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

146. Minutes of the Bonn Economic Summit Meeting¹

Bonn, July 16, 1978

BONN SUMMIT

Session 2

Schmidt: I will brief the press from 4:15–4:30. Can I do it in behalf of all participants?

Carter: I think this is a good idea, but you should leave specific items until tomorrow when they can be presented in a package, not piecemeal.

Giscard: Agree with Carter. You can bring atmosphere and the idea of progress but not reveal texts.

[Omitted here is discussion of a joint statement on hijacking and energy policy.]

Schmidt: Let us now turn to a discussion of monetary issues.

Giscard: I guess I should start the ball rolling. There are a number of somewhat vague paragraphs in the Declaration, but they do impart a positive impression. They say we should seek stability in our monetary relations. This point will strike public opinion favorably. It is useful to reiterate it here, especially for the Americans and Japanese.

Let me take a few minutes to explain why we seek stability in the European Community. We have noted that there are three monetary zones represented at this table—North America, the yen zone, and the EC. Of the three only the EC has experienced a high degree of internal instability with currency variations as high as 60% between two extremes. This explains, in a small way, slow EC growth. Japan has had 11% growth in two years, the U.S. has had between 9 and 10%. EC growth is less than one-half of these. I can’t develop a direct numerical relationship between instability of exchange rates and rates of growth, but I believe there is some. The structure of EC trade is that one-half of our trade is within the Community. If stable exchange rates eliminate one-half of the instability, that will improve prospects for one-half of our trade.

Much thought has been given as to how such stability would be achieved. We have agreed to adopt within the EC the type of mechanism which operated worldwide in the 60’s, i.e. to achieve stability of exchange rates tied to intervention and a credit facility operating in a short-term and medium-term. There will be other mechanisms to correct the problems of differential rates of growth. In the new scheme there would be an estimated 20% of currency reserves available, which would equal roughly $20 billion of reserves. The same amount would be paid in the national currencies of European countries and would thus be a total of $40 billion in reserves. This is a very large sum, but compared to the Eurodollar market it is not unduly large. We will be issued under conditions similar to that of SDR’s, i.e. against the opening of credits resulting from currency deposits. I should say, of course, that Mr. Callaghan’s government has expressed a certain measure of reservation. The results would be stable exchange rates offering the possibility of adjustment by permitting changes in parities, with agreement by participants. This would be done infrequently, as a result of substantial changes in commercial and trade relations.

We would coordinate with the U.S., Japan and other countries so that among the dollar, the yen and other currencies there would be coordinated intervention on exchange markets. All European currencies would move in parallel vis-a-vis the dollar, the yen and other currencies. Coordinated intervention by central banks would be used for this.

Within the EC we would then have relatively stable exchange rates which would stabilize one-half of our foreign trade and a grouped float vis-a-vis other currencies. One-half of the trade would therefore be with countries participating in this grouped float. As a result, the rate of exchange of the ECU would be lower than the deutschemark and higher than that of weaker currencies of the system. This then would be an indirect way of acting on the economic policies of some countries. The FRG would stimulate more strongly because its currency would be weighted down by others. Other countries with exchange rates which are higher than at present would be more stable.

I informed President Carter of our thinking of this as did Chancellor Schmidt. I indicated that as a result of instability in the EC we decided to do this. We still have not reached a clear judgment as to what the plan will look like. The Ministers of Finance will meet and develop a plan for the next EC Council meeting in December.²

I repeat though that in no way can we separate the problems of coordinated monetary policy from that of economic growth. A high level of monetary uncertainty in Europe depresses our economies. A zone of greater monetary stability will create a stronger market and a stable monetary situation vis-a-vis all areas of the world. Progress will contribute to reduced unemployment and encourage higher levels of growth.

Fukuda: I highly value the significance of the Bremen Summit. Since the London Summit the Japanese economic growth target could not be achieved. Others also could not do so because international currency instability played havoc with our projections, and that is why our projections were not realized. In the case of Japan, failure to achieve growth was caused in large measure by appreciation of the yen and depreciation of the dollar. If they had not taken place, 6.7% growth could have been easily achieved. But we have not exceeded 5.4% because the yen fell abruptly.

In Europe a similar situation prevailed. Monetary instability affected all of the growth projections. As a result, the situation today differs from that of Downing Street. Monetary instability looms larger than last May. I believe monetary instability is a very crucial issue which must be tackled with priority. First, we must deal with fundamentals such as inflation and growth. The surplus countries must reduce their surplus. These are the fundamentals. At the same time we need to pay heed to abrupt fluctuations in exchange rates. We must make an effort to overcome and avoid sharp exchange rate fluctuations. It takes time to achieve fundamental improvements. While we deal with fundamentals, we must have a parallel effort to prevent sharp fluctuations in parities. We must make a major effort on these two fronts.

In this context the dollar is important, because it is a key currency. As long as it is unstable the whole world economy can never be secure. I urge the U.S. to prevent excessive fluctuation in the dollar. The situation of the dollar looms more important than ever. Every other country should offer the maximum cooperation to achieve dollar stability. If further dollar depreciation occurs, we cannot hope for stability in the world economy. I urge President Carter to make maximum effort to ensure a stable dollar. And I ask others to do all within their power to stabilize the dollar.

Carter: I have only a limited knowledge of the details of European monetary policy. I recognize that there is no unanimity among leaders involved. Our policy is to encourage the EC and its cohesiveness in political and economic matters. It is better for the U.S. if there is a strong and united Western Europe.

There is some concern about this problem, possibly it is based on lack of adequate detail. We are pleased by the revised articles of the IMF. We hope that the European plan is compatible with its principles. We assume no adverse intention regarding the dollar, and I doubt that there is any toward the dollar. We would like to be kept abreast of plans so we can voice an opinion if we feel affected.

We favor maintenance of dollar stability and protection against temporary aberrations. But we do not favor interfering with trends. The way to deal with trends is to attack the fundamental causes of them. We would like to understand how the new fund might be used. We are interested in growth in Europe and want to see strong and growing economies. We will be concerned if the new system causes contraction by putting more pressure on deficit rather than on surplus countries. We also have some concerns related to growth. We favor a strong economic and monetary system in Europe. It is not completely accurate to say failure to meet London Summit growth targets was caused exclusively by a drop in the dollar. Perhaps some will be correlated to exchange rates, but some countries have not attained much more than one-half of their growth targets. This was perhaps the cause of the drop in the dollar rather than the other way around. Japan’s surplus has increased. It is not accurate to attribute failure to meet goals to the drop in the dollar when in fact this failure has contributed to the drop in the dollar. We do not want to interfere, though we want to let our concerns be known.

Jenkins: I support the analysis of President Giscard. If we look back to the period when circumstances were such that Bretton Woods operated well, it was a productive period. External exchanges are obviously needed because of inflation and energy. The critical point, however, is the economic effect of any instability. It is not a question of blaming the dollar, but instability does more damage to growth in Europe than in the rest of the world. It would be like monetary fluctuations between New York and San Francisco, or Tokyo and Osaka. It is highly desirable to get stability without too much rigidity. Under this scheme our currencies would be more closely linked together than has hitherto been the case. This will lead to more growth within the EC.

This will not, of course, solve the whole problem of exchange rate fluctuations, but can reduce excessive fluctuations. It should not be thought of as a scheme hostile to the dollar. If we in Europe use our own economic power responsibly, it would make it more difficult to speculate against the dollar by going into European currencies. I also see the scheme as having a major advantage in ensuring positive growth in Europe.

Schmidt: Let me respond to President Carter. The real reasons behind our action is our understanding of recent history. There was a period of despair regarding fixed exchange rates. Because of differences in rates of growth and inflation, these could not be sustained. Following this, there was great enthusiasm for exchange rate fluctuations. But in recent years there has been criticism of instability. We are now in a period of adjustments relating to changes regarding raw materials, energy and new LDC production and competition. The rigid monetary system of the 60’s was not flexible enough to support adjustment and if it existed now, there would be a crisis. Now we need a more flexible international monetary system, but Europe still can have one with more stability. Europe has certain characteristics in common. Except for the UK, we do not have energy, we all have heavy industry, and we are in competition with new countries. We do not have an historical system of flexible currency changes. We don’t need a system which involved parallel adjustment. When we hear it said that currencies are going up and down, it creates uncertainty which affects half of our foreign trade. If we remove elements of uncertainty in the EC, we can also move toward structural change in the future. We can better adapt to new conditions when the EC decides on monetary cooperation. I see no reason why we cannot openly exchange information with the U.S. and Japan on this.

My second comment relates to the dollar. My currency has increased since 1969 by 78% against the dollar—38% in real terms. It has not appreciated against any major currency as much as against the dollar. Imports have grown more than exports. Other countries are also pegged to the dollar. Our imports have grown three times as fast as our exports in the last three years—a 25% increase of imports in real terms. Our GNP is up only about 1/5 of that. We have exported jobs as a result of changes in our currencies. This has hurt us, but we recognize that it is our contribution to world growth. We are shortly coming to a situation when we have to think of monetary stability in the interest of the market.

We recognize, however, that there is no way in which we in Europe can influence the long-term development of the dollar’s exchange rate. The long-term movement of the dollar depends on fundamentals such as U.S. inflation and incentives to limit the imports of oil. And, U.S. companies have a certain disadvantage because of their lack of aggressiveness in exporting. There is a huge U.S. domestic market and thus for many there is little reason to seek out exports. We in Europe cannot influence these factors, but we can influence the volatility, speed and sensitivity of currency markets’ reactions to them. I agree with Roy Jenkins. That is why we need a large basket of currencies. But we cannot reduce underlying trends.

Also, I was surprised that after the Washington discussions³ our purpose is not better understood. Our efforts in Europe to create more stability in Europe are conducive to a better overall situation. None of us have yet gone fully into the technical considerations. But if we create stability in the EC, it will be conducive to high rates of growth for all countries. Some countries have more constrictive, and some have more outgoing, money supplies. We can achieve some harmony here. We should not put these comments into a final communique, although I am grateful to Giscard and Jenkins for what they said. Perhaps we can indicate that we have notified you of this, but we do not need to relate this discussion. We believe it essential to create confidence in business circles and we might indicate why monetary issues affect that confidence.

Giscard: We might say we informed our main partners of our intentions and procedures on how we can create a zone of monetary stability in Europe.

Schmidt: The dollar is the asset of central banks of the major industrialized countries outside of the U.S. The holdings have increased by 30 to 35 billion dollars in an effort to help stabilize the exchange rate. I do not believe that this level of intervention will continue in the future because to intervene means creating national currencies. I do not believe that the central banks of the developed countries will in the future intervene on the order of magnitude of $30–35 billion. There is a danger that the central banks will decide that they do not need more dollars. If this is the case, additional deterioration of the dollar exchange rate is bound to happen.

Carter: My impression from this discussion—from the points made by you, Giscard and Jenkins—is that your objective is not to reduce the volatility in Europe, but to reduce instability between the dollar and the European exchange rates. (SCHMIDT: No, no, that is not the point. GISCARD: No.) CARTER: I don’t know that the dollar is now overvalued or undervalued. I can’t say. Your currencies have been undervalued in the past. Many things determine the rate of exchange. To a relative degree, the U.S. is obviously not as concerned about changing rates of currency as you are. But we have not detected the export problem that you describe. Our own exports have suffered more than yours. We had a decline in our trade deficit in oil by about 3–4 billion dollars in the first few months of this year, but we have had a large increase in the U.S. deficit on manufactured goods. We have not tried to impose restrictions on your goods. In fact, U.S. proposals in the MTN moved farther, earlier than your offers. On some of our agricultural items foreign markets are closed to us. I don’t say this to criticize, but to be clear. There is little criticism of the U.S. for excessive imports of manufactured goods, but there is criticism of our excessive use of oil imports.

We would like to be kept informed and ask you to assess our views during discussions among yourselves. We favor more stable European currency and avoidance of temporary aberrations in the value of the dollar.

Callaghan: This has been a useful discussion. Fukuda made some interesting points. We agree that traders dislike currency fluctuations. Although this helps the City because lots of money is made writing insurance—especially when the Pound rose from $1.35 to $1.95. The U.K. would like a scheme to lessen fluctuations. But we have had a bitter experience in trying to beat the market. It helps if you have a lot of reserves. Some fluctuations occurred in the past because we did not have adequate reserves.

Jenkins and Giscard put forward strong points of view. And Helmut believes this will contribute to higher rates of growth.

However, I do not believe the analogy with the U.S. is quite perfect. It is true in the U.S. that San Francisco is not concerned about fluctuations. But there has been a drift of industry in the U.S. from the Northeast to the South. The U.S. imports 9 percent of its GDP. In the U.K. the figure is over 30 percent. The U.K.’s share of trade is 39 percent in the EC and 62 percent outside of the EC. Thus, the EC scheme will not affect 62 percent of our total trade. We will try to work out these factors. Lots of work needs to be done if we are to find a satisfactory scheme. Such a scheme should not operate against the dollar.

I would like to reemphasize Fukuda’s point. These techniques may be useful, but they will not deal with the fundamentals. We need success in equalizing inflation and reducing disparities in the balance of payments. This will mean more stable exchange rates in the long term.

All of us in the EC want to keep the U.S. fully aware of events here. It is right to emphasize that all developments have to be done with the full knowledge of the U.S. and in consultations with them. I hope for a satisfactory and constructive conclusion.

Carter: We wish you well.

Schmidt: I would like to respond to the American President. It is a good course for the USG to bring about more export mindedness amongst its people. In agricultural trade all of us are sinners—both the U.S. and the EC. Our scheme that we have been discussing is to bring about monetary stability in the EC. We cannot influence basic trends of currency outside of the EC. We cannot and we will not. We hope to reduce very volatile movements in the short term, but in the long run currencies cannot be stabilized by monetary devices. Stability in exchange rates requires discipline. If not, exchange rates will go up or down. Letting the DM go up reduces inflation. But this has caused too much trouble with our neighbors.

We will inform our friends in North America and Japan and keep you fully informed of developments.

Trudeau: One point of information. We don’t have a Common Market in North America. We try to have stability and would like to have stability but the Canadian dollar has gone from U.S. $1.03 to $.89. Thus we do not really have stable exchange rates.

Schmidt: We will meet again at 10:30 tomorrow.

1. 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. For more information on the drafting of this memorandum and a list of Summit participants, see footnote 1, Document 145. This second session of the Summit, which took place in the Palais Schaumberg, began at 3 p.m. and ended at 6:43 p.m. (Carter Library, Presidential Materials, President’s Daily Diary) The portion of the discussion relating to energy policy is printed in Foreign Relations, 1969–1976, vol. XXXVII, Energy Crisis, 1974–1980, Document 157.
2. The EC Heads of Government met in Brussels December 4–5.
3. Not further identified.