Mr. President:
State has been working all day on a plan to deal with the offset problem
without a radical unilateral troop reduction.
I suspect this will be the major item for discussion at lunch tomorrow. I
will get you George McGhee’s cable
and, I trust, the State Department paper before then.
The object at lunch should not be to make final decisions but for you to hear
from George Ball and Bob McNamara their somewhat different
perspective on the problem we face and the options open to us.
Attachment
Washington, September 19, 1966.
Memorandum From Secretary of Defense McNamara to President Johnson4
Chancellor Erhard, in December 1963
and again in December 1965, reaffirmed his intention to fulfill the
offset arrangement. In 1963, the
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Communiqué5 stated, “The President expressed appreciation for
the cooperative arrangement whereby United States dollar expenditures
for American military forces in Germany are offset by German purchases
of military equipment in the United States. It was
agreed that this arrangement should continue.” Last December 21, the
joint Communiqué6 said that you and he “discussed the
arrangements between the two governments whereby United States military
expenditures in Germany entering the balance of payments are offset by
the Federal Republic through its purchase of United States military
equipment and services. It was agreed that these
arrangements were of great value to both governments and should be
fully executed and continued.”
The current German commitment is to place $1,350,000,000 of military
orders in the US in calendar years 1965–1966 and to make payments of that amount in US fiscal years 1966–1967. As
of September 1, the orders (with three months to go) have reached only
$665 million, or less than half of the commitment, and payments (with
nine months to go) have reached only $261 million, or about 20% of the
commitment. A September 9 cable from Ambassador McGhee7 reported that the German Assist-ant Secretary for
Economic Affairs in the Chancellor’s office said “as matters now stand
he sees no real alternative to a large shortfall in the present offset
payments target next June 30 and a stretchout of the period in which to
meet the target.”
It is clear that the difficulty arises from the inadequacy of the German
military budget. That budget increased annually until 1963. It has
leveled off since then. Indeed, in real terms (taking account of
inflation), the 1967 German military budget is almost 10% less than in
1963. Germany now devotes 5% of her Gross National Product to defense,
compared to 6% in 1963. The UK spends
6.8% and the US 8.8%. While the Gross National Product of Germany is
increasing on an average of 5% a year, none of the increase is being
devoted to military expenditures. The Chancellor states that the reason
for this allocation of resources is domestic political pressures.
It should be remembered and understood that the German shortfall in
meeting the offset is not because Germany has no military requirements
to make purchases in the United States. US policy has been to ask
Germany (1) to do only what she promised to do—namely, to meet the
offset, (2) to buy only what she needs to bring her forces up to NATO standards, and (3) to buy from us
only those items which it is most economical to purchase in the US. With
respect to German requirements to meet NATO standards, the German forces are seriously deficient.
The
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Chairman of the Joint
Chiefs of Staff and USCINCEUR have
concurred in a report which indicated some $4 billion in German
requirements for initial equipping, modernizing and training and for
reserve stocks. By way of comparison: The US has a division slice of
more than 41,000 men in Europe while the Germans have 27,000; the US has
been maintaining 90 days of war reserve stocks in Europe while the
Germans barely meet 30 days on some items and considerably less than
that in the major equipment area; the US is at 100% of equipment levels
in all its divisions while the Germans are not only less fully equipped,
but equipped with less modern arms. Another comparison: The United
States has 230,000 tons of bombs either in or in transit to Southeast
Asia; the German Air Force’s total inventory amounts to approximately
4400 tons—an obviously inadequate amount. If Germany were to procure
proper conventional ordnance for her aircraft, expenditures on the order
of $150 million would be involved for this item alone. German statements
to the effect that they do not need the military items involved in the
offset are therefore clearly untrue.
Our best estimates are that, unless something is done, there will be a
very large gap between the foreign exchange costs of US deployments to
Germany (an average of approximately $850 million a year over the next
five years) and German foreign-exchange expenditures on the military
account in the US (predicted by the Germans to average $350 million a
year). Therefore, unless changes are made, a gap of $500 million a year
should be expected next year and probably every year thereafter.
It would not be wise for the United States to accept this gap as a
continuing situation.
I believe that we should break the problem into two parts. The first part
is the current offset referred to above; the second part is the
follow-on offset arrangement.
With respect to the current offset, the agreement to place $1,350,000,000
of orders by the end of December 1966 cannot be
fulfilled. Payment, however, of the
$1,350,000,000 by June 1967, in accordance with that part of the offset
arrangement, could be made despite the reduced
budget by German borrowing for prepayment against future orders. This
approach is not fully satisfactory, but is probably the most we can now
ask for. The Chancellor almost certainly will object to such an
approach, but in my view we should push hard for this form of
fulfillment of the current offset.
With respect to the follow-on offset arrangement, we should:
- a.
- Press the Chancellor for a larger defense budget and
consequent offset. In view of the Chancellor’s political
problems, the pay-off from this pressure may not be great in the
next two years, but it may produce returns in the longer run.
(In this connection, the Chancellor may propose the inclusion in
the offset of purchases of space items, items destined
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for foreign military
assistance, passenger aircraft for the German airline, and so
on. We should accept any items which are truly “additional” and
not merely a “giving of credit” to Germany for purchases, such
as the passenger aircraft, which Germany would make here anyway.
The total of such “additional” items will be very small and
therefore almost irrelevant to the basic problem.
- b.
- Insist on trilateral (US–UK-Germany) discussions to address the question of how
the remaining gap will be closed—including arrangements for US
troop reductions.
We must face the fact that the United States can deal with any remaining
gap only (1) by cutting US military expenditures in Germany or (2) by
absorbing the balance of payments drain caused by the excess of US
expenditures over German offset.
I believe we can cut US military expenditures in Europe by about $200
million ($160 million in Germany) without significantly reducing our
military effectiveness. (The JCS do not
concur.) This $200 million total is reached by reducing each division
slice by 10,000 support personnel (a total of 50,000 men, producing a
saving of $125 million); by “dual-basing” approximately half of our 700
reconnaissance and fighter aircraft (saving $60 million); and by other
economies ($15 million). But a deficit in the vicinity of $300 million
is likely to remain. This $300 million cannot be saved without removing
major combat units.
Even the $200 million adjustments may have a traumatic psychological
impact in Germany, in NATO and in the
United States. Adjustments to close all of the remaining $300 million
gap, by cutting US combat power, would be even more traumatic and, in my
view, dangerous; but I believe some reductions in US combat power will
have to be considered if the problem cannot be solved in any other
way.
The Secretary of State and the Secretary of the Treasury have received
copies of this memorandum. The Secretary of the Treasury concurs in it.
I believe the Secretary of State does also; however, he is planning to
supplement this memorandum with a paper describing the political
pressures which today limit the Chancellor’s freedom of action.
