Robert Keatley and Karen House, Wall Street Journal
As we enter 1988-89, how concerned are you that we are going to have a world recession?
Prime Minister
I think it depends how you define a world recession.
We could not go on next year growing at the same rate as we have this year. So we shall grow next year, but it will not be quite so fast. I think probably the rate at which we shall grow - we expect 2½% to 3% - will be the maximum rate at which anyone will grow.
The United States economy is very strong and it is a very enterprising economy. People get on with the creation of wealth, with the foundation of business, with the creation of new business.
So no, the growth will not be as great as this year and to some extent you can define that as a recession, but you will still have growth on this year. [end p1]
The difficulty will be to try to persuade those countries who expect to export to others who have freely open markets to make certain that their markets are as open - and the Japanese are not as open anything like - and also to try to persuade countries like Germany, which is a big exporter, to have a similar level of domestic demand internally as she takes advantage of in other countries.
Robert Keatley and Karen House, Wall Street Journal
Why do you think the Germans are so reluctant to have more expansion? What can you do?
Prime Minister
Historically, because they are frightened to death of inflation. That has a history which you know and which is understandable, and I too am frightened to death of inflation, but they knew a real hyper-inflation and I think that probably gives them a greater fear of taking any risk with slightly increasing demand.
They certainly are putting up their deficit. We are not; ours is going down, as you know, so we do not have that problem. I think we have just handled our economy absolutely right, but with a rising deficit in Germany, with their historic fear of inflation, I think that probably explains why they are very very reluctant to lower taxes as much as we think they should. [end p2]
Robert Keatley and Karen House, Wall Street Journal
You mean there is nothing that can be done from the outside to promote expansionism?
Prime Minister
It is possible to expand, you know, without getting inflation. Heaven knows, we have shown it, and it is possible to reduce your deficit and still get expansion. That is what we did in 1981. We cut our deficit actually by increasing taxes and we still got expansion.
But there is this historic thing in Germany and I think that that explains a very great deal.
Robert Keatley and Karen House, Wall Street Journal
Are you saying that the rest of us simply have to accept that the Germans are not going to do that or is there anything that the Western Allies can do to make Germany do what it has not done so far?
Prime Minister
I do not think so. It may be that with the rise in the deutschmark that exports will fall, but otherwise, you see, it means that if you have got two very considerable surplus countries, then when the United States deficit on trade goes down, unless other [end p3] people's surplus goes down then it means that others of us take up the deficit, and we certainly shall have a slightly bigger deficit next year than this year, but not a big one.
Robert Keatley and Karen House, Wall Street Journal
Briefly, will there be any policy departures in the British economy in the year ahead for the purpose of keeping growth at a high rate, developed at a higher rate?
Prime Minister
No, and we shall follow the policies that have been really very successful up to date, which is a very sound financial policy, and as you know, we have not got ourselves into a deficit position. We have steadily tried to reduce the budget deficit and that will continue to be our policy.
Many a time I have been thankful that, happen what may, I knew our financial position was sound. It happened over the Falklands, it happened over the Coal Strike, so I have never had to worry about the financial position because I have been reducing the deficit or got it down to where it is now and we have got inflation down and kept inflation down. [end p4]
And we still managed at the same time to reduce direct taxation, to give that increasing incentive to enterprise, because it is not enough just to keep inflation down. That is a necessary condition to sound growth, but on its own it is not enough. You always have to have the incentives to enterprise, you always have to have the incentives to keep some of your top people, your enterprising people, your researchers, here and it has been always the two sides - perhaps three sides should I say - to economic policy: lower inflation, sound finances, and incentives to enterprise, and that will continue to operate.
Robert Keatley and Karen House, Wall Street Journal
Can I ask one last thing on this topic? Are you concerned at the Americans getting through an election year without a recession at least in our own country - by postponing in 1988, that we may create a worse one in 1989?
Prime Minister
No, I do not think that. I think people are a good deal more canny sometimes than we give them credit for, and I give them credit for being canny. Heaven knows, they have been through three elections without altering any of one's policy because it was an election year. On the contrary, I would not have done that. [end p5]
What we have said is we have the best policy, the soundest policy, and you keep it going through an election year and we should forfeit respect if we did not, and I think that there is much more of that spirit now in the United States.
I think, you know, if you try to have a false boom people know that it would only lead to trouble in the future and what most people are concerned with now this year, after the events of the autumn which came very suddenly, is to have a return to confidence. The only way in which you get a return to confidence is by running sound policies, even if some of those sound policies have to be tough.
It is different here because the Nigel LawsonChancellor of the Exchequer and I and a few groups of colleagues could decide on what those policies were, take them to Cabinet, get them through, and know that we would get them through, so there is no question about it. So we could restore confidence very quickly.
You have a different system but the crying demand is to restore confidence and you do that by sound economic policies, and I think it is one of the lessons that we really have taught those who may have thought otherwise. [end p6]
Robert Keatley and Karen House, Wall Street Journal
As you said at the beginning when you said that you anticipate somewhat slower growth, you are not anticipating a recession?
Prime Minister
This is why I say it depends really on what you call a “recession”, but we could not possibly, I think, keep up the growth we have had during this last year, which has been very considerable and higher than we planned for. Therefore, we anticipate slower growth, but it is still growth on this very active year that we have had. It is still something like 2½% growth, perhaps up to 3%, on top of a year when we have had very considerable growth.
Robert Keatley and Karen House, Wall Street Journal
In the United States would you see the same?
Prime Minister
I have the impression that United States industry now is in very efficient condition.
You have to get your industries efficient when your currency is high - you really have to - and I believe it has. When it falls, you get an extra [end p7] element of competitiveness and so you have the two things: when your currency was very high, they had to cut the surplus, to get rid of any restrictive practices to be really efficient - they have! Added to that, you have got a fall in the value of your currency. Really, it gives a fantastic chance for exports.
Robert Keatley and Karen House, Wall Street Journal
If you sound sanguine about the global economy, is that an accurate impression or if not, what is it that worries you?
Prime Minister
I am not as fearful as many people. I am much more fearful of the protectionist factor which could slow down trade, rather more than the economic factor.
You may say they are both part and parcel of the same thing. Of course they are, but you see, you could really shoot world trade in the foot by getting a round of protectionism and that would be very serious. I know President Reagan resists that as much as he possibly can - so do I!
Incidentally, I read all of the commentators on the economy, but then I do read the reports and company accounts and the success of industries that I see in your columns. We take the “Wall Street Journal”, we read it every day. I might say it is a very good paper. [end p8] But so often, the condition of American industry at the moment seems to me better than some of the economic commentators are counting for.
Robert Keatley and Karen House, Wall Street Journal
As we are in the Middle West [US] in an election year, I think the role that you and others in Europe in trying to focus on issues becomes even more important.
Can you talk about whether you think there is a danger to the Alliance in Ostpolitik?
Prime Minister
No. I think that there are certain differences of opinion and Germany's politics are very different from ours. Once you have a coalition government with a very small party in the middle determining so much, that is something to cope with that we just have not got, but I am quite certain that Chancellor Kohl is as aware as I am of the need not to have a third zero; very much aware that the Soviet Union might attempt to get a third nuclear zero, because it would be in their interest to do so, whereas it is in our interest to modernise our intermediate air-borne and sea-borne nuclear weapons because whatever weapons, whatever armed forces you have, they have to be up-to-date with modern equipment - that applies as much to nuclear as to anything else - [end p9] and it is very much in our interest to make the Russians negotiate on getting down their conventional, where they are enormously superior, and their chemical weapons, and the Russians will try to divide Europe, to play on nuclear fears.
But you know, we are all very much conscious of the psychological warfare of the Soviet Union. We are all very conscious of what they are trying to do, and you know, to be forewarned is forearmed. It is trite, but it is true!
Robert Keatley and Karen House, Wall Street Journal
Are you confident, in other words, that the Chancellor's statement at the Verkunda (phon) Conference this week-end is not a backing-off of the modernisation commitment?
Prime Minister
Helmut KohlHe said he does not want a third zero. I think perhaps he is a little bit more worried about modernisation than I am, but I think you have to start by asking the right question, and not come in mid-way and ask a subsidiary question. [end p10]
The right question that every head of government and head of state has to ask is: “What have I to do to ensure the defence of freedom and justice and to convince any potential aggressor that we are strong both in professionalism of forces, weaponry and resolve - so strong that he could never win if he attacked us?”
Robert Keatley and Karen House, Wall Street Journal
I do not get the impression that the Germans are asking that question.
Prime Minister
I am fed up of people starting way way way down with small things in disarmament and starting on: “Do you modernise? What is the effect?”
The head of state, head of government and the parliament have a duty to ensure that freedom and justice can always defend itself and triumph. You do not do that with obsolete weapons! You do not deter an aggressor by saying: “Oh dear, we must modernise!”
You make your treaties, you abide by them meticulously, but each time you make one you watch the total defensive position to see that it is always sure and you watch when you are negotiating on the detail to [end p11] see that you are not somehow inadvertently hampering your overall defence effort by agreeing to some detail which could prevent you from carrying out your fundamental duty.
That is why I said this is the place which I always start with because I find so many people starting by asking what I think are not really the illuminating questions or the right questions to get the fundamental answer, and if ever there were another war, the lead time with weapons now is so great that you could never make up for a mistake during your peace-time defence and so our whole defence posture is one of deterrence, and that means being so sure that any potential aggressor knows that he could not win.
And it is not only your weapons and modernisation - that is vital - but it is the resolve as well.
Robert Keatley and Karen House, Wall Street Journal
Do you feel you can get the German Chancellor and Foreign Minister and others to focus that way or are you going to have difficulty? [end p12]
Prime Minister
I think when it comes to NATO - and this is why I am always so keen to have NATO summits, to have consultations across the Atlantic; I am delighted that the Ronald ReaganPresident is coming here - then, we among ourselves discuss these things because, of course, part of having that sure defence is of having an absolute alliance where we do discuss these things and where we can bring these arguments to bear and you know, there is no earthly point ever in saying: “Oh well, people are fearful of this, that or the other!” Our job in government is not to follow - it is to lead - and people expect you to lead, particularly in defence, because they say: “Look! You know a great deal more than we do!” but the fact is that many people have become fearful of nuclear weapons.
The nuclear weapon has kept the peace in Europe and, as General Galvin said, we are interested in a war-free Europe and that probably means having nuclear weapons in Europe. We are not interested in a nuclear-free Europe, but in a war-free Europe.
Robert Keatley and Karen House, Wall Street Journal
You want not only modernisation, but you want the nuclear weapons left that remain here? [end p13]
Prime Minister
Most certainly! Most certainly!
If I might respectfully say so, there is no such thing as a nuclear-free world.
The nuclear weapon is the greatest deterrent to war. If you got rid of it, you could never be certain that other people had not fully got rid of it and if, by getting rid of your own, you tempted a third conventional war, it would be infinitely more terrible - do not think that conventional war is cosy! - than anything we have ever known, and the race would be on immediately, as the race was on in the last War as to who got the nuclear weapon first.
So do not think that you can have a nuclear-free world. You cannot, anymore than you have a dynamite-free world!
Robert Keatley and Karen House, Wall Street Journal
Are you convinced that the Germans share that view, that some nuclear weapons are necessary?
Prime Minister
On nuclear weapons, I am absolutely certain.
Robert Keatley and Karen House, Wall Street Journal
That they do not want a third zero? [end p14]
Prime Minister
I am absolutely certain that Chancellor Kohl does not want a third zero and it is up to us to continually put this view, which I believe in passionately.
Robert Keatley and Karen House, Wall Street Journal
Do you consider that a critically defensible view that can carry the day in German politics for Chancellor Kohl?
Prime Minister
If you lead firmly enough, you will carry the day. If you are weak or practise followership, you will not! Chancellor Kohl does not practice followership, he really does not. I must say he has been absolutely loyal to NATO and very very firm indeed.
Robert Keatley and Karen House, Wall Street Journal
Could you address the NATO Summit? What do you hope to accomplish there or what is accomplished at the meeting itself?
Prime Minister
I think what we must accomplish is a clear understanding and definition of the next stages, and I think they may be those which I have indicated - in arms control. [end p15]
Robert Keatley and Karen House, Wall Street Journal
Focussed on conventional and chemical?
Prime Minister
You are doing your 50% Soviet and United States, and that obviously one has to watch because the mix of weapons very much indeed in that reduction and the agreement must be a mix which suits the West.
We shall keep our independent nuclear deterrent. As you know, we purchase the missiles from you and do the nuclear warheads ourselves, based on Trident, but I do think one has got to watch every stage of the negotiations and I think verification is going to be very difficult indeed, verification on the SS20s is difficult enough; the verification on START is going to be very difficult with the complicated mix, it really is!
And you must never forget that the Soviet Union is about nearly two-and-a-half times the size of the United States. It goes right up the polar ice cap, and you must never forget the difference in geography which dictates different factors for the two major powers, NATO and the Warsaw Pact. [end p16]
They can reinforce quickly, straight overland, with railways right across. We would have to reinforce right across the Atlantic from Britain to the Continent, from Britain to Norway. You must always take these factors into account. You cannot deny geography. It is Western Europe that is much more vulnerable than any other part, for very obvious reasons, and your strategy must always take this into account.
Robert Keatley and Karen House, Wall Street Journal
Can we talk about how concerned you are, if at all, about the talk of American retrenchment and declining leadership and the whole issue of the US turning inward?
Prime Minister
You know, we get that from time to time and, again, it is up to those of us who are passionately interested in these matters to say that that would be quite fatal, not only for Europe, but the frontier of freedom for the United States is across the European continent and people like me are always very very conscious of the problems with Central America and how much that concerns the United States, because she is nearer to those countries obviously than we are and you have got some of the problems with communism in those countries which we understand, because we have got it. [end p17] So that also is to some extent our frontier and I do always say to our American friends: “Look! We are much smaller than you are!” But because we are not constrained by NATO we do a lot of out-of-area work. We at least keep troops in Belize at the request of Belize and always hoped to move them out. That was the idea when Belize became independent, but every time we try they come along and say: “Look! Please leave them in!” and Belize is a democracy and that, in a way, is part of our contribution to trying to get stability in that part of the world, because the fact that we are there does make Belize stable.
Robert Keatley and Karen House, Wall Street Journal
But are you deeply concerned that we are in the process of retrenchment?
Prime Minister
No. You had very big expenditure on defence and if I might say, as I am constantly saying, - it sounds boring to me, tell me if it sounds boring to you and stop me if it does - but I am always constantly saying: part of your deterrence is your capacity in a free society to be ahead more technologically than in a country that is run totally under central planning and control. [end p18]
So some people call it SDI. I say call it what you like! You have a bounden duty to keep your latest technology going because that itself is a deterrence and one learned in the last War that if we had not kept our latest technology going through the Thirties when we were poor, through the War, and got the atomic weapon first, the history of the world could have been different.
So yes, I am a passionate defender of what is called Strategic Defence Initiative. It really is the very latest approach, the very latest weaponry, the very latest command control, and it is vital. It is part of your deterrence; it is part of your reassurance that if anything happened you are already well on the way with anything new and, again, one has to remember that we are never quite certain what is going on in the Soviet Union or how far they have got. It is much more difficult to find out.
Robert Keatley and Karen House, Wall Street Journal
If we could stay with that point, part of NATO's policy is to act, of course, on assumptions about what the Soviets are up to. [end p19]
You have something of a special relationship with Mr. Gorbachev. What do you see as his objectives in Europe vis-a-vis NATO, vis-a-vis the Alliance or the Western European nations? What is he after? What are your assumptions that you then have to build your own policies from?
Prime Minister
I think the Soviet Union would like, in fact, to divide Europe from the United States, which it will not succeed in doing, and I think it would like to exploit differences in Europe, because I think that it basically would like to feel that there is not a great big sure defence in Europe, for very obvious reasons.
Robert Keatley and Karen House, Wall Street Journal
Nothing has changed?
Prime Minister
I do not think anything has changed in defence or arms control, no.
Robert Keatley and Karen House, Wall Street Journal
But in Soviet intentions? [end p20]
Prime Minister
I do not think so, because I think they are going full steam ahead with their weapons programmes, with their radar programmes, with up-dating their anti-ballistic missile systems, with their research and, of course, their chemical weaponry is streets ahead of ours both in modernisation and in quantum.
I recognise - I always have done - that they have as much right to defend their system as we have to defend ours and this is one of the secrets of getting, I think, an effective relationship with those who have a different system. Whether we like the system or not, they have as much right to defend the system which they believe in as we have and they want their security as much as we do.
We are always fearful that they have aggressive intentions, whereas we are wholly defensive - democracies tend to be. We are not aggressive. NATO is defensive, but the fundamental nature of communism was such that it thought that the extension to the world of this so-called “scientific system” was inevitable, and I think that the great historic change that has occurred - and I cannot emphasise how historic it is - is that this idea that it was the most wonderful system in the world and were we not lucky to have it, has crumbled to dust and ashes. As they realise, it neither produces the [end p21] latest kind of industries, except in defence, nor a standard of prosperity, nor a standard of social service, that they were led to expect and they cannot conceal this much longer and this is an inherent part of the central control.
Now, that really is a historic revelation, absolutely historic, and I am constantly saying: “Now what does it mean for their external affairs? Does it mean, too, that they drop their policy of trying to extend it to the rest of the world by one means or another, either by being very strong and being able to threaten, either by subversion at which they are adept, or by proxy - the Cubans, East Germans - at which they are also adept?” And that is why we watch their external policy the world over very carefully indeed, because we are not really able to make a judgement yet.
Robert Keatley and Karen House, Wall Street Journal
Does Afghanistan answer that?
Prime Minister
I do not think Afghanistan answers that. You must be careful, I think, not to put too much on Afghanistan although, may I say absolutely I find the announcement very encouraging. We have to watch how it is [end p22] implemented very carefully. We have to watch that the refugees are able fully to go back and be free to go back and we have to watch that the resistance fighters who have resisted and fought against the occupants of their country are also free fully to take part in the government and that there is no attempt to determine the future shape of government.
But when a country does what you have been urging it to do, let us say: “Yes, it is tremendously encouraging!” but do not forget that there have been great demands, I believe, in the Soviet Union for them to come out and I think that they realised it was a mistake to go in.
But do not put too much on it. It is taking the Soviet Union back to where it was before it went in 1979.
Robert Keatley and Karen House, Wall Street Journal
Do you think there are any pitfalls in there, in that the West seems to &dubellip; such tests as: “Is Gorbachev serious? If he actually gets out, what are the potential impacts of getting out?” [end p23]
Prime Minister
You still have to watch the policy elsewhere and if there are signs elsewhere - if the Cubans come out of Angola, if the Cubans and East Germans came out of various other countries in Africa where they are as advisers - if you see the subversion being reduced, that too would be very good.
We do not see signs of it at the moment. If we do, right, then that is very very good, but they have got a tremendous lot to do inside the Soviet Union and, as I say, it is historic and it really did take a personality like Mr. Gorbachev, I think, to be bold enough to attempt it and courageous enough to stick to it, both of which I believe he has.
In the meantime, you watch the military and you watch the other kind of vested interests in the Soviet Union. There are great vested interests. “Vested interests” used to be a phrase in fact you applied to the West. Now it is a phrase you apply to any bureaucracy. There will be people there who are more interested to keep what they have got than to go to a Brave New World, and never never never forget that until we have evidence to the contrary - which I do not believe we shall ever get - what they are trying to do is to reform their economic system within the [end p24] constraints of the communist party and so, within a matter of a few years, they will come up against the $64,000 question: how far can you do it within the constraints of the communist party?
Robert Keatley and Karen House, Wall Street Journal
Do you think he is getting out of Afghanistan for his own internal reasons and that one should not &dubellip;
Prime Minister
I think so. I think for both, but I think primarily for his own internal reasons. Primarily because Mikhail Gorbachevhe realises that it will be a continuing black mark against him, but it is getting out of Afghanistan and that is good and is encouraging, but do not say because of that you can drop your defences or you will find immediately that there is no subversion in the rest of the world, you will find that he drops any ideas of extending communist influence to other countries and fundamentally dropping the old communist doctrine. Do not go to that conclusion.
In other words, the tendency is to draw too much conclusion from too little evidence. [end p25]
Robert Keatley and Karen House, Wall Street Journal
You talked about leadership. One cannot lead abroad without strong political support at home and there seems to be some serious problems these days - social services, the poll tax, later television perhaps.
Is your Government's position being eroded?
Prime Minister
But these are not great serious problems! These are the problems you get every year in politics! Social services: we have increased enormously the amount that goes to them. We have increased the proportion of national income that goes to the Health Service. We have increased the number of doctors, the number of nurses.
Robert Keatley and Karen House, Wall Street Journal
People do not seem to think that they work very well, the money aside, something is wrong.
Prime Minister
You go to the people, if I might say so. I have actually been to National Health Service hospitals. You will find 80% of them immensely pleased, immensely grateful for everything that is done. [end p26]
Look! There are 45,000 operations every week. How many do we hear about?
I am asked about perhaps one of the things &dubellip; and the party that asked me about one or two or three is the party that did not condemn a strike that in one day stopped 400 operations.
A Community Charge: this is how you pay for local government. The Community Charge only pays for one-quarter of the expenditure of local government. It has an 80% rebate for those who cannot afford it and those who are on Supplementary Benefit, they get the other 20% averaged throughout the country, to pay it.
This is putting forward your programme: to alter local government finance, which needs it because rates are grossly unfair.
Yes, of course it is contested, but this is the normal business of politics. There is nothing unusual about it.
Robert Keatley and Karen House, Wall Street Journal
It is not a question they doubt your political authority? You do not see anything … here? [end p27]
Prime Minister
No. It is not a year since we had an election. If we had one today, we might win with an even bigger majority because the parties which put themselves up as possible governing parties, goodness me, people have just seen the crumbling state which they are in, and the fact that they are not right for Britain and they just have not any cohesiveness, any sense of direction, at all.
Robert Keatley and Karen House, Wall Street Journal
&dubellip; work action going on now, concern over the poll tax, do you think it is just part of the political nature …
Prime Minister
There was fair concern when we wanted to abolish GLC and the other metropolitan counties. We had a battle. We had a pitched battle and rows about it. Of course we did. That is just in putting through the normal business of politics.
Do not ever expect a period of calm as far as the House of Commons is concerned! [end p28]
Robert Keatley and Karen House, Wall Street Journal
But when the markets react to these strikes, they presumably are expressing some sort of worry and you would say to the people who listen to that: “There is no need to worry!”?
Prime Minister
You think that is new! In the last Parliament, I endured a Coal strike for a year and you think this is new!
We have a ballot system now and the people who ballot to go on strike - as I said in the House yesterday - “You must be presumed to intend the consequences of your own action!” It is what democracy is all about!
Robert Keatley and Karen House, Wall Street Journal
Can I ask you on Hong Kong, where the vote occurred yesterday to postpone elections, but can you say with confidence that there will actually be an election in Hong Kong by 1992 or in certain dates? Do you have a deadline? [end p29]
Prime Minister
There will be elections in Hong Kong well before the time comes for it to be handed over and the judgement we have to make is the best time to have those elections, and I think Hong Kong people are well aware that the timing is often the essence of politics.
Let there be no doubt about it. We shall go to elections well before the critical time.
Robert Keatley and Karen House, Wall Street Journal
But you are not prepared to set a date?
Prime Minister
No. The difficulty about these is you often try to provoke us into answering questions. I can only tell you it would not be wise either to set a date, but on Hong Kong there is not the slightest shadow of doubt that there will be elections well before 1997. That is part of our way of life. The question is to try to get the timing right and, of course, there is a certain amount of difference of opinion in Hong Kong, so you must take that along with you too.