25 October 1938
1. On 4th October, the Commonwealth Government was informed by the British Government that the Italian Government had decided to withdraw 10,000 troops from Spain on its own initiative and without reference to the withdrawal of foreign volunteers by the Barcelona Government, and that the Italian Government had in these circumstances proposed to the British Government that the Anglo- Italian Agreement should be brought into force at once. The Commonwealth Government was informed in a subsequent cable  that the Italian Government had stated that if its present proposals were accepted no further Italian troops would be sent to Spain and that it was quite probable that the remainder of the Italian troops would soon be withdrawn. It also appears from this telegram that the British Government has informed the Italian Government that it could take no immediate action in regard to the matter, but if the withdrawal of Italian troops now contemplated could be effected, the Italian Government's proposal would be brought before Cabinet at the first opportunity and, if Cabinet agreed, would be laid before Parliament immediately on its reassembly when the matter would become one of confidence in the Government.
2. It will be recalled that the Anglo-Italian Agreement is to come into force on a date to be determined by agreement between the two Governments, and in this respect the British Government regards the settlement of the Spanish question 'as a pre-requisite of the entry into force of the agreement'.
During the past few months the Italian Government has repeatedly urged that its acceptance of the British plan for the withdrawal of foreign volunteers is, in effect, a settlement of the Spanish situation, and that the Anglo-Italian Agreement should accordingly be put into immediate effect. The British Government has, however, maintained that the settlement of the Spanish question must be one which would eliminate this matter as a source of international friction, and that a settlement could only be achieved by:-
(a) carrying out the plan of the Non-Intervention Committee;
(b) a unilateral withdrawal of Italian troops from Spain;
(c) the conclusion of an armistice.
3. The non-intervention plan has not yet been put into effect. It has been accepted by the Spanish Government, but General Franco , after delaying for weeks in his reply, said that the plan would only be acceptable if the Non-Intervention Committee were first prepared to grant belligerent rights to his Government.
In the meantime, the Spanish Government raised the question of the withdrawal of foreign volunteers from Spain at the League Assembly meeting in September, and agreed to the supervision by a League International Commission of the withdrawal of volunteers from Republican Spain.
4. The intimation by the Italian Government to withdraw a large part of its forces from Spain, and the reiteration of declaration that it has no territorial or economic ambitions in Spain, indicate that it genuinely desires the implementation of the Anglo-Italian Agreement, 5. At the same time, it must not be overlooked that the continuous drain on Italian resources of this unprofitable Spanish adventure, frustrated hopes, growing opposition on the part of General Franco's adherents, and the end of the war apparently as far off as ever, may have considerably influenced Signor Mussolini in his decision. A statement in the last Foreign Office despatch from Burgos  is significant: 'Spanish and Italian relations have steadily gone from bad to worse. No amount of propaganda or mellifluous phrasing can hide the fact that the two allies are heartily tired of one another and look forward to the day when their partnership in arms will be dissolved.' 6. The real reason for the recent advance by Italy probably lies in the strengthened position of Germany, and the correspondingly weakened position of Italy. Italy now has a common frontier with Germany, which increases and emphasises her vulnerability; she fears the possibility of Germany endeavouring to obtain an outlet to the Mediterranean for her Austrian territory; she looks askance at the augmentation of German military and economic power by the Anschluss, the acquisition of the Sudeten areas in Czechoslovakia and the gravitation into the German camp of Hungary and Poland.
Reports from the British Embassy, Rome, during the recent crisis, led to the belief that despite Signor Mussolini's public declaration on the solidarity of the Berlin-Rome axis, Italy was not prepared automatically to go to war on the side of Germany.
Various reports received by the Commonwealth Government indicate that the economic and financial position of Italy, severely strained by war, shows a continued deterioration.
The acquisition of Abyssinia has made her even more vulnerable militarily than before. Like Great Britain and France she has a strong incentive for the maintenance of a free Mediterranean, Suez Canal and Red Sea by agreement, and it is this that, the Anglo- Italian Agreement is designed mainly to effect.
7. The views of the Commonwealth Government on the question of Anglo-Italian friendship were set out in two telegrams as follows:-
(i) Telegram to the Secretary of State for Dominion Affairs-dated 2nd February, 1938-
'My colleagues and I have read with great interest your telegram of 27th January, 1938, with regard to international affairs. We agree that the present situation calls for action and we feel that the re-opening of conversations with Italy is of the utmost importance. I should be glad if you would continue to keep me fully advised as to the situation.' 
(ii) Telegram to the Hon. Sir Earle Page, London: from the Hon. J.
A. Lyons-dated 6th July, 1938:
'Information recently received from despatches and cablegrams indicates a deterioration in Anglo-Italian relations which is causing grave concern to the Commonwealth Government. We feel that implementation of Anglo-Italian Agreement is of paramount importance in the present international situation, and we would like you to urge the United Kingdom Government that everything should be done to bring it into effect at earliest possible moment especially as it appears to us that slow progress in negotiations over Sudeten question may lead at any moment to a crisis. 
8. The Prime Minister on the 21St October received a personal telegram from Mr Bruce stating that Mr Chamberlain and Lord Halifax were in favour of the application of the Agreement, and that he thought it desirable for the Commonwealth Government to indicate as soon as possible that it would welcome an early application of the Agreement (See Annex 'A'). 
The views of the British Ambassador at Rome, dated 4th October, are also attached (See Annex C). 
Lord Perth states that if we fail to bring the Agreement into force, 'consequently he (Mussolini) will conclude a definite military alliance with Germany even though this is against his innermost wish and would be unpopular in the country.' 9. It is a matter for decision whether the Commonwealth Government, considers it advisable again to inform the British Government of its views.
10. Should the Anglo-Italian Agreement be put into effect this would involve the de jure recognition by Great Britain of the Italian conquest of Abyssinia, and it would then presumably be necessary for the Commonwealth Government to indicate its attitude in regard to this question. A copy of a submission dated 18th May, 1938, dealing with this matter is attached (Annex 'B').