Foreign Relations of the United States, 1969–1976, Volume XXXI, Foreign Economic Policy, 1973–1976

134. Memorandum From the Under Secretary of State for Economic Affairs (Robinson) to Secretary of State Kissinger¹

Washington, March 29, 1976.

SUBJECT

• Greenspan Europe Support Discussion

Problem:

Alan Greenspan has discussed with the President his concern over growing economic instability in Italy and the U.K. (This is in addition to the existing difficulties in Portugal and Spain). The President suggested that he review this with you on an extremely confidential basis to determine what steps we might take in cooperation with Germany to encourage these problem nations to adopt programs of economic stabilization. These efforts would be undertaken in the context of the joint pledge of cooperation at Rambouillet last November.

Background:

At the Rambouillet summit meeting the six leading industrialized nations pledged support for cooperative efforts to achieve economic stability and sound future growth. They also pledged to cooperate in preventing abnormal and erratic movements in foreign exchange rates based on the belief that this could be accomplished through coordinated efforts to achieve underlying economic stability in the industrialized nations.

Since Rambouillet, our experience in this area has been less than encouraging.

• —Italy’s economic deterioration is mirrored in a 20% reduction in the value of the lira and heavy foreign borrowing since the first of the year.
• —The U.K.’s persistent double-digit inflation and low productivity have forced abandonment of serious Bank of England efforts to defend the pound, causing its value to decline 7% in the past few weeks.
• —Devaluation in Italy and the U.K. has put severe pressure on the French franc, forcing its withdrawal from the European monetary “snake” with what could be serious economic and political consequences.

These developments raise serious questions as to whether or not the industrial countries have yet faced up to the basic problem of establishing economic stability so as to assure sound economic growth throughout the free world. In his summary analysis to you,² Greenspan explained that domestic political policies of over-consumption in Italy and the U.K. have driven them to maintain expansionary fiscal and monetary policies, resulting in excessive budget deficits and mounting foreign debts. Labor has demanded and been granted inflationary wage increases. The inevitable result is a declining value of the currency which cannot be resisted for long by central bank intervention in exchange markets.

Greenspan suggests the possibility of a second Rambouillet type meeting to discuss this critical issue which, he feels, could approach crisis proportions this spring. He suggests that the U.S. and Germany cooperate in providing financial aid to Italy and the U.K. (and perhaps other problem nations) on condition that they undertake stipulated economic-political policy reforms designed to restore sound and sustainable financial stability.

This matter has not been discussed with anyone other than the President and Greenspan requests that it be kept on this basis until we have developed a more definitive concept of the problem.

Discussion:

We face three basic questions in considering and acting on Greenspan’s suggestion:

• —Is the situation so critical as to require extraordinary measures beyond the capacity of the IMF and the European Community institutions?
• —If so, what appropriate action could be developed within the limited time frame suggested which is “do-able” in both political and economic terms?
• —How should we proceed in initiating and implementing such a plan?

With regard to the threshold question, we need the judgment of key Europeans and Witteveen, whom we must not approach prematurely. While reserving final decisions on this basic point, I believe we should proceed on Greenspan’s assumption and assemble our own data discreetly.

With regard to the plan itself, we have two possible alternatives:

• —To utilize an existing multilateral mechanism or to establish a new mechanism, either multilateral or a set of coordinated bilateral programs. I believe an effort to establish a new mechanism would be abortive and perhaps counter-productive for the following reasons:
  • —It is unrealistic to expect that we can develop a new mechanism now, given the realities of an election year;
  • —In any event, entirely new approach would require a great deal more time than appears to be available.
  • —Public discussion of an aid program for Italy and the U.K. could precipitate an even more serious crisis in these countries, further compounding our problem.

Further, I believe bilateral U.S. aid to OECD countries is neither saleable to the Congress nor politically appropriate for the kind of intervention in national policies that will be required.

Accordingly, we should look at the possibility of using an existing multilateral mechanism, modifying it as required to serve our specific purposes. The logical candidate is the Financial Support Fund. Its resources could be supplemented by the IMF.

Final agreement to establish the Financial Support Fund has been delayed by inaction on the part of our Congress, which must authorize U.S. participation. It now appears likely that this authorization will be forthcoming within the next several weeks.

The Financial Support Fund was designed for a somewhat different purpose. It was intended to protect OECD member nations from abrupt shifts of OPEC surplus funds. Our experience to date suggests that the banking system is meeting this need, and this threat is not likely to require heavy drawings on the Support Fund. However, the Financial Support Fund of 20 billion SDR’s (approximately $23 billion) would be available as a last resort safety net, to meet serious balance of payment problems encountered by any participating country.

The articles of agreement establishing the Fund make it available to nations in financial crisis situations not limited to those caused by petrodollar shifts. Its use is subject to three conditions:

• —Avoidance of restrictive trade measures.
• —Cooperation on energy policies.
• —Adequate economic and balance of payments policy.

It is the latter condition which would allow the Fund members, as a group, to impose monetary and fiscal reforms on a borrowing member so as to correct the causes of its crisis.

The present formula provides for U.S. participation of 28% (or approximately $6.5 billion). West Germany’s quota is $3.0 billion and the Japanese have the third largest participation, $2.8 billion.

We might need to modify the borrowing limits for each nation, with a maximum amount allowed for the U.K. under the present formula of $3.8 billion and $3.3 billion for Italy. (These amounts now can be exceeded only with a special and unanimous vote.)

There may be other Fund amendments which expert and political analysis would suggest. However, I will not arrange for such a study unless and until it is decided that we should pursue this proposed alternative.

Proposed Action:

In planning a course of action to assist the U.K. and Italy (and possibly Spain and Portugal) in their immediate crises, I see great disadvantages in the idea of calling a second Rambouillet immediately because

• —We don’t yet have a definitive plan to discuss;
• —inasmuch as the U.S. and Germany (and possibly Japan and Canada) will have to assume primary responsibility for any solution, we should have prior consultation with these key countries before any further action is taken;
• —a Rambouillet meeting to discuss the U.K./Italy could accelerate deterioration of confidence in these countries, greatly compounding our problems.

Accordingly, I propose that we proceed sequentially along the following lines:

1. Meet with Greenspan during the week of April 5, following his return from California.

2. Work with Greenspan on a general plan for adapting (or if necessary modifying) the Financial Support Fund to achieve our objectives.

3. If we agree on an approach, meet confidentially with Simon to solicit his views and support.

4. Seek Presidential approval and arrange for George Shultz to visit with Chancellor Schmidt to explore this problem and our suggested approach. (This could be expanded to include Miki.)

5. If we are sufficiently encouraged by George Shultz’s efforts, initiate confidential bilateral discussions with the U.K. and Italy.

6. Based on the foregoing, consider the possibility of convening Rambouillet II, billed as a general follow-up to Rambouillet I, where the activation of the Financial Support Fund and its use in conditioned assistance to the U.K. and Italy would be discussed with predetermined prospects of agreement.

I would like to discuss this with you further, prior to Greenspan’s return.

1. Source: Ford Library, U.S. Council of Economic Advisers Records, Alan Greenspan Files, Box 39, Subject Files, Economic Summit (Puerto Rico) June 1976 (3). Secret; Sensitive; Nodis.
2. See Document 133.