Speeches, etc.

Margaret Thatcher

Interview for Wall Street Journal

Document type: Speeches, interviews, etc.
Venue: No.10 Downing Street
Source: Thatcher Archive: COI transcript
Journalist: Robert Keatley, Wall Street Journal
Editorial comments: 0930-1045. Robert Keatley’s words have been paraphrased for reason of intellectual property.
Importance ranking: Key
Word count: 9067
Themes: Agriculture, Civil liberties, Defence (general), Economic policy - theory and process, Industry, Monetary policy, Privatized & state industries, Trade, European Union (general), Economic, monetary & political union, European Union Single Market, Foreign policy - theory and process, Foreign policy (Asia), Foreign policy (Central & Eastern Europe), Foreign policy (USA), Foreign policy (USSR & successor states), Foreign policy (Western Europe - non-EU), Race, immigration, nationality, Transport
[end p1]

Robert Keatley, Wall Street Journal

Question paraphrased: Eastern Europe. Growing belief German unification inevitable and sooner not later. A good idea? Do you encourage this or suggest caution?

Prime Minister

I think you will find what I call the orthodox view contained in the Communiqué from Strasbourg, which recognises that Germany may want to reunify but also recognises that if that is so, that she must reunify bearing in mind all other commitments, against the background of resolving the division of Europe. That is for obvious reasons because otherwise it would reunify right across the division of Europe. [end p2]

And also against the background of the Helsinki Accord which thirty-five nations signed under which you will know there is a clause where we agreed not to violate one another's frontiers but if there were any changes to be made, they were to be made by agreement.

And so you will find that most of us are using that formula, recognising that Germany may want to reunify, recognising what we put in the NATO Communiqué year after year, but recognising also that she must have regard to other commitments otherwise it could be destabilising which would not help anyone at all.

So I am afraid it is a rather vague formula but its meaning I think is pretty clear, that it must take place in the background of the actual division of Europe and trying to get rid of that which of course means supporting Mr Gorbachev in all he is doing. And the Helsinki Accords, which are much later, 1975, the four-power arrangement on Berlin of course obviously is still there, that dates from the wartime period, the division of Europe is really post-war but 1975 is the latest Accord which we all freely entered into. So it is a range of commitments right across the post-war period.

Robert Keatley, Wall Street Journal

Question paraphrased: If East and West Germany agreed to unify within existing external frontiers, would Britain object? [end p3]

Prime Minister

Yes, of course there are problems and I think you have all written about them because the division of Europe is right across the German territory. But the division of Europe is not only a geographical, it has been an ideological division, and of course you will say that Eastern Europe wants to go to democracy. It is much easier to tear down than it is to build up a genuine democracy. Democracy is really about more than one person, one vote, even with a choice of parties.

For example, it is about a whole rule of law. You and I understand that, understand that it is that which is founded on certain fundamental human rights, that a government is just as much bound by a rule of law as is a citizen, that is what a rule of law is about. Its civilisation is about protection of human rights and minorities.

Now one of the most difficult things for communist countries, ex-communist countries, to build up is a genuine rule of law with impartial administration of justice binding the government. I do not think we realise what it has been like. They had nowhere, no person to whom they could go and complain if something was fundamentally wrong except the local communist party and at local level it was the communist party, at national level it was the communist party, it is a communism which recognised no authority beyond the state. [end p4]

Added to that you have the whole problem of creating a market economy on people who have had no responsibility. In Hungary they have had a little, they have got a little bit further with their small businesses. When I went to Hungary in 1984 you could have a small business and employ twelve people but you were still surrounded by permits and bureaucracy.

So to build a market economy is an enormous problem, particularly in the way in which they have run their economies. They have no figures as to what their inputs were, what their outputs were, no method of financial control, no method of a proper credit control through their banking system because their industries were state-owned and so they just handed out the money to pay them, no price, no cost.

Now it is an enormous job and that is why it is going to take really quite a long time because it is a whole attitudinal change.

I think the only other comment that I would make is this. There have been two kinds of change in Eastern Europe, one led from the top of the old communist regime like Mr Gorbachev who said: “This system really is not working”. I think we did not know the full economic extent to which it had collapsed quite, but I think he had no option but to say that it was not working, was not producing a sufficiency, let alone prosperity, and that they must change and that the cadre, the communist cadre must change. They must have more initiative, more responsibility, something more towards a different kind of economy and so he had the glasnost [end p5] and the perestroika, the one discussion, the other economic restructuring. I am sure he did it that way because he hoped that glasnost would produce the discussion which would produce the answer to the perestroika.

Now that is reconstruction and increasing freedom, as it were, from the top down. Of course when you do that all their grudges come out. When they have increasing freedom of speech and all the feelings and nationalities which have been suppressed for years, of course they come out. One always knew that the first five years would be extremely difficult.

You also have it from the top down in Hungary. It was the reforming of the communist party, Mr Grosz, Mr Pozsgay and Mr Nemeth, top down. From Poland it was unique in that there was Solidarity plus the churches, that was a kind of unique combination. And then Hungary top down. And the others came having seen what was happening in other countries and so it came a bottom up plus church in Germany. Much later in Czechoslovakia—people up—Czechoslovakia and Hungary should have I think a chance of getting on faster than the others because Czechoslovakia had a very successful economy until 1948. And then Romania, absolutely overwhelming. And Bulgaria, a combination.

So they are very different but to me the important thing is, which overrides anything else which I have tried to say, to get democracy throughout Eastern Europe and the Soviet Union, with a much greater move towards a market economy which I think you can get in Eastern Europe and I think that they will have to have it [end p6] in the Soviet Union otherwise they will not get the prosperity. And that is such a great prize that no country should be willing to jeopardise that.

So any country which wants to change, like reunification, has to do it taking account that background and of the great prize that we are all going for, which you must not assume will happen, you have constantly to work for it and go forward not jeopardising the larger vision to which we are working.

Every single thing that happens is part of a larger picture and you have to put the jigsaw piece in place of the picture.

Robert Keatley, Wall Street Journal

Question paraphrased: The two Germanys may not wait, unification might just happen and British attitude seems reluctant?

Prime Minister

The British attitude is precisely as I have put it down and also what we put down in Strasbourg. Now you will have seen that M. Delors, before the European Parliament, said that if East Germany wanted to become a member of the Community before others then that would be all right. There was no authority for that and that was made abundantly clear when it was raised again at the meeting of Foreign Ministers in Dublin. [end p7]

But you see no-one can join the Community unless they have a democracy in place and a rule of law and the greater part of their economy is a market economy.

Robert Keatley, Wall Street Journal

Question paraphrased: Would a reunified Germany one day join EC and NATO?

Prime Minister

I do not know, we are groping forward, you are asking questions which honestly we cannot answer at the moment. And it is because it could have such a destabilising effect that we are all of us saying that if it comes about it must come about at a rate which takes account of the other obligations and which gives us a time to work things out, otherwise that could destabilise everything.

And if I might say so, the person to whom that would be most bitterly unfair is Mr Gorbachev, without whom it could never have come about. So it depends upon whether you are prepared to put yourself before anything and anyone else or whether you are prepared, as I am sure Helmut Kohl would be, and Herr Genscher, to consider it in the wider context. Because it is only in the wider context that we will all be able to work for a stable world and a peaceful background. [end p8]

Robert Keatley, Wall Street Journal

Question paraphrased: Do you worry reunified Germany might be even more dominant economic power in Europe?

Prime Minister

Yes of course she would be, of course she would be.

Robert Keatley, Wall Street Journal

Question paraphrased: You have concern?

Prime Minister

Of course, yes, because it unbalances. Yes I think it would change the European Community if she were unified and if East Germany came in. But you see East Germany cannot come in until she is genuinely democratic and you will notice that Chancellor Kohl had very much a step-by-step approach.

Yes, Germany is already dominant. I watch with great interest the things that you say about Japan. Germany has a bigger proportion of trade surplus than Japan, 70 per cent of it is with the rest of Europe. So to add to that, yes she would be a dominant partner.

I think also some of the other countries in the Community have a certain feeling that she obviously would put so much into East Germany that there might not be as much to put elsewhere to other countries in Europe. And also some of the overseas territories, like the African ones, are saying: “Look, please remember our needs too”. [end p9]

But I do say this. Even Chancellor Kohl 's ten point speech, he was recognising a steady approach and that it has to be done within the context of the division of Europe. And of course we all agreed the Strasbourg communique.

I think the other thing which one might ask sometimes in view of the nature of central Europe is, we talk about self-determination, I cannot give you the answer to this question, but I know the answer is very important—What is the unit which is entitled to self-determination?

Robert Keatley, Wall Street Journal

Question paraphrased: That is next question.

Prime Minister

Well, I have told you the answer. Central Europe is full of minorities. It was the Helsinki Accord which said we do not violate one another's boundaries, we do not, and thirty-five nations signed that, we change them only by agreement. And this is what I am saying to you the whole time. You can only have that agreement against a background of stability and security, that is why your NATO is important because it has given stability and security.

So you are asking questions which we cannot wholly answer at the moment but which, as we take each decision, we hope to be able to keep that stability and security because otherwise the history of Europe, if it were ever to be repeated, is appalling. [end p10]

So I think we have a bounden duty to keep that. People say self-determination, and I do sometimes say: “What is the unit to which you say is entitled to self-determination?” Look at the Helsinki Accord and it is that we shall not violate one another's boundaries. So you would think that the unit is the existing borders.

Robert Keatley, Wall Street Journal

Question paraphrased: President Mitterrand very concerned about old nationalisms arising again with resulting instability.

Prime Minister

That is what I am saying, that is what we are talking about. I think all of us who are passionately interested in history and have re-read the history again from about 1850 onwards. Central Europe is full of minorities. Look, Yugoslavia itself is a whole state of several minorities. Romania had a part of Hungary, has about a third of the old Hungary. At the other end she had to give up half of Moldavia so you have got a quite extraordinary state.

You know that Chancellor Kohl has not formally agreed to the Oder-Neisse Line for Poland although I would have thought that Poland was covered by the Helsinki Accord, we do not violate one another's boundaries. [end p11]

Robert Keatley, Wall Street Journal

Question paraphrased: What can prevent such re-Balkanisation?

Prime Minister

We have to go forward by agreement. And that is why some people are very anxious to have a new CSCE, which is a new Helsinki meeting, this year. The old Helsinki meeting in 1975 took a very long time to be prepared, a very long time, and I am always hesitant about having a meeting unless it has been very well prepared. And if we are going to have one we have got to start to think about it now because you either confirm what you have got there, that you do not violate borders, that you cannot change except by agreement, and therefore there will be some things which by agreement you could change because you then have a look at the stabilising or destabilising factor.

But I think you are asking things which you cannot necessarily answer at the present time, particularly in a fast running situation.

Now you talk about a resurgence of nationalism. Nationalism has never died, never. It may have been suppressed sometimes but it never died, that is why you have great problems with the minorities, it has never died. It may have been suppressed by force but did any of you go to France's Bastille Day, her 200th bicentennial? Was anyone telling me that nationalism has died in France? Is anyone attempting to tell me that nationalism has died in Germany? What is reunification all about—one people, one [end p12] fatherland. The Italians are marvellous, they are Italians, they have great difficulty in getting themselves into one country because their tradition was the city state, they still have their loyalties to the city state. Spain—quite different—the Spanish again with a different history, quite a valuable history to the Community because of course the particular contact with Latin America, of which we had some. Portugal—it has a strong history.

The idea that just because you formed a Community or because you formed a Soviet empire that nationalism was dead, is I am afraid flying in the face of human nature. People naturally have an affinity to something which you can recognise, you have an affinity to your country, of course you do. And so you do in the United States. But do not think nationalism was dead and do not think that it is a bad thing that it is still alive because this is the difference between some of us.

I think that yes, I am not the least bit concerned that people are proud of their own country. I think it is every bit as honourable and far more successful in international terms to negotiate cooperation and partnership between people who recognised their identity and are really rather proud of it and are much more likely to uphold agreements when you are rather proud of your identity and know what you are doing, that you work together in parts which you can recognise. I think it is every bit as worthy an objective and it works better. [end p13]

So I do not fear that. To me it is a perfectly natural thing but so long as it does not preclude the alliances, without which there is no security, and the cooperation on an increasing scale between countries which is necessary because of the modern world we live in.

And the European Community of Twelve also has to negotiate with other countries through the GATT because it is world trade we are talking about. We hope to have free trade in our area, not to put a barrier round our area although some people would like to have it that way, but as an example to other countries that as we open up our trade so they open up theirs. And of course if we have any protectionism we could be hauled before the GATT too.

But do not think nationalism precludes the wider interests, it does not because people also recognise the wider interests.

Robert Keatley, Wall Street Journal

Question paraphrased: Many on continent think, perhaps wrongly, that Britain not searching for new ideas, the new architecture that James Baker talked about, going beyond EC and NATO.

Prime Minister

Let me say this to you. I think I was the first out there when I went out to the television, after Poland, after Hungary, when we got the uprising elsewhere and I simply said that we now have to work out a form of association between the Community and [end p14] each of these states. They are all different, we can either work out trading agreements or we can work out an association agreement which goes wider than trade because we shall always want to help in different ways, or agreements that we have now with the Community and with the United States also coming in which is also the three-way agreement, as you have now in the current stabilisation funds, and simply set down the architecture for the development of relations between the Community and between them which has now become the accepted one.

If I might say so, it was we who insisted on going ahead with the Common Market, that was what we joined the European Community for. But it was not before we got in, they were not going ahead, they got all their internal barriers up, and it took us a time to start it because the first thing we had to start on was a Common Agricultural Policy, which you also have great complaints about. So did we and we are altering it.

We did that, the finances were not in good shape. We got the budget into a reasonable shape and so that the Commission could not go over it to give more agricultural subsidies. And we started the Common Market and that is the integration of Europe, the trade integration of Europe. And we did the methods, the structural methods.

And if I might say so, the text for political cooperation, which became a Treaty, was ours. It had a rather famous origin which everyone knew about at the time, we worked it out completely because there was no political cooperation on overseas affairs [end p15] in what is an Economic Community. I consulted with Germany: “Would this be to your liking? If not we can change it before we draft it”. I consulted with France. Both agreed it would be a good thing and then I thought we will table it. The whole thing was tabled—our text—by Germany without any consultation with me.

So I find it rather difficult, it was a very difficult meeting we had after that. I am not telling you anything that was not published at the time. But we do think about the architecture, we do think about Central Europe, so does President Mitterrand.

Robert Keatley, Wall Street Journal

Question paraphrased: James Baker, and others, seem to think that EC should move further, faster to achieve economic and political unification. Have things changed in this area? Have your own ideas changed since your Bruges speech?

Prime Minister

You are talking about the architecture of Europe, will you go back and look at that speech? Who was first to say the European ideal is not the property of the Community? “Prague, Warsaw, Belgrade are just as much European cities as Berlin, Paris, London.” Quite prophetic was it not? [end p16]

What the Bruges speech was about was the kind of Europe we are searching for and of course it had to be made because the Commission is a kind of unique structure, none of it elected, with quite considerable powers and taking more and more powers unto itself which is the opposite of democracy.

And just as you have got Eastern Europe coming away from more and more centralised powers, it was very ironic to have a totally non-elected body taking more centralised powers and it has powers of initiation and was taking every opportunity to widen its power of influence.

So what I am after is the kind of Europe. You cannot compare Europe with the United States. Everyone went to the United States to get away from something and to achieve a freedom which they built. Heaven knows, it was difficult enough to combine the United States with the north and south and gradually to get it together. But you went there to be American. You positively went there.

Now we are where we are and we have whole areas where we speak English, whole areas where we speak German, whole areas where we speak French and are French, whole areas where we speak Spanish and are Spanish, whole areas where we speak Portuguese and are Portuguese, whole areas where we speak Italian and are Italian. We have not that history and you cannot impose on it something which people, believe you me, would not take. [end p17]

So yes, we do work more closely together and it is astonishing to me that since 1956 [sic], when the Treaty of Rome was signed, we have not yet got a Common Market. And that is what people regard as the integration of Europe and that was what really has alerted them that once you get the barriers to trade down there will be a much more powerful economic unit there, much more powerful. That is the real integration of Europe.

But to try to impose a political integration, history is against it. Again, look at what was imposed on Central Europe, and I do not think you can. Nor do I think it is necessarily a worthy objective.

Robert Keatley, Wall Street Journal

Question paraphrased: Lots of new ideas now in economic and political area, one of them an independent central bank in Europe to control money supplies and interest rates. You have opposed this in the past but could you advocate it now?

Prime Minister

Certainly not. It was discussed in our Parliament, no party would accept it. That is again giving up power. It is not only the interest rate, etc., and of course do not forget the central bank would be answerable to no-one. You have a different structure to yours. [end p18]

But also the Delors Report, again, was anxious that the Commission, this central body, should be able to set the taxation parameters. You realise what this is, this is a central body taking more powers away from democratic control. Now ours is the most ancient Parliament in Europe, by far. Its origin is to control the expenditure of the Executive by controlling the supply of money.

That is the essence of democratic control, there is no way we would give it up, nor is it necessary to give it up. The free market economy way to do that is the way which we have put in, by our paper, nor in fact do I believe in I must say absolute exchange rates, we tried that with [Bretton Woods?] but it cracked. You must always have a margin.

You have no need to go the way of a central bank out of democratic control, take your main budgetary paramaters out of democratic control. The irony of West Europe going to more central, non-elected decisions at the same time as East Europe is crying out for democracy is too absurd for words. But do not forget, we have got a socialist majority in the European Parliament at the moment—it should not be forgotten. [end p19]

Robert Keatley, Wall Street Journal

Question paraphrased: President of Bundesbank tried to deal with question of control?

Prime Minister

I know him well, I am a great fan and devotee. Let met tell you something about Karl Otto PöhlKarl Otto, that you will find he has said everything, at some time or other you will find he has said everything. Sometimes you see he said: “No, that this should come much more gradually” and then he has congratulated us on our paper, they will be concerned that if you get a central bank that the concentration on the value of your currency would be diluted because there will be others who might have other objectives. [end p20]

Now the Bundesbank and the German people, by history, by their history of hyper-inflation, suitcase money, their great fear, and it has stayed with them ever since the great inflation after the First World War is that they would get a return of inflation. And it is a great fear which is in their psyche, it is in their soul. And so they are absolutely rigid, the thing they must do is to keep down inflation. They do not need to be allied to anyone else to keep down inflation, they do it because that is their objective.

There are some other nations who have not got that strong thing. In our country our bitter experience was of unemployment, so it was in yours in the thirties because you know when we went back to the gold standard we all went back on the wrong rate and so on.

Now what Karl Otto Pöhl and the German people and the German Bundestag will be in fear of is that the purity of that doctrine would be diluted in the central bank so they are not all that mad keen on it. To counter-balance that they say: “Well, we are the strongest nation in Europe, we should be by both population and because of this colossal trade surplus that gives us a great deal of money to invest where we like”—the Japan phenomenon in Europe—“so we in fact should be able to influence it our way and to triumph.” So there are two opposite things being run at the same time. [end p21]

Karl Otto Pöhl wants us to join the Exchange Rate Mechanism and again I have said: “Yes, we will but I am not prepared to do it on what is called an uneven playing field these days”—we have these blessed playing fields everywhere!—“I am not prepared to do it except on the basis that we all observe the same rules.”

Now that is coming about. France has now abolished all foreign exchange control. Italy has taken the first step to doing that. The others, Spain, cannot do it yet. But I have said that we simply must have free movement of financial services and again on the same rules. You see we do not.

Do not think that everyone concerned is as concerned and as keen on free trade both in manufacturing, agriculture and services, as we are. We have not got free trade in agriculture but in 1992 when the green pound is going to go, unless the others, Germany does not want it to go but we want it to go and it has got to go.

But Germany, for example, has other constraints on the free movement of capital. If you look at the rules which govern her pension and insurance funds you will find that 95 percent of her investment has to be in securities denominated in deutschmarks, not even in ECU. I am the one who is accused of being non-communautaire, we deal in ECU, we have securities in ECU, but Germany will not even allow her people to hold securities in ECU.

But there are whole other differences in structures which you really must take into account. A large part of German industry is owned by the banks. That is totally different from the way our industry works, with a free stock exchange, and the way yours works with a free stock exchange. [end p22]

It gives us, and you have articles in your paper about the short-termism which sometimes that leads to, because your pension funds want results and not so much long-termism. Personally I think that the pension funds would do very well to consider their prospects in ten years time as well as their immediate prospects because their beneficiaries are interested in whether they are going to get good returns in ten years time. And I do not think that it should theoretically be a problem, it is the way they are working it out.

But you do not get that problem in Germany because the banks own a lot of the shares. You try to take over a small merchant bank in Germany from another. Will they deal with you? No, it is very difficult. You try to take over a company in Germany, you will not, the network will stop you. It is more difficult to take over a company in France than it is here but at least you can and the French find it at the moment much easier to take them over here because we are freer.

So what I am saying to you is that even when we have got some of the visibile rules all the same, there are frankly enormous different attitudinal and cultural changes which will still be effective, which one has to try to break down to get a true Common Market.

So if I might put it this way, it is I who am more concerned to have a true Common Market and a true Community than others. And we had this in the Merger Agreement. Germany wanted it both ways, that in the end she would have her national say. [end p23]

There are fortunately four Directives which are essential for the completion of the Common Market, other than those on industrial relations, tax, there are four things, we can go by majority and thank goodness we can because we were able to override Germany.

Let me give you another example—cabotage—our ports have been open to ships of other countries, they can pick up—huh, we cannot down your coast, you have got some pretty big restraints on trade and services—other European ships can pick up cabotage in our ports anywhere round our coastline and I said: “I am not going to go on doing this unless you are going to open up your coasts for our ships the world over, they should just be able to pick up something from Naples to bring it round to Rotterdam, that is the way they are going”.

No, we have not got that. Germany has been one of the most difficult countries in getting cabotage on lorries. Absurd that you have to go across with a full load and you cannot pick up on the way back.

Architecture—I am trying to get them to put the bricks in without them saying that they want all their own rules even if they flout the Community rules. And you will find that we are in the lead, we and Denmark, are in the lead when it comes to implementing the Directives. So it is about time that the people who criticised us actually learned the facts. [end p24]

But to try to impose a political union on a European people that do not want it, and let me assure you, some of them would just carry on the same way anyway, we should observe the rules, will not do.

The European ideal did not begin with the Community. The European ideal is not the property of the Community. We should never have had the European ideal had Europe been a monolithic, united, political unit, as was China, as was the Ottoman Empire, as has been the Soviet Empire.

It is very interesting, you have all ready Paul Kennedy 's Rise and Fall [of the Great Powers], parts of it we do not agree with, but he pointed out that Europe was never totally monolithic. There was always some place which had rather more freedom which people could move to, hence the Huguenots moved over to us, hence there was always some place in Europe where the ideas could flourish and bubble up and they did. It was not a monolithic Europe. We would not have had that great European ideal.

Robert Keatley, Wall Street Journal

Question paraphrased: Do you favour admitting new members to Community in relatively short-term?

Prime Minister

I think, and we actually did discuss this, but this was before the latest thing with Europe, we have discussed it, we actually discussed it in the Paris meeting called by President [end p25] Mitterrand and I think you will find in the press conference which he gave there that he said that at the moment we have so much on our hands, because if we get everything through for 1992 it would be the biggest change that Europe has ever known, where all our young people practise just as much, the qualifications are accepted from one country to another, the goods can flow freely, the services can flow freely, the financial services, it will be the biggest change the Community has ever completed since its beginning.

That is a big enough change on its own. Together with the amount of help we are going to have to give and must give to Eastern Europe, because any country which has come from communist government to a genuine democratic government, with all the support, with all the other things, democracy requires the political structures, the legal structures, the economic structures—it is a three legged stool, the stool collapses.

We must do our level best to make that succeed. And we really said we have got enough on our hands without entertaining new applications for the time being.

Let me put this proposition to you. Do not forget, the structure, the institutions of the Community, were built when it was intended for six on a German-French axis with Italy and the Benelux. The wider you go the slacker your centralisation must be, of course it must, that is freedom, otherwise you are going to a more centralised unit which just is absurd. [end p26]

You can have a big customs union, you have got a big customs union between Canada and the United States, you did not need a Commission, a central Commission and masses and masses of regulations.

Turkey wants to join, she is a big country. Austria wants to join, she is a small country. We have in the Community already one neutral country, which is Ireland, so we cannot discuss defence necessarily with Ireland there. But the bigger it gets then the looser the bonds.

Obviously you have the Common Market, must be there, we are looking very carefully at the Common Agricultural Policy, but I do not know whether any of you were reporting on the Toronto Economic Summit and Jim Baker was there in his different capacity. The biggest battle we had there, believe it or not, and it comes out when you draft the Communique, was in getting the other partners in the European Community there, that was Germany and France, to agree that we must go further on agricultural reform in the light of the GATT negotiations.

It took us nearly three hours to do that phrase in the Communique and it was a battle between Ron Reagan and myself on one side, yes we must because we have all got agricultural subsides, the United States has, the Common Market has, Japan has, we are ruining those countries who only have agriculture to export and we are for freer trade. So you would have to have a look at that again. [end p27]

This is clear, is it? You will put it in much briefer language but I just want you to understand that it is all worked on a sort of basis of the experience of history and the experience of politics, together with fundamental beliefs in politics. And what I really cannot stand is the language of free trade and the language of freedom and then the underlying taint of bureaucracy. The two have to go together. And I know you understand because you wrote a quite brilliant leader sometime ago, after the Bruges speech.

Robert Keatley, Wall Street Journal

Question paraphrased: Much thinking about Eastern Europe and future relations assumes Gorbachev and his policies will continue but that seems doubtful?

Prime Minister

I most earnestly hope so, I most earnestly hope so. If we get through with all these things, and it depends on us as well, you see a guy going in the right direction, taking the boldest path towards everything you have believed in, although I think his vision is really now much more limited, it is much more socialism with a human face because he has realised the enormity of what Mikhail Gorbachevhe is doing, but you get that far and you will want to go further. If we cannot visibly support him then we shall be cheating future generations. [end p28]

Robert Keatley, Wall Street Journal

Question paraphrased: How can we support him?

Prime Minister

Look, I have been doing my level best, I have supported him right from the beginning because I realised he was a totally different person. There is no point in giving enormous credits or anything like that. We are supporting him now but not if people are going to say: “Well, his future is in doubt”.

How are we supporting him? We are supporting him on the arms negotiations but only so that they keep their safety and stability and we keep our security and stability. I had hoped that we would all be in agreement about the fundamental structure of Europe so that it only gets changed by agreement, that is what I was saying to you earlier. Because if not, you put something else in issue which is really a bigger prize than any of us.

He, I think, recognised that when he had what virtually was tantamount to civil war between the Armenians and Azeris in Azerbaijan, that was something totally different from anything else he has had and …   . to put in the Armed Forces because all the innocent people were just suffering. And no-one, neither President Bush, nor myself, nor President Mitterrand has complained about that. We understood the necessity. [end p29]

That helps. He wants a Helsinki meeting and I have said to them that if there is going to be a new Helsinki meeting it must be prepared and so we will try to do that. But it really means that we do not, as I said before, we do not do changes that put one another in enormous difficulty which jeopardise the larger vision.

Now this to me, I am interested that over in the States someone is running a Man of the Century, it is interesting, whether it should be the discredited Lenin and Marx so that they would become an aberration of history, history going down the wrong turning, or whether it should be Mr. Gorbachev who realised that history had taken the wrong turning in the interest of human beings and had the courage to try to take the right turning.

The right turning that he is taking is the right turning that we believe in and we have just got to do everything we can to support the direction in which he is going and not to make life difficult for him in any way.

Therefore, any change we have to have has to be by agreement because otherwise you are forfeiting the whole democracy that future generations could have. And that matters.

Robert Keatley, Wall Street Journal

Question paraphrased: You want to hold back German enthusiasm for early reunification? [end p30]

Prime Minister

It is putting the larger vision to them. They still have to get democracy. And when we met in Paris, Chancellor Kohl was the first one to say: “We will not give main aid to East Germany until she gets democratic structures in place”, the same as we have not to Hungary. Poland was different, Poland had to have food, we had to get food aid into Poland but the main help had to wait until the IMF.

Now of course, for nationalism reasons which I understand, because I understand nationalism, she is pouring in help to East Germany but the rest of us are not except know-how help because it has to be the same.

But it is not surely a lot to ask of anyone who understands that peace, security, stability of themselves can only be achieved through our existing alliances negotiating with others internationally. East Germany has been under Nazism or communism since 1930, you are not going to go overnight to democratic structures and a freer market economy.

And so one says to them, and I think they are talking about transition periods openly, that means they recognise what I am saying, they put their name to the Strasbourg Communique, that means they recognised what we are saying. They are talking about transition to different structures, they recognise what we are saying.

But we must not cheat future generations of the prize that is within our grasp—no, correction—that is within our reach, that is within our reach, not yet within our grasp, that depends on what we do and depends on how other people react. [end p31]

Mr Gorbachev, as you know, is a most powerful personality, I think he has the most amount of political skill and I think if anyone wishes to challenge him then look around and they must think well none of the problems will go away, you cannot put that stopper back into that bottle, not to that extent.

Robert Keatley, Wall Street Journal

Question paraphrased: If unfortunately Gorbachev went, do you think his successor would be more defensive, hostile, suspicious, as so often in the past?

Prime Minister

The only reason for a change would be a government that wanted to be more repressive, in other words a government that flouted everything that we believe in and have been trying to achieve. It is in the interests of everyone who believes in democracy, everyone who believes in human rights, that Mr Gorbachev continues in power, everyone who believes in freedom of speech and in a freer economy.

Robert Keatley, Wall Street Journal

Question paraphrased: You would help Gorbachev by avoiding any foreign policy shocks that might cause him internal troubles? [end p32]

Prime Minister

Look, they signed the Helsinki Agreement. Any change in borders really has to be by agreement. If you can get everything else right, you would not naturally withhold agreement because we have been saying that peaceful reunification of Germany will take place in the context of the larger scene, without going into the full details. If you look back, it is even in the latest NATO Communique, there are two parts of it, the comprehensive concept and the political part.

I think, and I must say this, it was a very good proposal of Jim Baker to say that NATO must be more powerful politically because it is still a struggle to get the unfree world free which means that you still must keep a strong political entity to the free world and the strongest political entity there is NATO. Now that tends to be a military entity but it is also a political one because Mitterrand is not in the military thing.

And so you must not look at the free world as the centre of Europe, the Atlantic Basin is the centre of the free world and so I think that that was very, very important.

No, my struggle on Germany is to get anything that they wish to happen happening in agreement and in a way which does not deliberately take it out of your neighbour, does not deliberately harm the chances of ones neighbours coming towards greater freedom. [end p33]

Robert Keatley, Wall Street Journal

Question paraphrased: On productivity and competitiveness in Britain, we all know your economic reforms but Britain's share of world markets in many industrial sectors has fallen well behind France, Germany, even Italy. Why? What will fix that?

Prime Minister

I do not think you will find that it so with Italy.

Robert Keatley, Wall Street Journal

Question paraphrased: I'm talking about productivity.

Prime Minister

Per person, yes, with France we actually touched her in 1986, our unit labour costs were going down faster than theirs. At the moment they are not. Now it is very interesting, industry will say to me that there are whole parts of industry where they are highly competitive, and there are, the chemical and pharmaceutical industry is just such. If you take, as a whole, then certainly on cars we are not as competitive under the same category as they are in Germany. When our people go to work in Germany they say that they are every bit as equal in productivity.

The car industry, if I might put it this way, has been the cause of a lot of our problems because of the great grip of the unions. It is coming up much faster now but is still not up to the productivity, that is the big one. [end p34]

Our steel is up to the productivity of Europe, our chemicals, it is cars and engineering.

Robert Keatley, Wall Street Journal

Question paraphrased: Some areas quite good but overall picture not good?

Prime Minister

No, on productivity for six years we were coming up faster, much faster. This year we are not and our unit labour costs, I say this year, this year's figures related to last year, our unit labour costs which of course take into account your productivity as well, we actually are 6 per cent up. It was a bad year last year because we were going ahead so fast that industry did not have to take so much trouble to stay competitive. It will have to this year, it knows it. So there has got a bit of slack in.

In the United States your unit labour costs were only up by 2 per cent. Japan is down by 1 per cent. So you are right. Last year the growth was so fast that the wages went ahead of productivity, you are quite right. The previous year, in 1986, on productivity and jolly nearly on output per head we were equal to France.

The car industry, which went totally wrong, very ironic because we had some marvellous cars, marvellously designed cars, is now coming back up. Our output went down to 900,000 or below that. It is back up, it is well up over 1 million, it will be 1.5 million [end p35] within four years, it should go up after that.

The collapse of the British car industry, because of course we had to nurse Rover, British Leyland, along with tax-payers' money which was very bad for it. You never get efficient if you can tap into the tax-payer's pocket, never.

Robert Keatley, Wall Street Journal

Question paraphrased: What needed now?

Prime Minister

They are going to have a tougher year and they know that they have let a bit of slack into their competitiveness and they will have to pull it up. Do you know when your industry got really competitive? When it had to. First the Japanese competition, then it actually got competitive and ours started to get competitive when we had a very high exchange rate, they have to.

Robert Keatley, Wall Street Journal

Question paraphrased: So industry will now be more competitive?

Prime Minister

The real thing now is that it is going to be a tougher year. The interest rate takes, as you know, quite a long time to bite. I think your economists would say, or those of you who are economists would say that an interest rate would take between a year and eighteen months to bite. [end p36]

We have been up at 14 per cent for over a year and 15 per cent for six months, it is starting to bite, that means that they have got to look at any slack that has got built in and it will get better, yes.

Robert Keatley, Wall Street Journal

Question paraphrased: That will bring improved competitiveness generally?

Prime Minister

Yes. Let me say this, we have only 5.8 per cent unemployment so we have got our productivity up and our competitiveness is much better. I say to industry never come to me and want a lower exchange rate, your competitiveness must consist of your efficiency and nothing else because if you want a lower exchange rate the first thing that is going to happen, we have to import a lot in this country, most of our raw materials, quite a lot of semi-fabricated goods. In the next year all your raw material costs and semi-fabricated costs come up so your only claim to efficiency and competitiveness is your own efficiency, some you will find extremely good, some slack.

I have been talking about it in the House of Commons in the last two or three weeks and saying: “You set it but you take the consequence of your own action”. But at the moment France has nearly 10 per cent unemployment. This, I think, has been the price that she has paid for belonging to the Exchange Rate Mechanism, she got inflation down. [end p37]

Our trade cycle, as it happens, is not coincident with the rest of Europe. We started to go faster in 1981 and we are slowing down faster, so that might be why our unit wage costs went last year and I have to come back this year quite sharply. [end p38]

You are getting the general background are you? Our productivity and growth virtually exceeded yours for a time. Mind you, it needed to because it was from a low base. But it will come back all right. We had to put the interest rate up and it has to stay up until inflation is coming down. In other words we are very orthodox.

Robert Keatley, Wall Street Journal

Question paraphrased: Hong Kong. British policy there and elsewhere has conceded too much to “a rather nasty Chinese Government” on promotion of democracy in Hong Kong. Why? [end p39]

Prime Minister

Look, you have written some very cruel things about Hong Kong, some of which were totally unjustified, for this simple reason, ninety-five per cent of that land is on a lease. We could not defend the 5 per cent, as a matter of fact we could not defend the 100 per cent because all our water and food comes from China.

Are you suggesting in your paper that I have any option, as an international treaty, but to surrender that lease to China in 1997?

Robert Keatley, Wall Street Journal

Question paraphrased: Not my question.

Prime Minister

No, it is not the question you are asking now but you have been writing pretty harsh things, not taking into account the international law or international treaties. We have no option but to return that territory to China in 1997 and the situation that faced me was either I could negotiate with China with my 5 per cent of freehold, which they knew full well I could not maintain or defend. It is not like Grenada, in the middle of an ocean, it is attached to the mainland. I hope no-one is suggesting that I rat on my treaties—I do not. [end p40]

So Hong Kong had to go back to China and I had to try to negotiate the freehold with China. First, British administration had been so successful with the Chinese character, would they, as the landlord who has the freehold, give us another lease or give us a management contract for administration, that would be their decision. They would not.

So we said: “Look, Hong Kong is a great asset to you, we have a duty to it because it is ours until the lease expires and frankly, if it had not been for that lease, Hong Kong would have been Singapore and independent by now”.

But that is what you have got to understand and what is at rock bottom. We have a duty until 1997 and we have our duty to do our level best for the people of Hong Kong so that it goes on with its way of life after 1997. And they take the way of life, the Chinese, mainly as the economy and of course the rule of law, which is different, and we try also to increase the democracy.

But what we have been trying to do, and we got quite a good agreement, which said that the way of life, the economic way of life, should go on for fifty years after 1997 and for three years we should even have a Liaison Committee afterwards.

Then of course Tiananmen Square, because we negotiated with Deng Xiaoping and Zhao Ziyang, and of course that alters the feelings and the views. Now we are negotiating because under the agreement China has the right to do the Basic Law for after 1997 and for all her economic zones and we are doing as much as we can [end p41] to influence it with the cards we have to play and the best interests of the people of Hong Kong is that Hong Kong stays prosperous right up to 1997 so we have got to keep confidence going and that is the best interest for China.

So to keep confidence going we have to try to satisfy the Hong Kong people that we are acting in their interests and we have to satisfy the international business community that it all will not suddenly finish in 1997, that you will get continuity through 1997. That is not easy. We would like it to go straight through 1997.

So the equation we have to look at is: What is the best chance? Shall we take the best chance of getting through 1997 on a rising number of people in democracy or shall we say it is our duty to take the advice of what the Hong Kong people want now, regardless of the fact that that might have quite a sharp change in 1997?

What is in the best interests of the people of Hong Kong? We have not decided because it is not an easy decision to come to, it really is not. And, please do not put this down, because we cannot, we do not know what will happen in China between now and 1997. That makes it more difficult. If we go and get everything that we would like to do, will it still be there and not come down with the shutters, hard, or will they have got freer during that time? It is a very difficult hand to play and I say this to you, not for any attribution, it is like playing a game of poker—you do not know. [end p42]

And I do also say that if things go wrong you will blame us because in the end the decision is ours but we will take it, we are taking it. But you see we had no option but to hand over in 1997.

Now do you see how this ties together? We would like it to be a steady, almost unseen change in 1997. We have to keep the confidence, financial confidence there until 1997. Now we knew that quite a lot of important people were leaving, critical people, some of the young professionals, some of the entrepreneurs, they are going to Vancouver, they are taking Australian passports elsewhere, and it is quite clear to us that unless the critical people to the administration of Hong Kong, which are those who serve us—the police, the security, the administration—they are very able, there is a market for able people the world over, they were not going to stay unless we said: “Right, we give you critical people, you are loyal to us, we will be loyal to you, British passports”. That is on the admin side and some of the great services are flying in and flying out and so on and then on some of the big companies and the trade and industry to stay there.

That comes to about 50,000 passports and then their families, that is how we calculated it. Loyalty to the people who are crucial to us to keep administration going, loyalty to the five million who will have to stay there, that we keep their prosperity going. [end p43]

Now will you please, therefore, take a different view on this termination of treaty in 1997 and we have to do our level best for all of them. And the view we had taken, I say had and still take, it is still in the interests of China to observe that agreement, to show the world that they can administer a free economy and keep it prosperous.

But it is not easy and it is jolly tough when you have a lot of criticism from people who do not have to do it.

Robert Keatley, Wall Street Journal

Question paraphrased: Chinese motive now perhaps to even the score with Hong Kong people who supported Tiananmen dissidents, raised money for them, got politically active. That shifted Chinese attitude?

Prime Minister

We spent two years negotiating an agreement and we know that negotiations are long—two years. It is in China's interest that when the lease terminates, Hong Kong is prosperous, it really is, and that the spirit of Hong Kong and the confidence in Hong Kong is such that it will keep it prosperous. Now that is the card we have to play with them. These people have been used to a different way of life. If you want the prosperity, you have got to keep their spirit up. [end p44]

Then you see the fact is that we think immediately of the people whom we govern because we have no authority normally except from the ballot box.

But please, we are still negotiating, we continue to negotiate, and we would like the Hong Kong people to go steadily towards far greater democracy and faster than the Chinese would wish it to happen and coming up to the right structures in the end. And the people of Hong Kong will say: “But we have the right of administration in 1997” and they are absolutely right and it is whether you consider, and the whole point of negotiating was to consider them after 1997 and to try to get agreements which would be seen in the eyes of the world and registered in the eyes of the world. And so China has to stand in the court of the world to see whether she keeps her agreements.

Tiananmen Square was catastrophic, was devastating to all of us and that was just an extra problem that we have. But please look at it against the background that we have to keep our treaties. And again, you must not put it, but Hong Kong is indefensible, you only have to turn off the water and the food supply.