restrain oil imports; underline the difficulties you face in trying to define that determination in specific terms, if contraproductive Congressional reactions [Page 497]are to be avoided; and explore how weak a statement on energy would be sufficient to elicit his expansion decision.

After hearing Schmidt out, you may want to say that you will decide what to say on energy in light of this conversation, and that your advisers will communicate the specific language to his staff later in the day. (He will want to know what you intend to say before the Summit opens, since it will affect what he says on growth.)

This procedure would provide an opportunity for us to give you a careful assessment of what he had said about his growth intentions (assuming he was willing to make some sort of pledge), before you made your decision, choosing between the stronger and weaker statements at Tabs A and B. We believe that a weaker statement, such as Stu Eizenstat is proposing, which would do no more than defend our energy record to date and promise to continue trying, would likely be insufficient, and would be perceived, at home and abroad, as such a sharp backdown from your April statement and such evidence of weakness as almost surely to be followed by a sharp fall-off in the dollar.

It would be understood that use of both your statement on energy and Schmidt’s statement on growth would depend on what you found out in the Summit about Japanese, British, and French intentions.

  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Trip File, Box 14, President: Germany, 7/13–17/78. Confidential. Sent for information. Solomon initialed for Blumenthal. The memorandum is typed on White House stationery.
  2. Callaghan was in Washington March 23, Fukuda May 1–3.
  3. According to the President’s Daily Diary, he met with Schmidt on Friday, July 14, in Bonn. (Carter Library, Staff Office Files)
  4. The EC Council met in Bremen July 6–7.
  5. Telegram 12298 from Bonn, July 6. (National Archives, RG 59, Central Foreign Policy Files, D780277–0155)
  6. Tabs A–C are attached but not printed.
  7. Carter spoke on April 11 to the American Society of Newspaper Editors on his anti-inflation policies. He stated explicitly: “If Congress does not act, then oil imports will have to be limited by administrative action under present law.” For the full text of his remarks, see Public Papers of the Presidents of the United States: Jimmy Carter, 1978, pp. 721–726.
  8. In response to threats by Carter to impose “massive” oil import fees if the Senate did not agree to his proposed tax on domestic crude oil, Senator Robert Dole (R–KS) proposed an amendment to the energy bill in conference committee that would revoke administrative authority to impose fees on oil imports. (The New York Times, June 28, 1978, p. D15)
  9. Entitled “Energy and the Summit,” dated July 7; attached but not printed.
  10. Entitled “Economic Effects of Alternative Outcomes at the Summit;” attached but not printed.