My telegram of 7th August Circular B. No. 63 [2] 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 [4]
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 [5] told the Italian Ambassador [6] 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 [7] 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 [8] [and the] Latvian Foreign Minister has
this month in the course of a striking address [9] 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 [10] [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 [11] 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 [12]
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.