Economic Summit to Test Reagan’s Strength Abroad

For President Reagan, who leaves Wednesday for next week’s annual economic summit in Venice, his 10-day European trip offers a welcome opportunity to demonstrate that for all his political troubles at home he can still dominate the international political scene.

“Any time you have an international event of that sort, it tends to dominate the news for a while,” White House Chief of Staff Howard H. Baker Jr. said in an interview. “The President handles himself well in that setting, and I’m sure he will this time.”

Along with his personal skill and his inherent strength as head of the most powerful nation in the Western alliance, Reagan’s hand will be strengthened by the fact that several of his counterparts are struggling with serious problems of their own or--in the case of Italy--have fallen into political limbo.

Support for Gulf Policy

Nonetheless, Reagan will need all the clout that he can muster for this year’s summit. On his agenda, overshadowing even the thorny issue of the U.S. international trade deficit, will be efforts to develop support for his Persian Gulf policy and build a consensus behind his negotiations with the Soviet Union on eliminating medium-range and short-range nuclear missiles from Europe.

And it is far from clear that Reagan, his image badly tarnished at home and abroad by the Iran- contra affair, can play the same dominant role at this summit that he generally did at the previous six that he attended.

The Iran-contra affair, according to a recent report by the London-based International Institute for Strategic Studies, “has virtually assured that the most powerful nation in the Western alliance will face (future challenges) with its ability to conduct a forceful foreign policy badly compromised.”

At last year’s summit in Tokyo, where terrorism and the Soviet nuclear disaster at Chernobyl overshadowed economic issues, Reagan so thoroughly controlled the agenda that he could claim credit for initiating every major declaration issued by the summit leaders, including a tough stand on international terrorism.

Warship Plan Draws Fire

Within two weeks of that declaration, however, the United States made another in a series of secret arms sales to Iran in an effort to secure the release of hostages in Lebanon. The subsequent disclosure of those sales has ballooned into Reagan’s gravest political crisis at home and may damage his credibility among his fellow heads of government in Venice.

Reagan, under fire at home from Republicans as well as Democrats for his plan to use U.S. warships and planes as a shield for Kuwaiti tankers in the Persian Gulf, says he will put the issue on the agenda for discussion at the summit of seven industrialized nations. Senate leaders have warned that the policy risks involving the United States in the Iran-Iraq War. Republican congressional leaders are urging the President to insist that the allies share the burden of keeping the Persian Gulf open and protecting the tankers.

Britain already has three warships in the gulf and France has one. They and other European allies have not closed the door to increasing the European presence there. Japan is constitutionally prohibited from maintaining an oceangoing navy.

On the crucial issue of nuclear arms reduction, the President, hoping to finally reach an agreement with the Soviets, will press for a consensus among North Atlantic Treaty Organization allies in support of a U.S. response to the Soviet proposal to eliminate mid-range and short-range missiles in Europe, White House aides say.

“The Administration is determined to make this a real consultation and not simply a formal conversation,” Baker said. And if a consensus develops, he said, the issue will take up much of the leaders’ discussion time during formal dinners and other meals--when political issues, rather than economic matters, generally are discussed.

The summit will include five other NATO countries--Britain, France, Italy, West Germany and Canada--along with Japan, though Italy is currently under a caretaker government and will not have a new leader until elections, which will be held after the summit.

Will Travel to Rome

After flying to Venice on Wednesday, Reagan will remain there the next two days and travel to Rome on Saturday for a meeting with Pope John Paul II. The summit is scheduled for the following Monday through Wednesday, and Reagan plans to remain in Venice the following day before returning to Washington on Friday, June 12.

In contrast to last year’s summit in Tokyo, the Reagan Administration has tried hard to play down any expectations of a further breakthrough in its efforts to enhance economic cooperation among the leading industrial democracies. As a result, few economists expect any developments from the summit that would dramatically affect the value of the U.S. dollar in foreign currency markets.

Although Baker said the Administration hopes for some progress in deciding how to coordinate the summit countries’ approach to such economic issues as trade barriers and the Third World debt, he acknowledged that because of Italy’s uncertain political situation and the fact that most of the chiefs of state are either lame ducks or preoccupied with reelection campaigns, it is unlikely there will be “major movement in many fields.”

Reagan’s European visit, which also includes a trip to Berlin after the summit for the 750th anniversary of the city’s founding, promises to offer him a welcome respite from Washington’s preoccupation with the Iran-contra scandal.

One problem Reagan will still face is that his major ally among the summit leaders, British Prime Minister Margaret Thatcher, is expected to spend only one day at the Venice meeting because she is seeking election to a third term on June 11, one day after the conference ends. Last year in Tokyo, Reagan teamed with Thatcher to persuade several reluctant allied leaders to go along with a declaration branding Libya as a sponsor of international terrorism.

Authority Diminished

Moreover, the authority of the Japanese and French leaders to make binding commitments is considerably diminished by their political circumstances.

Prime Minister Yasuhiro Nakasone is expected to leave office at the end of October after having suffered a series of recent defeats in the Japanese Parliament. The dual French leadership of President Francois Mitterrand, a Socialist, and Premier Jacques Chirac, a conservative, is preparing for next year’s election, and Baker said that when they go to Venice they “aren’t going to stay for the whole time.”

In planning for the Venice summit, the Reagan Administration is focusing its economic agenda on only a few narrow topics, counting on little more than token support from the other leaders for tough negotiations aimed at reducing farm subsidies, another pledge to work toward currency stability, and support for allowing banks to work out their own “menu” of options for dealing with troubled loans from Third World debtor nations.

“I hope and expect that we may make some progress on removing trade barriers on agricultural products,” Baker said during a breakfast session with The Times’ Washington Bureau. “That’s been the subject of extensive conversation with those preparing for the summit, and I think there’s some reason to think that there will be some progress. The Common Market, however, has very strong views on this subject, as does the United States, so it won’t be easy progress.”

Meanwhile, as Reagan prepares to leave for the summit, many analysts are convinced that the instability of financial markets and world economic uncertainties are adding to the pressure on Reagan to reappoint Paul A. Volcker as chairman of the Federal Reserve Board for a third four-year term.

Praise for Volcker

Volcker’s term expires in August, but some analysts believe Reagan needs to move immediately to reassure the financial markets. In recent weeks, top Administration officials have gone out of their way to praise Volcker and some have left the impression that he can have the job if he wants it.

And when rumors swirled through Wall Street last Thursday that Volcker would step down at the end of his term, causing bond prices to fall sharply and the dollar to drop, the White House and the Fed hurried to deny the stories.

But White House officials insist that they are in no hurry to clarify Volcker’s status before the summit to reassure the other leaders that he will stay in charge of monetary policy.

“I know of no plans to make a Fed announcement prior to or at the summit,” Baker said. Nonetheless, Volcker is regarded overseas as a rock of stability among U.S. policy makers. And the expressions of concern over the direction of American policy that Reagan will hear from his fellow leaders in Venice are likely to intensify the pressure for Volcker’s reappointment.

Times staff writer Tom Redburn contributed to this story.