27. Minutes of the London Economic Summit Meeting1

LONDON SUMMIT—First Session (May 7, 1977)—Morning Session

Callaghan: I want to welcome all of you to London. We are sitting close together today because in my view the closer we are, and the more intimate, the less likely we are to make speeches. This is not as de[Page 81]lightful a setting as Puerto Rico or as splendid as Rambouillet,2 but there is a small garden in the back if you wish to walk around. In the past we have made a major effort to keep the same group together throughout all meetings. But I know that the French Prime Minister must return to Paris tomorrow and his place will be taken by M. Boulin. I know President Carter also wants to make a change, but as far as possible we should try to keep the same people around the table.

Also it was agreed that at this meeting the EC would be represented by the President of the Council, namely me. The President of the Commission will be present on matters of EC competence—trade, North-South and energy—to be discussed tomorrow.

As far as agenda is concerned, I propose that we start with a discussion of the economic situation and, if you agree, devote the afternoon to proliferation and human rights. I would like to ask President Giscard to begin the discussion of the world economic situation. I will inform President Jenkins today of any matters which arise which are in the competence of the EC.

With regard to substance, I feel that there has been good preparation for the Summit by our officials. They have met and exchanged views, thereby providing us with a valuable starting ground. Some of these issues are most easily handled by officials, but some will require the thoughtful consideration of those of us sitting around this table. On North-South, for instance, it is a matter of high importance that we develop a common view. We do not necessarily have to put in the communique everything we decide. We can make a general statement, but more important is what we agree among ourselves.


If you will allow me to put the ball into play. There are a range of different views on the health of the world economy. We ought to record our successes. For instance, a few years ago we all thought it unlikely that you could have the sort of deep depression we have had and resist protectionism so successfully. There are of course examples of protectionism, but there has generally been strong resistance. This has been helped by the Puerto Rico and Rambouillet Summits and the OECD trade pledges.3 This is a success we should record. None of us believes in protectionism and the best way now to avoid it is if we give one another combined strength.

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Some can also claim success because they have taken harsh measures to reduce inflation. This is hard in a democratic country. The UK standard of living has been cut by 5% to restrain inflation. No wonder people don’t vote for us in democratic societies. We must continue for a time to follow harsh policies. But unemployment is also an extremely important problem. There are 15 million people unemployed in the West. I am glad to hear from President Carter that unemployment has fallen in the US last month. But whereas the US seems to be leading in this category, in most countries unemployment is likely to go up in 1977. In the UK and perhaps in other countries, we may be doomed to some further increases in unemployment.

We all recognize, however, that inflation is the enemy—the father and mother of unemployment. Chancellor Schmidt said yesterday that you can beat inflation and still have high unemployment, and you can have high inflation and also have unemployment. First priority is inflation, but does that mean we cannot also reduce unemployment?

In my view it is not right for Britain to press other countries to reflate beyond the level they think necessary or right for their countries, and beyond that which they think is needed to get to their objectives. But I should relate to you a meeting I had with a delegation from the International Conference of Trade Unions which included representatives from the US, Germany, Japan as well as the UK. They said they would sooner have one or two extra points on inflation if it can soak up unemployment. I pressure no one to reflate beyond the level he thinks he ought to go, but unemployment can put the system under serious strain. We should understand the political consequences of unemployment. This springs to mind especially for certain countries which we all know.4

A second problem is OPEC’s $45 billion surplus—which is matched by the equivalent deficit of many developed and developing countries. This will likely remain and we therefore must have coopera[Page 83]tion in an effort to match these deficits. Countries collectively are not likely to reduce their deficits.

Another problem is that there could be less growth in 1978 than in 1977. From now until 1980, apart from Japan, it is difficult to see who will meet the OECD targets. Only Japan will have larger growth in 1978 than in 1977. The US and Canada are doubtful as are France and Italy. How can we answer this problem?

Also, with regard to balance of payments again, the US has moved to a deficit while the UK is moving to surplus on balance of payments but with less growth than we would like. We must ask whether the IMF proposals are adequate. Are they sufficient? And, I must say that I doubt whether they will be carried through on time.

Helmut Schmidt said, and I agree, that we should project confidence. But this should not be a false confidence. We should give a real assessment on this situation and find real answers. I have one final concern. People are looking for direct benefits from the Summit; we must all keep that in mind as we proceed.

Giscard: I thank you Mr. Prime Minister for living up to London’s tradition of hospitality. I welcome also two new leaders. President Carter has already gained considerable popularity in international public opinion. I also welcome Prime Minister Fukuda whom we all know and respect.

I would caution before we begin that the final outcome should avoid a bureaucratic tone. Our experts excel at bureaucracy. We should ensure the final outcome reflects this group in this room.

I have five comments on the economic situation:

First, I deeply believe that profound structural changes have taken place in international economic affairs over the last three or four years. This is not a conventional crisis of 18 months or two years; there are profound changes. We had accustomed ourselves to cheap energy and reliable raw materials. The developing countries were not seen as a threat to our industry. We were accustomed to the healthy growth of the 1960s. We wasted resources and all of our emphasis was on relations among developed countries. All that now is behind us and we cannot go back to an old situation. We must adjust to a new resource distribution by organizing ourselves differently.

Second, on the issue of employment. While things are improving in the US, the situation in Europe is poor. Whether in countries of low inflation (such as Germany) or high inflation (such as ourselves), the unemployment situation is serious. It will have an ideological content for our youths. The Socialist countries seem to have low growth but appear to be able to solve the problem of unemployment. Whatever their economic problems, they solve unemployment. We cannot accept high [Page 84] unemployment among our youths. The result will be an ideological shift in favor of Eastern Europe. I subscribe to President Carter’s views on human rights. One key element of human rights is the right to employment.

Third, energy is at the heart of our problem and the worst may still be before us. When we look at the projections for 1985 and 1990 there will be more difficulties. In 1974 we thought that if we broke OPEC we could cause a drop in the price of oil. But now oil is becoming a rarer substance, and other minerals as well. We must define new and wider range energy policies. For instance, the US made a very positive decision on this a few weeks ago.5

Fourth, on trade the industrialized world has gone through three years of crisis without protectionism. But there are new causes of concern with some shifts in trade terms. The share of the market of certain countries has abruptly changed, for instance in steel, shipbuilding, etc. There is also competition in high technology areas, such as aerospace and computers. We should not be compelled to forego our positions because others are stronger in these areas.

Fifth, the developing countries do not like our meeting here in London. It is anathema to them. We should devote a considerable amount of time here to meeting their aspirations. For instance, their high level of debt has repercussions on us. And if CIEC fails, there will be serious consequences.6 The Canadians are particularly aware of this. We should say that we are concerned about these problems and say that CIEC should succeed.

Fukuda: The world economy is in a serious situation. All of us here are capable of finding a breakthrough. I was posted here in London in the 1930s—one-half century ago. The situation is reminiscent of today. The Hoover depression in the US spread to Britain. It triggered a UK departure from the gold standard. Others followed suit. Unemployment led to social insecurity. In 1933 an international economic meeting was convened in London, chaired by Ramsay MacDonald. I was deeply involved. I recall that in the 1929–34 period there was a drastic decline in world production, by 30%, and a 40% drop in world trade. This led to great social instability. A number of countries turned to totalitarianism and fascism. The 1933 conference tried to deal with these problems but did not succeed. The meeting was recessed and never re[Page 85]convened. We can learn from this. Countries resorted to protectionism. They thus worsened the depression still further. All tried hard to deal with the problem, but the situation instead became a backdrop to World War II.

Today there is a much better regime for international economic cooperation, but in many ways the situation is worse. As Giscard said, there are limited resources and energy. But there is also East-West tension and a North-South rift which did not exist then. The situation is made more serious by such structural problems. The question then is, what to do. We must contain inflation but also do what is necessary to recover world economic health. This is the predominant issue. There is much that President Carter can do in this regard. The US is the greatest economy in the world. It can lead other nations to provide the stimulus for world economic recovery. It is important for all of us to have a healthy recovery in order to stimulate employment. This also has an effect on North-South issues. It is important for us to recover so that others can sell more commodities to us. And it is helpful in dealing with the balance of payments issue. Countries which can help should take the lead. This can lead the world to recovery without rekindling inflation.

I want to mention in this context US policy. The US initially took action to provide a tax rebate; this was a significant step, but it was subsequently withdrawn.7 Because of this, there might be concerns that you have given up the effort to further strengthen your economy. But I still believe that the US is trying to stimulate its economy. I think the US feels that the rebate is not necessary anymore. I feel that the US is not giving up the idea of leading the world economy. I hope there is no change of policy by the US leadership because I believe that the US can lead us to pull out of the recession. But I still feel a nagging apprehension. Some people feel that the US is moving a little backward.

In the 1930s in London we witnessed the world moving into war. We cannot afford that mistake again.

Andreotti: An analysis of the world economy provides conflicting conclusions. It is better than we thought, but there are still signs of instability and developments in many cases are unsatisfactory. Expansion has been lower at this point than previous similar points of the economic cycle. We have not properly increased the use of human re[Page 86]sources. Unemployment is still very high and inflation affects all of our systems.

With respect to balance of payments issues, only a few OECD countries have surpluses. Most of them, and most LDCs, are in deficit. The surplus OECD countries simply add money on top of the already large OPEC-related deficit. To overcome this, we need to deal with the structural problem. All of us must make an effort to bring the structure to conformity with new realities. This requires time and a gradual approach to adjustment. If not gradual, there will be negative consequences for unemployment. We should reduce our deficits, but this also depends on countries with favorable balances. If the stronger would reaffirm their primary role in achieving growth, it will be easier for the weaker economies.

Also, there must be adequate balance between financing and adjustment. The oil importers have turned primarily to the private markets for finance. Now they are less solvent and find it more difficult to sustain future deficits. The financial market has reacted positively but there cannot be a solid financial position without a positive attitude by the creditor and debtor countries. The creditors have been lending primarily to good-loan risks—the low-risk countries. The debtors could restore solvency if they stress the will and ability to put their economies in order. The IMF has a role to play, in that it can provide adequate resources to support stabilization plans. But the Fund should act more symmetrically in order to lay the preconditions for recovery. We ourselves are contributing through our stabilization policy and by not imposing trade restrictions. This involves major efforts to secure the consent of various elements of society and our political parties.

With regard to unemployment, Giscard highlighted the political aspects of the problem. We should leave no stone unturned to reduce the gravity of the phenomenon. Also, we should discuss the growth of youth unemployment. Seven million young people, 40% of unemployment in the OECD, are a major problem. The young represent 22% of the work force. Also there is high unemployment among degree holders. We cannot await an impact in a drop of the birth rate, which should take effect in the mid-1980s, to deal with this.

Certain actions must be taken. We should refer to this in our final Declaration. Unemployment is a major challenge to us all.

Schmidt: I thank Jim for his traditional UK hospitality and also welcome President Carter and Prime Minister Fukuda. Valery is right in saying this is not a normal situation, or typical business-cycle recession. It is a structural crisis. It reflects a lack of confidence among the world’s rich nations, particularly among our consumers. In Germany, we have a 14% rate of savings and the lowest interest rate in history. No one asks for credit, yet we have money available. People do not use it [Page 87] because there is lack of confidence. This Summit ought to give more confidence in the ability of our countries to pursue complementary policies to achieve growth and lower unemployment.

Conditions are more favorable today than at Puerto Rico or Rambouillet. Prime Minister Fukuda had compared today with the 1930s, but conditions are different. There is greater cooperation in the IMF and through the use of Summits, and there has been no resort to economic warfare. These have prevented us from having the problems of the 1930s.

The reasons for the structural differences and changed business cycles in the 1970s are different from the 1930s. Both periods had high unemployment but the causes are different. We must address the causes of unemployment.

What are the causes of the structural crisis? There are, in my view, three:

First, we should not ponder on the issue of inflation versus unemployment. Unemployment followed inflation. Since the 1960s, inflation has expanded. One reason for this was the way in which the war in Southeast Asia was financed. The US flooded the world with liquidity. But inflation has also been homemade. Parliaments and governments have not resisted inflationary pressures. In addition, there are disparities in the rate of inflation from country to country. Also related to this, and because of these disparities, the fixed rate system of Bretton Woods had to collapse. It was inevitable after the disparities in the rates of inflation. We can get back to fixed rates, but not quickly. We all have a long-range goal, Germany as well as France and others, to get back to fixed rates, but I do not think this is probable for at least 36 months or so.

The whole monetary system was, however, a regulating factor after World War II. With the transition to flexible rates, countries were no longer forced to obey the rules of Bretton Woods. The new flexible rates were also a major uncertainty. If you bought or sold on installments, or on six-month payments, your financial risks of trade were very large. This was especially bad for the smaller firms.

Second, there was the oil crisis and the oil price explosion. This dramatically changed the terms of trade and caused major balance of payments problems. It led to a shrinkage of demand and a reduction of international trade, which came to a low point in 1975, and weakened confidence in the industrialized countries.

Third, is this overall lack of confidence in the world economic order, particularly on the part of industries and trade unions.

We must fight unemployment and inflation together. The prospects for OECD country growth in 1977 are not too bad. Growth was [Page 88] 5% in 1976 and will be 4.5% this year. It differs from country to country. The US and Japan are likely to lead; Germany will not attain the impressive figures of last year, but we will have 4½% to 5% growth this year. We will watch our growth to ensure that we have a healthy economy. If not, we will do something; not by printing money, however. We do this, quite frankly, because we want to survive, but we also do it because of our international responsibilities.

As a social democracy, my first aim is to reduce unemployment. The question is how do we do it. We do this not by neglecting price stability since inflation is the underlying uncertainty. We cannot create necessary capital until there is confidence that we will not have a new round of inflation leading to a new clampdown by governments which will make resources idle. A go-stop policy is disastrous.

But we recognize that in the meantime, without necessary private expenditure, governments must fill in the gaps. There must therefore be additional public capital expenditures. I just launched a 16 billion DM program in addition to the money that the local, state and federal governments are already spending. This is the biggest in our history. But we cannot fix unemployment in a short period of time.

We also have to live with large OPEC surpluses. The structural upheaval in balance of payments is also likely to continue for a while. Energy policy is one important tool in this remedy. For this reason, I welcome President Carter’s initiatives to reduce dependence. And there must also be a structural network of balance of payments cooperation. Germany has up-valued the DM by 18% since the beginning of 1976; imagine what that means for our exports—18% in less than 18 months. We do this because we think it is our responsibility to help others. But this has an impact since we export 29% of our GNP. We will stick to our flexible currency regime because it helps others to let this happen. There have, however, been some examples of competitive devaluation; for example, Sweden. I am not talking about you, Jim. (Callaghan: I can do without mine.)

I want to stress that we cannot cure the illness without curing the cause of the illness. We must deal with inflation, the problems of the international monetary system, uneven exchange rates, and unequal distributions of incomes. We need a stable consensus among us and a stable social consensus within our countries. Most of our efforts must be autonomous national tasks, but we also need psychological help from other parties.

The results of the Summit need not stress all of the measures that have been decided—but they should give the impression to the world that we are not going to fight each other by means of economic warfare, and that instead we will have complementary economic policies.

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Trudeau: I am encouraged by what has been said so far. Giscard mentioned the ideological difficulties relating to the problems of youth unemployment. Fukuda referred to the 1930s and the consequences for growth. In Puerto Rico we had not gone that far. We had not crossed the threshold. We discussed structural problems without accepting the need for structural change and without even recognizing the structural changes which had already taken place. Our democracies are threatened unless we find ways of affecting the structural changes to which all here have referred. We all see the same problems in terms of fundamental changes which have taken place. These concerns are major ones. I agree with Schmidt that we must tackle the causes if we do not want the causes to continue to produce the same effects.

Giscard also said the freedom of trade should be organized. This warrants our attention. It is not novel but we should take a close look at it. To some extent, this has already been done; for example, by OPEC. There is also a danger that actions by the dominant economies will have consequences for all countries; for example, in such areas as computers and aerospace. We have been dealing with OPEC, for instance, recognizing that it may be essential to organize our markets to defend ourselves. This is in some ways a new task for our liberal economies. In addition, we must also intervene in the mechanisms of the market, perhaps to help the developing countries.

This means that we must realize that our liberal philosophy is undergoing change. When we look to the causes and solutions, we must also look at certain additional measures of cooperation. Cooperation is essential and unavoidable. These types of meetings have in the past prevented economic wars which would have been a disaster to the industrialized world.

We must recognize, however, that there is no single formula to combat unemployment and inflation. We must enlist the support of our citizens. This issue was not addressed sufficiently in Puerto Rico. Problems are caused by excessive hopes and aspirations of our citizens. The problem is that people like to live beyond their means. It is hard to say to them that things are going badly because all unions and employers are asking for more. We need a spirit of discipline in our countries. We should use our democratic institutions to help each other and to direct our attentions to the need for restraint rather than simply allow the market to give free reign to unrealistic expectations.

Callaghan and Schmidt agreed on the need to generate confidence and a spirit of optimism. But how can we encourage people to have confidence in the future and then turn and say that things are going badly. We cannot say that all will be well because things are not all that well unless we scale down expectations. This is the paradox I put before you.

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Callaghan said that we need greater confidence but he also said growth will be lower. We should make our people aware of the possible consequences for industrial democracies, of not winning the ideological war. This is not only true with the Third World, although it is important because it will determine whether they look to us or to the socialist countries, who have no unemployment and greater order, as examples. But it will also have a serious impact on our own positions, particularly on growth.

As presently worded, the communique does not sound a warning note. It only talks of structural change without appealing to the people’s attitudes and telling them that they share responsibility for the health of the democracy. We cannot fail to invite people to live up to their responsibilities. Each of us needs to do this. If we sound this warning collectively, indicate the threat that our democracies are subject to, and bring about greater awareness in people, we can get support from our people for the necessary measures that we need to accommodate structural change.

Carter: Thank you for your very cordial welcome. I come here not as an economist, though I know many of you are very experienced in this area, but as an eager student. I know many of you were former Finance Ministers and have valuable experience in working together. I look forward to hearing your views so that when I get back I can make better decisions. I recognize the deep importance of our decisions on one another.

We in the US have set specific goals. I give you my assurances that we will maintain our efforts to achieve healthy growth. I believe we can meet our 5.8% target. When I came into office, we had 8.1% unemployment. I predicted we could get it down to 7.1% in my first year. Now it is down to 7%. I believe this is because of a surge in new confidence. This is in part reflected in a US rate of savings of 6% compared to 14% in Germany. There has been a big increase in consumption of consumer goods and we have gotten figures indicating an upswing in investment. This is the reason—after these changes in unemployment and consumer spending—that we saw no need for the $50 rebate. We still have more than $20 billion worth of stimulus in the economy. We have tried to focus this on the structural needs of our economy. We have paid direct attention to youth unemployment—particularly summer jobs—as well as employment for adults. We plan to continue our direct attack on unemployment. We hope to get it below 5% at the end of my term. For instance, we have a $4 billion public works program.

But we are also concerned about inflation. Our basic or underlying rate of inflation is 6–6.5%, although it is higher, about 12%, at the wholesale level. This leads to uncertainties about the future, even though results to date are encouraging. We do not want to stimulate [Page 91] any more than presently proposed. As I mentioned, we have indications that business investment is increasing rapidly—about 17% or 18%. Discounting for inflation, this means a 10% or more real growth in business investment. At the beginning of my Administration there was uncertainty in the business community about what I would do. But now investment is increasing very well, which to me indicates a new business confidence.

One issue I have been facing is protectionism. I have received a number of very harsh recommendations from the International Trade Commission. These are in response to domestic pressures but give no consideration to international relations. They are designed to protect US industry. I believe I have fought off these recommendations very effectively. We have a deep commitment to fight protectionism. A strong declaration by the Summit against protectionism would help me in resisting it in the US. As many of you know, Congress can override my decisions. But now I believe I am strong enough to prevent this. It is not likely during my first year or two in office.

We are trying to overcome a very large trade deficit, particularly our oil deficit. We collectively will have a $45 billion current account deficit, which matches the OPEC surplus. We are bearing our part of the deficit. Last year our current account position was zero. In 1975 it was $12 billion in surplus. This year it will be roughly $12 billion in deficit. We have over a $20 billion trade deficit, but our economy is strong enough to absorb this. Germany and Japan, however, continue to have large surpluses; these increase the deficit for others. We can sustain our deficit because we are strong enough to do so, but some countries are too weak to accept this burden. We should all recognize this.

On energy, we have launched a major program. In 1985, we would without this program import 16 million barrels per day. Our program will try to get this to 6 million barrels per day through conservation and by moving toward coal and gas. We have ended our moratorium on the export of fuel; just before I left, I approved a large sale of enriched uranium. Under adequate conditions on the export of enriched uranium, we will be able to meet the world’s needs. We believe that supplies are adequate provided that there are strong safeguards to avoid the use of uranium for explosive purposes.

A key issue for all of us is confidence. I feel very confident about the future of the US and the Free World. Vietnam and Watergate shook confidence in the US, but I think this lack of confidence is past and I am not concerned about it anymore. The new confidence can only come from within people and I believe that this has emerged. But we should not be afraid about explaining problems and the need for bold action, and saying that we need one another. If we are timid about stating our problems and the need for cooperation, pessimistic predictions about [Page 92] the future, predictions about loss of confidence, might come true. We need here a frank discussion of the challenges and how to meet them effectively working with one another.

Also we need to be sure that our decisions are carried out by our bureaucrats. We should not just discuss things, but do something about them. For instance, we should try to have a Tokyo Round of trade negotiations as successful as the Kennedy Round. We should try to meet our energy problems, cooperatively deal with developing countries and effectively deal with the problems of nuclear fuel. We have combined strength and we should use it. We should follow up promptly at staff level to achieve results. And we should be certain to set our goals fairly high. If we set goals too low, they will represent the maximum we will be able to achieve.

On trade, we should say that we would like to do as well as in the Kennedy Round. Unless we set high expectations, others will lower their expectations.

We should also consider how to absorb the new leaders of the economic world. Saudi Arabia comes to mind. Saudi Arabia wants to participate with us in the Horn of Africa, to help the developing countries and to establish fuel reserves so we won’t be hurt so much by any embargoes. Their strength and financial influence need to be recognized. We should give them the influence that they deserve along with requesting their financial contributions.

In addition, we should strengthen the IMF and the World Bank. Together they are very effective and provide useful guidance. We welcome the efforts by the IMF to ensure financial accountability on profligate nations. For this reason, we need to strengthen the IMF. Here again Saudi Arabia can be helpful. We should also carry out our commitments at Puerto Rico on strengthening the IMF. We are ready to participate in the Witteveen plan.

I welcome this opportunity to meet with you, and to have your advice and counsel. I am here to learn and I think I can learn a great deal from you. If I ever make a decision which is contrary to your important interests, I hope you will let me know. On two or three occasions, we were too insensitive to your needs, and it has taken me a while to understand this—for instance, on the nuclear fuel issue.

Callaghan: I agree we should try to do just as well on trade as in the Kennedy Round, but we need to reconcile this on one hand and our concerns about such problems as those in the shipbuilding and steel sectors on the other. We need to give guidance to our people on such issues in the communique.

MacDonald: On the issue of confidence, I speak as a lawyer surrounded by economists. But I must say I am not sure that professional economists today know what is going on. The pattern of events that [Page 93] they talk about does not fit current facts. I have heard Prime Minister Fukuda’s excellent analysis of the problems of the 1930s. I fear that people think in terms of Keynesian analysis and are now applying these old patterns to present circumstances and that pattern of thinking is not consistent with present facts. Hoover economics has not been updated to deal with such issues as how do we give resources to developing countries.

Our task as politicians is to make the choices, such as how much of our GNP we give to the developing countries. These are allocating problems. Also for instance, we have discussed youth unemployment. Here there is a problem with the unions, which is part of a generational problem.

We should think about an inter-generational transfer of resources. There is a structural problem in unions which is harmful to youths. How do we transfer resources from the older generation to our youths? This may be how we have to deal with this problem. The job-creation programs today are not necessarily sufficient. I have noted Prime Minister Barre’s proposals of a make-work nature for dealing with youth unemployment. When such projects come to an end, we will still have youth unemployment. This should be an important issue discussed here.

Healey: I want to support some of the things that Don MacDonald has just said. Prime Minister Fukuda has used the words “nagging apprehension”. Chancellor Schmidt spoke of “lack of confidence”. But except in the US, who is confident? In other countries there is a certain malaise, characterized by high savings and low investment, high unemployment, high inflation and election losses. At our meeting in Puerto Rico, we were too complacent and this complacency was unjustified. In some of our countries a downturn had begun, from which President Carter benefited later in the year.

All of us have been taught the relationship between growth and unemployment, and growth and inflation. But all established relationships seem to have disappeared. The inter-relationships appear to be different in different countries. Canada and France have recovered from a recession and have increased output, but also suffer from increasing unemployment. The UK has increases in its labor force and low growth, yet unemployment is falling when we expected it to be rising. We do not quite understand this. We have much work to do to understand these problems and should share the lessons of our experience.

One key element is high inflation and high unemployment. This has contributed to the five-fold oil price increase. The OPEC countries couldn’t spend all the money, therefore it led both to inflation and deflation. We must finance the counterpart to the oil surplus or have de[Page 94]flation. The problem is that the balance of payments is unevenly distributed. Germany and Japan have substantial surpluses. Others have a $20 billion shared deficit as a result, on top of other OPEC-related deficits, to accommodate.

Another problem related to this is that we have concentrated on the growth of countries’ GNP rather than the source of growth. If growth has been led by exports, as is partly the case in Germany and Japan, the burden on the weaker economies is greater even if the strong countries achieve their growth targets. The stronger economies should follow the US example in taking a bigger share of the deficit.

Countries should agree to stick to announced targets and monitor progress, and they should take action to reach the targets if it appears that they are failing to do so. And we should do our best to see that the global deficit is financed in ways acceptable to the deficit countries and does not weaken the overall financial system.

There is a risk that the type of credit provided by the IMF at the moment is not acceptable to countries who need financing. If the IMF requires stringent conditions, countries might prefer not to borrow from it and resort instead to protectionism or induced recessions, which can lead to the overthrow of the government. Their successors might go for protectionism. What I am talking about does not only apply to the developing countries, but also to some developed countries like Spain, Portugal or Turkey, which have serious financial problems. It is far from clear that they can meet IMF conditions. There are similar problems in the Caribbean, for instance Jamaica and Guyana. We should accept the principle that the Fund should not be so tough on conditionality that the offer of money is meaningless.

And we ought to monitor what happens after this Summit more closely than after previous Summits. There could be periodic reports. We meet frequently in the OECD and IMF. We could do reports on growth, the financing of payments imbalances, unemployment and especially youth unemployment, and extension of the freedom of trade, taking advantage of our opportunity to get together at these various meetings.

Apel: I want to make five quick points. In 1975 we had a growth rate of 5.6% in Germany and will have 5% this year. Yet despite these high growth rates there has been little reduction of unemployment. Some foreign labor has not returned to Turkey, and others took their pensions. We hope to meet our 5% target this year. But even with this high unemployment, we will have large amounts of imports. Our imports from the non-oil LDCs will increase 30%. This shows that our wage-cost level is very high. But on the other hand we have increased our export balance with European countries with very high inflation rates. As you see, there are a lot of German cars in London. This shows [Page 95] that we are not unwilling to increase imports, but countries with high inflation must stabilize prices if they are to be able to export to us. Last year we had a $3 billion current account surplus. This year it will be $2 billion. Therefore, we are approaching equilibrium.

I also agree that that the IMF must play an important role in financing imbalances. The banking system has reached certain limits. I am afraid that certain banks cannot increase their liabilities. Therefore, we need an increase in financing by official institutions. In this respect the IMF is extremely important. We will do our best to strengthen the Fund working with other industrialized countries including the US, Japan, Sweden and Switzerland. It is important to have close contact with the Saudis as well. It is a good idea to have market-related interest rates in the new facility. This benefits the Saudis. This facility also removes some of the risks. A depreciation of national currencies does not hit them to the same extent as it otherwise would, if they put their money in the Witteveen facility. On conditionality, the IMF should be strict, but not too strict. It must depend on the character of the recipient.

My third point is that we should be careful not to put too much emphasis on energy saving. It could reduce economic growth if we do so. We must also understand that we need nuclear energy within the next few years. If we cannot have nuclear energy, it could seriously hurt our industry and we would be in trouble in a few years. We need energy sources now in order to save imports later on.

Fourth, we need resource transfers to the developing countries. But if they ask too much of us, they could destroy their sources of help. If they do this, they will run into trouble because their electorates will not stand for it.

Fifth, we must spread confidence without creating false hopes. Prime Minister Trudeau indicated quite correctly that we should avoid creating false hopes. If we do, we will be confronted with our own words in 12 months. I agree that Rambouillet was a success, but that Puerto Rico was too complacent. Here we should be confident but indicate the dangers which should be overcome.

Blumenthal: I am impressed by the fact that there is a general view here that protectionism is not the answer. President Carter has indicated that we should strive for results which match those of the Kennedy Round in their economic and political significance. The goals we set should attempt to equal those of the Kennedy Round while recognizing that the conditions are different. We should, of course, as suggested, look at shipbuilding and steel, hopefully attempting to achieve greater openness. We should not move toward government-blessed cartels which would work in the opposite way. We hope that the results can be far reaching. We should project a sense of commitment and give assurances of our positive attitude.

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Our recovery has also meant that we have a high trade deficit—roughly $20 billion, which means a current account deficit of roughly $10 billion. One point in this is not fully understood. The large investment by the Saudis and others in the US and the high demand for dollars keeps our exchange rate higher than would otherwise be the case and thus contributes to our current account deficit. It gives us a higher exchange rate than otherwise. If we did not have such large investment, the dollar would decline in value.

Schmidt: In July of 1972 the dollar was worth 3.20 marks, now it is 2.25 marks, so that the dollar has weakened and not strengthened.

Blumenthal: All I am saying is that the dollar would have been lower without Saudi investment.

Apel: They invest in the Federal Republic too.

Blumenthal: I understand that, but the higher exchange rate contributes to our current deficit because of Saudi investment. On conditionality, we believe it is important and must be retained, but with flexibility. Political leaders must say what they can bear with respect to conditionality. We are trying to be helpful in our bilateral relations to Mexico and Portugal. There are various ways of dealing with these problems in which the IMF is not the most appropriate vehicle.

Healey: I agree, but if other ways are used too often, it could erode the IMF. We should soften IMF conditionality rather than have new channels.

Callaghan: I am not sure I agree with Denis on this. I think politicians should say to the IMF that, for instance in the case of Jamaica, if you insist on these conditions, you will throw them into the hands of the Cubans. Our technicians and officials should be tough. It is leaders who should intervene for political reasons.

Blumenthal: Just to finish up on our energy program, which was mentioned earlier, it is true that we place primary emphasis on conservation and savings, but we also place strong emphasis on the development of other sources of energy.

Jamieson: Do I take this to mean that the US wants less Saudi money? You should be aware that you were the Saudis of Canada for years.

Blumenthal: Yes, we still want Saudi money. I was just pointing out one implication.

Carter: Following up a point on energy, our target calls for an increase in coal of 60% and new uranium enrichment through use of the centrifuge. We expect to get 600 million to 1 billion tons of coal per day. The centrifuge plant is a big investment—perhaps $4–5 billion. So our program is not just conservation but it also has a strong emphasis on production. We feel that our overall program can reduce the world bal[Page 97]ance presently in favor of OPEC, and in so doing reduce the pressure on other oil importers. Also, we recognize that the development of new supplies, for instance, solar energy, is very costly. We should look for ways to reduce the costs of research and development and pilot models. We would like to see additional cooperation on R&D financing in such areas as the EC (JET) project. We would like to pursue this idea further.

Callaghan: We encourage your conservation efforts and support increased cooperation.

Fukuda: I am impressed by the emphasis in this conversation on structural problems. But what are they? One key element is that we are now in an age of finite resources. People are worried about the future. I congratulate President Carter on his bold energy program. We need additional efforts to increase energy sources through strong international collaboration. The US is a large country. But all of us will do better if we engage in a collective effort and effective collaboration to develop new energy sources, such as fusion. We must deal with the problems of petroleum investment and investment in a variety of new sources.

CIEC is particularly important in an energy context as well as in North-South context. Unless we resolve our differences, we risk further difficulty and unrest. All of our efforts will take time. If these are really structural problems, they take time to resolve. But we should see what we can do immediately to address the problem of unemployment and address North-South issues together. We should achieve harmonization between surplus and deficit countries. If the strong countries get together to reflate, it will provide great buoyancy for our economies. Without it, unemployment is bound to rise, and there will be more North-South confrontation. Without it the developing countries will push us further in a number of areas. Economic confrontation and political chaos will result.

This is why we in Japan want to restore our economic vitality. We are carrying a high fiscal deficit. We want to contribute to recovery in the world and to finance the deficits of others. We want to stimulate demand by deliberate action. Through our fiscal actions, we have reinvigorated our economy and generated more effective demand. We have applied $36 billion of fiscal expansion for public works; 73% will be spent in the first 6 months—April through September. This will create jobs in the Japanese economy and it will also encourage imports into Japan. We import much from the LDCs. Our stimulus helps the LDCs. Also our exports will be more sluggish as a result. Our goal is 6.7% growth. We would like to accomplish this objective at any cost. One way we have attempted to do it is to lower our interest rate. We have lowered our discount rate to 5%. Now our exchange rate is 275 [Page 98] yen to the dollar, up from 300 yen to the dollar. This is a 12% appreciation in 6 months. It will help.

We must also recognize the need for a follow-up to our discussions. I am pleased that President Carter suggested this too. We need this follow-up on other levels and in a variety of institutions, such as the DAC, IMF, OECD, IEA, GATT, etc. All meet separately rather than as part of one unified effort. But we should now attempt to get all of them to concert their efforts in the same direction. When the Finance Ministers meet in these various forums, they should be sure that everything is going in one direction.

There is one trade problem I want to raise. Last year we saw a concentration of Japanese exports of color TVs. There was a torrent of exports. I will see that this is corrected. We all must avoid any inclination to protectionism. I am referring to the protectionism of the 1930s, especially 1934. We must not repeat this. This will weaken us vis-à-vis the East and South. Today the Eastern Bloc is about as powerful as the Free World. If we are lax enough to sink to protectionism, it will be a tragedy. The OECD pledge is important even if we don’t repeat it. The spirit is important and we should make sure this spirit is upheld.

Barre: I have three short points. This Summit can have major psychological value as well as practical value if followed up energetically. But it should not raise false hopes. We are, first of all, in a crisis of confidence. This is due basically to the fact that we have had 20 years of prosperity which has slowed down in recent times. Some thought that the slowdown would be a short-term phenomenon, and that soon we would return to the period before 1973–74. We should not allow this thought to continue. We should make public opinion aware of the facts, as President Giscard said. For instance, the oil-importing countries should recognize that the transfer of resources to exporters will reduce the possibility for increasing the quality of living and the standards of living in the developed countries. If we don’t do this, we will all expect too much over the short-term. Also confidence has been shaken because of uncertainties over the shortages of supplies and the problem of prices. I believe that the CIEC shows that the oil-importing countries are aware of this difficulty.

The second problem is unemployment. We should not give the impression that our struggle against unemployment replaces our fight against inflation. These efforts must be undertaken side-by-side. We must continue to struggle against inflation which will lead to a reduction in unemployment as well. This should not be done in the Keynesian context of the 1930s. The labor situation has changed. People get unemployment benefits. They are not looking for just any employment, but are looking for a job they will accept. Many women are coming into the labor market and turnover has increased significantly. Youths [Page 99] today do not have the same motivation. There is less concern with the continuity of work. The struggle against unemployment calls for specific programs to find long-term employment rather than part-time jobs. We should not say we are going to solve the unemployment with a big rush forward because this would soon mean the application of restrictive measures.

My third point is on trade. President Giscard stressed structural changes and the need for organized freedom of trade. We should safeguard the freedom of trade. If we want to guarantee freedom of trade, we cannot repeat the same phrases as in 1960, 1967, or 1973. Public opinion will not be impressed. We should make a collective commitment not only to resist protectionism but also to deal with problems of trade.

We also need access by exporters to important markets which are closed not only because of customs duties, but other barriers as well. The EC has given the developing countries great access and technology. A number of countries are now subsidizing their exports and closing their markets to the developed countries. A lack of symmetry cannot be supported in the future. If this exists, the negotiations cannot deal with the problems in a climate of cooperation. Public opinion will not allow cooperation. We should stress that the new problems require new approaches, and give an acceptable content to the notion of trade, demonstrating that it is not in conflict with the notion of employment.

A follow-up is a good idea. The Summit could lead to positive results on trade, economic growth, and employment.

Callaghan: This has been a useful discussion. We have overlapped into other areas. One essential point which has emerged is that we not only want a good declaration, but good results. We should relate the declaration to our people.

I listened to Prime Minister Fukuda express his concerns and compare this period to the period of the 1930s. I believe that President Giscard was the first to mention structural changes which makes this period different from both the 1930s and the period before 1973. Prime Minister Trudeau also added a point about the consequences of this for ourselves and indicated the need to educate our people, the developing countries, and the oil producers who do not understand the change in the situation. Our communique should have a short analysis at the beginning which points to these matters. We need an analysis of this situation.

On the issue of inflation and unemployment, all of us are agreed on the political consequences of high unemployment. Our number one aim, as Chancellor Schmidt said, is to reduce high unemployment, particularly among the youth. But there are also serious inflationary pressures which must be dealt with.

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On the issue of confidence, we need to bring renewed confidence and a greater sense of certainty. We should say that we intend to carry out our commitment on growth for this year. As Prime Minister Trudeau said, we should reinforce each other by telling people not to exaggerate in their minds what can be done. The points that were raised on the IMF and protectionism should also be included.

Another good point was on the proliferation of international institutions. Our actions must be followed up in institutions by our people. We can take a bird’s eye-view of what they are doing in these institutions. We must we willing to meet again to keep an eye on what they are doing—to keep an eye on these goals. The Foreign Ministers at lunch should inform our colleagues of these objectives. We should invite our colleagues to meet in the afternoon to draft a communique.

Carter: We should say that unemployment is the most important issue, but follow immediately by discussing inflation to show that they go together. We should let the world know what we discussed and what we think. We should lead off the communique with the main points we agreed on and then follow-up with the supporting facts. We should present our conclusions in the first paragraph.

Giscard: I believe that the communique was read last time only by those who drafted it. It is too long now.

Callaghan: We should cut it down and make it direct.

Fukuda: You have correctly indicated the high points. We should also put in that one change is a tighter supply of resources and energy.

Callaghan: I agree.

Andreotti: The communique should have value, something for public opinion. We want to stress the main points and give reassurances and hope. It should have a political content.

  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Trip File, Box 1, President, Europe, 5/5–10/77: Memos and Cables, 5/5–20/77. Secret. Sent to Carter under cover of a May 20 memorandum from Owen that reads: “I attach the notes that Bob Hormats took of the Downing Street Summit. They cover the first day and the morning of the second day. They do not cover the afternoon of the second day, which was largely devoted to revising the Declaration.” (Ibid.) The sessions of the London G–7 Summit were held May 7–8 in the State Dining Room at 10 Downing Street. Two sessions were held on May 7, the first from 10 a.m. until 1:10 p.m. and the second from 3:30 until 6:16 p.m. The third and fourth sessions on May 8 were held from 10:30 a.m. until 1:24 p.m. and from 3 p.m. until 6 p.m. (Carter Library, Presidential Materials, President’s Daily Diary) The minutes of the Summit’s second session on May 7, which covered nuclear non-proliferation and human rights, are in the Carter Library, National Security Affairs, Brzezinski Material, Trip File, Box 1, President, Europe, 5/5–10/77: Memos and Cables, 5/5–20/77.
  2. See footnote 7, Document 21.
  3. See footnote 6, Document 4.
  4. In a pre-Summit message to Carter, Callaghan discussed his concerns about unemployment. Owen sent Callaghan’s message to Carter under cover of a May 3 memorandum, in which he suggested that while Callaghan was “right to be concerned about unemployment in” the United Kingdom, France, and Italy, he was “wrong to think that marginal changes in the rate of German, Japanese, and U.S. expansion can set this problem right.” Owen asserted that unemployment would “not yield to quick fixes—only to long run remedies. At present, each of the Seven Nations is embarked on the right long-term policies: moderate expansion in the U.S., Germany, Japan; stabilization in the UK, France, and Italy. Over time, these policies will bring down both inflation and unemployment—if the countries concerned stick to them.” (Carter Library, National Security Affairs, Brzezinski Material, Trip File, Box 1, President, Europe, 5/5–10/77: Memos and Cables, 4/29/77–5/4/77)
  5. Possibly a reference to the Carter administration’s proposed energy program; see footnote 7, Document 25.
  6. The final Ministerial meeting of the Conference on International Economic Cooperation took place in Paris May 30–June 3. Telegram 16351 from Paris, June 3, contains the communiqué issued at the conclusion of the meeting. (National Archives, RG 59, Central Foreign Policy File, D770206–0274) The communiqué is printed in the Department of State Bulletin, June 20, 1977, pp. 650–652.
  7. Fukuda is referring to Carter’s January 31 proposal to Congress for an economic recovery program that included, among other measures, individual tax rebates. See footnote 7, Document 1. On April 14, citing changes in the domestic economic environment, Carter announced that the proposed $50 tax rebates were to be eliminated from the economic recovery program. See Public Papers of the Presidents of the United States: Jimmy Carter, 1977, Book I, pp. 618–622.