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(g) Date of expiry of 1.A.R.

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The French confirmed that the intention of M. Schuman's letter to Dr. Adenauer (our telegram No. 1140 of 16th April) was that the International Authority for the Ruhr should cease to function as soon as the High Authority had started to operate under the interim provisions (2:2 IV). They further con- firmed that this function would be among the first exercised by the High Authority,

(h) Exports in the Interests of Western Defence Interests of Western Defence

The French were reminded that under the “guarantee of equitable apportion- ment given by the Federal Government to the Allied High Commission, the Germans had undertaken to see that there was a reasonable balance between German internal consumption and export in the case of goods in short supply. This guarantee applied, inter alia, to finished steel and scrap and to exports outside the Schuman community. The French confirmed that there was no specific provi- sion in the Schuman Treaty which ensured that the needs of countries outside the community would be given due priority in this connexion, when the Council or the High Authority came to allocate coal and steel under Article 59. Hirsch, how- ever, emphasised that the needs of Western defence had been very much in the minds of the drafters of the Treaty, particularly in the case of Article 59. He explained that the rather curious procedure under which allocation in time of shortage should be undertaken in the first place by the unanimous decision of the Council and, failing such a decision, by the High Authority, had been designed to prevent the Germans, who were not members of N.A.T.O., from disregarding the needs of Western defence. If the Germans blocked a decision of the Council which took due account of defence needs, the question of allocation would then come before the High Authority which would act in a responsible way in relation to the obligations of the greater part of the community.

The French further explained, incidentally, that Section 22 of the Interim Provisions, which lays down that German interzonal trade in coal and steel shall be regulated between the High Authority and the Federal Government, does not in any way affect the Security powers of the High Commission. It was intended to prevent any implicit recognition in the Treaty of the Soviet zone as territory foreign to the Federal Republic.

ANNEX B

INTERNATIONAL - AUTHORITY FOR THE RUHR (1.A.R.)

The information which has been obtained about the Schuman Treaty shows that its objects cover the objects of the Ruhr Agreement, and that the proposed High Authority will absorb the only essential function of the I.A.R This is the division of German coal production between internal consumption and export (not the country-wise allocation of exports). It is in the general interest of the United Kingdom that:—

(i) Germany should export sufficient coal to fulfil the needs of at least the

major European consumer industries.

(ii) Germany should retain sufficient coal to provide at least for those industries -

which contribute most to Western defence and to righting the German balance of payments.

2. These objects have naturally proved increasingly hard to reconcile in the forum of the I.A.R., which the Germans have always regarded as a servitude imposed upon them and as an obstacle to equal status in the European community. It is indeed doubtful whether the Germans would for much longer continue to implement the decisions of I.A.R. in this sphere. Most of the main importers of German coal are participants in the Schuman Treaty, and they are likely in the long run to have their needs met more fully and more readily under the Treaty (where the Germans are equal partners) than under the Ruhr Agreement. In times of ample supplyGerman foogly should be available freely throughout the Schug 7

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PCommunity 58 In times of shortage, there will be allocation within the "Com- inunity of its total coal resources either by the Council of Ministers acting unanimously, or failing that by the High Authority. Participant Governments would be free to determine their exports outside the Community" provided that deliveries within the "Community are not affected and subject to consultation with the High Authority. In practice this might mean that the French or Belgians would receive preferential treatment in respect of German coal exports vis-à-vis for instance the Danes and the Swiss. This might (though not necessarily) be against our interest; but it is probable that the Germans will do all that they can to maintain their exports to some countries at least outside the "Community."

3. In general I consider it in our interest to see the I.A.R. abolished. For our part we get nothing out of it at present except a share in the odium aroused among the Germans by an unpopular organisation. In the future it can only become more ineffective as the Germans tend to refuse co-operation. Nor could it, in my view, usefully assume any powers to prevent reconcentration and "re-Nazification " or to control investment for which provision is made under Articles 18 and 19 of the Ruhr Agreement. These are functions which in the long run can best be exercised by the Schuman Treaty High Authority (prevention of re-concentration and control of investment) or by the Federal Government under a contractual arrangement with the Allied High Commission (prevention of re-Nazification). It will be recalled that we agreed to the establishment of the I.A.R. largely because we wished to obtain French agreement to the establishment of a German Federal Government; if the French, in view of the establishment of the Schuman Treaty High Authority, are willing to contemplate the abolition of the I.A.R., we may regard ourselves as honourably discharged from that bargain.

THE ALLIED HIGH COMMISSION'S POWERS OVER GERMAN COAL AND STEEL

4. The powers of the Allied High Commission are exercised through the Tripartite organisation of the Combined Coal and Steel Groups. By far their most important function is the deconcentration and reorganisation of the German coal, iron and steel industries under Allied High Commission law No. 27, The French have now formally confirmed that the Schuman Treaty is not intended to cover this process, and that ratification will not in any way affect the powers of the Allied High Commission to carry out its functions in this field. They have further confirmed that, even after the Schuman Treaty has been ratified and the High Authority has started to supervise the investment programmes of coal and steel enterprises within the "community," the Coal and Steel Groups will be able to exercise their powers of controlling the investment programmes of the German industries with a view to the protection of foreign interests and to the completion of the deconcentration programme. The most important functions of the High Commission in the control of the German coal and steel industries will thus be safeguarded even after the Schuman Treaty is ratified and begins to take effect.

5. The functions of the Coal and Steel Groups outside the sphere of reorganisation are in general of little importance. It may be mentioned that we have a continued interest in maintaining and increasing German coal production (which was at one time the primary task of the Coal Control Group). This function can safely be left to the "High Authority" to be set up under the Schuman Plan. The immediate effect of the Treaty may be to reduce the profits of the German coal companies, by imposing a levy on their output and by abolishing dual pricing for exports to other countries within the "community." In the matter of invest- ment, however, the High Authority can and probably will assist the German coal companies under Article 54 of the Treaty (see Appendix I) both by direct financial assistance and by guaranteeing loans raised from other sources. The net effect of this action should be to increase German coal production.

REMOVAL OF PRESENT LIMITATIONS ON STEEL PRODUCTION AND CAPACITY

6. The present position is that there is a nominal limitation on German crude steel production of 11.1 million tons per annum, but steel used or exported forth lifted as a temporary system after the New York meeting of Foreign the purposes of Western Defence is permitted outside this quota This control, Which was instituted

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Ministers ages pemb57950, and has been maintained in the aggreement 5817 Industrial Controls of March 1951, at the insistence of the French, is more nominal than real and is largely unworkable. German steel production has been fluctuating between annual rates of 13.3 and 12 million tons in the last six months. The controls on steel production and capacity in the Agreement on Industrial Controls are operated on a licensing system which permits additions and modernisations provided they do not substantially increase the capacity of the plant in question or of the industry as a whole. It must be recorded that the practical difficulties in operating these controls are bound to grow, as German co-operation becomes more reluctant under changing political conditions.

7. These controls were instituted for security purposes. The Chiefs of Staff agreed at a meeting on 12th February, 1951, that the security risk involved in waiving restrictions on steel-making capacity was acceptable. They added that there would be definite advantage if the lifting of restrictions were to result in an increase in the availability of steel for Western rearmament as a whole. Even in the absence of a German military contribution, German industry, with steel as its core, can be of substantial assistance to Western defence programmes and the prolongation of controls cannot fail to discourage the Germans from providing such assistance.

8. There are, moreover, strong political reasons for removing existing controls on production and capacity at an early date even apart from the Schuman Treaty. Under the policy, approved by the three Foreign Ministers in Brussels and now being worked out in detail, of placing upon a contractual basis all reserved powers now exercised by the High Commission except those which must be reserved for a Peace Treaty, there will be little prospect of retaining effective controls over German steel production or capacity. It is, moreover, our avowed intention to bring Western Germany fully into the community of Western nations as an equal partner without disabilities save those imposed by the absence of a formal Peace Treaty, the occupation of Germany in the interests of Western Defence and the maintenance of our position in Berlin. Apart from the fact that to stand against the removal of the existing controls on German steel production and capacity would expose us to the charge of trying to provoke German resistance against the Schuman Plan and thus of obstructing its realisation, it is very doubtful whether, in terms of our German policy, we can afford to stand out for long against Franco-American agreement to remove these controls.

9. Under the provisions of the Schuman Treaty, there would be no limitation on German steel production (except possibly in time of slump) but investment programmes involving the extension of capital plant would, under Article 54, be liable to scrutiny by the High Authority. Approved projects might receive direct or indirect financial assistance from the Authority. Projects which are not approved would be entirely dependent on " self-financing" from their own funds and would be unable to raise any form of unsecured loan. The French consider that, in the light of the High Authority's powers to procure and check information and to impose heavy fines on the firms concerned, it should be quite practicable to enforce control under Article 54. In answer to enquiries, the French would not admit that this Article would operate to check excessive expansion of the German steel industry. They would not-say more than that the High Authority would reach its decisions in the light of the interests of the "community" as a whole and that the Article was not conceived as restraining capacity in any country, although they admitted that a check envisaged on policies of nationalistic and autarkic expansion. It is, however, very unlikely, in view of French efforts in recent years to restrain German expansion, that the High Authority on which French interests would in effect be substantially represented, should not in fact operate as a check on indefinite German expansion. Indeed, over the long term, the High Authority is likely to provide the best means of control that will be available to us against such expansion.

10. Over the long term therefore the removal of the existing limitations on the German steel industry and the substitution of the machinery to be set up under the Schuman Treaty will probably be advantageous to us. It must, however, be admitted that some of the immediate consequences may be less palatable. An increase in German steel capacity will in the first place result in an increased con- sumption of ferrous scrap by the German steel industry. This, in turn, may further reduce the scrap available for export to the United Kingdom. I doubt whether this disadvantage is as grave as it may appear at first sight. It must be recognised that

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the supply of German scrap for export is diminishing rapidly quite apart from the Bagama Tifesty7 and in spite of the continuing pressure which has been brought to bear in Germany on the Federal Chancellor and German officials. It must further be recognised that, when the Schuman Treaty comes into effect, the supply of scrap as well as of coal and steel will be controlled by the High Authority, and we must assume that priority will be given to the needs of the "community. The French have made it plain that non-participant countries have no safeguard under the Treaty against cuts in coal exports from the "community" and the same will apply to scrap exports. Unless therefore we are prepared to oppose the whole conception of the Schuman Treaty (which I regard as impracticable and politically impossible) or to drive a bargain with participant Governments at a later stage about the supply of scrap to the United Kingdom (which is hypothetical), it will be a difficult to count on further supplies from Germany when the Treaty is ratified. Moreover, I am very doubtful whether, even if we succeeded in maintaining theoretically the existing limitation on German steel capacity, it would be possible to enforce this limitation in practice for much longer against German, French and American opposition.

11. In so far as our difficulties in obtaining scrap lead us, as I believe they may, into purchasing semi-finished steel in Germany in its stead, the removal of existing controls on steel production and capacity should operate to our advantage. It must, however, be recorded that there is no specific provision in the Schuman Treaty which ensures that the needs of countries outside the " community," even for purposes of Western defence, will be given any priority when under Article 59 a period of shortage is declared and the High Authority starts to allocate the coal and steel production of the "community." This may be held to nullify one of the advantages which we might hope to gain from lifting the existing restrictions. In general, however, it is my view that the disadvantages of acting in this sense are substantially outweighed by the political arguments which I have advanced in paragraph 8 above.

APPENDIX I

ARTICLE 54 OF THE SCHUMAN TREATY

The High Authority may facilitate the carrying out of investment programmes by granting loans to enterprises or by giving its guarantee to loans which they may obtain elsewhere...

With the concurrence of the Council acting by unanimous vote, the High Authority may assist by the same means in financing works and installations which contribute directly and principally to increase production, lower production costs or facilitate marketing of products subject to its jurisdiction.

In order to encourage a co-ordinated development of investments, the High Authority may, in accordance with the provisions of Article 48, require enterprises to submit individual programmes in advance, either by a special demand addressed to the enterprise concerned or by a decision defining the nature and the size of the programmes which must be submitted.

Within the framework of the general programmes described in Article 46, the High Authority may, after having given the interested parties an opportunity to present their views, issue an opinion on such programmes, accompanied by a justi- fication. It it obliged to issue such an opinion when so requested by an enterprise. The Hugh Authority shall notify the enterprise of its opinion and shall bring it to the attention of the Government concerned. The list of opinions shall be made public.

If the High Authority recognises that the financing of a programme or the operation of the installations which it entails will require subsidies, assistance, pro- tection or discrimination contrary to the present Treaty, the unfavourable opinion taken by virtue of this justification shall have the force of a decision as defined in Article 14, and shall have the effect of prohibiting the enterprise concerned from resort to resources other than its own funds to put such programme into effect.

The High Authority may impose fines not exceeding the sums unduly devoted gealisation of the programme in question on enterprises which violate the pro- visions of the above paragraph.

G.R.

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