My telegram of 7th August Circular B. No. 63  Confidential.
Following for Prime Minister:-
Conversations with Italian Government resulting from the Prime Minister's 3 exchange of letters with Signor Mussolini which it was hoped to start in September last were inevitably postponed owing to various reasons. The principal reason was that the outbreak of submarine piracy in the Mediterranean and the nature of Mussolini's messages to Franco after the fall of Bilbao created an atmosphere at the Assembly of the League in September which made it impossible to proceed with the conversations at the time originally intended. Proposals to initiate conversations on a restricted basis, specifically excluding all questions connected with Abyssinia, were made in Rome by His Majesty's Ambassador  on 3rd October, but elicited no official response. The Italian propaganda meanwhile against Great Britain continued to increase intensely, and on 2nd December the Secretary of State for Foreign Affairs  told the Italian Ambassador  that, unless this propaganda against ourselves and the French ceased, it would be impossible to create the atmosphere which was necessary for these conversations. This elicited a written reply from the Italian Charge d'Affaires  on 23rd December stating that the Italian Government felt that the problem of Anglo-Italian relations should be approached and solved in its entirety and not partially, and that all subjects should be discussed including that of Italian sovereignty over Abyssinia. Whereas at the time of the Mediterranean agreement of January 1937, the Italian Government probably expected that this question of recognition would be solved in the natural course of events [outside and apart from Anglo-Italian conversations], they evidently lost hope when they did not see their expectations fulfilled at the September meeting of the League Assembly, with the result that we are now faced with the condition that it should form an integral part of any Anglo- Italian conversations.
Meanwhile the international situation has become more and more acute. The Italian Government has left the League of Nations and the Rome-Berlin Axis has been strengthened to an extent which would have appeared impossible a year ago, while an understanding between Germany, Italy and Japan is rapidly developing.
Further the technical position as to recognition of the Italian conquest of Abyssinia is becoming more and more complicated as time goes on. Austria, Hungary, Switzerland and Germany, have recognised the Italian conquest by formal announcement.
Yugoslavia, [the Yemen], the Holy See, Japan, Albania, Chile, Guatemala, Paraguay, Honduras, Ecuador, Panama and Nicaragua have signed documents such as credentials of their representatives in Italy in which the King of Italy is described as Emperor of Ethiopia. Such action in the opinion of the Italian Government amounts to recognition of Italian sovereignty in Ethiopia and His Majesty's Government in the United Kingdom are advised that this opinion is legally correct. Similar credentials will be presented shortly by the new Roumanian and possibly by [an] Irish Ministers [to the Quirinal]. Poland has announced its intention to issue similar credentials  [and the] Latvian Foreign Minister has this month in the course of a striking address  toasted 'His Majesty the King of Italy and Emperor of Abyssinia'. Other Governments, including certain signatories of the Oslo Convention (the Netherlands, Belgium, Sweden and Finland) are desirous of regularising a situation of fact which failing such recognition of Italian sovereignty, is merely rendering their relations with the Italian Government more and more difficult.
In these circumstances we have been considering whether time has not come for us to re-open conversations  [with the Italian Government with a view to a general settlement]. On the one hand as was indicated in my telegram under reference and has since been made clear in writing on December 23rd by Italian Embassy in London (see paragraph (1)), it is now certain that the Italian Government require that recognition of Italian position in Ethiopia shall form one of the subjects to be discussed in any Anglo-Italian conversations and we must therefore be prepared to grant such recognition if any general settlement is to be reached.
On the other hand, we only contemplate that recognition should be accorded at the end of conversations with Italy if it appeared that the result of such conversations would be a material advance towards world appeasement in one of the world's danger spots. We should hope that contributions from Italy would include cessation of despatch of large numbers of Italian troops to Libya, of fortification of various islands in the Mediterranean and of constant stirring up of mischief in the Near East by propaganda against this country and France. We should hope also that a general settlement would assist in the problem of the withdrawal of Italians from the Spanish struggle. We should also want to settle other matters in which Italy and the United Kingdom would be alone concerned, such as Abyssinian frontier questions and mutual interests in Arabia and the Red Sea. It is possible that the Italian Government might be prepared to consider an understanding on these lines, and it seems to us that in the present critical International situation, aggravated as it is by the conflict in the Far East, we should be incurring a heavy responsibility in not making an effort to come to terms with Italy.
We are also now considering how best we can follow up in the near future the conversations which Lord Halifax  held in November with various members of the German Government, but that is a separate matter on which I shall telegraph later.
It is proposed that the Secretary of State for Foreign Affairs should take advantage of this week's meeting of the League Council to discuss position tentatively with French Foreign Minister  on above lines. It is not thought desirable that questions should be raised at the forthcoming Council but in the view of His Majesty's Government in the United Kingdom it would of course be right that at an appropriate stage the League should be brought into the matter. The preliminary conversations with the Italian Government would, however, as indicated have to cover a considerable number of very difficult questions and discussion of these would inevitably take a good deal of time.
It should, perhaps, be added that as regards the possible effects of the recognition of Ethiopia on the question of Manchoukuo there seems no reason to expect any serious attempt in any quarter to have the latter question raised at Geneva. Japan is not showing any eagerness to seek recognition [for Manchoukuo] from other countries except from China: it is understood to be one of Japan's peace desiderata and if China were eventually to recognise, the objection to recognition hitherto felt by members of the League would presumably have to be reconsidered.
Above will show you the way in which our minds are at present working. We shall telegraph you again as soon as a decision is reached as to starting conversations with Italy. In the meantime if you should have any comments to make on the above, we shall be grateful for them.