Office of the Historian

75. Telegram From the Embassy in Germany to the Department of State0

Bonn, July 13, 1963, 8 p.m.

3433. Pass Defense and Treasury.

1.
As long as US balance of payments remains a serious problem, our military presence in Germany will be vulnerable to criticism and a target for reduction, in absence of satisfactory offset arrangement to compensate for US foreign exchange costs. I have stressed this in all my talks with German officials, including Chancellor, von Hassel, and Erhard. Recent negotiations in Washington and Bonn have revealed a disturbing lack of understanding, among certain key officials in the Ministry Defense, and others, of the importance of the offset arrangements to a continuation of the present level of US military effort in Germany.
2.
Despite von Hassel’s firm assurance last February, MOD has been unwilling to commit itself to payments in excess of $1,000 million during US FY 1964-65 (target $1,300 million). Furthermore, they foresee payments of only about $100 million during the second half of CY 1963. From the standpoint of new orders, the prospect of reaching the target during CY’s 1963 and 1964 ($1,300 million) is somewhat brighter. Thus far, however, we have only succeeded in establishing firm FRG military requirements for orders amounting to $532 million.
3.
I believe Minister von Hassel, the Chancellor and other Cabinet officers have a sincere desire to provide a full offset. They seem to have a vague impression that an offset is feasible, and that it will probably be achieved anyway without much effort on their part. Actually, Germany is fairly close to being able to provide a full offset for CY’s 1963 and 1964. The main difficulty at present is in maintaining a steady flow of payments during remainder of this year. This will require special effort (perhaps an advance against the CY 1964 defense budget), but with support of high levels in the German Government, I believe it can be accomplished.
4.
The President’s visit presents an important opportunity for a new initiative on this subject. I believe the President should seek firm assurance of a full offset from both Chancellor Adenauer and Economics Minister Erhard. The President should obtain confirmation that the agreements call for new payments (during US FY 1964-65) as well as new orders (during CY 1963-64) fully equal to US military expenditures in Germany during CY 1963 and 1964, now estimated at $1,300 million.
5.
Related to the offset objective, and in some respects even more important, is the need to assure adequate defense budget for CY 1964, including compensation for any advances. I believe the President should express to the Chancellor and others his recognition of the FedRep’s very important contribution to Allied security in increasing the defense budg-et from about DM 10 billion in 1960 to DM 18 billion in 1963. The President might, at same time, stress importance of maintaining momentum of the military buildup and his hope that Defense would continue to receive a reasonable priority in the allocation of budgetary funds. In our judgment, a feasible goal for 1964 would be DM 21 billion (MOD is requesting DM 21.6 billion) but I question propriety of President recommending a specific figure.
McGhee
  1. Source: Department of State, Central Files,FN 12 US. Secret; Priority. Relayed to the Department of Defense.↩