DRAFT

INTERNAL DOCUMENT

(not to be quoted)

Henry A. Kissinger

Thank you very much, Gianni. First of all let me express my appreciation to Fiat to appeal to my masochism. I've spent some of the most miserable periods of my life in this building, negotiating with the Vietnamese, but not in this room.

I was asked to talk about the relationship between US and Europe, and I will try to keep it to an extent so that you can ask questions about other aspects of American foreign policy as I see them.

I belong to the generation that grew up believing in an *integral relationship* between Europe and the US. My heroes, when my political opinions were formed, were people like Acheson, McLoy, David Bruce. They were the people that I was looking up to, and even Dulles.

Those were the people who believed that there was such a thing as an *Atlantic partnership*, and that our destinies were closely linked.

Now, we face a new situation, at that time there was a common threat, and there was the history of the thirties and forties. Now there is no perceived common threat, and the history that many Americans have in their mind, is the history of the seventies and of Vietnam, the generation of the forties in America believed in the possibility of great achievements in the international affairs.

The generation -- and this is not a partisan matter, because these attitudes exist in both parties -- the generation afterwards has the memory of Vietnam. They above all don't want to get involved in situations which involve any risk of conflict, or casualties; conflict they don't mind as long as it has no casualties, as long as it's free. And so, our foreign policy now has to navigate between running certain risks and making sure they don't happen.

This is a different attitude than that which dominated the Forties and Fifties and Sixties. This is a fact of life.

There is also a change in the political center of gravity in the US, that the leadership that formed the American-European relationship was New York and the East Coast. And the leadership now in America is South, South-West, at any rate they do not have the personal experience with Europe, or the intellectual experience with Europe.

And I would say that the American political debate right now is divided between the *isolationists* on the left and the *hegemonialists* on the right, between the people who have a certain moral isolationism. And on the right I would urge you to read a journal called The Weekly Standard, which has no big circulation, but which every candidate on the Republican side reads in America, which really advocates ignoring all other parts of the world, and especially Europe, and operating on the basis of American hegemony.

And it's in this framework that any American political leader has to operate. I won't talk here about the change in Europe, which many of you know better than I do. But I would point out that when people keep saying that the new German government will learn and that it will do all the things that the previous government did, I don't think that's possible.

I think it's a new generation. I think the center of gravity moving from Bonn to Berlin must make a difference. And I believe that one has to assess what Germany is likely to do not in terms of any big decision, which I don't believe will be made, but in the series of the fifty little decisions that any government takes a week that don't receive great attention, but which will, which could create at least a different, more nationally oriented attitude.

But let me go back to America and let me say that in general the problem we face is the one that Mr. Weiss mentioned. In almost every country, the political leaders are obsessed with gaining public approval, and in every country the contempt for political leaders has never been greater, as a class, and that is an interesting paradox. And the reason may be that what the public in the end wants from its leaders is that they take them from where they are to where they have not yet been, and that if leaders mirror the insecurities of their public, they will in time lose legitimacy.

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[LC]

This is our national problem in many ways in both parties, and it is also the fundamental problem of Europe and America. Europe is now economically comparable to America, in many respects. It certainly can be, and I think will be.

The question we face in America and Europe is: Is there still such a thing as a common destiny? Is it better for us to operate jointly, in a parallel way, or is it better to operate very autonomously, partially competitively, and see what emerges?

I think this is a fundamental decision that we all have to make. Right now the only common institutions that exists in the Atlantic world are NATO, and we have watered those down to such an extent, that they can only handle issues like Kosovo, but they are not really a forum for a common Atlantic policy any more.

So what we now face is whether we are capable or willing or desire to create some common efforts. We have before us, it seems to me, a whole series of issues. One of the biggest was suggested to me by M. Trichet.

When I listened to him, and to the financial people, I think the gap between the sophistication of the financial people and the mediocrity of the political people is one of the aspects that concerns me most about the present situation.

The people who sit at the computer terminals in New York and wherever, and that M. Trichet describes as "the market", have in their field an extraordinary sophistication. But many of them are really totally uneducated about the political consequences of what they are doing, and I believe that in the period ahead of us the intersection between politics and economics is of fundamental importance.

The crisis that we now face in the international financial system is in an important way caused by the fact that the financial institutions that exist have not understood the political consequences of the actions.

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Last year, a country of 210 million population, Indonesia, was consigned to political chaos, by the actions of international financial institutions backed by the US Government, and tolerated by the Europeans, even though this now will produce political consequences in South East Asia that will be with us for an indefinite period of time. In the name of reform, demands were made, that the political system could not possibly withstand, as a result of which, the political system has collapsed to a point that now no reform is possible until the revolutionary process has worked itself out. And one reason is, that countries find themselves in difficulties as a result of the operation of the global financial system, that are then asked to solve these difficulties entirely by national actions. The problems in Indonesia were caused partly by their own mismanagement, but really largely because of various discrepancies that they developed in the values of the currencies to which they had pegged theirs.

If you say the corruption in Indonesia accounted for say 3% of the GNP, in order to get rid of 3% corruption, we have sacrificed 14% of GNP, if you assume that they are now at a minus 7%, and that they were growing at the rate of 7% before.

I have the uneasy feeling that the same thing may be happening in Brazil. And it would be interesting to know to what extent the Brazilian crisis is caused by their own mismanagement, and to what extent it is caused by the fact that international banks and other institutions are withdrawing funds from Brazil in order to make up for the losses they suffered in Asia, or at a minimum to avoid the risks that they suffered in Asia.

Whether I am right in the economic analysis or not, the point I want to make is that the big question that must be addressed now is the gap between the sophistication of the market and the inadequate understanding of the tolerance of political systems. And if the market is used as a justification for an amount of suffering that goes beyond the capacity of the political system, one will find attacks on markets that will destroy the operation even of the economic system.

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[L.C.]

I do not believe that either the banks that I know or the International Monetary Fund have the degree of sophistication on the political side of their action that they have on the economic side. This is one of the problems that in my view absolutely needs to be addressed. Another problem is Russia. Incidentally, one example: Indonesia became a victim of an excessive concern with technical economics plus a slight overlay over American domestic politics.

In Russia, on the other side, an excessive attention has been given to a particular interpretation of the political necessities, without any real understanding of the history of Russia. But now we have Russia, and we have the global markets at a minimum. I think it is impossible to permit a black hole to exist on the other side of Europe, and to say: They have to work their way out of it.

They cannot possibly work their way out of it by themselves. On the other hand, we cannot possibly continue what we've done before, which is to give support to some myths of a Russia with an allegedly democratic government, that is capable of doing its own reforms.

So, it seems to me that those are two issues that must be addressed by somebody.

Then, some of the issues that M. Trichet mentioned about the difference in perception of the appropriate interest rate for Europe and America, the emergence of the euro as a possible reserve currency in the world, those are new experiences for the American psyche and for the American perception of the world.

So then the question is: Should those issues be dealt with by each part of the Atlantic separately, or should there still be a European American partnership or whatever one wants to call it?

As I said, in the US it wouldn't take much to convince people that we ought to do it alone, and there is no longer a leadership group in either party that has the emotional ties to Europe that the Acheson generation and the Nixon generation had, so it would have to be something that is deliberately cultivated, and there's yet another American problem which will soon reach Europe too, which is that we first of all have a Congress which is not interested in international affairs, and our educational system does not teach history or geography.

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I have a nephew – I told this to M. Trichet – I have a nephew who went to Princeton, and who is teaching high school in Colorado, and he came to see me the other day, and he was wearing a little goatee, and I said: You are beginning to look like Napoleon III. This would have been a crushing comment, if he had ever heard of Napoleon III. He didn't know who Napoleon III was. He really didn't know who Napoleon I was, either, except that he wound up in Saint Helena, that he did know. Since then I have been going around trying the names of European statesmen on anyone below thirty, and almost nobody has ever heard of anybody, nor do they know geography, and I'm sure that if I'd try Confucius or any Chinese name it would be even worse.

The conclusion I draw from this is that unless some educational effort is undertaken by our national leadership, on the importance of a transatlantic relationship, it will just wither or it will degenerate into a series of confrontations on specific issues.

If you read the American press on Kosovo, a significant part of the population says: Once more the Americans have dragged the cowardly Europeans reluctantly into a desirable action. It's not interpreted as an example of great cooperation.

So, I would argue that the emergence of the euro obviously gives Europe in the field that's now most important, namely economics and global development, an extraordinary voice. But there are problems we have to deal with, the relationship between economic and political development, the relationship of the future of Russia, the problem – I'm no expert on this – but when you look at the automobile industry, for example, of potential surplus production around the world, which could become an issue for many industries, how to deal with all of these issues, in a coherent way?

Should it be done by maximizing the regional self interest or should it be done by creating an Atlantic effort? Should one try to find a home for those nations that have not joined Europe or will not join Europe in some Atlantic relationship, or should one keep everything totally separate? Those seem to me to be fundamental problems at least for us in America. And they should be fundamental problems for Europeans.

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The short-term political benefit is to let every region maximize its own benefit in the short term. And if that happens, then I think we will repeat what I believe to be the tragedy of Western civilization, which is that if you look at Western civilization, some of the greatest achievements in human history have come from the West. But the West has also nearly destroyed itself on several occasions by its propensity to jealousy and civil war. It's true within countries, it's true between countries and it could now be true between regions.

So my fundamental concern right now is two-fold. One, for my own country. How we can raise our sights from the day-to-day politics to a long-term historic role against which all the incentives of our political system mitigate.

And secondly, between Europe and America, whether we can create some set of institutions and some set of challenges. I do not believe—and on that we probably disagree—that the market by itself will do this. I believe that the way that the market is interpreted today leads to such dislocations that unless some limitations are put on it, it will lead to the same sort of reaction that in the 19th century the unrestrained capitalism led to Marxism.

In this century, I think the wild speculative tendencies, the capacity to turn currencies into commodities for smaller countries is unsustainable and has already led to reaction and will lead to a worse reaction. Now, one has to make that this reaction does not go beyond a reasonable interpretation of how the market can operate. But it seems to me that if Europe and America could work together on this problem, we could bring it under control.

If each side, however, tries to maximize its own benefit for its own short-term political necessities, sooner or later we are going to threaten not only the market system and we will produce the sort of crisis that we're all concerned with today. That is my basic view on this subject.

Since Mr. Agnelli thought we should leave some time for questions maybe on other topics, let me stop at this point and see whether there are any...

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Avvocato Agnelli

Thank you. Has somebody got some questions to put up to Mr. Kissinger?

Mr. Cantarella

An issue that is particularly sensitive for us is Russia. You said that Indonesia had too much help from the International Monetary Fund and financial organizations, but Russia needs some help.

Which kind of help do you mean, and will they be able to receive and to handle the help in a business-like way or in a modern way?

Mr. Kissinger:

My view on Indonesia was that we did not appropriately separate the problems of Suharto from the problems of the currency crisis. I think the problems that we were posed with Suharto could have been solved over a 5-year period. The problems of the currency crisis needed to be solved more or less immediately, and that the attempt to mix the two together led to a collapse of all the political institutions without which any reform becomes very difficult.

In the case of Russia, there was the assumption that we were dealing with a democratic government that was market oriented, neither of which was really true. Therefore the temptation was to bail it out of its immediate short-term problems, without bringing about any fundamental reform.

I think in Russia today there are a number of things that I think need to be done. The first is that the West ought to demonstrate that we care, and therefore I would strongly favor some humanitarian program for the Winter, whatever it is simply to show that we are present, and it matters to us what happens to Russia.

Secondly, I believe that some medium-term economic reform program ought to be developed, and again I would say by Europe and America, more or less as a joint program. However, both of these programs have to be put under the management, at least under the joint management of the donors. I

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don't think there is any point in making available to existing Russian institutions, more resources to waste or to transfer abroad.

And in this respect there is a certain similarity to what was done with the Marshall Plan in Europe, though obviously in Europe, there was no level of corruption as it exists in Russia, but I don't see how we can have a black hole on the other side of Europe. That in time will tempt a big crisis in Asia as well, because sooner or later the neighbors in Asia are going to make claims to some of this territory. So I think one joint effort at the two sides of the Atlantic might make us to do with the future of Russia, and we really have no choice on that matter, because the more chaotic it becomes, the worst it will be for us in the long term. And I say there's somebody who has his doubt about what Germany will do once Russia recovers, and who believes one ought to tie Germany very closely into Europe before this temptation materializes, but still I believe chaos in Russia would be a bad outcome.

## Mr. Fornasari

The timing of this crisis and the ongoing discussion on the reform of Bretton Wood institutions is probably unfortunate. Is there a way out of this, is there a way to have some orderly dealing with the crises in these different parts of the world, and in particular in countries like Russia that have been so much supported by everybody? I recall the embarrassment when one Russian mister said that they had been systematically misleading the missions of the IMF. It's really difficult to see how and who should be dealing with Russia at this point, quite independently of any reform of Bretton Woods institutions.

## Mr. Kissinger

I think what needs to be done is to find some way of introducing political analysis into the economic analysis of the IMF. But then that raises the question, whose political analysis, and what I think needs to be done it's not going to be easy to accomplish considering the conflicting political

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[Lc]

views on how to deal with developing countries. For example, had I been asked about Indonesia, I would have said: Preserve Suharto through this crisis and work on a gradual reform of the regime; but as Vernon Jordan will know, there would have been many people in America who'd have said: Get rid of the guy first, and why should his family benefit from any of these assistance programs? So you would have had a fundamental debate in America on what the right approach is. It depends whether you believe in gradual reform or revolutionary upheaval, but we will be facing this problem over and over again, it is something we need to develop a common view on.

## Avvocato Agnelli

Thank you, I think Stevy wants to ask you a question.

## M. Davignon

As one goes towards the issues that Henry has mentioned, the number of them, some have come up with Russia, and so on and so forth, it's obvious that because of the importance of the issues, and because of the political environment, there will not be a clear leadership coming from anywhere to deal with these questions in an organized fashion. It seems to me that you were saying that also. So, at that moment, how does one create a *procedural environment* which obliges you to take care of the issues?

Let me give an example. You mentioned Russia, by far the geographical origin of the help being given to Russia comes from the European Union. A way in which a very significant part of that aid is being focused is unclear versus any goals; and I am not speaking about the economic help, I am speaking about what is humanitarian help, training for people to manage market economy, and so on and so forth. There is no relation with the United States on this, although the country University professors are fighting to explain why the other University professor was wrong, which seems to me rather uninteresting because, as far as I've seen, they've all been wrong. We have no real meeting

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[L/C]

place. If one looks at the issues which are related to NATO, where obviously the traditional separation which existed because of the common enemy was that you could have a security element aside with which the main question was the effectiveness of the capacity to intervene. The political issue was not a dividing issue at a given moment. Today it is clear, one sees it with Yugoslavia, it is a combination of economics and security. Who deals with that?

The third point I want to make is that the composition of these institutions makes it more and more difficult to agree on a division of labor. As NATO expands, the European Union expands, with memberships which are not identical, we run into difficulties, so I would like to push Henry a little further on when he says: What type of institutional or procedural setup do we require in between Europe and the US to be sure that we deal with the issues, that the importance of the issues exerts such a pressure on the decision makers that they can't avoid facts?

Facts have this disagreeable characteristic of being extremely stubborn. You permanently push them under the carpet, and at one moment there is a such big mountain that you fall over it. It's not the best way of dealing with the issue, but you can't avoid it. And how do we do that, knowing that there is ambiguity on the US side, because this means that they have been pushed into taking a position, and that there is enormous ambiguity on the European side, because who would be doing this on the behalf of Europe? We have not solved the question of our representation and our participation in terms of monetary questions, although we've set up the Euro. We still have the old structure, as if euro did not exist. This will take away a lot of the credibility, or some of the credibility of what we would like to have.

So, how, in your view, Henry, can we push towards something which is totally coherent with the joint interests -- politically and specifically -- of keeping the Atlantic relationship operationally useful, because it's the usefulness of the operational side of it, which will keep it over the years, and leaving it to ad hoc as it is today, in my view will not be sufficient.

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And as 1999 is going to be a difficult year for US-Europe relationship in any case, because of all of
the issues, I think it's a good time to think about it.

Mr. Kissinger

I think the question is a lot better than my answer is going to be. If an American President asked me
that question, I would say this: In our system the President has an extraordinary educational
capacity, no matter what public opinion is. Mr. Weiss referred to the fact that I mentioned in my
book. In 1937 the Congress passed three neutrality Acts, and Roosevelt said: We have to quarantine
the aggressor. And within four years, against all public opinion, he gradually turned public opinion
around to the point of view that America had a vital interest in the outcome of the war in Europe,
and managed to introduce a united people into that conflict.

That was an example of great leadership. I don't think there is anything to prevent this President or
the next President to affirm the importance of the Atlantic relationship, but not to do it in a
bureaucratic way, but to do it in a philosophical way, and then I think we have to create some new
institutions. NATO is a security organization, and moreover we have watered it down in the process
of expansion to a point where it can no longer perform the functions that I have in mind. But I
believe that if the President of the US said that we have a conceptual problem around the world. We
have an economic system that has a tendency to produce crises, if we do not try to mitigate it
jointly, and if we do not know how to protect the market from its excesses, and if he affirmed the
fact that Western civilization has some sort of a common destiny, all of this would incidentally
evoke a violent reaction in many parts of the US, within both the Republican and the Democratic
Party. Don't you think Vernon? But it would be a fight worth having.

I am afraid that the way things are going America will isolate itself from the rest of the world
through a theory of individual politically driven measures, and Europe and America will drift apart

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on the basis of operating the euro and the dollar system without a common conception, and so this is
one level.

The second level is that, since Governments may not be able to produce this, organizations, if I may
so being in it, like the Bilderberg Group, in which senior people on both sides of the Atlantic meet
regularly and are not constrained by immediate political considerations, if they came up with some
ideas on these subjects, they could influence the governmental process, but I believe that unless an
institutional Atlantic framework is being created, the relationships, the global problems will not be
solved jointly, and we will be dealing from one expedient to the next. So the first thing that I would
urge our president to do is create some institutional Atlantic framework where these issues can be
discussed in a systematic fashion. And Vernon will agree that this is not a partisan point, being that
there would be as much opposition, if not more, also within the Republican Party that within the
Democratic Party on this. This would require the formation of some center group around which to
crystallize it, which I don't think it's impossible.

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