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

44. Memorandum of Conversation¹

Washington, July 14, 1977, 10–11:35 a.m.

PARTICIPANTS

• The President
• The Vice President
• The Secretary of State
• The Secretary of the Treasury
• Assistant to the President for National Security Affairs Zbigniew Brzezinski
• Ambassador Walter Stoessel
• Ambassador Henry Owen
• Assistant Secretary of State George Vest
• Gregory F. Treverton, NSC Staff Member, Notetaker
• Harry Obst, State Department Interpreter
• The Chancellor
• Foreign Minister Hans Dietrich Genscher
• Ambassador Berndt von Staden
• State Secretary Manfred Schueler
• State Secretary Klaus Boelling
• Assistant Secretary for Political Affairs Juergen Ruhfus
• Assistant Secretary Dieter Hiss
• Director, Political Office, Klaus Blech
• Mrs. Gisela Niederste-Ostholt, Interpreter for Minister Genscher

[Omitted here are opening remarks and discussion of MBFR and SALT.]

General Economic Issues

Secretary Blumenthal commented that there was total agreement in his discussions with the Chancellor the previous day on the nature of the economic problems facing the developed countries and on the need for full cooperation between the FRG and the U.S., and among the developed countries, although there were some differences of emphasis on particular measures which should be applied.² The rise in oil prices has caused large imbalances on current account in many countries, accompanied by inflation and unemployment. Periodically, there are serious balance of payments crises, particularly among the Mediterranean states and some LDCs. The OPEC surplus will total some $45–50 billion this year, while Japan will run a $7 billion payments surplus and the FRG a $2.5–3 billion surplus. The U.S., on the other hand, will have a current account deficit of $12 billion and a trade deficit of $25 billion. These deficits are unlikely to diminish for some time.

Secretary Blumenthal then suggested strategies with which we can deal with these problems.

—Progress on energy is vital, but will take time and the economic effects of the U.S. program will not be felt until 1980 or 1982.

—Non-OPEC countries in surplus or close to payments balance can encourage imports from the deficit countries by meeting the London growth targets. The U.S. will continue to emphasize exports. Surplus countries should let their currencies appreciate. The Japanese have not been completely cooperative on this issue, although there has been improvement lately; they have considerable administrative control over the value of the yen. Our aim is the gradual reduction of the U.S. deficit; that is important because the continued outflow of dollars could be inflationary, although this is less of a problem if currencies are floating, because exchange values accommodate.

—Secretary Blumenthal stressed cooperation to make available financial reserves—through the Witteveen facility and increases in IMF quotas—noting that such assistance can be very effective, as in the case of Britain.

—Finally, Secretary Blumenthal urged that the Chancellor do whatever possible to achieve German growth of at least 4.5%, indicating that he and the Chancellor had discussed Germany’s problems and possibilities.

The President said that the U.S. will not interfere with the goals various nations set, or with changes that they deem necessary. If they want to change their goals, fine. The Japanese will be close to meeting their goal of 6.7% growth; the U.S. will be close to its 5.5% target, although growth will drop off in the second half of this year. If the FRG cannot attain its goal, the U.S. will understand. But there is an impending problem for the U.S.: with 7% unemployment it is difficult to explain a $25 billion trade deficit to Congress, especially while the Germans have a $9–10 billion surplus. But the U.S. and the FRG will not impose policies on each other.

The Chancellor commended Blumenthal’s summary, as fair and accurate. He stressed the importance of regular, quiet meetings between the Finance Ministers of the U.S., Britain, France and the FRG. The Japanese should be included periodically. Meetings are easier without them because they are not fluent in English or comfortable in such meetings, but it is important to reduce their intellectual isolation from European and American experience.

The Chancellor noted that the Deutschemark had been permitted to appreciate in value by some 60–70% since 1970. Recently, the rate of appreciation had been 1% per month. That had been the German contribution to recovery. But this has been difficult on the steel and shipbuilding sectors. The FRG will have a growth rate of 4.5% this year along with 3.9% inflation and over 4% unemployment.

Dr. Brzezinski questioned whether FRG unemployment figures included foreign workers who do not leave Germany, and the Chancellor said they do. One million are unemployed. The German labor force includes 4 million foreigners, who stay in the FRG and collect welfare when they are unemployed.

The Chancellor said that there had been a change in the structure of demand. It is now satisfied. There will be no new housing construction, only replacement, but demand for cars is high and demand for holidays overseas is very high (60% of German workers vacation abroad). He noted that 14% of disposable income is saved. Interest rates are very low and there is more money to lend than demand for it. He had decided to raise the VAT by only 1%, not 2%, and to offset that hike by other measures. There will thus be a net tax relief. That has been hard on Finance Minister Apel because of the resulting government deficit. Since private investors will not invest, the government must. A 60 billion DM investment program is underway, despite unenthusiastic response and red-tape delays in the states. The Chancellor wondered what the FRG can do about its surplus on current account but allow the Mark to float.

Secretary Blumenthal said that if growth could reach 4.5% and the Mark were permitted to float, that would be enough.

The Chancellor said that was a difficult answer for Parliament to accept; they wanted more growth.

Specific Country Situations

The President asked for the Chancellor’s opinion of other nations’ economic situations.

The Chancellor responded:

—Britain: the “social contract” is breaking down; North Sea oil will resolve British difficulties in 2–3 years, but that the interim will be trying.

—France: is financially more solid than any other Western state, but suffers from structural problems. The unemployment (5%) is very sensitive politically; if the government can cut it by 100,000–200,000, then it can win the elections; if unemployment rises, it is sure to lose. The Chancellor had spoken with Giscard and Barre; neither thought the government should do more than it is doing at present.

—Italy: growth is not the problem; it is the social differences—North v. South, rich v. poor, etc.

—Holland is in good shape; Belgium is not. Austria is very healthy, but too small to affect general Western recovery. Switzerland is economically strong after expelling its foreign workers. While Norway is fine, Denmark has problems and the Swedish situation is deteriorating.

The Chancellorconcluded that while there are difficulties, he did not think that there will be further economic decay. He noted that growing productivity complicates German efforts to cut unemployment.

The Presidentresponded that U.S. productivity is falling.

The Chancellorsuggested that good labor relations are responsible for the rise in German productivity. Much of the unemployment is a result of women entering the work force.

The Presidentsaid that women also account for much of the problem here; there is also a huge illegal alien population, as many as several million Mexicans.

The Chancellorcomplimented the President on U.S. economic performance in the first two quarters, saying that he thought the change was less one of economics than of mood, a good part of it brought on by the President’s arrival in the White House.

The Presidentsaid the low 6% savings rate was the cause of U.S. growth. If the confidence reflected in polls continued, so would the growth.

[Omitted here is discussion of Turkey, Portugal, and Spain.]

The Presidentsaid that both he and the Chancellor were concerned at the public impression of discord between the U.S. and the FRG. He said that they had decided the previous night that should occasional disagreements arise, they would call each other. An image of US–FRG tension is difficult for the weaker states.

The Presidentnoted that disagreements are always exaggerated by the press and instructed U.S. officials present to inform him of any hints of trouble in the relationship so that he could call the Chancellor.

The Chancellorfully endorsed the President’s statement. He said that some of the sources of such exaggeration were in his country—those who want a return to the Cold War. Also, there are those in the EC who do not view German economic growth with pleasure and are willing to play up any US–FRG disagreement. Some of the sources are also in the U.S. The Chancellor felt that he and the President should fight against any discord in US–FRG relations by maintaining personal contact.

The Presidentinstructed Powell to inform the press that the U.S. is very pleased with Germany’s economic performance and attitude toward the nuclear fuel cycle evaluation. We are pursuing the same goals, and the U.S. and European publics should know that. The President joked that agreement between the two leaders is so broad that they needed to find an area of disagreement.

The Chancellorsuggested one: on the phone the President should speak more slowly.

[Omitted here is discussion of the Law of the Sea negotiations.]

The Chancellorsaid he hoped that the President would come to Germany soon. He understood the President’s schedule problems and did not expect an immediate answer, but said that a Carter visit would be received enthusiastically. After Germany itself, Germans look to the U.S. for leadership. All Germans would see a Presidential visit as indicative of the close relations between the two countries.

The Presidentwas grateful for the invitation as well as for Schmidt’s visit to the U.S. He and the Chancellor spoke briefly about a “Friendship Force” visit to West Berlin. The President agreed in principle to visit the FRG in the near future.³

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 35, Memcons: President: 7/77. Secret; Sensitive. The meeting took place in the Cabinet Room. Schmidt paid an official visit to Washington July 13–15. During a meeting on July 13, Carter and Schmidt discussed, among other issues, the multilateral trade negotiations. Noting the importance of “rapid movement in MTN,” Carter asked for Schmidt’s help in encouraging French movement in the negotiations. Carter and Schmidt also discussed the problems posed by Japanese trading practices. (Memorandum of conversation, July 13; ibid.)
2. Blumenthal, Solomon, and Bergsten met with Schmidt on July 13 from 5 until 6:15 p.m. at Blair House. A memorandum of conversation of the meeting is in the Department of State, Office of the Secretariat Staff, Files of Walter J. Stoessel, 1959–82, Lot 82D307, Box 3, Ambassador—Chron Memos for the Record—1976–77.
3. In a July 16 memorandum to Carter, Brzezinski relayed a report from Hiss that Schmidt was “delighted by his visit here. It confirmed him in the impression, which he had formed at London, that you and he could work well together.” Schmidt also “profited from the economic discussions with Blumenthal and then with you” and “was comfortable with the way you discussed the growth targets.” After discussing Hiss’ thoughts on the date for the next economic summit, Brzezinski noted Hiss’s confidence “that the Chancellor will press his subordinates and his allies to fulfill the ambitious schedule on trade negotiations that Bob Strauss and Jenkins agreed to last week, to fulfill his summit pledge.” Carter wrote “Good” on the memorandum. (Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 24, German Federal Republic: 4/77–3/78)