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Note of the Prime M i n i s t e r ' s C o n v e r s a t i o n w i t h the P r e s i d e n t of the European Commission, Mr. Roy J e n k i n s , at 10 Downing S t r e e t , on 21 May, 1979, at 12 noon

P r e s e n t :

The Prime M i n i s t e r The Rt. Hon. Roy J e n k i n s

Mr. M i c h a e l F r a n k l i n Mr. C r i s p i n T i c k e l l

Mr. B.C. C a r t l e d g e

A f t e r welcoming t he P r e s i d e n t o f the Commission, the Prime M i n i s t e r s a i d t h a t i t would not be n e c e s s a r y t o r e p e a t t o him t he Government's g e n e r a l approach t o Europe, which was t h a t i n h e r i t e d by the C o n s e r v a t i v e P a r t y from Mr. M a c m i l l a n and Mr. Heath. There c o u l d be no q u e s t i o n o f the UK e v e r a g a i n s t a n d i n g o u t s i d e Europe, and the Government was f u l l y aware o f the g r e a t advantages which a c c r u e d t o t h e UK through h e r member­s h i p o f a l a r g e r group o f n a t i o n s . The UK would c o n t i n u e t o f i g h t her c o r n e r i n the Community v i g o r o u s l y , but t h i s would be done a g a i n s t an o v e r a l l background o f c o o p e r a t i o n w i t h her p a r t n e r s . The Prime M i n i s t e r s a i d t h a t the EMS posed problems f o r the UK s i n c e the Government w i s h e d t o r e t a i n a h i g h exchange r a t e f o r the pound for the time b e i n g : the o u t l o o k on i n f l a t i o n was not good, and i t was d o u b t f u l t h a t the UK would be a b l e t o e n t e r the EMS i n September, a l t h o u g h she would p r o b a b l y be a b l e to g i v e a d e m o n s t r a t i o n o f h e r good i n t e n t i o n s by swopping some o f our g o l d and d o l l a r r e s e r v e s f o r ECUs. The Prime M i n i s t e r s a i d t h a t she was not persuaded t h a t the EMS c o u l d i n i t s e l f b r i n g about the convergence o f the EEC economies; t h i s c o u l d o n l y be done by the a d o p t i o n o f convergent p o l i c i e s by t h e member governments.

Mr. J e n k i n s s a i d t h a t he thought t h a t the argument i n f a v o u r of UK e n t r y i n t o the EMS i n the autumn was t h a t l a t e j o i n e r s were apt t o s u f f e r d i s a d v a n t a g e s , j u s t as t h e UK had done i n r e l a t i o n t o the EEC as a whole. The Prime M i n i s t e r agreed, but

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p o i n t e d out t h a t no one c o u l d have f o r e s e e n t h a t the CAP would have to o p e r a t e i n c i r c u m s t a n c e s o f such wide c u r r e n c y d i f f e r e n t i a l s , and of such h i g h l e v e l s o f MCAs. The s t r u c t u r e o f the CAP made no sense i n c u r r e n t c i r c u m s t a n c e s . The Prime M i n i s t e r s a i d t h a t she d i d not c omplain about the f a c t t h a t , as a r e s u l t o f the UK's l a c k o f c o m p e t i t i v e n e s s i n the i n d u s t r i a l f i e l d , Europe e n j o y e d u n c h a l l e n g e d access to the UK market f o r manufactured goods. She d i d , however, complain about the f a c t t h a t i n a g r i c u l t u r e , where the UK was so much more e f f i c i e n t than her c o n t i n e n t a l p a r t n e r s , the UK was d e n i e d an e q u i v a l e n t market f o r her a g r i c u l t u r a l produce. At the moment we were l o s i n g a l l ways round, and on f i s h as w e l l . The p r e s e n t s t r u c t u r e of the CAP c o u l d not l a s t , and something had to be done about i t . Mr. J e n k i n s s a i d t h a t the budgetary a l l o c a t i o n t o the CAP was immense: but t h i s problem s h o u l d not be c o n f u s e d w i t h t h a t o f the s t r u c t u r e o f the CAP i t s e l f . I t was not p o s s i b l e t o s o l v e the problems o f the Community budget by way o f r e f o r m i n g the CAP, a l t h o u g h a f u r t h e r e s c a l a t i o n o f the c o s t o f the CAP c o u l d and s h o u l d be p r e v e n t e d .

Mr. J e n k i n s went on t o say t h a t the Commission c o m p l e t e l y s t o o d by i t s commitment to a p r i c e f r e e z e f o r a g r i c u l t u r a l p r o d u c t s which were i n s u r p l u s , and w i s h e d i n a d d i t i o n t o do something about m i l k by means o f the c o - r e s p o n s i b i l i t y l e v y . I f t h e c o s t o f the CAP were a l l o w e d to e s c a l a t e f u r t h e r , any e f f o r t to s o l v e the problem of the Community budget would be n e u t r a l i s e d . The Prime M i n i s t e r t o l d Mr. J e n k i n s t h a t the UK would s t i c k f i r m l y to the VAT 1% c e i l i n g . Mr. J e n k i n s e x p r e s s e d some doubt as t o whether t h i s c o u l d i n i t s e l f c o n t a i n the c o s t o f the CAP.

Mr. J e n k i n s s a i d t h a t e v e r y i n g he had h e a r d from German s o u r c e s i n d i c a t e d t h a t C h a n c e l l o r Schmidt's v i s i t t o London had gone very w e l l ; but he g a t h e r e d t h a t the Prime M i n i s t e r had found the C h a n c e l l o r very hard on the s u b j e c t o f the budget. The Prime M i n i s t e r s a i d t h a t she had been a s t o n i s h e d t o f i n d a

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d i s p o s i t i o n on C h a n c e l l o r Schmidt's p a r t t o argue about the f a c t s . Mr. J e n k i n s s a i d t h a t t h e r e was good reason to b e l i e v e t h a t what the Prime M i n i s t e r had t o l d C h a n c e l l o r Schmidt about the budget had sunk i n , and t h a t the C h a n c e l l o r was now much more d i s p o s e d to r e c o g n i s e t h a t t h e r e was a problem. The Prime M i n i s t e r s a i d t h a t she, f o r her p a r t , was d e e p l y alarmed by the budget s i t u a t i o n : p a r t n e r s h i p i m p l i e d a j u s t and r e a s o n a b l e d e a l f o r everybody, and the UK was not g e t t i n g one from her EEC p a r t n e r s . A g a i n s t t h i s background, i t was d i f f i c u l t to s e l l Europe to the B r i t i s h p e o p l e . The Community approach to f i s h e r i e s p o l i c y a l s o h i t the UK very hard: w i t h o u t some g i v e on t h i s i s s u e , as w e l l , i t would be d i f f i c u l t to r a l l y the B r i t i s h p e o p l e to Europe.

Mr. J e n k i n s s a i d t h a t i t had t o be borne i n mind t h a t t h e UK was o p e r a t i n g a g a i n s t the background o f the r e n e g o t i a t i o n which had produced the p r e s e n t f i n a n c i a l terms: t h e r e was a d i s p o s i t i o n t o argue t h a t the UK had made her bed, and s h o u l d l i e on i t . I t would be d i f f i c u l t t o a c h i e v e t h e n e c e s s a r y a d j u s t m e n t s u n l e s s the UK was seen t o be c o - o p e r a t i v e i n o t h e r f i e l d s . The Prime M i n i s t e r s a i d t h a t i t was i m p o r t a n t t h a t Commissioner Gundelach s h o u l d s t a n d f i r m on farm p r i c e s . Mr. J e n k i n s r e p l i e d t h a t the Commissioner would do so so f a r as p r o d u c t s i n s u r p l u s were concerned, and a l s o on the co­r e s p o n s i b i l i t y l e v y f o r m i l k . The Commissioner's c o n c e r n was t h a t the UK might d e s t r o y h i s e f f o r t s by i t s a t t i t u d e to the c o - r e s p o n s i b i l i t y l e v y . I t would be a m i s t a k e to assume t h a t a l l B r i t i s h a g r i c u l t u r e was e f f i c i e n t and a l l c o n t i n e n t a l a g r i c u l t u r e i n e f f i c i e n t ; i n some a r e a s , t h e d i f f e r e n c e i n e f f i c i e n c y was i n f a c t v e r y s m a l l . The Prime M i n i s t e r s a i d she c o u l d n ot have B r i t i s h d a i r y farmers p a y i n g the c o - r e s p o n s i b i l i t y l e v y when l e s s e f f i c i e n t farmers were exempt.

T u r n i n g a g a i n to the budget, Mr. J e n k i n s s a i d t h a t i t t r o u l d be i m p o r t a n t f o r the UK to a v o i d g i v i n g the i m p r e s s i o n t h a t The budget was the o n l y focus o f i n t e r e s t . The f i r s t e s s e n t i a l , however, would be t o ensure t h a t the budget would be a c c o r d e d f u l l and s e r i o u s d i s c u s s i o n at S t r a s b o u r g . P r e s i d e n t G i s c a r i , whom the Prime M i n i s t e r was s h o r t l y to meet, would not be fceea t o

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g i v e ground on budg e t a r y m a t t e r s , and he, as P r e s i d e n t o f the C o u n c i l , would have a major say i n the S t r a s b o u r g agenda. Mr. J e n k i n s s a i d t h a t he d i d not t h i n k t h a t i t would be r e a l i s t i c f o r the B r i t i s h Government t o aim at a s o l u t i o n to the budget p r o b l e m i n June: the r i g h t s t r a t e g y might be t o aim at a c h i e v i n g a s o l u t i o n by the time o f the December European C o u n c i l , under the I r i s h P r e s i d e n c y . The Prime M i n i s t e r commented t h a t the f i r s t e s s e n t i a l would be t o s e c u r e an agreed statement o f the f a c t s o f the budg e t a r y s i t u a t i o n . Mr. J e n k i n s s a i d t h a t t h e r e was no d i s p u t e about the b r o a d e s s e n t i a l s o f the p o s i t i o n ; i t was p e r f e c t l y p o s s i b l e t o demonstrate what had happened i n 1978, and a l s o what would have happened i n t h a t y e a r under the 1980 r u l e s . The d i f f i c u l t q u e s t i o n was t o a r r i v e at an agreed assessment o f the impact o f the MCAs. In the UK, the MCAs b e n e f i t e d the consumer and the T r e a s u r y , but worked t o the d i s a d v a n t a g e o f t h e f a r m e r s , whereas i n the FRG the s i t u a t i o n was r e v e r s e d . The Prime M i n i s t e r s a i d t h a t , even on the b a s i s o f t h e method o f payment agreed i n 1976, i e . t h a t MCAs were p a i d t o the e x p o r t i n g c o u n t r y , the UK remained the second l a r g e s t net c o n t r i b u t o r t o the Community budget. Mr. F r a n k l i n i n t e r j e c t e d t h a t the UK would, on the same b a s i s , be the l a r g e s t c o n t r i b u t o r i f i t were not f o r the t r a n s i t i o n a l arrangements. The Prime M i n i s t e r quoted t h e f i g u r e s i n her b r i e f f o r the net t r a n s f e r s by and t o EEC Member S t a t e s i n 1978 and Mr. J e n k i n s c o n f i r m e d t h a t they agreed w i t h h i s own. Mr. J e n k i n s went on t o p o i n t out t h a t , a l t h o u g h i t was p o s s i b l e t o be c l e a r about t h e p o s i t i o n i n 1978, t h e r e were a number o f u n c e r t a i n t i e s s u r r o u n d i n g t h e o u t l o o k f o r 1980. I t n e v e r t h e ­l e s s l o o k e d as i f t he UK would remain i n net d e f i c i t , t o the o r d e r o f 1,440 m i l l i o n ecus i f MCAs were attributed to exporters and

1,010 m i l l i o n ecus i f they were attributed to importers. In 19S0, the UK would p r o b a b l y be p a y i n g a p p r o x i m a t e l y 20 per cent o f the Community budget w h i l e a c c o u n t i n g f o r o n l y 15 per ce n t o f the Community's t o t a l GNP.

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Mr. J e n k i n s s a i d t h a t the c o l l e c t i v e mind o f the Community had been s h i f t e d so f a r as the i s s u e o f a g r i c u l t u r a l p r i c e s was concerned but was o n l y j u s t b e g i n n i n g t o f o c u s on the problem of the budget. He was bound t o say t h a t the approach adopted by the UK t o o t h e r Community i s s u e s i n r e c e n t y e a r s had not h e l p e d her case on the budget. Mr. J e n k i n s s a i d t h a t he would l i k e t o o f f e r a word o f a d v i c e about the p o s i t i o n o f I t a l y . I t a l y , l i k e the UK, was i n d e f i c i t so f a r as the budget was concerned - a l t h o u g h to a l e s s e r e x t e n t than the UK - but the I t a l i a n d e f i c i t seemed t o be more c y c l i c a l than s t r u c t u r a l and c o u l d cure i t s e l f w i t h i n the next two o r t h r e e y e a r s as a r e s u l t o f o t h e r f a c t o r s . T h i s meant t h a t t h e same remedies might not a p p l y t o bo t h c o u n t r i e s and t h a t i t might be more advantageous t o the UK t o seek a s e p a r a t e s o l u ­t i o n r a t h e r than a j o i n t U K / I t a l i a n remedy. The Prime M i n i s t e r commented t h a t t o ask f o r a s e p a r a t e s o l u t i o n seemed t o her t o be a bad n e g o t i a t i n g p o s i t i o n .

Mr. J e n k i n s s a i d t h a t the o t h e r members o f the Community were a n t i p a t h e t i c t o the c o n s i d e r a t i o n o f the UK as a permanently l e s s p r o s p e r o u s c o u n t r y . They were i n c l i n e d t o take the view t h a t the UK's l a c k o f p r o s p e r i t y was l a r g e l y her own f a u l t ; and the argument t h a t the payment of money a c r o s s the exchanges, as a r e s u l t o f the budget s t r u c t u r e , a c t u a l l y h e l d back the UK's r a t e of growth was on the whole u n p e r s u a s i v e i n the Community. I t would be b e t t e r t o argue t h a t the e f f e c t o f Community p o l i c i e s on the UK s h o u l d be l o o k e d a t o v e r a l l and f o r a s i g n i f i c a n t p e r i o d i n t i e f u t u r e , from which i t would be e v i d e n t t h a t the UK was not b e i n g g i v e n a f a i r d e a l .

The Prime M i n i s t e r s a i d t h a t she f u l l y a c c e p t e d t h a t the UK c o u l d and s h o u l d be w e a l t h i e r : but the new Government would not be a b l e t o t u r n t h e economy round i f they were s a d d l e d

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with a drain of public expenditure r e s u l t i n g from the Carrnunity budget. She was s t i l l a l i t t l e shocked t h a t the b a s i c f a c t s s h o u l d not be g e n e r a l l y a d m i t t e d .

The Prime M i n i s t e r then r e f e r r e d b r i e f l y t o the d i s p u t e between the Commission and the B r i t i s h Government ov e r the o r d e r g i v e n t o H a r l a n d and W o l f f f o r a B r i t i s h R a i l F e r r y . The Prime M i n i s t e r s a i d t h a t whatever excuses the UK was o b l i g e d t o o f f e r , H a r l a n d and W o l f f would c e r t a i n l y get the o r d e r . Mr. F r a n k l i n asked Mr. J e n k i n s whether he would be w i l l i n g t o l o o k i n t o the m a t t e r w i t h Commissioner Vouel or whether he thought i t b e t t e r t h a t a B r i t i s h M i n i s t e r s h o u l d pursue i t w i t h the Commissioner. Mr. J e n k i n s s a i d t h a t he would c e r t a i n l y t a k e the problem up h i m s e l f but t h a t the B r i t i s h Government c o u l d pursue i t w i t h Commissioner Vouel i n p a r a l l e l .

The Prime M i n i s t e r then mentioned the I n t e r e s t R e l i e f Grant Scheme f o r o f f s h o r e s u p p l i e s . Mr. J e n k i n s s a i d t h a t he r e g r e t t e d t h a t t h i s m a t t e r had been taken up w i t h the Government i m m e d i a t e l y a f t e r the E l e c t i o n : but the Commission had been r e l u c t a n t t o r a i s e i t d u r i n g the E l e c t i o n campaign and Commissioner Vouel had been d e t e r m i n e d t o put the problems on t h e desks o f the l a s t Government b e f o r e i t l e f t o f f i c e . The Prime M i n i s t e r s a i d t h a t the Government was w a t c h i n g Mr. Davignon's a c t i v i t i e s o v e r s t e e l w i t h some c i r c u m s p e c t i o n : t h e y were a p p r e h e n s i v e l e s t p r o t e c t i o n i s m s h o u l d e n t e r the i n d u s t r i a l s e c t o r as i t had the a g r i c u l t u r a l . Mr. J e n k i n s a s s u r e d the Prime M i n i s t e r t h a t Mr. Davignon d i d not have a p r o t e c t i o n i s t a t t i t u d e .

The Prime M i n i s t e r asked Mr. J e n k i n s what the UK c o u l d do t o g i v e the Community e v i d e n c e o f i t s good i n t e n t i o n s . Mr. J e n k i n s r e p l i e d t h a t much, but not e v e r y t h i n g , c o u l d be done by u s i n g the r i g h t words, as the F o r e i g n and Commonwealth

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S e c r e t a r y had done d u r i n g h i s f i r s t m e e t i n g w i t h h i s European c o l l e a g u e s . More p r a c t i c a l l y , energy was a f i e l d i n which the UK had both the r e s o u r c e s and the e x p e r i e n c e t o make a p o s i ­t i v e and c o n s t r u c t i v e c o n t r i b u t i o n i n s t e a d o f d r a g g i n g her f e e t as she had done i n r e c e n t y e a r s . S e c o n d l y , he was con­v i n c e d t h a t the UK s h o u l d agree t o a s e t t l e m e n t on f i s h ; t h e l a s t Government had been v e r y c l o s e t o one. The Prime M i n i s t e r s a i d t h a t she took a v e r y hard l i n e on the f i s h e r i e s i s s u e . F i s h had been d e c l a r e d a common r e s o u r c e j u s t b e f o r e the UK's e n t r y i n t o the Community d e s p i t e , o r because o f , the f a c t t h a t t h e UK had the l i o n ' s s h a r e of the Community's f i s h ­i n g w aters and of the Community's f i s h . When Mr. J e n k i n s r e f e r r e d t o the p o s s i b i l i t y t h a t a 12-mile e x c l u s i v e zone combined w i t h a quota system up t o a 50 - m i l e l i m i t might p r o ­v i d e the b a s i s f o r a s e t t l e m e n t , the Prime M i n i s t e r s a i d t h a t she was opposed t o quotas which were d i f f i c u l t t o m o n i t o r . There c o u l d be no q u e s t i o n o f a l l o w i n g S p a i n t o e n t e r the Community u n l e s s a s e t t l e m e n t had been reached on f i s h i n advance.

R e v e r t i n g t o the s u b j e c t o f energy, Mr. J e n k i n s s a i d t h a t i t was c l e a r t h a t the Economic Summit i n Tokyo would be dominated by energy i s s u e s . The Prime M i n i s t e r s a i d t h a t she found i t hard t o see what s p e c i f i c agreements on energy t he Tokyo Summit c o u l d r e a c h . She was concerned t h a t t h e EEC, and th e West as a whole, had never p l a y e d a l l t h e c a r d s which they h e l d i n o r d e r t o e x e r t p r e s s u r e on OPEC. C o - o r d i n a t e d r e s e a r c h needed t o be done on t h i s so t h a t the West was i n p o s s e s s i o n o f a l l the f a c t s which c o u l d form a b a s i s o f her b a r g a i n i n g p o s i t i o n . Europe's a g r i c u l t u r a l s u r p l u s e s , which were a bur­den i n some r e s p e c t s , c o u l d t u r n out t o be an a s s e t i n the con­t e x t of n e g o t i a t i o n s w i t h OPEC. Mr. T i c k e l l commented t h a t the CIA had produced a s t u d y o f t h i s s u b j e c t i n 1976. Mr. J e n k i n s s a i d t h a t t h i s whole s u b j e c t would be v e r y s u i t a b l e f o r d i s c u s s i o n a f t e r d i n n e r i n S t r a s b o u r g .

/ The Prime M i n i s t e r

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The Prime M i n i s t e r t o l d Mr. J e n k i n s t h a t the UK would need the h e l p o f her p a r t n e r s over Rhodesia. Mr. J e n k i n s s a i d t h a t the r e a c t i o n t o what L o r d C a r r i n g t o n had s a i d on t h i s s u b j e c t at h i s f i r s t m e e t i n g w i t h t h e EEC F o r e i g n M i n i s t e r s had not been as n e g a t i v e as might have been e x p e c t e d . The o t h e r Governments o f the Nine would i n e v i t a b l y t a k e some time t o a d j u s t t o the UK's change o f p o l i c y but the i n i t i a l r e a c t i o n s of the F r e n c h , t h e Danes and the Luxembourgers had been mildly e n c o u r a g i n g . In response t o Mr. J e n k i n s ' q u e s t i o n , the Prime M i n i s t e r c o n f i r m e d t h a t t h e B r i t i s h Government would not take t h i s i s s u e at a g a l l o p : but the A f r i c a n a t t i t u d e s were h a r d e n i n g and t h i s caused her concern. U n l e s s B i s h o p Muzorewa and Mr. S i t h o l e were g i v e n some encouragement t o make the i n t e r n a l s e t t l e m e n t work, t h e consequences f o r Southern A f r i c a c o u l d be v e r y s e r i o u s . The UK no l o n g e r had any b a s i s f o r m a i n t a i n i n g t h e i l l e g a l i t y o f Rhodesia's s i t u a ­t i o n and would need c o n s t r u c t i v e h e l p from o t h e r s . The Prime M i n i s t e r s a i d t h a t she was v e r y f i r m l y o f the view t h a t i t was f o r the pe o p l e i n s i d e R h o d e s i a t o d e c i d e on the Government they wanted and not f o r tho s e o u t s i d e the c o u n t r y who wished t o s e t t l e the i s s u e w i t h guns.

C o n c l u d i n g the d i s c u s s i o n , Mr. J e n k i n s e x p r e s s e d the hope t h a t the Prime M i n i s t e r would f i n d time t o pay a n o t h e r v i s i t t o B r u s s e l s ; the Prime M i n i s t e r s a i d t h a t she would c e r ­t a i n l y hope to do so.

The d i s c u s s i o n ended at 1315. J . .

21 May 1979

CONFIDENTIAL