Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

131. Memorandum From the Chairman of the Council of Economic Advisers (Schultze) and the Special Representative for Economic Summits (Owen) to President Carter¹

Washington, May 26, 1978

SUBJECT

• Economic Issues at Your Tuesday Breakfast with Chancellor Schmidt²

This is a joint memorandum, since we are both interested in the Summit—Owen as your representative on the International Summit Preparatory Committee, and Schultze as chairman of a group of economic experts that met last weekend to prepare a report on macro-economic policy for that Committee. This memo also reflects the views of your advisers in State and Treasury. A report on the Schultze group’s meeting is attached at Tab A.³ The Summit Preparatory Group will meet this coming weekend; if anything develops during this meeting that you should know, Owen will send you a supplementary note before you see Schmidt.⁴

1. Introduction. Whether Schmidt decides to take the decisions that we believe are needed for a successful Summit will depend partly on the impressions that he forms in his meeting with you Tuesday.

Schmidt’s German colleagues have told us that he was puzzled in past bilateral meetings as to whether you agreed with him or not; in some cases, they say, he mistook your courtesy for assent, and was upset afterwards if he concluded that this had not been the case. They urge that you make clear any disagreements with him; he respects people who do.

You may want to start by thanking Schmidt for the statements that he has made, in answer to your telephone request, about the energy bill.⁵ He spoke about this in his interview with the Washington Post,⁶ in his BBC interview with Callaghan, and in a speech at Hamburg (which was misinterpreted in the US media as an attack on your policy).⁷ The German Ambassador has been told how grateful we were, and that we hope Schmidt will speak further about this question while he is in Washington—to the press and to any members of Congress whom he may meet.

2. Schmidt’s Views. Schmidt wants to preside over a successful Summit. He wants the US to contribute to that success by curtailing inflation and limiting oil imports;⁸ he wants the UK and France to contribute by adopting sensible trade policies; and he indicated to Prime Minister Callaghan that he is prepared to contribute by taking additional economic stimulus action if German growth appears to be falling short of the earlier FRG forecast of 3.5%.⁹

Although most German estimates suggest that 3.5% growth will not be achieved without further stimulus, there is little political pressure in Germany for expansionary action. Moreover, there are substantial differences of opinion in Germany as to the form that any action should take. Thus it will be easier for Schmidt to act if he can present his actions in the context of international cooperation, including action by the US.

Schmidt may elaborate to you on his difficulties, indicate that he doubts more than a small stimulus—if any—will be needed, suggest that he would like to make up his mind only after the Summit, and add, as in his last letter to you, that the Summit should focus on underlying structural issues (i.e., inflation, energy, and trade, where the action would come from others), rather than on short-term issues (i.e., growth, where the action would have to come from him).¹⁰

He may also make clear that if he does take stimulus action he will insist on reciprocal action by others, including US action on inflation and energy. As in his conversation with Owen,¹¹ he may say that it makes no sense for Germany to accelerate its growth unless the dollar is strengthened by such US action, ask when you will take administrative action on energy if the Congress does not act, and urge on you the merits of raising the US crude oil price to the world level.

4. Our Position. We want the Summit to develop an economic package along the lines that you and Callaghan discussed: US action on energy and inflation, British and French agreement (along with the other Summit countries) on sensible trade policies, and German and Japanese efforts to improve their growth, to the extent feasible without adding to inflation. Each of these elements of the package depends on the others being present. More specifically, significant action by Germany to promote growth is an indispensable part of any coordinated set of measures, since it will largely determine what other European countries are able to do to increase growth in their economies, and whether they would be willing to reduce their barriers to wider trade.

The scale of German action will be important; Schmidt is probably thinking in terms of expansionary measures that would add ½% or less to GNP. The US view is that a stimulus on the order of 1% of GNP (i.e., DM 12 billion) would be a more appropriate policy. When Schultze suggested such a stimulus, the German member of his group did not object, although he may not have reflected Schmidt’s thinking. In any event, we wish to cast the Summit discussion in terms not of numerical growth targets but of the need for a significant improvement from current prospects, which are well below the earlier forecasts for both Germany and Japan (which were 3.5% and 7%, respectively).

5. Talking Points. You might organize your discussion of economic issues with the Chancellor around the main components of a Summit package:

a. US Action on Inflation and Energy: It is important to stress the priority that the US is giving to dealing with inflation and, even more importantly, to persuade Schmidt of your willingness to commit yourself at the Summit to get US domestic oil prices up to world market levels over a very short period. This is crucial from his standpoint.

b. Trade: You might stress your support for international efforts to keep an open trading system and to prevent the spread of subsidies and other measures to prop up unviable industries, and indicate that we will work at the Summit and otherwise to bring the French and British into agreement along these lines.

c. Growth: You might point out that it will be easier for you to take the politically difficult actions that Schmidt wants, particularly on energy, if they are balanced with actions by others that will also contribute to world economy recovery. You might mention Fukuda’s recent expression of willingness to announce further Japanese stimulus at the Summit, if this proves needed to achieve Japan’s own growth objective, and mention your hope that Germany will be able to do the same.

You might indicate your understanding of the delicate political problem that Schmidt faces; your recognition of his desire to avoid “stop-and-go” policies, and your agreement on the need to promote long-term sustainable growth. You might suggest that a substantial German expansionary move at this time could pave the way for steady and continuing improvement in both the world and German economy, carrying well beyond 1978 and 1979.

(In all of this, it will be well to avoid the term “stimulus”, since Schmidt equates this with short-term “quickie” measures; you might speak, rather, of action to achieve sustained economic growth.)

6. Conclusion. If Schmidt leaves Washington with a clear understanding of the importance that you attach to German action on growth and US action on energy, the chances of his taking the lead in developing a successful Summit are reasonably good.¹² The critical point to convey is that a successful Summit will require that all countries shape their policies in ways that contribute to world recovery. We agree with the Chancellor that the Summit should not be the occasion for programmatic decisions (a point on which the Chancellor feels strongly); but it should be the occasion for defining policy directions. A meeting that resulted only in an exchange of views would be widely criticized.

1. Source: Carter Library, Staff Office Files, Council of Economic Advisers, Charles L. Schultze Subject Files, Box 6, [Bonn Economic] Summit 1978 [1]. Confidential. Sent for information.
2. Carter and Schmidt held a breakfast meeting in the Oval Office on Tuesday, May 30, from 8:04 until 9 a.m. (Carter Library, Presidential Materials, President’s Daily Diary) No memorandum of conversation was found.
3. Tab A, attached but not printed, is a May 25 memorandum from Schultze to Carter entitled “Economic Policy and the Summit.”
4. In a May 28 memorandum to Carter, Owen reported that “nothing emerged” from the May 27–28 meeting of the Summit Preparatory Group that would “change the briefing memo that Charlie Schultze and I sent you” on the breakfast meeting with Schmidt. (Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 24, German Federal Republic: 4–6/78) Owen’s May 31 report on the Summit Preparatory Group meeting is in the Carter Library, National Security Affairs, Staff Material, Special Projects, Henry Owen, Box 25, Summit: Bonn: 6/1–23/78.
5. During an April 13 telephone call, Carter said to Schmidt: “Any time you have the chance to speak out on the importance of our action on energy, please do so. Your words are closely monitored in this country.” Schmidt replied: “I use the words ‘assistance to the President’s energy conception.’” (Memorandum of conversation, April 13; Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 36, Memcons: President: 4/78)
6. On April 20, The Washington Post published a report by Michael Getler on his “lengthy and wide-ranging interview” with Schmidt on April 19. (“Bonn Anxious on Dollar’s Fate,” The Washington Post, April 20, 1978, p. A17)
7. A New York Times report on Schmidt’s April 28 speech in Hamburg bears the headline “Schmidt Attacks U.S. Attitudes on Oil and Economics,” while a Washington Post report is entitled “Schmidt Assails U.S. On Economic Policy.” (The New York Times, April 29, 1978, p. 29; The Washington Post, April 29, 1978, p. A6)
8. Earlier in May, Blumenthal and Owen urged Carter to press Congress to pass the energy bill; should Congress fail to act, they suggested that he take executive action to curb oil imports before the Bonn G–7 Summit. Eizenstat and Schirmer opposed this recommendation, while Schultze and McIntyre offered alternative ways of strengthening the U.S. Summit position. (Memorandum from Blumenthal to Carter, May 8; memorandum from Owen to Carter, May 11; memorandum from Eizenstat and Schirmer to Carter, May 11; memorandum from Schultze to Carter, May 11; and memorandum from McIntyre to Carter, May 11; all in the Carter Library, Records of the Office of the Staff Secretary, Presidential File, Box 85, 5/15/78 [2]) Owen’s May 11 memorandum to Carter is printed in Foreign Relations, 1969–1976, vol. XXXVII, Energy Crisis, 1974–1980, Document 149.
9. In a May 10 memorandum to Carter, Owen relayed a U.K. report on a Schmidt-Callaghan meeting, in which Schmidt appeared “prepared to participate constructively in a concerted plan of action for the Summit, and he told the Prime Minister explicitly that if President Carter would act on inflation and energy, then he would act (notwithstanding his lack of intellectual conviction) on stimulating the FRG economy. We do not think that he intends to take any such action until July, and the size of what he will do will no doubt be influenced by how he judges the rest of the package. Nevertheless the readiness seems to be there, though he hoped we would not press him too much publicly between now and July.” (Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Subject Chron File, Box 111, President’s Europe Trip: 4–5/78)
10. In a May 17 message to Carter, Schmidt suggested that it was “extremely important that at the July summit we should devote special attention to the long term structural aspects of economic development.” (Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 24, German Federal Republic: 4–6/78) In a May 18 letter to Carter, Trudeau also stressed the importance of addressing the Summit agenda “in a way that brings clearly to our minds the longer-term, structural nature of the forces with which our policies must contend.” Owen noted in a May 18 memorandum to Carter Johnstone’s belief that Schmidt’s message and Trudeau’s letter “were both the result of a phone conversation between Trudeau and Schmidt.” (Both in Carter Library, National Security Affairs, Brzezinski Material, President’s Correspondence with Foreign Leaders File, Box 3, Canada: Prime Minister Pierre Elliott Trudeau, 1/77–8/78)
11. See Document 125.
12. In a June 9 memorandum to Carter, Owen discussed two pieces of “evidence that your breakfast with Schmidt was useful,” concluding that it had begun “to look as though our package strategy may pay off.” (Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 24, German Federal Republic: 4–6/78)