Foreign Relations of the United States, 1981–1988, Volume X, Eastern Europe

349. Telegram From the Embassy in Hungary to the Department of State¹

5931/Depto 3014.

Budapest, June 8, 1988, 1527Z

SUBJECT

• DepSec Whitehead’s Meeting With General Secretary and Prime Minister Karoly Grosz.

1. Summary: In 75-minute meeting with newly-elected General Secretary and Prime Minister Grosz, DepSec Whitehead provided review of U.S./Soviet summit, endorsed Hungarian efforts to create a freer and more market-oriented economy and reiterated invitation for Grosz to visit the U.S. in July. He urged Grosz not to be excessively cautious in introducing economic policy changes, noting that it was important to take advantage of momentum created by Hungary’s recent change of leadership. Grosz said he very much looked forward to his upcoming U.S. visit and had devoted more than a week of his schedule to the trip in order to be able to see many parts of the country. He expressed appreciation [garble] to meet with the President and stated [garble] for the warm tone of the President’s congratulatory message.² Regarding economic changes, that priority was still being given to assembling an effective team and that many more personnel changes could be expected within the next few months. After these changes had been completed, the leadership would be able to devote its full attention to dealing with fundamental policy issues. Grosz appeared relaxed and confident throughout the meeting, reflecting the air of one who had just won a major political victory.

End summary

2. After an exchange of opening formalities in which Mr. Whitehead congratulated Grosz on his selection as General Secretary, the Deputy Secretary commented on the just-concluded U.S./Soviet summit meeting.³ The summit had been a great contribution to what can be considered perhaps the major recent development in world affairs—an easing of tensions between the U.S. and Soviet Union. We recognized how important an improvement in superpower relations was for all countries of the world. At the same time, it was crucial to realize that great changes do not take place overnight and thus important that both sides not become prematurely optimistic about the prospects for immediate changes. Major differences remained between Moscow and Washington. What we sought to avoid were the succession of ups and downs which had characterized U.S./Soviet relations in the past. We wanted steady progress and a stable predictable relationship, which also recognized that there were significant differences between us.

3. Grosz responded that it was extremely important for partners to be predictable. He said that the current Soviet leadership was a good potential partner for us to work with. This had not always been the case. History was offering both sides a very significant opportunity which needed to be used in the interest of promoting a better worldwide political environment. The improvement in U.S./Soviet relations was also creating more opportunities for the U.S. and Hungary to work together.

4. With respect to Hungary’s own foreign policy, the recent party conference reconfirmed basic policy directions. Hungary was willing to go anywhere to meet with partners who were willing to see them. This was even true when no diplomatic relations existed as shown by the recent visit of Israeli Foreign Minister Peres to Budapest. Grosz commented that originally the GOH had tried to give this “illegal” visit a very low profile while, at the same time, allowing Peres to meet with a broad range of Hungarian leaders, including himself. However, in the end, it turned out that the press knew as much about the visit as the GOH itself.

5. Turning to bilateral relations, the DepSec said that he hoped recent changes in the Hungarian leadership would permit an intensification of U.S./Hungarian ties. He added “We would like to be considered among your best friends”. The steps towards the creation of a freer, more market-oriented economy being planned by the GOH and the authority the party conference had given to carry these steps out was very encouraging to us. Grosz responded that there should be no doubt about the Hungarian leadership’s determination to bring about fundamental economic changes. Problems existed and long standing “ideological knots” in the thinking of many people had to be eliminated. It was harder for a tailor to redesign a poorly-made suit than to make a new one from scratch. The leadership now faced two very basic problems: a public that very much wanted change while simultaneously fearing that change can only be for the worse.

6. Grosz stated that his first task was to restore confidence in Hungary’s leadership. While no one liked unpopular decisions such as the introduction of income taxes, such decisions, nevertheless, needed to be taken and there would be more such decisions. The new leadership needed to correct the errors which had been promulgated over the last 15 years. Personnel and organizational changes had to be completed by the end of 1988 in order that the party and government could begin to tackle difficult policy questions in 1989 and 1990. Lobbying centered on personalities continued to be a problem in Budapest which, in reality, was a small city where people tended to know one another and persistently pushed for their special interests. This created much speculation regarding future appointments, on the question of Grosz’s relations with Kadar, and even issues of protocol. While much attention was being given to personnel questions, there should be no doubt about the new leadership’s willingness to assume the burden which the current economic situation placed on them and make tough decisions. The leadership wanted economic reform, democracy and an open foreign policy. There were those whose confidence in the leadership was lacking both in Hungary and abroad and Grosz said he recognized that time would be needed to demonstrate that he can act as well as speak. The tough period ahead would be a good test to see who Hungary’s true friends were. Perhaps the biggest problem of the moment was general popular impatience for change. Grosz said that just as Hungary had once made the mistake of moving too slowly, he now wanted to avoid the opposite extreme. He is determined not to move too quickly since hastily endorsed policies could produce more harm than good. It was critical to carry out policies with resolve and circumspection. Failure to do this had the potential to create another conflict in the center of Europe which could not be in the interest of any responsible parties.

7. The General Secretary said that he took the DepSec’s repeated visits to Hungary and President Reagan’s recent letter of congratulations to him as signs that the U.S. wished to strengthen relations with Hungary. Although Washington was far away, the Hungarian leadership felt good that there was interest in the course of events here. It was important not to forget the fundamental rules which good communications play and need to repay good words in kind. Contacts between our two countries were expanding quickly and Grosz commented that at times it seemed some of his senior colleagues were spending more time in the U.S. than in Budapest. Agriculture Minister Vancsa’s report of his recent visit had been particularly positive and enthusiastic. It was an encouraging sign to see that even those foreign journalists who had long been hostile were now looking at Hungary in a much more positive light.

8. The DepSec responded that Grosz would find great interest in Hungarian developments during his upcoming visit to the U.S. The large number of Hungarian-Americans had helped create a special bond of friendship between our two countries and recent changes in the leadership and the way these had been carried out had been followed with much positive interest. Having a new face at the top also served to eliminate some of the bad memories of 1956. Hungary’s decision to move towards a free economic system was a fundamental one in trying to create a more prosperous future for its citizens. The successes of other free market economies provided clear examples as to the advantages of such an approach. While it was understandable that many Hungarians were uncomfortable with the prospect of giving up some of the security and predictability they had become accustomed to, they would accept change once they learned to appreciate the new freedoms they had obtained, such as the right to start their own business, change jobs at will and move from city to city. He urged Grosz not to be overly cautious in implementing change since the momentum of the moment could be lost. It was important for the people to realize that a real revolution was taking place. If progress were too slow, this fact would not be appreciated.

9. The DepSec said that he personally looked forward to seeing Grosz in Washington and had taken it upon himself to ensure that his visit would be a successful one. President Reagan was expecting Grosz with pleasure on July 27. Mr. Whitehead said that he would make every effort to ensure that the General Secretary met with all important American political figures, including Secretary Shultz, Vice President Bush and Governor Dukakis.⁴ We were pleased that he was devoting sufficient time to his U.S. visit to see more than Washington and New York.

10. Grosz thanked Mr. Whitehead for the invitation and said he had been making intensive preparations. His visit was intended to be more than just a political gesture but an opportunity for concrete work as well. He said that the Hungarian side was currently working on several proposals which would be made in connection with the visit. The most important goal of the trip would be to give Americans an opportunity to become more familiar with Hungary and its current policies. The U.S. was a large country, a long distance away and not visited every day. For this reason, Grosz said, he decided to undertake a visit of more than one week. He added that he was particularly appreciative that time had been found for him to make the visit in the midst of a U.S. election campaign when foreign visitors are generally not received. Grosz added he had received a letter from his 83 year old uncle, who has lived in the U.S. since 1930 and now resides in a suburb of Los Angeles stating “We are in the midst of an election campaign right now, do you think they will have time to receive you?”

11. Turning to prospects for expanding economic ties, Mr. Whitehead noted that now was an excellent time to promote more trade and investment. While this had been growing in recent years, we had only scratched the surface of our potential. As the GOH developed details of its new economic policies, regulations and laws, it was important that they keep in mind the need to make these attractive to potential American investors and businessmen. Close relations with U.S. companies not only had the potential to bring in scarce capital and jobs, but management know-how as well.

12. Grosz said that such factors were being given intensive consideration as changes were being planned. In the past, one of Hungary’s great mistakes had been to compare itself to other Eastern European countries rather than to the larger world. There were political, ideological and personal reasons for this, but such attitudes could not be continued. Hungary needed to develop products which could be sold in the entire world, these could then be delivered to CEMA countries as well. Nevertheless, serious obstacles remain on the Western side, including a broad-based COCOM list which Grosz said contained many items which had nothing to do with the military production. Capital scarcity was also a very major difficulty. Practically all the money which was being borrowed had to be used to pay current debt which had caused some, including certain officials of the IMF, to say that one had to be careful in lending to Hungary since it did not use its money well. These people forgot that money was needed just to keep the economy running. At the same time, it was absolutely critical to find a bottom for the barrel which was swallowing up most of the loans being raised so reform policies could be carried out effectively. However, it was not a simple matter to phase out production even though the broad profile of goods now being produced was much too large for Hungary’s size. Even when inefficient product lines were discontinued, it often cost twice as much to obtain replacements from abroad. Noting the affinity of Hungarian companies for ties with German firms, Grosz said that this had been the result of long traditions and familiarity with German language by older Hungarians. He personally wanted to see greater diversification and enthusiastically supported language training in English and French as well as German. (Indeed he intended to insure that fluency in one of these three languages was a pre-condition of university admission and for this recently welcomed the availability of English language satellite TV programs, even though the programs themselves were often of low quality.) At the same time, the fact that the FRG had extended a one billion Mark credit could not be ignored. It was natural that the FRG would expect that the overwhelming majority of these credits would be spent on German imports.

13. The DepSec responded that U.S. prices were now much cheaper as a result of the dollar devaluation and that almost anything that could be bought in Germany would be less expensive in the U.S. As far as credits were concerned, the most effective capital was foreign investment. Loans cost interest and needed to be repaid. In contrast, investment was paid back only if successful and at the same time, provided the spin-off of management and marketing know-how. Grosz concluded by remarking that he was glad to get an “American advisor” endorsing the potential benefits of foreign investment to Hungary. He added that “when I say the same thing they always say that the party secretary is speaking.” Grosz said that an arrangement had been decided upon which would allow a German firm to buy out a Hungarian enterprise. The British were also building a hotel in which their participation would be 70 percent. The ownership of production, now 94 percent in state’s hands and 6 percent private, would also be changed significantly in the direction of greater private ownership. Ideological concerns about foreign ownership were no longer a major problem. Although technical concerns remained, the new generation of Hungarian economic leaders was not infected with the dogmatic virus of its predecessors and was inclined toward practical problem solving. Grosz noted that Deputy Prime Minister Medgyessy was only 45 years old and the party Economic Secretary (Miklos Nemeth) was just 40. Hopefully, the good ideas that these young people will produce would generate sufficient wealth to enable Grosz to enjoy his own properous retirement.

14. Hungarian participants in the meeting were, Grosz, Foreign Ministry State Secretary Gyula Horn, Deputy Foreign Minister Laszlo Kovacs, U.S. Desk Officer Bela Szombati (interpreter). U.S. participants were the Deputy Secretary, Ambassador Palmer, NSC staff member Rudy Perina and DCM Don Kursch (notetaker).

15. Moscow minimize considered.

Palmer

1. Source: Reagan Library, Rudolf Perina Files, Presidential Meeting with PM Groz Hungary 7/27/1988 (1). Confidential; Immediate. Sent for information to Eastern European posts, Vienna, The Hague, and West Berlin. Sent Immediate for information to Bonn.
2. See Document 346.
3. Reference is to the Moscow Summit, May 29–June 1. See Foreign Relations, 1981–1988, vol. VI, Soviet Union, October 1986–January 1989, Documents 155–164.
4. Michael Dukakis, then Governor of Massachusetts and front runner as the Democratic candidate in the 1988 Presidential election. Dukakis met with Grosz in Boston on July 25.