235. Memorandum Prepared in the Central Intelligence Agency1

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THE UK: PRESENT PROBLEMS AND SHORT-TERM PROSPECTS

CONTENTS

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Page
PRINCIPAL CONCLUSIONS :
DISCUSSION : 5
Major Problems Facing the Country : 5
Economy : 5
Industrial Relations : 6
The EC Membership Question : 8
Other Major Issues Facing the Government : 9
Northern Ireland: The Problem That Will Not Go Away : 9
The Defense Review : 10
Relations with the US : 11
The Possibility of an Early Election : 11
Outlook : 12

PRINCIPAL CONCLUSIONS

1. During the next several months Prime Minister Wilson’s government will be facing two major and potentially divisive problems:

—the worsening economic situation

—renegotiation of the terms of Britain’s EC membership and a referendum on continued membership.

2. In 1974 the British economy had:

—price rises of nearly 20 percent;

—wage increases of more than 25 percent;

—gradually rising unemployment reaching close to three percent;

—falling gross private investment to a rate of less than four percent;

—a current account deficit of $8.8 billion.

Without drastic new measures, the economy in 1975 will not perform better than last year.

3. High oil and other raw materials prices as well as the poor state of industrial relations, obsolescent machinery and equipment, and poor managerial practices largely account for Britain’s poor economic prospects.

4. The deteriorating economic situation could result in an inability to borrow in private capital markets by mid-year and possibly to a devaluation of the pound. Britain may be forced to turn to the IMF for help.

5. The UK is looking to North Sea oil production to boost its economy by the end of the decade. The optimistic outlook for North Sea oil, however, has been clouded by rapidly rising costs of exploration and production and by oil industry fears about taxation and participation measures that are not yet spelled out.

6. The Wilson government has not been substantially more successful than its predecessors in improving industrial relations. The social contract—an informal pact between the unions and the government exchanging union wage restraints for certain government [Typeset Page 752] concessions—appears to be collapsing. The unions are demanding large wage increases and are unable to prevent wildcat strikes. The government is warning the unions that this sort of behavior cannot be tolerated.

7. All this suggests that the social contract sooner or later will be replaced, probably by a reimposition of wage controls. Wilson first will try to come up with a plan more palatable to the unions.

8. Whether to continue EC membership is expected to be the principal foreign policy issue debated in the UK this year. Among the principal UK objectives during the renegotiations are:

—an adjustment in the EC budget mechanism that would link a country’s payment to its gross domestic product;

—revision of the common agricultural policy;

—better safeguards for the interests of Commonwealth and developing countries;

—guarantees that Britain will retain control over regional, industrial, and fiscal policies.

Both pro- and anti-marketeers have begun to speak out, although the referendum will not be held until June. The anti-marketeers are concentrating their efforts on trying to convince the voters that EC membership will erode British sovereignty. Proponents of membership say Britain will have more control over its destiny if it remains in the EC.

9. The outcome of the referendum will be determined by:

—the state of the economy this spring;

—the willingness of the other Eight to make further concessions in the renegotiations that will make British participation in the EC more palatable to the electorate;

—the nature of government’s pre-referendum campaign.

Wilson’s attitude is especially important. Opinion polls suggest that voters will opt for continued membership if the government takes a strong stand. Yet Wilson will be reluctant to impose party discipline lest it lead to resignations and possible splits.

10. The outcome of the referendum cannot yet be predicted. Staying in the EC means Britain would have a larger voice, especially in European affairs, while pulling out would probably deprive Britain of financial assistance from the other Eight.

11. On the other problems facing Britain, the Labor government has made little progress toward reaching a political settlement in Ulster. Continued violence, both IRA- and Protestant-inspired, in Ulster and in English cities is likely to increase the pressures on the government to pull out British troops from the province.

12. The force reductions recommended in the defense review, yet to undergo parliamentary scrutiny, try to strike a balance between [Typeset Page 753] Britain’s poor economic situation and the country’s defense obligations. Left-wing Laborites are going to press for additional cuts in the UK’s defense expenditures. The defense issue may be divisive for both the government and the Labor Party.

13. The UK’s foreign policy will be influenced by the interplay and possible competition of three forces: a desire for good relations with the US, European ties, and British self-interests. Britain wants to maintain good relations with the US but if the UK decides to remain in the EC, European ties are going to become more important. Also, British self-interest can be expected to win out even if they conflict with US or EC policies. This will be especially true in the case of the Middle East because Britain needs OPEC oil and OPEC money at least until 1980.

14. Wilson is not likely to call an early election because he will not want to risk having the electorate hold the Labor government responsible for the poor economic situation and possibly reducing the slim parliamentary majority his party now has. Wilson’s energies over the next several months are going to be concentrated on holding his party and government together.

[Omitted here is the remainder of the 13-page memorandum.]

  1. Summary: The memorandum explored the topic, “The UK: Present Problems and Short-Term Prospects.”

    Source: Central Intelligence Agency, History Staff Files. Secret; [text not declassified]