111. Memorandum From Secretary of the Treasury Blumenthal to President Carter1


  • My Discussions with Chancellor Schmidt

I have given you an oral report last week on my discussions with Chancellor Schmidt. It may nevertheless be useful to supplement this with a written summary of the principal points, particularly since this relates to what we do in our relations with the Europeans and with the Germans over the next few months, the tactics on preparing for the Summit, and how we handle any energy actions you may decide to take.

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1. German Growth Prospects

After delivering your letter,2 I inquired about German growth prospects for 1978, but did not put any pressure on Schmidt to accelerate these efforts nor directly ask for a raising of the 3.5% target they have set for 1978. Obviously the Germans assumed I would be doing some of these things and the Chancellor almost immediately gave a very defensive analysis, making three points:

(1) doing more than 3.5% was not possible;

(2) he thought the chances of achieving this number were relatively good;

(3) while he might consider a further stimulus if the economy performed badly, he was unwilling to so indicate now.

I restricted myself to noting that 3.5% was a relatively modest target; that he was starting practically from a no-growth situation, and that, therefore, to get a 3.5% average implied an increase in the German economic growth rate to 4.5% by year end. I also said that bringing about that kind of result would be quite an achievement and would constitute considerable progress over 1977.

2. The Summit

The Chancellor raised this issue with a 20-minute lecture on the political importance of the Summit. He said it was obvious that these meetings may be called Economic Summits, but that they are really political. The London Summit had been useful for reasons quite apart from the discussions of economic issues, and the need for a similar meeting was urgent for it would provide opportunities to discuss such matters as the Middle East, the Horn of Africa, SALT, and other political matters. I agreed that a Summit meeting between world leaders provides opportunities for discussions beyond economics, but reiterated our position that there was no escaping an “economic” label, and that the Summit, with no hope of success in that area, would be counterproductive. The conclusion here is obvious: the Chancellor is vitally interested to insure that the Summit does take place in Bonn in July. If handled well, it does give us some leverage with him.

3. The Need for German “Leadership” in Europe on Economic Matters

I told the Chancellor that I thought Germany had a responsibility to provide leadership, particularly to help other European countries emerge more quickly from the recession of the mid-1970s. The U.S. could not be expected to provide such “leadership” alone.

This argument caused the Chancellor to engage in another lengthy lecture on the dangers of Germans taking the lead on anything. The main point was that the fear of Germany remains great and war-time [Page 337] memories are long. I did not debate this issue with him but merely acknowledged that I understood the problem while gently suggesting to him that the trick was to find the fine dividing line between not causing new animosities by overaction on the one hand, or rekindling the same animosities because of lack of action on the other hand.

4. U.S. Economic Policy

I described your economic program to the Chancellor, emphasizing the point that you were doing your best to meet your commitments and growth targets while working hard to reduce unemployment and keeping inflation under control. I also outlined the strenuous efforts you are making to secure passage of the energy legislation. The Chancellor had no specific criticisms of U.S. policy and acknowledged that we had been doing well on the growth and unemployment front. He did continue to point to the lack of energy legislation as a major problem, a point of view with which I agreed.

5. Collaboration in Exchange Markets

The Chancellor voiced no disagreement or criticism of U.S. action over recent months to help stabilize exchange markets. We agreed in the joint judgment that U.S.-German collaboration to help smooth out excessively rapid movements was working well and we noted the technical work being done to think through possible additional “bridging actions” for the future. The Chancellor accepted without argument my statement that we were not contemplating issuing foreign currency denominated Treasury bonds and my explanation why such a step might in any case turn out to be counterproductive. There was an agreement that the solution to exchange rate instability lay in the fundamentals, which he defines as U.S. action on energy imports and in which I included satisfactory growth rates in Germany and elsewhere.

6. Public Debate and Controversy

I told the Chancellor that I thought public criticism and fingerpointing because of the weakness of the dollar was not helpful to anybody. I emphasized that no U.S. official from the President on down had publicly criticized the Germans for a low growth rate. While not directly saying so, I implied that the same had not been true on the German side with regard to U.S. actions on the dollar. This point seemed at least implicitly accepted by the Chancellor and we agreed that public criticism from either side was to be avoided in the future.


If the Germans did really achieve an average of 3.5% real growth with an even higher level at year end, this would improve our position moderately. But this is not a realistic assumption, and it is a high possibility that the Germans will not act to take additional measures until it is too late to have any impact this year.

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There is now, however, increasing evidence that the pressures on the Germans are becoming very great—not so much from us as from other Europeans. We have also had recent evidence of differences of view on this subject within the German Government itself. With an EC meeting of heads of government coming up in April,3 I think there is therefore an increasing possibility that some German action may be forthcoming in spite of the Chancellor’s strong protestations to the contrary. With the leverage of the Summit meeting in the background, we have therefore no reason to give up as long as we avoid public debate on this subject.

Most importantly, I believe that there is an opportunity for a deal, if you decide to move on the energy front. It may be possible to negotiate a European-German statement committing to coordinated actions for more growth. While taking some steps that are advisable for domestic reasons alone, you could therefore get considerable credit for resolution of an international problem. It is well worth trying and our informal contacts indicate that it may be doable.

W. Michael Blumenthal4
  1. Source: Carter Library, Records of the Office of the Staff Secretary, Presidential File, Box 74, 2/24/78. Confidential. Copies were sent to Vance and Brzezinski. A stamped notation reads: “The President has seen,” and Carter initialed “C” at the top of the page.
  2. See Document 103.
  3. The EC Heads of Government met in Copenhagen April 7–8.
  4. Blumenthal signed “Mike” above this typed signature.