145. Minutes of the Bonn Economic Summit Meeting1
Schmidt: Cordial welcome to Bonn. Room was for 30 years Cabinet Room of FRG.[Page 442]
Coverage of conference kicked up a lot of dust. Should not give impression of just bilateral drifting. Should not raise hopes which deflate in day-to-day business of our inter-relations.
We are at foot of a mountain but we are determined to reach the summit. Governments working together is a good sign.
On the other side of Rhein there are seven hills. Each of us climb one individually. But we would all find it hard to climb this Summit alone. We should all tie our hopes in a rope party of reason and work together.
Satisfaction will depend on the public: they watch while we climb. Success will affect everyone.
Press reaction after the Downing Street Summit not very friendly. Some said no concrete results. I feel value of Summit lies in opportunity for a direct exchange of views—all acted in the spirit of the Downing Street talks 14 months ago.
We introduced additional measures in the FRG equaling 1% of GNP in the form of tax relief. We have not, however, resolved all our international economic problems because of changes in the world economic structure and we must, therefore proceed step by step, from Summit to Summit. But we have avoided a deterioration in our relations. Many countries, especially in Europe, have improved their current account balances. Inflation has been reduced, for example, the OECD foresees 7% inflation versus 8% last year. The US has been successful in reducing unemployment. The MTN is making headway.
Public hopes for the Summit are very high. We must see discussions against the backdrop of popular hopes. Failure will have a psychological impact on the world economy.
We need a package deal which shows that the developed countries are capable of managing the world economy. Long term growth requires that we continue to fight protectionism and make progress on energy, fighting inflation and stable currency.
We should all be gratified to our personal representatives who have provided us with a draft declaration.
I suggest that the discussion proceed as follows. First, a general discussion about relationships among subjects we will discuss. Second, monetary and energy issues, which would be this afternoon. On Monday2 morning we will discuss trade policy including the MTN, protectionism and adjustment. This would be followed by North/South relations. Before noon on Monday, and shortly after noon we would discuss the declaration. The draft declaration should be con[Page 443]stantly reviewed by delegations based on the information of our notetakers.
We have also agreed that there should be only three people from each country at the table, although substitutes are possible for individuals if the delegations so wish. In addition, of course, there would be Roy Jenkins and a notetaker from each country.
Before the meeting I received a delegation from the International Conference of Free Trade Unions. I believe Jim Callaghan received the same group last year. All of our countries were represented in the delegation. The Group gave me a paper, which I have distributed to you.3 The only point I want to make is that the trade unions do not have a recipe for us either.
Giscard: We should discuss the text of the declaration as we proceed. The Ministers present can then agree during the next two days on the parts discussed and then present them to us.
Schmidt: It is a good idea to update the draft as we go along, but nothing should be published before the end. Who now wants the floor? Jim Callaghan?
Callaghan: The countries represented here have over 50% of the world trade. The results of this meeting will be extremely important to investors confidence, trade unions and money markets. It is important that we recognize our responsibilities in this situation of many tensions, such as protectionist pressures. Protectionism has been growing, but we have managed to keep it at bay as a result of the Downing Street Summit and earlier meetings. Protectionism arises from pessimism, which is hurting our ability to achieve growth. What we can produce will be seen to be of great significance.
At Downing Street we joined to make general commitments. We will not make them this time, but should be more specific. There are blank spaces in the communique. If each of us can make contributions to fill those blank spaces, it will have a great impact. The Sherpas4 demonstrated that what we all need is a package approach. Each of us will be called on to make conclusions that are not popular but will be of value to the world as a whole. The package approach can reach certain collective conclusions that we might not reach individually.
The fact of this meeting is important and the results will influence people. All of us should make individual contributions. The thought of individual decisions will be greater than the sum of its parts.[Page 444]
Carter: Coming together is a great help. I shook hands with Helmut Schmidt on Friday5 and the stock market went up 15 points. We should understand the importance of individual commitments. We have tried to carry out our Downing Street commitments. US growth was 5.7% last year, but will drop some this year. We have also made a great deal of progress in reducing unemployment. Energy imports are up only 1% in 1977. During the first five months of this year, oil imports are down by about 1 million barrels a day.
I have introduced a five-part program on energy. Three are in little dispute. A conference committee has agreed on the fourth part, on natural gas. A few oil pricing elements are also agreed. As far as oil is concerned, the sum total of these agreed efforts will reduce oil consumption by 2.3 million barrels per day by 1985. I will attempt to raise the price of US oil to world market prices by 1980. I will check back home on these things so I am not doing what is politically unfeasible.
With respect to the budget, our 1978 deficit will be in the 50 billions. This coming year it will be in the 40’s and the next in the 30’s of billions. This represents a small part of the GNP. We are also limiting government spending.
We know our balance of trade is important to all of you. We are able to buy your goods better than you are to buy ours. Exchange rate changes should deal with some of these problems. Also, the dollar is down; while we regret this, it should help to correct the imbalance.
This meeting can provide a tone of general progress and specific commitments. We will do our share.
Schmidt: I believe Summits have been constructive on the whole. I know more about other countries problems than I would have otherwise. I am pleased that US Congressional leaders have demonstrated more of a personal interest in foreign affairs. We were pleased with Senator Byrd’s visit to Europe.6 We are also pleased that there is interest in the US in the success of Summits.
In a number of ways this Summit has already achieved some success by encouraging positive programs in certain countries. The proof of our efforts is what we do here and what the declaration says. For instance, progress in the MTN is essential. We should emphasize the progress that has been made, show appreciation for our negotiators, give them support, and encourage them to continue with this progress. There are also protectionist measures. To the extent that we [Page 445]can demonstrate success in the MTN we can put obstacles in the path of protectionist pressures.
Giscard: We should be frank in our analysis here. I know countries do not like to be offensive, but the analysis will remain among ourselves and will not be seen to be offensive in the outside world.
The French problem is unemployment. It is both a social and a political problem. Compared to the East the fact that the West has unemployment, particularly unemployment among the young, is a handicap we must do something about. Also, the LDCs are directly tied to our difficulties. We should not just pay lip service to them but include a discussion of LDC problems among our own. We are interdependent with them.
Let me assess the causes of our problems. During the 1960’s and the early part of the 1970’s there was a considerable amount of growth. There was then a gradual slowdown, and an increase in oil prices. This resulted in a new disequilibrium in the world. Things were improved a bit because of the oil price freeze. But there now may be a period of oil price increases, in part for international monetary reasons. There will be catastrophic economic difficulties if there is once again a steep oil price increase. This would cause an impossible situation, causing countries to tighten their belts and try to increase their exports. It will lead to huge increases in unemployment. The period between now and 1982 will be dangerous. We here have an economic responsibility. There is a long lead time before economic measures are felt. To influence events beyond 1979 we must take steps now. We should start to do things this summer or early autumn to be effective in future years.
Fukuda: This is an age of uncertainty. There is an opaque future for all of us. People are insecure. Many economic and social problems contribute to a lack of confidence. There is uncertainty in East/West and North/South relations. Within ten years there could be an oil crisis. We need a clearer vision for the future. We should adjust ourselves to the post-petroleum era, and should work toward a clearer vision of that era. In addition, we should cooperate to help the peoples of the world regain confidence. We should pool our wisdom and by the next Summit should take up the long-range future energy problems of the world.
Andreotti: The fact of this meeting has a useful purpose. It enables our people and public opinion in our countries to become accustomed to interdependence in the solutions of economic and social problems both among the industrialized countries and between them and the rest of the world. The issue of the LDCs is not a matter of aid but an element in the overall progress of humanity and attention to these problems in LDCs can reduce demand for improvement in our countries, which have already developed.[Page 446]
Giscard: Let us remind ourselves of the importance of solving the unemployment problem. In London we shared a joint commitment to solve that problem. Some have achieved a great deal of progress, particularly the US. Others have done little. The Bonn message should be understandable—particularly to young people. Today and tomorrow we should pinpoint some actions which our public opinion can perceive as conveying a commitment to solidarity and interdependence. These actions should both help our countries and show we have a broader vision of humanity as well.
Trudeau: We must establish goals and seek to establish a feeling of confidence. Our deliberations will affect the world and determine the degree of optimism and pessimism in world public opinion. Our communique must take account of this and show we can tackle problems. I also agree with Fukuda that we should extend our thinking to the long term, although we will probably have to take some steps only from Summit to Summit. There is a contradiction between our attempt to achieve progress here and what some of us believe in our hearts—that these problems cannot be resolved in the short-term. We must think more in the long term and have studies which show public opinion that we are seeking long term solutions. For instance, are we at the bottom of a curve that will go up again, are we at the end of the second industrial revolution, or is all we need is a little fine tuning. We should determine whether there should be studies, in groups such as the OECD, so that we can resolve in our own minds these issues and identify the structural difficulties we face.
Among the new difficulties are entrance of third world exporters to our markets, adjustment to higher energy costs and difficulties with slower rates of growth. There is some contradiction. Can we reduce energy imports and grow at the same time? We should examine whether or not we are at the end of a cycle of development based on the electrical revolution and are now in the faltering stages before a new period of expansion. We should study this so that our population can be informed that we are looking at the long term structural problems rather than attempting only to solve short-term economic problems. As long as we are on the analogy of the Summit, we should determine whether there is an “abominable snowman” out there to get us.
Schmidt: I don’t know if there is a long-term kondratieff cycle7 or if this concept is useful to us at this time. The problem is that world-wide pessimism is in part caused by the increase in oil prices and by the collapse in the balance of payments structure leading to exchange rate disarray. We must overcome inflation and also achieve international mon[Page 447]etary stability. We must achieve balance of payments equilibrium and exchange rate stability. I was interested in Carter’s statement regarding the US objectives of bringing oil prices in the US to world levels by 1980, to reduce US oil consumption and to ensure that the US current account deficit is reduced. I am sure that I and others will point out what we can contribute to the party, i.e. spell out these square brackets.
If oil prices increase in the coming year, there will be problems. Our Saudi friends have helped a great deal. But if oil prices go up, it will mean disarray in exchange rates. If the Middle East situation once again places oil exporters under pressure from the other Arabs, there will be a significant deterioration. This will be very serious for countries without oil, although less so for the US than for countries without energy. For economic and strategic reasons it is vitally necessary to limit oil import dependence. The EC at Bremen decided to reduce energy imports by 50%. This will be difficult for France, Germany and Italy. We spend .5% of GNP to subsidize coal. We already import vast amounts of energy. Our resolve is firm and unswerving to increase nuclear production. This is the only way we can increase domestic energy. We should look to the long term energy policy. I agree with Fukuda on this. But I would take it still further—to make individual countries much less dependent on imported oil. I stress this for strategic reasons, because of the depletion of fossil fuels, because of oil’s impact on payments balances and exchange rate stability and because it will affect protectionist pressures.
Let me add something on the latter point. There are protectionist pressures in many areas such as steel, textiles and shipbuilding. If any of us gives in, all may follow suit. This will lead to an increase in unemployment. In the communique we should re-emphasize the crucial importance of combating protectionist pressures. We should also agree to open our markets more to one another and to the LDCs, too. There has been progress by Strauss, Haverkamp and others. We should also discuss investment tomorrow, when we discuss trade, and how to make the system more open than in the past.
Regarding the question of growth, we have not done as well as we would like although our inflation has been only 2.5%. Our growth has been less than 4%. We can pay for our oil by exporting, and we do not have to finance oil imports from anywhere. We have a small current account surplus, but we would be happy to do away with the surplus because it constitutes a transfer of real resources abroad. We let the DM go up to offset this. It has increased three times more than GNP, and more than our exports. As a result, a certain amount of unemployment has developed. The DM was undervalued for two decades. This directly affected incentives for exports. These exports are now slowly decreasing. We need 5–7 years to correct the export-oriented focus of our [Page 448]industry by investments oriented toward the home market. We no longer for instance export ships or cameras.
Giscard: The Leica is a fine camera.
Schmidt: But it is too expensive. I can’t do much for shipbuilders by monetary action. Interest rates are up significantly in the FRG. A 1.5 billion DM loan had to be taken off the market because of a steep increase in interest rates.
We have serious constitutional difficulties as well—the opposite of Proposition 13.8 The Federal budget opposes giving more credit than there are budget receipts. If I say the FRG will contribute to the package, on the assumption that others will do so as well, this will pose constitutional difficulties. Thus, in our declaration we should choose our words carefully to give us the flexibility needed to deal with constitutional difficulties. But we are prepared to contribute to the package if others are willing to do so.
Jenkins: Unemployment is a major problem. It also leads to protectionist pressures which would lead to more unemployment. There has been significant progress in the MTN in the last few days. I agree with Giscard that energy price increases hurt our economies—but we should remember that there were underlying difficulties before. Our economies may also be running out of steam. Perhaps, the great stimulus of the past has begun to exhaust itself. Inflation is an inhibiting factor in our economies.
Regarding energy, there could be a blow like 1973 in the not too distant future—in the 1980’s. We should reduce our dependence on oil in this period and have new methods for producing energy. Also, we must think of the LDCs and give attention to encouraging them not to produce goods already in surplus but to focus on such goods as energy and food.
On growth, one can grow more effectively and safely if this is done on a concerted basis rather than individually.
Trudeau: Schmidt said FRG and Japan would suffer more if there were an increase in the price of oil. But a German economist has recently written that if a product’s price is set by a cartel, other prices are reduced. Thus, if Japan imports 10% of its imports in oil and the price of oil goes up, the price of 90% of its imports go down and thus Japan benefits. In the US the price of energy goes up but the price of other goods it exports goes down.[Page 449]
Schmidt: The reason for this is that if you have to spend five times more on energy, industry is not fully employed and thus it does not need as much raw material, so raw material prices go down.
Trudeau: There is a real transfer of resources to OPEC, but the balance of adjustments shifts to those who import lots of oil and against those who export other goods and commodities.
Giscard: This is a tax decided by OPEC. It goes with the transfer of real resources.
Fukuda: Let me identify measures taken by Japan. The oil shock dealt us a serious blow. We are heavily dependent on imported oil. Growth this year was 5.4%. We are aiming for 7% growth, and our economy is moving full steam ahead to this end. Our balance of payments had done too well. We have an $11 billion current account surplus. This is my biggest headache, and we are most seriously concerned about it. For JFY ’78 we have taken an obligation to reduce our trade surplus by expanding imports, reflating by expanding domestic demand to achieve 7% growth. This is the crucial test. Many thought it would be difficult to achieve 7% growth, but for the first quarter we have had 10% annual growth. We can’t maintain that momentum, but I am confident that we can achieve 7% for the year. If 7% seems doubtful, I am ready to take additional measures which may be needed. During August and September we will be able to see if additional measures are needed and determine the type of measures which will be necessary. By the end of September we will table a bill in the Diet.
The effects of our actions already taken will take time. That is why in the first half of this fiscal year we have a fairly large balance of payments surplus. To deal with this problem I have embarked on an emergency import scheme, including purchases of enriched uranium and oil stockpiling. There should be an improvement with respect to our balance of payments. But expanding imports alone is not sufficient. That is why I am contemplating adjustments of exports. The volume of exports in FY ’78 should be the same as in FY ’77. I will see to it that the volume of exports in ’78 does not exceed that of 1977. If this goal is achieved and the price of Japanese exports is the same as 1977, the surplus will be liquidated soon. But the prices keep rising and thus increase the value of Japanese exports. The single most important factor here is that we attain price stability in Japan and in the international market. For the same volume of exports, prices are now 20% higher in monetary terms than in the previous year. That is why even if we hold down the volume of exports (undesirable as that may be) we still need to hold down global inflation. For the first time in history I am overriding opposition in Japan by regulating exports. But our efforts will be defeated if there is inflation in markets abroad, because if there is, the value of those exports will go up even if the volume does not. Thus, I am asking [Page 450]you to give attention to inflation. This is of cardinal importance. I would like to have all of you share your concerns about inflation.
Still we recognize we have a very large current account surplus. I will also make efforts on the capital account by floating foreign bonds in the Japanese market. Also, we will double aid in three years—a decision which took much courage.
I can assure you that I am doing my utmost. I am doing all within my power. Whether our efforts will be productive will depend on inflation. Other countries must make efforts to counter inflation if this effort is to work. I am doing my utmost, and I would like to see my efforts matched by yours.
Carter: I listened with care to Fukuda and Schmidt’s commitment to do the utmost within their countries. These were very forthcoming and instructive. Schmidt will eliminate his current account surplus and achieve greater growth in the FRG. Fukuda will reduce his surplus and double aid in three years. We will do our part on our goals to reduce the consumption of energy and improve energy production in order to hold down imports; and we will increase coal production.
On trade we are launching a new program to improve our exports. They account for 7% of our GNP. We will increase our agricultural production, and it should be higher this year than last. We have reduced our unemployment even at a lower rate of growth. We now believe we can grow with a very slight increase in oil consumption. We are forcefully holding down our budget—more than any Democratic president has done in the past, with the cooperation of the Congress. Our balance of payments deficit is too high—1.5% of GNP. For the first five months our energy trade deficit declined by $3–4 billion, but the balance of trade in manufactured goods became worse.
I have a political problem concerning oil. Previous Congresses were heavily influenced by oil producers. Now there is an equal interest and influence by oil consumers. The big problem is to change thinking domestically.
We enjoy a very wonderful relationship with the Saudis. They have gone the second mile in holding down oil prices in recent months. You have gotten a bargain price for oil because it is tied to the dollar. We expect, however, that prices will increase, but hope this can be kept within the inflation rate. We hope we can incorporate OPEC into efforts to shape the world economic situation. We would also like to bring the Soviet Union into compatibility with us in dealing with economic matters. Surplus and deficit countries have a responsibility here. The commitments of Fukuda and Schmidt will help to make this conference successful and we will try to do our part as well.
Schmidt: With respect to the declaration, if we get similar gestures from other participants, I will go to our constitutional committees and [Page 451]legislatures. As a possible FRG commitment, I could put in the declaration that “as a contribution to reduce world-wide disequilibrium the German delegation stated that it could put additional measures to increase demand and rates of growth to the legislature in the coming autumn.”
Carter and Giscard: Do you have a number to add?
Schmidt: I can see additional measures designed to strengthen demand and to strengthen economic growth. I am not talking of tenths of percent of GNP.
Giscard: I appreciated Japan’s figures and deadlines—measures by the end of September. Have you (Schmidt) thought of saying which measures would be in your text?
Schmidt: The Government would, if others make commitments, transmit to its legislature broader additional measures in the month of September with a view to bringing about increased demand and higher rates of growth. We will have to meet in our Cabinet, and with others, in order to determine what types of measures our legislature will accept. Also, recognize that the opposition has a majority in the Bundesrat. The opposition has other measures in mind. In principle, I will get agreement to measures to stimulate demand and lead to higher rates of growth. Others must also commit themselves in the same direction. I must also say that there is some skepticism as to whether these measures can obtain growth.
Fukuda: I will give some phraseology for Japan early in the afternoon.
Jenkins: At Bremen the communique took a commitment on growth of a relatively general nature. What Schmidt has said will give more sharpness to the declaration. The communique as a whole cannot give quantitative indications for the EC because it cannot go beyond Bremen.
Callaghan: We have made much progress externally to improve our debt profile and we have improved our level of reserves. Our level of inflation has been cut by two-thirds. We will ask for another year of wage restraint. Our rate of inflation is now about the OECD average. We will continue with counter inflation measures. Unemployment is also down. Imports are high, and we have a high import propensity. North Sea oil helps to finance our high imports and has given a healthy boost to UK growth. We, of course, in this respect welcome high oil prices, but will do our best to keep oil prices down, and we will use our influence to achieve this because it is good for all countries.
We cannot make a contribution at this time to world growth. But if there is an improvement in the world climate we will consider going forward. Let’s discuss this over lunch and see how far we can get.[Page 452]
Schmidt: I suggest that the EC language which Jenkins read be included in the declaration before we come to the FRG, because we are acting under the EC declaration. Then we can have the German commitment. Then we can quote Callaghan’s contribution saying he will carry on the fight against inflation. It will help me in the FRG.
Callaghan: It will help me, if we commit ourselves here, to resist inflation back home.
Giscard: Much work has been done in the OECD group under Charles Schultze. We said we agree to the goals set for us in that group. We are the leaders of Europe in growth. We agreed with Schultze that we should have a stimulus of .5% of GDP. Our contribution will go hand-in-hand with the fight against inflation—a decrease in our budget deficit of 10 billion francs. We are prepared to put this in the final communique.
Carter: Our part of the statement concentrates on reducing inflation, our trade deficit and our energy imports. I have a feeling that Schmidt’s verbal statement was more forthcoming and specific than his written statement. The US portion of this is too lengthy and we look to your advice as to how we can extract the pertinent sentences. If the FRG and Japan are reluctant to indicate specific expressions of their goals it will make it more difficult for me to project more specific goals on energy. I would like to agree on specific goals if others are willing to do so. Percentage increases indicated in the declaration are more convincing to the general public. We can give specific figures on the dates and goals to be achieved. If others do the same, it will help me. We should clarify this today. We know what we can do if others do the equivalent amount. Criticize us if you believe our statement is not sufficiently forthcoming. Let our aides negotiate specific language.
Andreotti: We can say we are moving in the right direction. In 1977 we had a $1.7 billion current account surplus. In 1978 there will be a $3.5 billion surplus. But we still have a very large budget deficit. I will introduce very large cuts in public expenditure in new legislation. The task is difficult because inflation is still very high. And because of unemployment, an austerity program is not regarded with much enthusiasm. Our weak side is the employment problem.
Schmidt: Could you indicate something about Italy’s fight against inflation as the Italian contribution? We can leave it to the experts to determine the wording.
Trudeau: I agree that it is desirable for the participants to put something in the communique. We will put a phrase in it. Our situation is not very good or very bad. We have the fastest growing labor force in the OECD. We are creating jobs at a rate exceeded only by the US. But unemployment will remain high. We could refer to our rate of growth and to measures we are taking to fight inflation. We are now entering a [Page 453]decontrol period. We can mention our commitment to ensure that during this period there is no renewed spurt of inflation.
- Source: Department of State, Office of the Secretariat Staff, Records of Cyrus Vance, Secretary of State, 1977–1980, Lot 84D241, Box 9, Vance NODIS Memcons 1978. Secret. Drafted on August 8. Attached but not printed are two cover pages that indicate that Hormats drafted the minutes and identify the Summit participants: Trudeau, Jamieson, and Chretien; Giscard, Monory, de Guiringaud, and Deniau; Schmidt, Lambsdorff, Genscher, and Matthoefer; Andreotti, Forlani, and Pandolfi; Fukuda, Murayama, and Sonoda; Callaghan, Owen, Healey, and Dell; Carter, Vance, Blumenthal, and Strauss; and Jenkins. This first session of the Summit, which took place in the Palais Schaumberg, began at 10 a.m. and ended at 12:42 p.m. (Carter Library, Presidential Materials, President’s Daily Diary) Carter’s handwritten notes on the Summit are in the Carter Library, Plains File, President’s Personal Foreign Affairs File, Box 4, Summit Meetings, 7/78–6/80.↩
- July 17.↩
- Not found.↩
- The “Sherpas” refer to the representatives of the G–7 heads of government who were responsible for the planning and preparation for each G–7 Summit; Henry Owen was the U.S. sherpa during the Carter administration. The term derives from the term used for guides employed in Himalayan climbing expeditions.↩
- Carter arrived in Bonn on Thursday, July 13. On Friday, July 14, he met with West German officials in Bonn; the next day, he visited Frankfurt and Berlin. (Carter Library, Presidential Materials, President’s Daily Diary)↩
- Byrd visited Spain, Belgium, the Federal Republic of Germany, and the United Kingdom July 1–9.↩
- Reference is to the theory, named for Russian economist Nikolai Kondratieff, that economic activity is characterized by decades-long waves, or cycles, of boom and bust.↩
- In June 1978, Californians voted in favor of Proposition 13, an initiative that decreased the current level of property taxes and limited both future property tax rates and annual increases in property value assessments.↩