Transcripts For CSPAN3 Politics Public Policy Today 20140606

So now id like to turn over the floor to the people that are going to make that happen today, ask the tough questions, give us some answers. And id like to thank you everyone today for joining us today and hand over to tom bright from abrookings who is going to chair the panel on the economy and europes future. So, thank you. And thank you, again, everybody for joining us. Thank you. Im a fellow here with the International Order and strategy at brookings. And im particularly delighted to be able to chair the first panel. Id like to thank fionna and Jeremy Shapiro for asking me to do it. And its a particular privilege to do it at a conference in honor of clara who i knew for the past two years here, was really a wonderful colleague. And shes sorely missed. And i know several people here knew her and on the panel. I think she would be very interested in the topic today. Not just because of the events in ukraine, but also because she has such a strong passion for European Union Foreign Policy and europes role in the world. Were very fortunate to have three excellent panelists for the topic of really whats going on inside europe. The second panel looks at europes role in the world. And were trying to lock out not just europes economy, but really everything that goes on inside the box. Is europe about to get out of the financial crisis . And the phase has past and about to return to robust growth and take on a greater role in the world and complete the project of monetary integration by adding sort of fiscal federalism and all of the things that economists and others over the last decade said they need to do in order to be that stable and competitive . Or are we in the beginning of a japanstyle lost decade where at the worst of the crisis is over, but its going to be very hard for europe to get the Political Support to do it as necessary to really fix the fundamental flaws of monetary integration . And after the parliamentary elections of last week, what does that mean for the future of european federalism . Are we seeing a populist backlash whereby the politicians and the famous phrase, know what they need to do but dont know how to get reelected once they do. And maybe they wont be able to get the reforms through. And what are we looking at in terms of the Commission President and some of the key positions. So what id like to do is to turn to each of the panelists and to offer us their initial thoughts on this. And then well have a conversation and then open it up for a conversation for about half an hour. So, simon, if i could start with you. Could you begin by talking about europes sort of economic prospects . Are we really out of the worst of the crisis . And where do we go from here in terms of, you know, ensuring there isnt a new crisis and we see some sort of growth, and getting out of deflationary sort of spiral and europe can, you know, sort of begin to punch its way economically in the world again . Im sorry, i should add, as well, i apologize for not introducing properly, simon, but simon is the Deputy Director for the center for european reform that specializes in the euro zone and european fiscal policy. Thanks, tom. And good morning, everyone. Thank you very much to brookings and to kings for inviting me to speak today. I think its a lovely gesture to dedicate this conference to clara and see all of us are very, very grateful to brookings and kings to all of the help youve given us in setting up the fellowship which we hope will run for many years. To the subject, i used to argue about this point a lot with clara. She didnt disagree with my analysis. But i think for clara, it was close, almost a heresy for a colleague to argue that the euro, which is a huge symbol of europe and integration could actually become a threat to the eu and a threat to european integration. We would have lengthy discussions about this. Im going to start off by outlining why i think the economy, the eurozone economy in particular is in poor shape. Why this situation poses a threat to the eu as a whole, and why the choice really does now come down to more or less europe. Now, despite the talk of economic recovery that one hears a lot of in europe, and despite claims by eurozone policy makers that the crisis is over, the eurozone and by extension, the eu remains in a very serious mess. Its worth remembering that the eurozone economy is still 3 Percentage Points smaller than it was in the beginning of 2008. Now, even the u. S. , which is supposed to be pretty more abundant at the moment is six Percentage Points bigger. And if one breaks down the eurozone into the constituent parts, we see truly, truly terrible numbers. The spanish economy is 7 smaller. The irish one, 8 , the greek one over 20 smaller than it was six years ago. Now, eurozone unemployment has come down a touch, largely because of people withdrawing from the labor market and emigrating, but its still 12 . And much, much higher than that. In places like spain. Youth unemployment, this is the number that shocks people on this side of the atlantic is that about a quarter, over 40 initially, over 50 in spain. So were seeing truly shocking numbers, still. Now, the myth persists that these are the result of countries mismanaging their public finances. This was the case in greece, but aside from greece, it wasnt the problem. The central problem in europe was huge capital flows from the core of the euro zone, places like germany to places like spain in the periphery of the eurozone. This was interbank lending. That combined with the absence of socalled adjustment mechanisms in the eurozone is the crisis, not mismanagement of public finances. Basically, Interest Rates in the runup to the crisis were far too low to the likes of spain, ireland, other countries and too high for germanys economy. Inflows of all of this money led to booms in those economies, pushed up their wages and costs. When the financial crisis hit, the capital inflows stopped overnight. Resulting in bank crises. The capital stopped, economies bombed, the public finances hit the banks because the banks were sitting on all the government bonds. And then that depressed Economic Conditions and rebounding on the banks. The socalled Sovereign Bank doom loop. Now, the failure to predict this was forgivable. No one spotted this. This link between governments and banks on what it could do. But the weakness of adjustment mechanisms within the eurozone was predicted. This is a very large and very diverse currency. It comprises very, very different economies. So a shock, the economic shock will hit some of them very differently to others. Euro members cannot devalue their currencies as everyone knows. And they dont have what economists have a lender of last resort. They essentially borrow in a foreign currency. Theres no bank that will step in and buy their debt in the way you see here in the u. S. So without a currency and without a fully central bank, Something Else has to be flexible. Now, this means that markets for goods and services, capital, labor have to be highly integrated. So resources move to where they can be moved most productively. Within the eurozone, there is a market, a market for goods. There wasnt much integration when it comes to services which comprised most of economic activity. Capital is very slow to be allocated or to be used in the most productive fashion. So its very slow, productive capital. Frankly, slow to move from one part of the eurozone to the other. Labor mobility is very low. We have seen a lot of people emigrating from spain and ireland, portugal in recent years. But a lot of those people, the majority of those people have gone to countries outside of the eurozone. So the irish have been to britain, here, australia, canada, spanish have gone to latin america and british america. Very few have gone to other members of the eurozone. The second factor is that the European Central bank has hampered adjustment by allowing inflation to collapse in the eurozone. The inflation rate is 0. 5 , which makes it hard for countries such as spain and italy to engineer declines in the Real Exchange rates while getting on top of their debt burdens. Why this is such a risk. European central bank has also acted in a nakedly political manner. For example, by backing fiscal austerity in a slump, which ignores economic theory and history. And for exaggerating the likely impact on economies of structural fault. Three, the eurozone lacks any mechanism to transfer resources between constituent members. So with no federal budget to smooth asymmetric shocks, fiscal austerity has been the weapon of choice. The problem with this, its socalled pro cyclical. What it does is exacerbates, makes everything worse. Now adjustment based on austerity and internal devaluation, which is what europeans now call deflation is dangerous. First, low inflation, let alone deflation makes it hard to reduce real wages. Take spain, they need to reduce their real wages. But if inflations very low, thats hard to do because nominal wages do not fall. Its almost impossible to cut nominal wages. You need a bit of inflation. Two, deflation increases the real value of debt both public and private. Raises real Interest Rates. And this can lead consumers and businesses to delay purchases if they expect prices to fall further. And third, fiscal multipliers the impact of cuts in public spending. Very large when Interest Rates are close to zero. So spending reductions by governments tend to have a very big negative impact on demand. Now, what is needed against that kind of backdrop . Well, in the shortterm, looser management policy and accommodative fiscal policy. So asset purchases basically quantitative easing, big program of quantitative easing and i would argue higher inflation target at least temporarily. What would you put that on . The inflation target . Temporarily 4 . This would help prevent countries sliding into insolvency and facilitate the Exchange Rate adjustment. More investment, more Government Investment by countries that have the fiscal scope to do so would also help underpin demand. Thats the shortterm. In the longer term, its hard to see how this can work without a proper banking rather than the truncated one thats been agreed. But a proper one that includes fiscal backstops. So making the banks, removing the responsibility from banks from the National Level to the federal level. The backstop at the federal level and a common deposit insurance system for Bank Depositors across the eurozone. Another safe eurozone asset, some kind of bond. This would help break the doom loop between the banks and the government by making it easier for governments to restructure sovereign debt. Problem they cant do that at the moment because the banks are sitting on so much of that debt. And by restructuring solvent debt, they threaten to implode the bank. You need this kind of safe euro zone asset. And i would argue an element of fiscal union beyond what is implied in a fully fledged banking unit. Upon eurozone Unemployment Insurance system could form the embryo of such a fiscal union. And finally, more democratically accountable central bank for the broader mandate, something akin to the mandate of the u. S. Fed. So responsibility for price stability but also growth and unemployment. The problem with everything ive just said is that that requires more, not less europe. As time goes on, its becoming harder to make the case for more europe. Anyone following europe and political scene can appreciate that. Europe increasingly is now defined by the constraints that it places on governments. Rather than the opportunities it provides them with to improve the lives of their electorates. And the longer this continues, the greater the likelihood that we see a serious european backlash, not just europe but the eu more broadly. I think there are two solutions. One is to jump forward to a more federal politically europe within the euro zone with politics resuming at the federal level. Or a return to a European Union without a single currency and let individual countries manage their economies as they see fit. The problem is that the latter option will be hugely destabilizing. It would require capital controls, defaults in several countries, measures to deal with the ensuing financial crisis, and an agreement about how to deal with legacy debt and contracts. Hugely complex stuff. Itll be a very big crisis. But if a more federal europe is impossible, it will be better to get on with this before the politics turn seriously nasty. Thank you. Thank you. Fascinating. Simon, you said that, you know, you outlined what i think is a good sort of solution for europes problems in a number of areas. Everything from the Monetary Policy to fiscal policy to some of the politics. And you said that one of the reasons that can happen is because theres not enough support for more europe. Another reason maybe it cant happen is because germany in particular, but also the ecb and many of the leading thinkers in europe want more europe, but they actually disagree with those steps. So they disagree about a eurobond and disagree about quantitative easing. And theres been this significant philosophical gap in Economic Policy thats opened up between germany on the one hand and the United States and some other countries on the other hand. So i think its a its a tough question. Even if there is support for european integration and even if there are people in key positions who want to be forward leaning, there is this deep philosophical, you know, disagreement about whether or not you can do these things. And so id like to turn to randy henning, a professor of economic governance and really try to put this question to you. That if if we we are where we are in economic terms. There are these solutions out there that many people believe would have sort of a big bang effect of really being Game Changers and kickstarting growth. But theyre exceptionally unlikely because of german opposition and also because of rising sort of populism and the difficulty in getting it through in terms of treaty change. So what does that mean for the next sort of decade in european economics . I mean, if we cant do what simon sort of outlined and theres unlikely to be a collapse of the Currency Union for all of the reasons that, you know, people are afraid of what the alternative would be, what is the middle sort of muddling through option . How bad is it . Is it not quite as bad as we think . And what can they do within the constraints they have . Well, thank you, tom. Im pleased to be in part of this panel and happy to celebrate the life and work of Clara Odonnell in this way with you. Let me approach the questions youve posed to me in three bullet points, right . And preface this by saying on the 2070th anniversary of the landing in normandy, the United States is tied to the fate of europe, albeit thankfully in a different way in this country, i think has an abiding interest in the success of european integration. And a supporter of european monetary integration, in particular. And i want to see it succeed. I say this at the outset because were going to talk about the problems associated kind of with europe and the barriers to to success and how these but we do this in the spirit that its in our mutual interest across the atlantic to overcome them. So i have three main points. Now, the first is as the jumping off point, shapiro suggested i make this comparison to japan. So ill begin with that. Europe is not japan, but the stagnation displays some worrying similarities. And the second point ill make is the European Central bank shows the path that differs from the Federal Reserve in Monetary Policy. Ultimately going to its institutional context. And the third point would be that europe will need to do more than it has yet agreed if it is to stabilize the euro area permanently. In the long run, you will need to find a way back to the no bailout clause in the treaty. And ill use the american example to explain how and why that should be. So with respect to the comparison to japan, there are important differences between europe and japan to be sure, but the parallels are ominous. And europe wants to avoid them. So in japan, we saw the bursting of an asset price bubble, imposed losses on the banking system, regulators exercised forbearance, Monetary Policy behind the curve, deflation was allowed to settle in which created further losses for the bank, kept perpetuating a downward spiral. Italy has already suffered a lost decade in terms of growth, low inflation makes its debt deeply problematic, and italy has at best only 1 1 2 of the famous 3 arrows that Prime Minister japanese Prime Minister abe has use d. The one arrow it has at its disposal in the future. And the reform in italy progressed to yield kind of increases in growth over the longterm. Now, ben bernanke warned japan about this downward spiral that i just talked about early in the process. And his advice was not heated. The European Central bank also shows a path different from the Federal Reserve. Yesterdays announcement doesnt change that picture. The constitutional context is the reason for that different choice. Thats the subject of the second point. The interaction between monetary and fiscal authorities was famously modeled by Sergeant Wallace three decades as a contest between fiscal dominance and monetary dominance. High, maybe very high under the fiscal dominance scenario. Whereas their low under monetary dominance. In the euro crisis, this game took the form of chicken. Creditor governments could create a financial facility and bail out the debtor, or the ecb could buy sovereign bonds. The two actions were close substitutes at least over the short and medium term. And each side was better off if the other made its concession first. And each had a incentive to wait. So the upshot is that the ecb delayed taking aggressive measures much longer than the fed and the bank of england did. The ecb won this contest, right, monetary dominance prevails. Inflation is extraordinarily low. Perhaps too much of an overachiever. And deflation is a palpable threat. But ecb behavior is important to understand was a function of the strategic interaction with governments and the political fragmentation of the euro area. So this takes me to the point about fiscal policy. The euro area has chosen to apply fiscal discipline in a centralized fashion. And i think this path is fundamentally unworkable. Needs to find discipline in a decentralized way to be politically sustainable in the long run. So to think about this, consider how different the u. S. Rules are from the fiscal rules of the euro area. The fiscal compact in europe has been introduced into national law. But the process was initiated by the center, by the Community Institutions. And in some cases, under duress. In the United States, rules eliminating debt accumulation were adopted automou eed autonoe states. And second, Community Institutions play a leading role in enforcing the rules whereas the u. S. Federal government has no central role. Congress cannot legislate fiscal rules for the states. So the u. S. Model of fiscal rectitude for the states rests on multiple layers of rules kind of at the state level combined and this is really important, with a no bailout norm in the United States. By contrast, Member States have been bailed out. So the next generation of proposals in europe for dealing with fiscally dysfunctional states is likely to embrace more intrusion into domestic politics and policies. The rescue fund, like the size of the rescue fund in intrusive fiscal rules can go hand in hand. Can you just when you say intrusive fiscal rules, you mean, you know, going into a country and basically trying to determine their tax policy or spending or structure reform . Thats pretty serious interference. Its not sort of the technical stand back, you need to sort of fill out this performance sheet at the end. Its really, you know, people, in capital cities, you know, writing the budgets of these countries. Is that correct . So, yes. Absolutely. Its not just the size of the fiscal deficit thats coming under scrutiny from brussels in particular, its the elements of the budget that achieved those deficit targets as well as, of course, the debt kind of targets, as well. So a good example of this is of this next generation of proposals that i see on the horizon was jean clauds proposal which is a couple of years old where he advocates federal governance by exception. And in the which would apply in a case where the recommendations of the commission and council are not implemented by a member state. In that case, proposed that the institution should be able to propose an increase for a specific country or they should be able to oppose an internal devaluation, right . And so the important thing to recognize, okay, in the comparative context is this represents the degree of intrusion, okay, in complexity that could never possibly work in the United States. Arguably we have a more favorable environment for this kind of thing than we do in europe. So theres no support for it in the u. S. History, there are not good examples in other federal institutions, and i think its a little more likely to succeed in the euro area. So there are a couple, two or three logical implications that come from this that id like to fill out and rest my case. This approach that europe has taken, risks repeat of the epic showdown of the union on the one hand and the Member States on the other that we saw ten years ago. And we already see this conflict looming again between the commission on the one hand in italy on the other, followed soon by france and possibly spain, right . In my alternative to this strategy, i would call get back, article 125 of the treaty which contains the no bailout clause. The u. S. Experience kind of teaches that strengthening of the federal institutions protects the union from contasion when the center denies request from a bailout from the Member States or, say, from greece, right . A robust kind of fiscal role for the center established credibility for the no bailout norm here. If california, right, were ever to come to the federal government and ask for a bailout, this would be out of the question. Fortunately, californias running a surplus now. But two years ago, didnt look so good in california. Such a request for a bailout would be out of the question because californias a wealthy state partly. But also because the union, the rest of us have protected ourselves from contagion arising from a california default through a couple of different mechanisms. And because of this protection, the other states in the union are less vulnerable than say germany and austria are to a default on the part of their periphery. So the implication is that europe should put a more robust fiscal union in place in order to restore kind of the protection that many, especially germans thought they had in the no bailout clause of the treaty. This is paradoxical. A stronger fiscal union contributes to decentralized fiscal discipline. But thats kind of why this is interesting. From this perspective, the european stability mechanism isnt an anomaly among federal systems. Right . Other federations bail out their states from time to time. But im not sure if there are any that maintain a very large Standing Fund for this purpose. Right, and the esm is supposed to be permanent. So arguably, rules are needed more for the center to protect against the temptation to indulge requests for bailouts more than theyre needed for the states, right . And so this is the last point, and ill end on this. If the euro area kind of succeeds in moving to a deeper fiscal union, right, the institutional solution should be first to convert the esm from a sovereign support facility to a union fiscal backstop, right . Separating the sovereign from the banks, which simon emphasized. And second, to reestablish the no bailout clause. And i think this, right, is the formula for solving the problem of maintaining defenses for the union against blackmail from the periphery without creating fiscal moral hazard for the states. So let me leave it at that. And well come back to some of these other points in discussion. Great. Thats terrific. Thanks. Id like to move on to the political aspect now. Because obviously the economics is highly political. You know, we have had what five or six years, five years of this crisis now, very low growth throughout europe. Very, very low inflation heading toward deflation. At the end sort of the robust growth or dealing with some of these issues. And that sort of brings us, i think, to last weeks, you know, elections that we saw rise in populist movements. But it was a strong sort of signal. And so id like to turn to david renne. But prior to that, you were the Brussels Bureau chief for the economy. So youve seen it on both sides. What is your sort of assessment, you know, of the elections. And if you could also speak a bit about this drama were seeing unfolding about the Commission President. How significant is that in terms of europes future . Does it matter . Or is it sort of the brussels personality game where were all sort of focused on this, you know, battle between the commission and the governments where it was actually, you know, the real substance goes somewhat neglected. No, i think whats happening at the moment is very serious. And my bias as a political reporter, Foreign Correspondent political reporter is its always been about the politics. The economics, the flaws in the economic systems are the result of political disagreements. Before i get to kind of what happened last week, i mean, responding quickly to some of the things on the panel here. I remember when i was writing a column, running the in brussels. People used to have this line, the problem with euro, it was created back to front. We created this Monetary Union without a fiscal union or political structure behind it as if itd been an oversight. The reason they created this thing back to front was because they profoundly disagreed about what the Political Union might look like. And lets not forget, i mean, to my mind, the European Union and to some extent the euro, the single currency, they can be understood as kind of epic tussle between two visions of how to run an economy. And you can call one kind of competition and one solidarity. And i think that, you know, we need to understand why, you know, why does the euro have all of these incompatible countries . Why did greece get into the euro . Spain get into the euro . If you talk to sort of the germans, that was never their intention. Never their intention. How did it happen . Well, in part it happened because france and germany at that time are representing, if you like, competition versus solidarity. One of my favorite stories about the creation of the euro. Its so emblematic of what happened. Just after he got elected to president of france. And he had run on election platform attacking the strong franc. And had this idea that you let inflation run to boost growth. And he came to a summit in italy. And this was the time when it looked as though countries like italy were not going to be in Monetary Union. And france is anxious about having countries in the Monetary Union. One, they didnt want to be locked in the deutsche market. But he started attacking the italian Prime Minister. He said since time in memorial, every springtime, theres a place in the alps between france and italy, and the french alpine farmers raise these beautiful calves, and then they are driven over the high passes into italy where they are fattened to turn them into italian veal calves for the italian veal market. But because it was devalued twice against the french franc in the last year and a half, the veal calves cost too much. So for the first time in living history and he was very emotional about calves. For the first time in history, the calves have not crossed the high pass into italy because they cost too much. And thus, italy had to join the Currency Union because for france, the fear was the competitive devaluations in the south would make it impossible for the richer countries in the north to sell goods. And that was the pitch, you know, made to the germans. You want to sell a bmw in spain, make sure they go to your Currency Union. And so that kind of political thinking did not really contemplate sort of the elements that simon talks about in terms of currencies. That was the kind of thing being done. At the same time, people didnt predict what was going to happen. And my own newspaper magazine if you want, we supported the creation of europe because we thought precisely because these countries could no longer devalue, they would have no alternative but to undertake the reforms that were sort of crying out to be done. And we missed the problem of these huge capital inflows that made the structure reforms impossible. How does this connect to the present day . I think one of the biggest misunderstandings that you see among the kind of small handful, probably most of them in this room, people in america who really care about what happened in europe last week, theres a tremendous misunderstanding, very, very bad column in the Washington Post last week that said this is all about silly germany not understanding how bad austerity is. And, you know, wicked, wicked germany, imposing this wicked austerity on europe. And now europe is quite understandably kind of rebelled. And behind that is the kind of lazy kind of apolitical keynesianism. And if we can correct that by restoring the demand, everything will be right. I think thats, a, never accuse the germans of forgetting the Second World War. If thats your argument, youre wrong. B, the people say theyre against austerity in europe, the parties that have been doing so well in some of these countries, you know, spain, this new kind of essentially latin america has done quite well in spain. When they talk about austerity, what they really mean is reforms. What they really mean is keep the money coming. I mean, look at syrias election platform, its raise the minimum wage, enlarge the welfare state, nationalize Major Companies thats thats not a rejection of austerity in terms of, you know, fiscal discipline coming through some sort of monetary mechanism. That is these undisputably painful economic circumstances in the south of europe leading to a sort of wholesale rejection of globalization of openness, of structure reforms. And so, you know, people who sort of lazily assume this can be fixed with kind of tweaks to the monetary rules, i think theyre missing the whole point. This is a serious moment. Look at my own country. Now, the vote winning the european elections is mostly a process vote. You know, they will not do as well in the National Elections next year. But lets understand whats happened. The reason that the european debate is becoming so dangerous in my own country is europe basically means integration. Thats kind of the crude version. But its gone beyond the kind of complaints about, you know, excessive rule making. Its about immigration now. And i think american audiences and i know theres a lot of europeans in this audience and americans that know europe, as well. But there was a congressional meeting, and a bunch of congressional staffers and people. And i said, listen, you need to understand, europe has done some incredibly bold and liberal things over the last few years in terms of responding to globalization with sort of openness and embrace of competition. Imagine it would work if you said to the u. S. Congress under the new nafta rules, theres going to be Free Movement of labor. Any mexican who wishes to move to america to find a job can do so tomorrow. And the American Government will have no legal ability whatsoever to control the numbers of mexicans or canadians who wish to move to america. You can tinker with things like welfare rules or the nafta court of justice would have the ability to Tell Congress not to give state aid to a factory in detroit to keep it open because it was against nafta competition rules. And a canadian judge could Order Congress not to give state aid to an american company. You could never in a million years get away with that. So we need to understand that europe has done some incredibly radical things in terms of open border, open movement. The response to globalization that tried to offer sort of solidarity through fiscal transfers, but also a sort of extraordinary embrace of competition. Things that the economists, my employers, we whole heartedly supported. But i think we need to understand, if we whole heartedly support this stuff, we need to understand how much danger its in now. How these Election Results are a bellow of rage, a bellow of kind of contestation from voters in europe. Will these specific members of the European Parliament start taking specific votes in unison that start doing bad things. Someone on the panel on monday that said, oh, you know, 70 of the vote went to the mainstream parties and theyll have a grand coalition of the center left and center right and itll work fine. Well, sort of purely kind of mechanical level, thats right. And one of the terrifying things about the mood in brussels is people are proposing the former finance minister to be the president of the European Commission because, you know, he was chosen by, you know, the European Parliament wilted. Understand what that means for a second. Theyre essentially saying we hear this cry of kind of populist rage, and our solution is to offer you more of the same. Our solution is to offer you the past. Our solution is to offer you an old guy who stands for smokefilled rooms, opacity, who boasts about how important it is not to tell the truth to european voters and who believes in stitching up deals behind the scenes. And thats their response in brussels right now to whats happening. And thats kind of terrifying. If thats their response. Just a final point of responding to some of your simon makes this sort of economically perfect argument that the logical next thing to do is either have more federalism with the eurozone or end the single currency. The problem is, i think neither of those things is going to happen. I agree with that. So were into Something Else. You talked about sort of fiscal discipline rules, i think you understood. You also sort of indicated you suspected these were going to be hard to pull off if they meant intrusively going into a country still further. Just a find kind of thought based on my time in brussels, it always seems to me that people misunderstood why germany and there are plenty of very distinguished germans in this room. Id love to hear from them. But it would seem to me that people misunderstood why germany was so insistent on a no bailout clause and fiscal discipline as it was somehow sort of an economic preference. Again, it seems to me to be even more than a political preference. Seemed to be to me the problems in the eurozone when the crisis first broke out, it was worse than a clash of economic policies, it was worse even than a clash of political positions. It was, in essence, a clash of social contracts. The fundamental democratic social contracts that bind collected governments to their electorates. The germans have a social contract since the Second World War, entirely informed by, the prewar hyperinflation, vital importance of monetary stability. That social contract, you know, work hard, dont ask for excessive pay raises, maintain sort of labor markets, flexibility, have a labor market settlement with limited sort of inflation. Dont spend too much, be thrifty, prudent. And in exchange, the government will guarantee you lower inflation and a stable currency. A rock solid currency. That was the kind of fundamental social contract, prudence and thrift and stability. And you then bolted that on to countries whose fundamental social contract was something different. In greece, when people talk about wicked austerity in greece. I know greece is a special case. Take the example of the national broadcaster. They closed that down as part of the austerity package. Had 10 market share for tv audiences in greece. It had an annual budget of 300 Million Euros a year for a country of 10 million people. There were over 100 employees earning more than 1 Million Euros a year. All of whom were political appointees. Every new government came in and plugged in some people into the sort of directors cabinet who could never be sacked. So closing that down, is that austerity . And keeping that going, is that a kind of keynesian stimulus . Thats the problem, youre asking in a country, you know, in a Monetary Union which doesnt have a Political Union, you are asking german voters to carry on funding things like that. Thats what they see in the newspapers. Youre saying to them, youve agreed to extend your retirement age to 67. But youre going to have to fund greeks who want to retire at 55. Thats politically impossible. A clash of social contracts. Its politically impossible. And the problem with Election Results last week was the bellow of pain from southern europe, which is they have these appalling economic numbers, appalling youth unemployment. We should be sort of, you know, very alive to the human agony of that. But the problem was that those votes were saying keep the money flowing, germany, stop the world, we want to get off. We want to have, you know, a higher minimum wage. A european wide minimum wage. The politics just is not there to ask countries like germany to improve much, much larger fiscal transfers. And on the fiscal discipline point, it seemed to me that the fiscal discipline was actually a German Response to the democratic deficit. The single most painful thing about a Political Union with this Monetary Union is what happens if german, dutch finish voters send money south and then are no Structural Reforms and there is still endemic corruption . Were going to break all of our promises. Thats politically totally unsustainable. And because german voters have no say on the o government that is elected in greece or spain or in portugal, it seems to me that the fiscal discipline rules, clumsy though they were, were essentially an attempt to kind of fix that democratic deficit, to make it impossible for them to turn around and say, so long, suckers. So i think we need to be much more, much more sensitive to the incredibly tough politics that, i think, explains why the economics is so broken. And be very worried about last weeks Election Results because there is sort of there are smoke sort of clash of social contracts as bad and deep as ever. Thank you. I particularly like the [ applause ] i particularly like the image of nafta immigration. Im wondering what fox news would do with that. If we have a nafta court of justice explaining it. The congress, yeah. It would be quite interesting. I think one of the one of the you talked about the periphery. And i think its important to be sort of clear and germany sort of narrative of success. Its sort of missing on the panel. But there is a view we make here in the questions and answers part in terms of how this works. And its largely based on structural reform that, you know, the structural reform thats occurring doesnt have payoffs now because its sort of a slow burning thing. But it will have payoffs later and that will cause a return to growth and competitiveness in the periphery. And you dont need this great leap forward on Monetary Policy or quantitative easing or on the fiscal side. But one of the problems thats arisen is almost because of draghis actions, weve seen the cost of sovereign debt come down quite a lot. I think yesterday, irish sovereign come down quite a bit. All of the privilegeries costs have been coming down over the last 12 months or so. Theyre all pretty manageable. And that has taken off the pressure or structure reforms. You know, germanys case was that the problems in the bond markets would lead to pressures where governments had no choices except to reform. Because that pressure is off, its harder to do so because of the political opposition. Theyre against aus tearty but theyre mainly against tough reforms and cuts that are taking place in their countries. And so i guess my question to all f you is, if we see this rising sort of populism and opposition to sort of the status quo of the last few years, and if we see that governments find it very hard to initiate structure reform, what is the case as to how this will work . I mean not going back to they really need to do this or that, but is there any sort of scenario in which sort of the jeremy or the ecbs position will prove us wrong and in three or four years time, you know, the situation is a lot rosier if they just stay the course. Or is there just no way this is actually going to work . Simon, do you want to i think its bearing in mind how difficult it is to push through structure reforms through a backdrop of slum. That is very difficult which is why when any country faces the need, it does so through the backdrop of some kind of stimulus. In greece or portugal had been under a program, they would imposed fiscal discipline. But it would have provided some offsetting stimulus. The problem that we have is that there was nothing to offset the austeri austerity. It leaves them trying to do to continue districtry things. One is trying to rebuild the trade competitiveness. Bare inflation rates have been higher. While at the same time ensuring that their debt burdens dont rise. Now that is an impossible thing to ask them to do. The result of that has been a huge increase in debt relative to gdp since the onset of the crisis. We hear a lot about, particularly from this sort of the right on this issue that basically, look at their debt burdens. Theyre still not serious about reducing their debt and austerity. The greeks have cut more than any developed economy has since the 30s. They have made huge, massive cuts in public spending, far greater than anyone thought possible. But the net result is that their economic is 25 smaller than it was. What youre going to engineer is a slump. The burden of debt relative to gdp rises dramatically. And thats whats happened. We saw a writeoff three years ago. Were now back above to where they were prior to that debt write off. Theyre now running pretty close to a budget surface before the payment of interest and outstanding debt. Its because the economic has continued to contract. I think in greece, its not just a question of people wanting to hold on to their benefits. This is a poorly governmented country. No doubt about that. It should not have been in the euro zone. The question is how to do about doing that and whether you can pull that off politically in an economy that is being pushed into this kind of slump. Structural reforms, these are not a panacea for all problems. Structural reforms, if accompanied by a recovery in investment, will in the medium to long term deliver some benefits. But there isnt a particularly strong correlation between Economic Growth and, say, very flexible labor markets. For example, everyone is touting germany has an example here. They do not have a flexible labor market. They have u. S. Or british standards, a very highly regulated market. No correlation there. Its not just the south who needs to push through Structural Reforms. Spanish markets for goods and services are far more competitive and contested than german ones. This is a problem across europe of structurally very weak demand. We cannot all do what germany does, which is run a huge surplus savings and a massive trade service. That means its dependent on foreign demand to close to gap. That is the plan, though. Thats my point. But we cant all do that. If youre going to find a sustainable solution to what happens in europe, yes, there needs to be adjustments in the south but there also needs to be changes in Structural Reforms in countries in europe who are running huge unsustainably high surplus savings. Can you also just address this sort of german surplus issue which is quite extraordinary. Is there any prospect of internal rebalancing where some of that surplus would be used for investment . When people talk about, you know, a rebalance or, you know, change in sort of the stimulus, what theyre really talking about is that that should occur in germany. Yes. So what is is there sort of a prospect of that on the horizon . So its essential that we are rebalancing within the euro zone. Now we have the situation where to answer simons question, there has to be something to offset austerity, and this would be german growth, increase in wages, some kind of german inflation, right . Because we cant expect relative improvements and competitiveness on the part of the periphery without the periphery undergoing deoperations if a german inflation is a half a percent or 1 . We need to get that into the higher ranges. One of the under reported events over the last couple of months is that the commission actually cites germany for excessive surplus under the balances procedure. Where this goes and how it develops is unclear. It doesnt appears a if this is going to be a strong discipline on germ man policy to produce a stimulus of some sort. But this is essential, right . And in fact this is in part where the rest of the world comes in. Its essential, its important from the standpoint of u. S. Interests that the euro zone as a whole doesnt become just large germany in terms of the Macro Economic imbalances and running continuous large current account services, right . The way to you know, one of the ways to think about this problem in very specific terms is to think about the situation of italy again, right . So in italy wed like to see structure reform, of course, but this needs to come in the context of growth in order to be affective. Italys solution for this, renzi would like to see room in the fiscal rules for greater investment in infrastructure, for example, as a way to provide this. And indeed, italy needs this. This is a structural policy for italy that could compliment reforms in the liberalizing reforms. But of course this could require a change in the rules and thats part of the italian agenda for its presidency and the council of ministers in the second half of this year. Its important that that goes forward. Thank you. David, before we go to the audience, i would just like to raise a big question that im sure it will come in the q and a but its the role of the uk. Weve seen sort of cameron, you know, really lead the charge against the Commission President. But, you know, there are sort of huge issues on the agenda for the uk and europe over the next sort of four years. It poses very difficult challenges for chancellor merkel because how does she make the concessions necessary to come ron feels that he has enough of a victory to be able to keep the uk in, you know, while also deepening integration within the euro zone and doing the things that are nood needed to fix the Monetary Union. What is your assessment of, not so much uk and the referendum, but on the diplomacy between cameron and merkel and how that plays into europes future. Is it possible for the chancellor to pull off this balancing act and keep cameron happy while deepening immigration or is there a tradeoff there . Theres a lot of mechanisms that have been set in motion that will have unpredictable effects. You have this odd situation that chancellor merkel does not want britain to leave and shes willing to do quite a a lot to keep britain in. Although people say not any price. The leaders of the Political Parties in britain all of them are committed to the idea that britain should stay in the europe onunion. And still just about the majority of the brits want to say in. On the one hand it looks find. The problem is a lot of mechanisms have been set in motion, in particular this a a idea of a referendum on europe should the conservatives win the next general election next year. And i think the problem with that is i remember when i was in berlin by chance, when David Cameron was elected Prime Minister and it was a group of european correspondents and we were invited to see chancellor merkel for this kind of very, very off the record sort of meeting that they do every year for europe an correspondents. The basic germ man position was pretty clear. It was germany does not want to be left alone in a tight euro zone union with just the club med union ps they would rather have the reform minded countries as a balance. My impression of german mans policies germany likes to have the deciding vote. So she was definitely open to the idea of doing a lot to keep britain in. The problem is expectations on the british side and the british analysis. The fundamental problem with britains membership in the european yuan, they never loved the European Union. It was a cost benefit analysis begun when we joined in a kind of state of gloom and misery in the 1970s. But the constant looked much more economically dynamic than britain. They were at the end of an experiment that reached the end of the road and wed kind of reached just remember the cause that britain was produce in the 1970s and thats all you need to know. We joined in kind of a fit of, well, they seemed to know better than we do. It was cost of a cost benefit analysis. What has fundamentally changed, the short version, is once the prit tish public looked at europe and thought that looks like an economic basket case, if you never loved it and now it looks like an economic basket case, whats left . And the single sort of biggest driver, you know, conservatives used to hold their noses and go we like the Single Market but we dont like any of the other stuff. And the dangerous dynamic in the last couple of years was the number of conservative mps, saying is it really worth that much . Shouldnt we be this globalized anglo sax on power nation trading with the emerging powers. At the moment were tethered by rotting ropes. And if only we had the kurnl to cut the ropes and zoom forward, we could be a super Global Trading power. We have an island 23 miles off the coast of france. That is a problem. The other problem with the analysis is that germany, which obeys all of the crushing european rules as we do has a much more dynamic economy than we do. The problem that David Cameron faces, is britain going to lose the European Union . On the one hand, the grownup answer is no, i dont think so. But the thing that slightly worries me is when you map out how we stay in, heres how it works. This sort of seems the conservatives win the next election outright, which seems very unlikely, heres how it seems to work for me. For us to stay in, this is us staying in 2018. Heres the british election. Heres the intervening steps where there are forks in the road. David cameron goes to europe and said i want to have a renegotiation where im going to hold you hostage and extract things you dont want. And the others have to go okay, we ale let you do that. They might just go, you know what, we dont particular fancy that negotiation. So he then has to secure the negotiations and secure concessions that actually mean much from europe. Hell get some stuff. He then has to come home and say to the conservative party, these are concessions that you wanted. They basically want cut price membership in the Single Market with nothing else. They want an a la cart membership is what they want. He has to get the concessions, convince his own party that these concessions mean a thing and then the British Public have to be disciplined enough to vote on whats on the ballot paper. The referendum is do you approve of the deal that the Prime Minister just secured in europe. The history of referendums is that voters vote on what they feel about the economy or how they feel about the government of the day or other stuff. And if we think were going to tear up the immigration rules, that aint going to happen. All of those things have to go right for us to stay in. This kind of strange position, my gut instincts is, you know, most of the big powerful forces in british politics want us to stay in, the big Business Community and the three main party leaders. I dont think were going to walk out. But i think we could trip and fall out and that does kind of worry me. Very interesting. If you were a betting man, then, you would the only bet i have ever done in european politics made me a huge amount of money which is when they were choosing the new president under the new system i probably shouldnt even admit this. It was the Council Summit where they were discussing who was going to get it. Everyone was talking tony blair and there was this irish betting set. I oddly looked and they were offering odds on the count till sill president and tony blair was odds on favor. It was one of those rare circumstances where you know more about the book maker than whats going on. And rum foye was 33to1. They need a small country, a christian democrat, i think ill stick some money there. Unfortunately the website wouldnt bet me put on more than 50 euros. But then the odds immediately changed. I shouldnt admit that should i because that was deeply corrupt. But it didnt affect my reporting. But it made me a serious amount of money. Well watch very carefully the odds for little known sort of leaders. Im sure both of you want to come in on this britain question but we might go to audience because weve got about 25 minutes left and we have lots of questions. Lets start uf near the front is the microphone. Over here on this side. Two quick questions, one to david. You portrayed the elections as a referendum on european issues but the conventional wisdom on european elections is theyre second order elections because european voters dont care about the issues that the European Parliament deals with. You could make an argument for them caring about the euro but they dont deal with the euro. Why should we care about what the voters said in this elections and why should we expect policymaker to adjust to it given theres in electoral connection between voters and european issues. To randy, so youve tried to sort of make, you know, the euro dilemma not lack quite so bad saying if they were more american they could get out of this dilemma. Doesnt that depend on them being more american in two ways . The first is they would have to accept american standards of social welfare pro vision and depravation in the face of economic problems. Not european ones so assuming we dont create a social welfare system at the european level thats fully adequate, they would have to be willing to accept a greater level of depravation if there were really a no bailout clause because economic circumstances would get more difficult adds they adjusted. And secondly, the way america really adjusts to these Macro Economic differences is by factor mobility which was brought up before, right . When michigan goes through a decade of low per capita or negative per capita negative population growth for an entire decade, other americans say move to arizona, right . Thats the american system of adjustment. We cant say that to italians. We cant say that to spaniards. So would that really work in europe . Well take a few together and come back to our panel lists. Just the gentleman right in front there. Thank you. Just a quick point on what great panel. I agree with a lot of what has been said, including simon. A quick couple of points about davids story. It was a great story. He never forget that he was first minister. Its 600 nights away from italy. So the guests travel not by buses but in trucks which they cannot do in the uk because little old ladies, whistle the truck to save and sadly, more sadly, it doesnt mean fallon cause but thousand springs. But the question i think was an important one which is how can you have a Single Market if countries engaging in competition. There were two main reasons to go to the euro, one was a political one, counter balance and the other one was completion of the Single Market at the time. Also a major issue and still at the heart of the project obviously. Well take one more. Go in the middle here, lady in the middle. Yeah. Thank you. Im from the eu delegation. Two remarks and a question. The eu hasnt started with the runup to the euro. It started much longer ago. I always have the impression that faced with a panel such as this that everyone starts with the euro and the euro crisis. This is not true. Many more aspects of policy areas have been put in common and together since the buildup of the euro. We started in the aftermath of the Second World War and then we agreed on a certain putting together of policy areas. Second, fiscal rules, ive heard interesting ideas coming from randy on this with the centralization. This is certainly an idea this that is interesting in pure suing physical integration. With that said, Member States have set these rules themselves and its not as if brussels was setting rules out in a vacuum. Member states agreed to these fiscal rules. So the parallel with the u. S. Has its limits because members or the equivalent of u. S. States agreed to those rules in the beginning. My question is ap little bit in line with davids remark about simons intervention. Why are number one and number two solutions not feasible, probably. Id like to hear one constructive proposal from simon that has a chance of success, of succeeding politically in europe. Thank you very much. One more, i think the gentleman right behind had a question and then well come back. No, no. Sorry the gentleman yeah. The person who had the microphone was the right person. Sean cline. I used to be the bureau chief in brussels. I was in berlin just before the elections which made some interesting gains in the new party in germany. They were suggesting a kind of twospeed euro zone. Im interested to know what the pnl thinks of that. They were saying it would be an act of mercy to let greece go and let greece leave the euro, and others like it. Would that the Halfway House solution . Thank you. Weve a lot of questions still to come as well. If you could all pick and choose in terms of the ones that were directed to you and try to be brief so we can go back and get another round. Simon, lets start with you. This isnt about making life harder for the countries struggling most with that. This is about correcting a situation in which unsustainable levels of debt are being maintain, rather than written down. Whats happened in the euros in the recent years is countries havent been bailed out. Theyve been lent lots of money to pay back their creditors. Their creditors are the big banks in the countries who have been lending them money. This has affected a way of per pech waiting unsustainable debt in countries and requiring them to pursue unsustainable levels of austerity. So this isnt about bailing countries out. This is about a bailout, a no bailout clause combined with some kind of automatic stabilizers, perhaps a Banking Union of transferring money. Probably id argue the best way. Its not about making life even harder for particular governments in the south. The one constructive idea. Ill come on to that. In terms of comet tif evaluations, devaluations when you went up to the euro were undertaken by countries that had higher levels of inflation. Now if you can make all of these Member States so similar in their structures, their inflation rates are very similar, then the risk of getting rid of National Currencies can be addressed. If you cant, youve just removed an essential tool of macroeconomic adjustment. Real depreciate is as much of a problem as nominal depreciation. So if it cuts the Real Exchange rate, it imposes far greater costs on them than italy ever did in the run up to the euro. Devaluations of the pound took them back to where they had been prior to the pickup in their inflation rates. You can change the Real Exchange rates back to 1980 and italy and britain were not the problem. In terms of something positive, ive said what needs to happen. There needs to be in short order some significant military similarly. There needs to be an acknowledgeable that there has to be some demand creation from some source. There has to be a big Investment Program, perhaps under the auspices of the eib. It needs, i think, an acknowledgment the problem is, if we could get to the point where people acknowledge that this isnt just about countries breaking the rules. Most of this would fall into place. But in terms of what could be done, its an Investment Program for the eib. Its a pretty radical change on the part of the European Central banks, a big program of military stimulus. I think those two things are possible. Were going to get more action by ecb. The question is where they can do enough. Quantitative easing is only effective if they believe that the central banking question will go the distance. Ecb action and a big, big Investment Program. Thank you. Well, let me respond to the questions of andy and valerie with respect to this proposal for decentralized federalism, decentralized physical discipline that i have. Let me stress that this is in fact a long run vision and nothing that were going to be able to implement tomorrow. But im going to argue that it is likely to have more political traction over the long run than this strit gi that weve had so far of committing large resources through an esm which is challenged within the germ man political context and at the same time tougher rules to go along with them. It does require that there is a larger Fiscal Center in europe. It doesnt have to be the same size as the u. S. Federal government. 4 or 5 of gdp could do it. Nonetheless i acknowledge that requires a stronger commitment to central, you know, to mutualization of fiscal policy than we have now. Its important it requires also a large fiscal backstop to the Banking Union. And here i think this is more important than the transfers that take place through the social safety net in the federal system in the United States. Weve looked at the economic states, a lot of economic stays is done on the importance of the transfers. But the transfers that take place in the midst of a banking crisis through the fiscal backstop and for the Banking Union and bank recapization are huge compared to the transfers that that place in the social safety net. Quantitatively speaking, this is for more important for maintaining the cohesion of the Monetary Union through crisis sort of like this. For that reason i think we can accomplish what we need to do with a modest Fiscal Center in europe. On valeries point that we have kind of Member States agreeing to these rules in the form of the fiscal compact. And i acknowledge that weve done this through the council, through kind of a succession to the treaty changes, some of which have been voted on through referendum within Member States. But were now testing the domestic political ownership of these rules. I think we have to admit in some cases, particularly in the southern pro livery, theres been agreement to these rules under duress. So this case of italy is very interesting. Italy signed up to the debt rule in the fiscal compact and now its adherence is being tested. And while legally the rest of europe might be on solid ground and arguing that italy had agreed to it so it should follow through, im not sure we want them to do this economically speaking. And in fact i think we dont. I think we want to create some mechanism by which they can make the investments, kind of that they need in infrastructure and defer the adjustment. And i think inevitably this accommodation is going to happen. One of the big political questions in terms of fiscal rule enforcement will be how that happens. I have great sympathy for the position that the Commission Finds itself in because i think the commission is torn between, frankly torn between the literal application of these rules on the one hand and economics, economic reasoning on the other. Now, theres additional problem in the administration of these rules thats worth pointing out. And that is that the rules under the fiscal compact apply to a budget deficit which is defined in structural terms that is cyclically terms. This requires someone to make the calculation of what the appropriate adjustment is. Right . This is not an observed variable. This is a calculated variable. And it is a group of economy mists that are going to be making this judgment as to what the structural deficit for any country in the euro is. Is it conceivable that serious consequences could hinge on the accuracy of this calculation when in fact economists differ widely on how it should be done. There was an interesting article a month ago on the range of calculations for these kinds of adjustments that are done on behalf of the oced and the range is fairly large. Its not conceivable to me that a large fine or a serious consequences would be delivered on the basis of a technical argument like this. Its going to be more lit call and resolved in a political way. And so thats why i think we need to i think this is an argument for a much more decentralized system of fiscal enforcement which has to come with this no bailout clause. Thank you. David . So professor argument about what political message is or is not being sent. Im reminded, i covered the french, dush, spanish referendums on the constitution and i remember when the irish voted note and the french voted no and the dutch voted no, all people said none of them have read the constitution so why should we listen to that theyve said. It didnt really mean that the constitution wasnt the right solution. So that came out and turn it into a new form and called it Something Else. And that was fine. But at some point if you insist there are no messages being sent of any sort, if you insist the dutch werent saying we want to put our foot on the break in terms of european immigration or we are now uneasy about globalization and all manner of liberal things and europe has become a proxy for those, or if you ignore the fact that in frans europe is an avatar for, you know, free Market Economics in a european context, you can keep ignoring all of those things as long as you like haen make a perfectly technically accurate argument. And it is true in this most recent european elections, a lot of it was not about the Work Programs of the large parties in the European Parliament. Im the first to admit that the European Parliament has no mandate for what it says it has a mandate for. The point im making is at some point you hit the wall. What is the wall . Is the wall the National Front winning the elections in france . That doesnt matter. Because it wont have a direct effect. It wont be the national mvps will control the votes but it will have an incorrect effect every time theres a fork in the road where National Government o or the big parties, there will be endless forks in the road. Shall we do the populous easy thing, shall we do the open thing, shall we do the closed thing. One of her first demands was to scrap the negotiations. Is it in her pow tore scrap the negotiations . No it shes only the woman who runs the party who won the french election. But i bet it makes it harder for france to agree to stuff. I bet it doesnt help. I bet its really unhelpful when american says to europe putin has done this, we need to do some serious tough sanctions now because the western world needs to alie itself against russia. Does it matter that so many of these far right parties have basically more sympathetic to russia than america . I bet it matters in terms of whether europe goes along with those tough sanctions or doesnt. When britain comes through and says, high are the concessions that we would like. Plenty of conservative members of parliament who dont like their Prime Minister, they think if they had a much tougher, more antieuropean, more antiimmigration line, their seats will be safer next year at the general election. That will dramatically impact David Camerons room for maneuver. It will harden the list of thing they ask for if we get to that point. It will make britain much less realistic about what is possible and the other parties will make it more difficult for National Government to let britain have what it wants. It makes it that much more likely, much harder for britain to stay in. On all of these marginal calls, you know, thats how politics work. Politics is like the weather. Theres a freezing gale out there and that makes todays people put on an overcoat and scarf and hunker down. Its at that level that it makes a difference. You can ignore it, you can give me lots of clever reasons to ignore it, but at some point, you know, its going to catch up with you. Youre going to hit the wall. And we may have hit the wall right now. But you cant keep ignoring this stuff saying it doesnt mean anything. Jeremy are we finishing up now with the break for 15 minutes or are we running until 10 45 . Unfortunately we dont have time for more questions. But there will be plenty of time to address those questions i think in the next session which is on the role of the european world. Id like to thank our panelists. [ applause ] well reconvene here in ten to 15 minutes. I would like to ask the panelists for the next panel to meet over here so you can sort of discuss as the next panel in advance. Thank you very much. As you may have heard, they will be back for the next panel on this discussion looking at the future of the European Union here at the brookings institution. We will have live coverage when they resume. And later today they will be hearing from the president S Deputy National security adviser, tony blinken will be talking about the response to the situation in ukraine. Well have all of that live here on cspan 3. Were going to show you a conversation from this mornings wall street journal focusing on the president s european troop which is wrapping up to following ceremonies at the 70th anniversary of d day. Here to discuss the president s efforts in poland, brussels and france this week is the executive director of the Transatlantic Academy. What were the goals of the white house heading into this trip and has the white accomplished them this week . The main goal is trying to reassure the europeans after the russian actions in crimea and ukraine. Theres a lot of doubt about the u. S. Commitment. His goal was to go over, especially in poland to reassure them that the u. S. Is with them, that nato means something and that we will defend their security against russian pressures and possible aggression. I think that was his main goal to reinforce it. Hes left an um presentation in europe in the last couple of years that he cares for about asia than he does europe. Hes concerned about the chinese threats and challenges in asia. Theres a lot of talk about the pacific pivot and this has unsettled the europeans. Also the other issue of course is how to keep the europeans together in a coordinated response to what the russians are up to with the sanctions in particular because of the big economic stakes that the europeans have with russia. I think he was also trying to see how much cos he could keep in many midwest flp is a division between the western europeans who are doing a lot of business with the russians and the eastern europeans who are feeling more threatened. Which countries were his most important audience that he had to reach this week . I would say poland and through poland the Baltic States. Those are the countries that feel the most directly affected right now by what putin has been up to. I do think he has, to me, the most important country is germany and you need to german ons board for any kind of consistent policy, visavis russia. That was important. The problem were having with germany is a snowden problem, the nsa problem. A lot of americans dont understand how deep right now the divisions are in germany over the u. S. And the loss of trust. So hes got to find a way to establish that. I dont think he did much on that on this trip. Two, efforts of the United States announced this week to try to get russias attention, the possibility of new sanctions coming up down the road and possible as soon as a month that new billion dollar effort to increase military deployments in yoourp. Start with that billion dollar effort that was announced in poland. Explain that. The eastern europeans are looking for a military reassurance and not just words. What this package does is allow nato to do more in terms of deploying forces in and out of poland and the Baltic States to show that article 5 matters. I personally think its a little bit too lit. I would have preferred to have seen a much more substantial reaction and to start thinking about the permanent deployment of u. S. And nato forces in a place like poland and possibly the Baltic States. Whats happened in the last two months is all of the agreements that weve ooded had with the russians about how to deal with the European Security, all of it has been broken. The russians had promised in a signed document in 1994 to accept and recognize ukraine easter toirl integrity. That opens the door on all of the promises weve made about European Security which included we would not deploy forces permanently into places like poland. I think thats apartmently off the table. Unless we take that more seriously and have a more permanent deployment into poland, this wont be enough. What is a permanent deployment men . Weve talked about, on this program, the president s efforts to send new fighter rotations. Right. Through nato. What are you looking for . Bases. I would say we have a lot of force, we still have forces in germany. Why not move to some of those bases and have permanent bases in poland. Baltic states are a little trickier but i still think we have to do something. What youre talking about is sort of, as you said, just rotations. Theyre not staying there. They come in for a while and then they leave. Not just american forces. We ought to have nato forces permanently stationed. Not a huge amount but to have an important trip wire there in poland. Here is how the white house described what its called this billion dollar effort. Some of the measures would be increasing kpaer sizes in training across europe, newer allies from the white house website as weve done in poland, deploy u. S. Planner to augment the capability of our alley to design and host a broad range of training and exercise opportunities, increasing the sponiveness of the u. S. Sources to explore initiatives, prepositioning, equipment improvement and infrastructure, increased participation by the u. S. Navy and nato naval force deployments and build the capacity of our Close Friends such as georgia, mall doe va and ukraine so they can work alongside the United States and nato. That from the white house document outlining the european assurance initiative. Any of this get putins attention in. Maybe a little but i dont think hes taking it too seriously. As you said its still not it seems to be a relatively minor attempt. The least they could probably do. But i dont think hes going to be too impressed by that. Hes beginning to see how the western europeans in particular are trying to find a way out of this situation and i am worried a bit about the separation that will come between the u. S. And some of the west europeans. We you saw whats going on in paris. You have David Cameron, the us Prime Minister meeting with putin. The president is not, as far as we know, officially having an official meeting with him. You can begin to see already putin can see how he can play off the western europeans against the americans and west europeans against the east europeans. G8 becomes the g7, russia kicked out of it. Does putten still have the same amount of influence with the leaders in the g7 this week . I think so. We had to do this but i do think as much as we dont know what putin has been up to, we have to talk to him. We cant get some kind of a settlement in ukraine in f russia is not going to go along with it. Its distasteful but i understand the need to reach out and discuss the. We dont have to have them in the g7. Hes kind of an informal member now, meeting with everybody. The official members canada, france, germany, italy, japan, the united king demeanor and the United States. Were talking about the president s four country four day threecountry tip trip across europe this week. If you have questions or comments abit, our phones are open. Republicans call at 202583. 8881, democrats and independents. And if youre outside the u. S. , call us as well. Well look for your tweets and email. As folks are calling in, explain what the Transatlantic Academy is. Were a foundation here in washington that promotes u. S. European relations and exchanges and understanding. We bring together scholars every year, six skol locholars to wor together. We have a lot of seminars and publications on the transatlantic relationship. Were looking at the future of the liberal order. How the u. S. And other consist work with the rise of russia and china, how we can develop and main tin the order we created since the end of world war ii. How long j you been the executive director there. Ten years. Jacqueline is going to be first calling in from huntsville, alabama on our line for democrats. Good morning. Caller good morning. Go ahead. Youre on the washington journal. Caller bush aint did nothing. I mean everybody give obama a hard time. Good morning. Yeah, go ahead. We heard you. You say everybody is giving president obama a hard time. Caller yes, you are. Are you talking about the bergdahl situation that we talked about before or the president s trip to europe this week . Caller yall are just giving obama a hard time really. Well, okay. Well go to joe next in annapolis, maryland on our line for republicans. Joe, good morning. Caller thanks for cspan. I was interested in your interests comment that mr. Obamas initiative in europe is going to be the european reassurance and its going to comprise, you know additional deployments of navy ships and other units simultaneously while obama wants to draw down the military in general. As governor romney said, obamas plan was decrease the navy below world war i level pps president reagan never quite got to his goal. I just didnt think the military can u support these initiatives if theyre really truly initiatives. It appears its just this happy talk that obama puts out, first its a pivot to the pacific and now a reshurns to europe. My last comment has obama has repeatedly threatened to reduce the Health Care Benefits and the pay of veterans and military activity duty. That just doesnt square with his rhetoric. Well, i do think that youre right in the sense that we are stretched pretty thin. I think we can make some important redeployments from germany to poland without increasing the cost too much. The polif the polls would be ok to pay for some of that. I do think its were not looking to have a real Defense Force thats ready day one in days there was an up vegas, but it would be an important symbolic trip wire and the russians would take it seriously that were reacting, not just doing happy talk. But i agree with you. This is the president s first step and i wouldnt say this the the only step. Lets hope that he does more. This billion dollar initiative, where does the money come from and does congress have to approve it . Thats a good question. Its not a lot of money in terms of the defense budget. I think hell go to congress. I think it would be good if we went to congress for it because i think hell get support for it open it would show the europeans that were behind this, not just the president but the entire country is behind it. Are we at the beginning of a new cold war . No. And i think the reason is, if you look back at the cold war, russia was isolated economy cli. Now theres a lot of russian investment in the west, russians can travel. They have access through the internet. Theyre not as a camp, a closed camp as they were world the cold war. It also means its more difficult to the west to react to these challenges because of the in particular in europe, the hum economic stakes that are involved. In germany, 6,000 Germany Companies are operating in russia, 200,000 german jobs depend on trade with russia. That was not the case during the cold war. Wu we are at the end of the post cold war era. As i mentioned before, all of these understandings that we had about russias role in europe about what European Security would look like, i think we started take it for granted that was going to be nice and quiet and peaceful in europe. Were going somewhere else. Some of the efforts announced this week, president obama and David Cameron discussing the possibility of new sanctions. I want to play our viewers a clip of that and come back and get your thoughts. The steps that david outlined earlier and that the g7 unanimously agrees with which is for mr. Putin to take cease this moment, recognize por when ko is the leader of ukraine, work with ukraine to engage those in the east did you recollect this process of constitutional economic reform. If mr. Putin takes those steps, then it is possible for us to begin to rebuild trust between russia and its neighbors and europe. Should he fail to do so, though, there are going to be additional consequences. One of the important things that came out of this meeting today was the recognition on the part of all of us that we cant simply allow drift. The mere fact that some of mr. Some of the russian soldiers have moved back off of the border and that russia is now destabilizing ukraine through surrogates rather than overtly and explicitly does not mean that we can afford three months or four months or six months of continued violence and conflict in Eastern Ukraine. We will have a chance to see what mr. Putin does over the next two or three, four weeks and if he remains on the current course, then weve already indicated the kinds of actions that were prepared to take. What would be the difference about these new sanctions that the president is talking about at the g7 agreed to . Right. Well these samesexes in the past it with us a much more sort of overt invasion, lets say, of russia into ukraine that would trigger sanctions. Then they moved it to if putin tried to block the election there would be sanctions. Now hes basically saying well even if you dont put troops into ukraine, if youre trying to destabilize ukraine, that will lead to sanctions. Its important to keep the sanctions on the table. This is one of the reasons that putin has backed off a little bit and accepted that the ukrainian election has not sent troops in. The russians can do these things subtly. They can deny any instability or whats going on with the agitators and people who are well armed fighting with russian equipment and training and putin can say we cant control that, thats people who want the join russia. So i could see how maybe the president and cameron have taken this position. But will he be able to bring along france or Angela Merkel from germany on this. If its this americay, i dont think theyre willing to risk the Economic Cost that will be that theyll have to bear. Were in a difficult situation because i think that putin will continue to destabilize Eastern Ukraine but hes no dummy. Hes not going to be obvious about it, the fingerprints are not going to be obvious. We e hope that the ukrainian president will be able to work out an argument with him. I think its important to have the threat of samesexes out there. As i mentioned before, it is not the new cold war because the russians really are worried about sanction ons their Energy Sector and their financial sector. Were here to take your questions and comments. Well go to james in bristol, tennessee on our line for independents. James, good morning. Caller good morning. Thank you for taking my phone call. You were mentions something about building up bases over in europe. Im with him if hes for like all missile bases, forces and stuff need to be built back up to show those people over there that we support them, we back them up. Because if we dont, i dont know whats going to happen. But ill tell you what, wed get more respect from the nations by backing them up and supporting them than we do just sitting by and letting alqaeda and the taliban and all of that come in there and, you know, just cause the distressed wars and stuff killing people. Thats not right. Well, thank you. I would just, if i could, i would agree with you. The one thing we have to be careful about is we dont want to make this an american operation or commitment. This is really a european problem. The europeans are more directly threatened in some respects than we are. I agree with you 100 we have to show leadership and resolve. But the president has been saying in brussels that the europeans have gotshould have e moved over, as well. Europeans are going to take a large part of the burden. I would not want this to be an americanonly operation. Transatlantic relations are something we talked about frequently. On several occasions set up the hope to set up something with brookings. I think this was before she came to brookings. I do hope we can work together. Thank you to fiona and particularly jeremy letting me free ride putting this event in place. We have four fantastic speakers. I will do you a favor and not waste any more of your time. Well start with andy on the far right, geographically. Hopefully have plenty of time for discussion. Andy. Great. Thank you very much for having me. I wanted to dispel a little of the gloom starting with optimism. It will be sweet and sour here. Every American Administration starts by turning to asia, somewhere in asia and ends up back in europe. This administration has done the same. There is a fundamental reason why this is true. Observers always underestimate europes power and influence in the world. I think we should reflect on that for a moment to put all this in perspective. So europe, judging by practical results and what its achieved over the last couple of decades is the other superpower in the world besides the United States. It is ambitious, it is successful, its extraordinarily powerful. Sometimes works formally, sometimes individually, really across the entire spectrum of ways of influencing the world, military, economic, ideational, has much more influence in the world than china. Its the worlds second Largest Military power. Its had on the average over the last two decades 75,000 combat troops in action throughout the world compared to china between zero and 2,000. In various operations like libya, its led those operations. Most problems in the world dont have military solutions. Europe is the preeminent trade power. It might be in trouble, but that shows how important it is because we see what might happen if it goes south. Its the Worlds Largest supplier of foreign aid. Its the most dynamic expanding regional power. So the single most costeffective instrument that any country or political body has had in the world to promote peace, security and economic wellbeing in the world over the last couple of decade has been european enlargement, and european enlargement continues into the western balkans. It has influence in places where there is little hope short term of a country joining the European Union like ukraine. Its the major supporter of International Law and institutions. Not just in the region, but throughout the world. Everything from the icc to the u. N. Organizations and Everything Else and trade. It is the worlds most important source of soft power ideas. If you poll people across the world or look at what they write into their constitutions, most of those ideas come from europe not from the United States, china or elsewhere. It educates students, it does dozens of other things of that kind. Throughout all this, it has a Firm Alliance with the United States, which is an enormous asset. Something that permits it to work in cooperation with the other great superpower in the world, and again something that cant be said of china or india or any of these rising powers. You will remember in this room just a decade ago bob cagin telling us europe and the United States were from two different planets and destined to drift apart that. Hasnt come to pass at all. Moreover, europe, the eu as a whole is, i believe, and to a greater extent than the conversation we had up here might lead you to believe, completely stable because pulling out of europe would be suicidal for any country. The euro, we can talk about how stable it is, but britain is not going to go anywhere any time soon. And even today, the eu is more popular and more trusted by publics in European Countries than National Governments are. That is even true for the british. If you poll british today and ask them, which institution do you trust more, the European Commission or the British Parliament . They kiwill tell you the europe commission. This is an institution that has a tremendous amount going for it. It has one major problem that started in 2008 with the economic crisis. Because in 2008, i lived for a year in china. All the chinese wanted to know about was europe because europe had managed to convince people, and i think rightly, that it was a real force in the world. Since then, europes achievements and global influence have been called into question by the failure of one policy. That policy is the one we recently discussed, the euro. So as simon pointed out correctly in the initial panel, its a kind of tragedy of europe that its success has brought about questions because the euro has become a threat to european integration itself. There are three possibilities. One possibility is that europe moves forward toward a federal solution. That will be extremely costly, politically and economically. The second is that it slips back fragmenting into different euro zones or into single currencies. That will be also a traumatic, difficult and costly. The third and probably most likely is that it stagnates in a kind of japanese solution of low growth and muddling through, and that, too, will be economically and politically difficult. Any of these options mean that europes economic and Political Capital will be lessened over the coming years and decade. So i would concede davids point that there are some Public Opinion and political constraints to what europe can do internationally, but i dont think theyre as gray as people think. For example, europe has continued to enlarge now to 28 and continued the process of enlargement, despite the fact that process has never had strong Public Opinion support in europe, and many countries that Public Opinion support is single digit and has been for decades. Nonetheless, european leaders continue with it and have done so successfully. The more important problem is that in order to pursue effective Foreign Policy, one needs Economic Resources and political wherewithal or room to move, and that is difficult. The difficulty here is that there are issues in the world for which europe, because of its great power, is essential. You see this very clearly in a case like ukraine. Were only in the situation in ukraine because of the extraordinary attractive power of europe. That is how we should remember the crisis started. Ukraine is closer to the western camp today than it was six months or a year ago, and putin is in worse shape than he was six months or a year ago today or trying to get back to where he was, precisely because the attractive power of ukraine, of europe managed to change the government in ukraine and change the status quo. But to the Current Situation in ukraine, there is, as ambassador issinger will state in more detail, no military solution. The solutions in ukraine are going to be economic and political. The western tools we have are only marginally military. Natos nice, but nato cant really do very much in the region except reassure poland. For influencing ukraine whats needed is action on trade, action on energy, action on foreign assistance, action on immigration, action on education and other assistance. Those kind of policies are going to have to come primarily from europe. It is europe that dominates economic relations, social relations, political relations and cultural relations in that part of the world. Europe is the entity that matters. So what we see is that in the end, it is the civilian power of europe more often than not, and the return to europe that emerges when we look beneath the surfof