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

350. Telegram From the Embassy in the Federal Republic of Germany to the Department of State¹

19021/Depto 3009.

Bonn, June 8, 1988, 1648Z

SUBJECT

• My Stop in Hungary.

1. Secret—Entire text.

2. As in Yugoslavia,² I found the talk here in Hungary revolutionary. Talk about free enterprise. Talk about market economies. Talk about reform and democratization and breaking with old ways of approaching problems. Also as in Yugoslavia, I found my visit well timed. I am the first high-ranking U.S. official to meet with Karoly Grosz since he pulled off his remarkable rise to the General Secretary’s position, and sent Kadar and six of his loyalists in the Politburo packing. Grosz arrives in the U.S. July 20 and will meet with you and the President about a week later. The chance to take stock of the man just before his visit, and to give him our views of the Moscow Summit so soon after the event, was useful.

3. I’ve always found the Hungarians to be among the most progressive thinkers in Eastern Europe, but much of that progressive thinking never got translated into progressive action. They talked about reforming their economy, and indeed have already implemented measures like a value-added-tax and income tax that are unprecedented in Eastern Europe, but much of their reform-minded talk remained just that—talk. The Hungarians suffer under a dols. 17 billion debt that is the highest per capita in Eastern Europe, and they’ve made little progress in whittling it down. They passed a bankruptcy law a few years ago, but very few firms have gone bankrupt. Major industries are all state-owned, and many continue to operate only with large state subsidies.

4. But the message I received this trip is that the time for talk has run out. Peter Medgyessy, a young, dynamic, reform-minded Grosz protege who is responsible for economic development, said a few coal mines are probably going to close down in the near future, and other bankruptcies will follow. The Hungarians recently concluded a standby agreement with the IMF that includes a new corporate law allowing for the conversion of state enterprises into joint stock companies. The IMF agreement also limits the state’s ability to grant wage increases. The biggest change of all, of course, is Grosz’s move to take over Kadar’s party job, and the rebellion in the party leadership that saw six relatively young technocrats move into the Politburo. As my host, MFA State Secretary Gyula Horn, told me, never in Hungary have there been changes as radical as these, brought about peacefully, and even with a measure of democracy. Horn, a Grosz insider himself, noted that in the past, quote personal factors unquote blocked progress to reform, an apparent reference to the Kadar old guard. When the time came for hard decisions, the old guard was not committed to reform. But the people are demanding change, said Horn, and this government plans to give it to them.

5. The key to all this, of course, is Karoly Grosz, whom I’ve met with on my previous trips, and who will see Bill Verity next week. I found Grosz self-confident and firmly in command. He is extremely proud of the new, younger people he’s brought into positions of authority. He said he planned still further personnel and policy changes, referring back to the Hungarian people’s impatience with the way things have been run.

6. But we should not expect changes overnight. Grosz is at heart a conservative person, and tempered his discussion of the need for reform with a cautionary note that he can’t move too far too fast. It’s much harder for a tailor to remake a spoiled suit, he said, than to cut a new one from scratch. Peter Medgyessy asked what happens when a country that has offered total job security to its people suddenly withdraws that security in the name of economic efficiency. Some protest seems inevitable. But I told Medgyessy that when people realized what they had gained was freedom—the freedom to change jobs, the freedom to start their own business, the freedom to make choices that previously were made for them—they’d never look back. I told Grosz he shouldn’t move too cautiously because he’d lose his momentum, and perhaps the people’s support along with it. As for whether all these personnel and economic changes will lead to political change, I noted in my departure statement³ that our experience in the U.S. suggests that a free economy will produce great benefits for the Hungarian people. And a free economy inevitably leads to greater political freedom as well.

7. Unlike my stop in Yugoslavia, the topics of conversation here did include other things besides the economy and reform. Both Horn and Grosz thanked me for my readout on the summit, with Grosz noting that smaller countries like Hungary feel much safer when the giants are talking. Horn said all the Eastern bloc countries welcomed this summit, unlike, he said, the publics of some Western European countries. Horn also was interested in discussing the upcoming Vienna Followup conference, and noted Hungary’s desire to be included in the zone for conventional arms reductions. Horn also covered the full list of our bilateral agenda, noting progress in most areas with satisfaction, and showing just a bit of pique at Congress’s recent defeat of OPIC legislation for Hungary. I admitted that we hadn’t correctly gauged the opposition on this, but would try again.

8. Grosz also told me he is looking forward to his ten-day trip to the U.S., which will be his first. He said he plans to visit an 83-year-old uncle who’s been living outside of Los Angeles since 1930. He also said he views the U.S. as a model for Hungary, and wants his visit to be an occasion to work on several concrete proposals he plans to bring along, and not just a political gesture. This trip will be important for U.S.-Hungarian relations. When the President sent Grosz a congratulatory message after the party conference, it appeared the next day front and center on the front page of the government newspaper. Grosz’s trip will be watched carefully from Budapest, and will give us an opportunity to make a lasting impression on a man whose mind is open to new ideas, and who has the will and perhaps the moment to implement real change.

Burt

1. Source: Department of State, Official Correspondence of Deputy Secretary of State John C. Whitehead, July 1982–January 1989, Lot 89 D 139, Potsdam Trip, June 4–16, 1988 (Eastern and Western Europe). Secret; Immediate; Nodis. Drafted by Kelly; approved by Whitehead.
2. See Documents 251–253.
3. Not found.