BONN ECONOMIC SUMMIT--THEME ISSUE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000202500001-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: January 28, 2010
• Sequence Number: 1
• Publication Date: March 7, 1985
• Content Type: REPORT

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Memorandum for:
Attached are contributions for the video
briefing requested The video
is being prepared for President Reagan's upcoming
trip to Europe this May.
George
7 March 1985
Distribution:
1 - David Low,
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Office of European Analysis
Directorate of Intelligence
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State Dept. review completed
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Bonn Economic Summit -- Theme Issue
An important theme at this year's Summit will be economic
restructuring -- in particular looking at the difficulties West
European economies are encountering in moving from a smokestack
industrial age to one of high-tech, information processing, and
services. Around 20 million new jobs have been created in the
United States over the past 10 years; in Europe over the same
period, no net jobs have been created. With hundreds of
thousands of jobs being lost in industries such as steel,
shipbuilding, and autos, and with a large number of young people
entering the job market because of a baby boomlet in Europe in
the early 1960s, the results are massive unemployment -- over 10
percent and still rising in practically every country -- and
budget deficits because of greater and greater unemployment and
welfare expenditures.
Even today, with their economies finally appearing to be
moving onto positive growth paths, practically all of that growth
is coming from an export boom due to US economic growth and the
competitive edge the Europeans have gained because of the strong
dollar. Most Europeans see such growth as temporary, limited to
a few sectors, and encouraging protectionist pressures in the
United States. Perhaps most important, they fear the potential
consequences of a massive trade turnaround if the dollar falls
and US products once again can compete in Europe.
Most West European leaders would agree privately that their
economic problems are due largely to domestic market
inflexibility -- that is, to factors such as administrative
bottlenecks, conservative financial systems, risk-averting
management philosophies, and pervasive job guarantee programs.
However, politics and human nature will almost certainly combine
to encourage a search for outside forces to blame. The primary
target is likely to be high US interest rates, which some leaders
-- probably led by the French -- will argue are sucking capital,
and thus jobs, out of Europe.
The Europeans are also likely to complain about tight US
research and technology policies -- especially those related to
defense and to COCOM-controlled products but increasingly to
civilian industries as well -- that they suspect are designed to
prevent West European access to new technologies and thus ensure
continued US competitive superiority.
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UNITED KINGDOM
The United Kingdom is into its fourth year of a moderate
economic recovery. London has adhered to tight fiscal and
monetary policies to wrestle inflation down to below 5 percent
and reduce the budget deficit to 3.25 percent of GDP. Thatcher
believes that selective tax cuts, market liberalization, and the
reduction of government involvement in the economy have been the
key to Britain's recovery. She is especially proud of her
program of denationalizing industry and may urge other countries
to adopt similar policies to reduce
t
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ruc
s
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g
dities in
their own economies. Thatcher also contends that an essential
ingredient to long-term growth is reducing the power of labor
unions in Britian and sees her recent victory over the coal
Nevertheless, serious economic problems remain. The
recovery has not been fast enough to arrest unemployment, which
is now over 13 percent and still rising. Moreover, Thatcher is
worried that high British interest rates -- raised a total of
four and a half points in January to defend sterling against a
strong dollar -- could worsen the unemployment situation. She is
likely to join other leaders in criticizing the US budget deficit
at the Summit, especially if the dollar remains strong on
international markets. Even though the Prime Minister does not
believe that exchange intervention can alter underlying market
trends, she may push for renewed agreement on coordinated
intervention by central banks on certain occasions.
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The Summit convenes in Bonn a little more than a week before
an important election for the leadership of West Germany's most
populous state, and Chancellor Kohl hopes to boost his party's
chances by presenting himself as host and his Christian
Democratic-led government in a positive light. For now, the
Chancellor's position is secure but he continues to suffer from
accusations of indecisive and often confusing leadership. While
high unemplond the US dollar and budget deficit remain
concerns in Mn, BonKohl will look to the Summit primarily to
produce action on a new round of trade negotiations and to
discuss the need for environmental protection. The rapidly
worsenin condition of German forests is producing negative
Political fallout for all the major parties. Kohl also hopes
that the Summit will produce a display of Allied unity that will
carry over into the following week as Europe celebrates the
fortieth anniversary of VE-Day. He is especially anxious that
this will demonstrate his country's unquestioned acceptance as a
member of the Western community of democratic states.
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President Mitterrand has been in office for four years, but
his seven-year term does not expire until 1988. After some early
economic policy mistakes, which included short-run stimulation of
the economy and nationalization of most banks and several large
firms, Mitterrand has reversed course and implemented restrictive
fiscal and monetary policies aimed at correcting some of the
fundamental problems of the economy. Inflation has been reduced
from near 14 percent in 1982 to less than 7 percent last year;
during the same period, the current account deficit has been cut
from $12 billion to near balance, in part due to increased
exports to the United States. Unemployment, however, has risen
throughout Mitterrand's term and now stands near a postwar record
of 10.5 percent. It is the major economic problem facing the
government and could lead to significant reduction in Socialist
representation in the National Assembly when elections are held
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Mitterrand generally has been impressed by American economic
flexibility and dynamism and is seeking ways to apply the virtues
of the A
i
mer
can system. So far, however, little tangible has
been accomplished. For example, although most government
officials, industrialists, and leaders of the major democratic
unions agree that labor practices need to become more flexible,
the powerful Communist-dominated trade union has torpedoed
efforts in this direction. As a result, the job-trimming
necessary in loss-making firms like Renault has not been
accomplished. The government has been hesitant to mandate
increased flexibility and 7y not do so before next year's
election.
Mitterrand's major worry coming into the Summit is that
France's fragile economic recovery could be threatened by high US
interest rates and the strength of the dollar. This concern is
balanced, however, by realization that a sudden decline of the
dollar could seriously upset French exports. Mitterrand is
likely to press you to reduce interest rates and may push for
international monetary reform measures to stabilize the d
ll
o
ar.
In the past, French officials have threatened to block US efforts
to begin a ne
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e round until monetary reforms have been
agreed. This'danger remains, but Mitterrand is generally more
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Jacques Delors--President of the EC Commision
Jacques Delors, Mitterrand's former Finance Minister, will
attend this year's economic summit as the newly appointed
President of the European Community's Commission. Delors
generally tries to avoid diplomatic ceremony and brought his
reputation as a candid pragmatist to the Commission when he
arrived in January. He is considered to be more self-confident,
forceful, and reflective than his predecessor, Gaston Thorn of
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The Commission President traditionally takes a back seat
during summit discussions, and we believe Delors generally will
maintain this low profile. According to diplomatic reports,
Delors believes the US and Western Europe must work together more
closely to minimize translatlantic economic frictions. Delors
has not hesitated to criticize sharply US economic policies,
especially when asked for his personal opinions. Speaking to a
European group in early March, he warned of a major clash between
the United States and Western Europe over international trade and
the handling of the Third World debt situation.
At the summit, Delors is likely to be most concerned by
Washington's determination to launch a new multilateral trade
round in 1986. According to diplomatic reports, Delors believes
such an initiative could detract from his efforts to liberalize
trade within the Common Market. He may also prefer to postpone
the new round until 1987 at the earliest--after Spain and
Portugal enter the European Community.
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Strasbourg and the European Parliament
Strasbourg--the capital of the French province of Alsace--is
located about 250 miles east of Paris, virtually overlooking the
Rhine River and the border with West Germany. Founded by the
Romans in the First Century, B.C., Strasbourg was a medieval hub
of learning and commerce. Over the years, the province of Alsace
has been bitterly contested by Germany and France and, since
1871, has changed hands six-times. It was fitting, therefore,
that following World War II the countries of the European
Community chose Strasbourg to be the meeting place for the
European Parliament--the institution that perhaps best epitomizes
the ideal of a democratic and united Europe.
The European Parliament--one of the principal bodies of the
European Community--is the only European-wide institution whose
members are directly and popularly elected. Its 434 members meet
for one week each month at the Palais de L'Europe--a starkly
modern structure that stands in marked contrast to the 17th
Century rooftops of the old city. Members of the European
Parliament, who serve for five years, sit according to party
preference, not by nationality. Socialist members form the
largest single party group in the current parliament--elected
last June--but a coalition-of----,center-right parties firmly
controls the body.
The President of the European Parliament--Pierre Pflimlin--
is a widely respected French Christian Democrat, former Prime
Minister of France, and ex-mayor of Strasbourg. The 78-year-old
Pflimlin was a close friend and supporter of Robert Schuman, one
of the founding fathers of the European Community, and is
committed to Schuman's dream of a united Europe.
Two other bodies of the European Community, the Commission
and the Council, are required by treaty to consult the European
Parliament before adopting EC-wide policies. Parliament's advice
is not binding, however, except on certain budget questions.
Despite its limited watchdog function, the European Parliament
has wide rein to discuss issues of common interest--ranging from
consumer protection to foreign policy--and make recommendations
to the EC members. Direct representation, plus the authority to
identify European-wide concerns, establishes the European
Parliament as the voice of the people in the European Community.
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Socialist Prime Minister Bettino Craxi has held his five
party coalition together now for over 18 months -- nearly double
the average life-span of Italy's 40 previous postwar
tt overnments. The Summit must seem like a heaven-sent opportunity
o Craxi, who faces important nationwide local elections on 12
Ma ; he probably will use it to enhance his image as an
international statesman and to cast some of the blame for Italy's
economic problems on high US interest rates and the strong
dollar. Economic issues will play an important role in the
elections. The Communists -- hoping to firm up their tentative
c aim to being the country's largest party -- are charging
economic mismanagement in the wake of the record 10.4-percent
unemployment rate, continuing inflation, and a budget deficit
that reached 16 percent of GDP last year. Unless the Socialists
do well in the elections, Craxi is likely to come under fire from
the left wing of his party, who prefer an alliance with the
Communists rather than with the Christian Democrats -- who appear
to be slipping after 40 years of ruling the roost. With an eye
on the elections, Craxi will take full advantage of Italy's
current six-month presidency of the EC Council -- the Community
body made up of representatives from the ten member states -- to
issue pronouncements on issues such as East-West rel , the
Middle East, and Central and South America.
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in leadership of his faction--by far the largest in the party. This, in
turn, could trigger a major change in the ranks of the party leadership.
SUMMIT VIDEO
JAPAN
Prime Minister Yasuhiro Nakasone comes to the Summit facing political
uncertainty at home. His major ally in the ruling Liberal Democratic
Party, former Prime Minister Tanaka, suffered a stroke in late February.
Nakasone's position as Prime Minister is not in immediate danger, but if
Tanaka's illness proves to be lengthy, pressure will build for a change
In his private meetings with you in Bonn, Nakasone will probably
reaffirm his support for the strategic defense initiative and may offer
Japanese participation in exploring related new technology. He may also
stress that by refusing to cave in to opposition to increased defense
spending, both within and outside the LDP, he has laid the groundwork for
a greater Japanese commitment to defense in the Pacific. He may add that
the military budget could break the limit of one percent of GNP as early
as this summer. He will probably review progress in opening markets in
the four sectors--telecommunications, electronics, forestry products, and
pharmacueticals and medical equipment--that you agreed upon at your
meeting in Los Angeles in January. Although we believe Nakasone is
sincere in his efforts to increase foreign access to Japanese markets, he
is facing domestic opposition, particularly to cuts in plywood tariffs.
sectors.
Nakasone's main objective for the Bonn Summit is to once again
portray himself as an international leader. He will also likely call for
a new round of multilateral trade negotiations to reduce global.
protectionism. In discussions of future worldwide economic growth,
Nakasone will emphasize that Japanese GNP grew in 1984 at its highest
rate since the 1970s. If there is debate on the high dollar issue,
Nakasone will most likely side with Western Europe, but will be low key
in his criticism of US policy. In view of growing complaints from the
Summit countries over'closed Japanese markets, Nakasone hopes to avoid
discussing trade issues in Bonn. If pressed, however, he will probably
point to recent successes, such as the liberalization of the financial
market, and claim that Tokyo is moving as quickly as possible in other
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Canadian Prime Minister Brian Mulroney almost certainly sees
the Bonn Summit as his first major opportunity to play on the
world stage. He is aware -- due to former Prime Minister
Trudeau's example -- of the Summit's potential as a vehicle for
impressing Canadian voters, and with his government having
difficulty implementing its domestic economic program, he
probably sees the need to perform especially well in Bonn.
Mulroney has moved speedily to build closer ties with the United
States; at the same time, however, he may use the Summit to
establish Canadian positions on some economic issues that differ
rom Washington's. In particular, Mulroney is likely to join
other Summit countries in criticizing the strength of the US
dollar. The dollar is of special concern because Canada imports
more from the United States than does any other Summit country.
As a result, Ottawa claims that the strong US dollar is causing
inflationary pressures in Canada and is drawi
Canadian investment into the United States.
Mulroney, however, will not be the wild card that Trudeau
was -- especially on arms control and disarmament matters -- and
almost certainly will work for consensus on major issues. For
Canada, trade is perhaps the most important issue. Nearly one-
third of Canada's GNP is tied to exports (compared with about
one-tenth for the US); moreover, exports -- three-fourths of
which go to the United States -- are the primary locomotive in
Canada's current recovery. As a result, Mulroney is especially
eager to promote Summit unanimity on the need for a new
multilateral trade round and on combating protectionism.
Although environmental concerns remain an important
political issue in Canada, the Prime Minister is not likely to
push as hard on this subject as did his predecessor. Mulroney
apparently would prefer to keep discussions of acid rain on a
bilateral basis with the United States. Nonetheless, he cannot
afford to be publicly perceived as doing less than West German
Chancellor Kohl and will follow Kohl's lead when the Chancellor
i
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ates the discussion of environmental issues.
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Portugal, one of the poorest countries in Western Europe, is
still settling into its relatively new democracy. Voters support
the democratic system that grew out of the revolution 11 years
ago, but are dissatisified with the performance of the
politicians who alternate in and out of office. Portugal's
present.government is a Socialist-led coalition that strongly
supports NATO and the United States. ? Policy differences and the
upcoming presidential election in December, however, are
increasing tensions among the governing Socialists and Social
Democrats President Eanes, a military man who is independent of
the established parties, cannot succeed himself and Prime
Vinister Soares would like to replace him. His Social Democratic
arty coalition partners, however, want to run their own
candidate, which will likely break the coalition.
President Eanes still harbors political ambitions and is
flirting with supporters of his who recently launched a new
political party to compete in the election. The party will need
his active support to get off the ground. To date, Eanes has not
ecided how much of his prestige he wants to risk in that
venture. A few of the part 's leaders talk about the need for
"dialogue" with Portugal's Stalinist Communist Party, a
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po
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y worrisome development.
Despite the strains within the coalition, the government has
pursued tough and unpopular austerity measures that cut
Portugal's balance of payments deficit from $3.2 billion in 1982
to $600 million in 1984. These improvements have come at the
expense of the workers, whose already low real wages were further
reduced by about 19 percent during the past two years. The
government is pressing efforts to join the European Community in
hopes that membership will promote economic development.
Initially, however, membership will be a major jolt for
Portugal's largely small-scalp and inefficient industry and
agriculturp_
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V even a cen rest and conservative politicians
from mounting an effective challenge. The coming year will be
decisive for his efforts to keep Spain in NATO. Gonzalez will
either have to back out of his promise to hold a referendum on
NATO by April of next year or mount an uphill campaign to reverse
the current 2:1 opposition to the Alliance. Either course will
be difficult personally and cost him politically. Membership in
the European Community probably would help reinforce Spain's ties 25X1
to NATO, but still unresolved differences over fishing and
agriculture and lack of a firm EC negotiating position may push
hark +hn nl ~..--A ...a- -~ - -
Socialist Prime Minister Felipe Gonzalez faces some of the
toughest problems of any West European leader. Despite his
Socialist background, Gonzalez has bet on conservative economic
policies to lay the foundation for lasting economic growth, but
unemployment has climbed from 17 to 22 percent since he took
office in December 1982. On the brighter side, Gonzalez faces
weak and divided opponents, and opinion polls make him a strong
favorite to win the next election which must be held by December
1986. Feuding between pro-Moscow and Eurocommunist factions has
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policies have t d t
The King, Juan Carlos, also plays an important role. He is
largely responsible for putting Spain on the road to democracy
after the death of Franco, and he intervened dramatically in
February 1981 to put down a coup attempt by restive military
officers. Since Gonzalez's election, the King has acted as a
largely ceremonial chief of state. Juan Carlos, however, remains
a booster of the United States and NATO, and advises Gonzalez
from time to time on foreign policy. He also helps him
occasionally in his dealings with opposition politicians. 25X1
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