Foreign Relations of the United States, 1969–1976, Volume E–15, Part 2, Documents on Western Europe, 1973–1976

269. Memorandum From Philip Odeen and Helmut Sonnenfeldt of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, September 20, 1973.

SUBJECT

• Balance of Payments Offset Negotiations

The bilateral balance of payments offset negotiations with the FRG started this week (Monday, September 17) with Under Secretary Casey heading the U. S. delegation.

The BOP offset question is becoming increasingly large in the Congressional European troop debate this fall:

—Secretary Schlesinger has promised in testimony full coverage of the roughly $2.5B potential deficit (the last agreement covered less than half).

— Jackson-Nunn have introduced an amendment which would make troop reductions proportional to the military BOP deficit. It looks as if this will be very hard to beat.

This memo brings you up to date on both the prospects for the bilateral negotiations with the FRG, the ongoing efforts to get a broader multilateral agreement including contribution from all the allies, and suggests ways you can help in overcoming some problems we are encountering, namely:

—Treasury’s intransigence and refusal to recognize that offset has a critical political component as well as an economic importance.

—The failure of the State Department bureaucracy to back the multilateral initiative.

You will recall that the original NSDM 214 signed in May (Tab A) called for:

—A new effort aimed at a multilateral offset covering as much as possible of the BOP costs ($2.5–$3.0) as well as all of the additional budgetary cost of keeping our troops in Europe rather than in the U.S. ($440 annually).

—Renegotiation of the bilateral agreement with the FRG as a parallel effort. The bilateral agreement would ultimately be folded in with the multilateral arrangement once the multilateral arrangement was formed.

An order of priority was established for the various actions which the allies could take to reduce our BOP deficit.

First priority was given to actions covering the additional budgetary costs of keeping the troops in Europe rather than the U.S. (e.g., FRG payment of land taxes for our bases, local civilian hire costs, etc.). These actions also reduce the BOP deficit.

Second priority was given to actions such as military procurement, which compensate for the BOP outflow but do not cover budget costs.

Finally, loans to the Treasury were to be included but only if interest rates were below market rates or subsidized by the FRG as they had been in the past.

It was agreed that loans would not be introduced until the other “hard” portion of the offset had been negotiated. In response to FRG inquiries, the negotiators would skirt the issue and take the line that we were interested in a “hard” offset.

Although they did not disagree to including loans in the agreement during preparation of the NSSM study, Treasury’s position has hardened and they are now insisting that all loans are economically and politically worthless. This, of course, reflects the Treasury’s fixation on the economic purposes of the offset agreement and failure to recognize that offset agreements are valued in Congress despite their lack of economic value.

Loans have little economic value and they should not be introduced early in the negotiations since this would erode chances of getting maximum value for “hard” offset actions. However, we cannot afford to refuse to include loans at all—especially in view of Schlesinger’s statement and the Jackson-Nunn agreement. Secretary Schlesinger has talked with Shultz several times on the need to soften the Treasury position and your support is needed.

The Multilateral Offset Initiative

In calling for a new multilateral effort, we did not expect that a sophisticated payments union could be created but that a system in which each ally would contribute to a common fund covering only U.S. costs, would be within reach. This sort of limited multilateral scheme still looks feasible.

We wanted NATO to take the lead in coming up with the exact plan. A study group was formed within the NATO Eurogroup to do the ground work and Rumsfeld gave the effort maximum support in the NAC and in private. He and his staff drew up an ambitious action plan in Europe coupled with high level political support in Washington. Meanwhile, the NATO staff is working on an individual basis with NATO countries to get an estimate of their contribution.

According to Rumsfeld, budgetary relief from the multilateral effort of about $75M–$100M is possible (almost double the last bilateral effort) and significant BOP relief may be attainable.

The State bureaucracy predictably has been dragging their heels largely because they believe a multilateral push would detract from the bilateral agreement. [1 At first, State argued that if we pressed for a multilateral agreement the FRG would become vulnerable to claims by other NATO countries who also have small BOP deficits with the FRG. We should, therefore, soft peddle the multilateral negotiations until the new agreement was signed. These concerns were not borne out in practice.] For example, they objected to Rumsfeld’s plan to visit individual NATO capitals to discuss burdensharing issues and a presentation to the NAC of the specific offset actions we have in mind. Now State wants to hold back on the multilateral effort until the bilateral agreement has been negotiated. We see no reason for this. In fact, loss of the little momentum we now have would put the entire initiative in jeopardy.

During his recent visit to Washington, Rumsfeld complained of a lack of political support from Washington. Except for the dialogue on the Hill, there has been little publicity given the effort since your original Year of Europe speech. To pick up the sagging momentum, a high-level political push is needed.

In addition to your role, Schlesinger and Rush should be urged to provide the political support for this effort that Rumsfeld believes is needed. This could include greater pressure on NATO ambassadors here in Washington, more public statements, etc.

1. Summary: Odeen and Sonnenfeldt briefed Kissinger on the status of the U.S.–FRG bilateral offset and NATO multilateral offset negotiations.

   Source: National Archives, Nixon Presidential Materials, NSC Files, Box 688, Country Files, Europe, Germany (Bonn), February–December 31, 1973. Confidential. Sent for information. Copies were sent to Charles Cooper of the NSC staff and Eagleburger. All brackets were printed as footnotes in the original. Attached but not published is Tab A. Kissinger wrote at the top of the memorandum, “What need I do now?” In a September 23 memorandum to Kissinger, Sonnenfeldt discussed the first round of U.S.–FRG negotiations. (Ibid., NSC Files, NSC Institutional Files (H-Files), Box H–239, Policy Papers, NSDM–214) Memoranda of conversation on the first round are ibid., NSC Files, Box 687, Country Files, Europe, Germany (Bonn) Vol. XIII, Jan–Sep 73 (2 of 3).