The Brexit Breakup: Negotiating the Separation

Speakers:
Karen E. Donfried

President, German Marshall Fund of the United States

Paul Tucker

Chair, Systemic Risk Council; Fellow, Harvard Kennedy School; Former Deputy Governor, Bank of England

Karl-Theodor zu Guttenberg

Chairman, Spitzberg Partners; Distinguished Statesman, Center for Strategic and International Studies; Former Minister of Defense, Federal Republic of Germany

Presider:
Gillian Tett

U.S. Managing Editor, Financial Times

Description

Experts discuss the upcoming Brexit negotiations, the various settlement options, and the future relationship between Great Britain and the European Union.

Transcript

TETT: Well, hello and good afternoon. And welcome, everybody, to the Council on Foreign Relations session called “The Brexit Breakup: Negotiating the Separation.” My name is Gillian Tett. I’m the U.S. managing editor of the Financial Times. And I’m absolutely delighted to be joined by a truly fantastic panel here today.

On my immediate left, your right, is Karen Donfried, president of the German Marshall Fund of the United States, who has been working—a stalwart of American security policy and foreign policy for a while, looking at Germany.

Next to her is Paul Tucker, the former deputy governor of the Bank of England, who is now at the Harvard Kennedy School.

And at the end is Karl-Theodor Zu Guttenberg, who’s a former German defense minister, who has told me that I didn’t have to call him “minister,” I call him “K.T.” (Laughter.) Sounds a bit like “J.K. Rowling.”

ZU GUTTENBERG: Exactly.

TETT: But anyway, any of you who’ve ever been involved in a divorce or had friends or family that’s been involved in a divorce, which I imagine probably includes most of the people in the room, know that separation/divorce invariably takes twice as long as you expect, is twice as expensive; and is never, ever as easy as anyone expects.

And when it comes—some people in the room are laughing bitterly—(laughter)—when it comes to a national divorce, we have truly an unprecedented situation because—my colleague Martin Wolf was in Davos at the beginning of this year and stood up and said to the crowd, well, by this time next year we could be seeing a world where Donald Trump is president, where we have Brexit, and where Marine Le Pen is president of France. And everyone in the room went—(gasps)—he must be joking. But here we are.

And we’re dealing with not merely a world that is increasingly unstable but one where the U.K. is trying to negotiate what is one of the hardest breakups that anybody has seen for a very long time. I discovered a new word last week because I was chatting with some European politicians about what the likely scenario would be. Would it be a hard Brexit? Would it be a soft Brexit? Would it be a fudge Brexit? Would it be a Brexit at all?

And one of them turned around and said, no, no, no, the term everyone is using now is a naked Brexit. (Laughter.) A naked Brexit apparently is where you literally leave cleanly and then start all over again.

But we’re going to try and work out today what do you expect to see over the next year, whether it’s going to be possible to emerge from this separation with any constructive solution.

But before I do, I’d like to quickly ask the audience where they stand in terms of their expectations before we hear from the experts. Hands up who in the room is a hundred-percent convinced that Brexit will actually happen. OK. Who thinks there’s a 50-50 chance that Brexit will happen? Interesting. OK. Who expects to see a hard Brexit? Not that many. And who thinks that some kind of fudge will be found, a sort of soft-ish Brexit? OK. Well, those of you who aren’t in the room and listening in or watching, that’s a sort of fairly mixed set of reactions.

So perhaps I can start maybe with Paul since you are—Sir Paul—since you are the honorary Brit on the panel.

TUCKER: (Laughs.)

TETT: What do you expect to see unfold over the next year? Hard Brexit, soft Brexit, or no Brexit?

TUCKER: I don’t think very much at all will unfold over the next year, but in terms of your questions, I think that Brexit will occur. I think the nature of our political culture, our deep norms and values is that there has been a referendum and although constitutionally it’s advisory, our parliament and our executive branch will follow that, and if it didn’t it would be at their peril via the ballot box.

So I’m very interested by the relatively few hands that Brexit won’t happen at all. I don’t think much will happen over the next year. I think the prime minister has done well in pushing out the triggering of Article 50, which begins the process of leaving, until late spring. The reason I think that has been skillful is that it means two years. It’s a two-year process. And most of that two years will be after both the French election and just as importantly after the German election. And I think we will live through something of a phony war until shortly after the German election, where the question will be do the various things that people say for effect create a path-dependent world?

As time passes, I think people will be—and I both believe they will and believe they should—be focused more on what will happen in the medium- to long run. I think we have to hope that the politicians in Europe take a 15- to 20-year view that the U.K. and the EU can change everything other than its geography. And that means that for foreign policy, security, defense, and where those issues bridge into economic policy—sanctions being the canonical example—there are lots of shared interests.

And so I both hope and believe there is a chance that we will move to a system of concentric circles.

TETT: So essentially you’re arguing that this process will be drawn out, nothing’s going to happen quickly; and the longer that people have a chance to sit and negotiate and ponder, the more sensible that they will become?

TUCKER: Well, I’m making—yeah, you’re right that I’m making two points. I’m making a positive, an empirical point. I just don’t see how anything can happen quickly when you don’t know who the French president is and you don’t know who the German government is.

TETT: Right.

TUCKER: And then normatively, I think as time passes that people will start to debate, well, what do we want the shape of Europe to be over the next 20 or 25 years? And even if they don’t debate that over the next two to three years, I think they’ll debate it over the next 10 to 15 years. So I don’t think any initial Brexit deal will be the last word on all of this.

TETT: Right. Well, just to offer a slight counterfactual, those of you who haven’t yet read your Financial Times today—(laughter)—you can come and see me later. We offer great subscriptions. Those of you who haven’t yet may not have seen that we have—our big read today is about Denmark, which has indeed had a chance to sit down and think about the implications of all of this. And Denmark, having had a chance to sit down and think about the implications, about what’s in Danish interest, is actually not becoming more sensible in the sense of reasonable. If Alex Barker, my wonderful colleague, is correct, they’re actually becoming more hardline.

Are you not concerned that in a climate of growing nationalism and populism where, you know, you may end up later towards the end of 2017 with Marine Le Pen running France, you may end up with a surprise in the Italian referendum, that actually the longer you wait, the worse it’s going to be, not the better?

TUCKER: I think if Marine Le Pen is elected, which I have thought for a long time and still think is the biggest democratic event happening in the Western world, bigger than our referendum, bigger than the U.S. general election, if we—if she were to be elected as president, I think there would be an existential crisis within Europe.

ZU GUTTENBERG: Specifically in Germany.

TUCKER: Specifically in Germany. And I think it would be a pretty massive crisis for the U.S. as well.

In the nearer term, if Italy stumbles in its referendum, that could—not would but could—unleash very destructive forces within the monetary union, which actually matters—it’s—the prosperity and stability of the monetary union probably matters more to U.K. prosperity than the terms of Brexit.

So there are plenty of things that can interrupt this. And the Danes and plenty of others will take lots of positions over the next few months. But I still would place most of my money on some construct that recognizes the geography of Europe. And that’s not thinking in terms of hard or soft but in terms of where shared interests are undeniable.

TETT: Right. Well, I ought to come back later and ask Karen how—what on earth America is going to do in response to all of this mess. But first I’d like to ask K.T., who has given me permission to call him K.T. instead of “Minister”—I realize that offends American sensibilities—but K.T., are you betting that as time passes, everyone cools down and gets sensible?

ZU GUTTENBERG: No, I don’t. I’m afraid. It’s—and I’m with Paul. We face a year where we won’t see anything substantial happening regarding the shape of the Brexit. But Europe will still be moving, and it’s moving into some awkward directions. One is that we don’t even—we don’t only have the Italian referendum, which is a very, very tight call at the moment. And if that turns out negatively, the repercussions will be quite enormous. Secondly, we have a Dutch election. Don’t forget that. Wilders could be the one—

TUCKER: Yes. Yes.

ZU GUTTENBERG: Wilders could be the one elected in the Netherlands.

TUCKER: Yes.

ZU GUTTENBERG: So we have another—

TETT: Well, Wilders is actually—

ZU GUTTENBERG: We have another—I wouldn’t call it—I wouldn’t quite call him a “softie” but another guy who is standing for pure nationalism, for anti-European thoughts, and with—that might trigger even more effects in that regard. Then of course the German elections—there won’t be a single substantial debate in Germany of how to shape the Brexit. It’s—if Angela Merkel starts to do that at this very moment or at the beginning of next year, it will fall back on her toes. So it’s of high risk for her.

And of course the French elections, where we’ve seen an interesting outcome yesterday of—regarding the runner-up for the conservative party now was Fillon. We didn’t expect that. Fillon may be—might be a surprisingly boring candidate in this whole European spectrum we’re facing right now.

But on the other side, his contenders—one was the hyperactive gentleman we have seen already for a couple of years, Sarkozy, who is out of the race now; and the other one, Juppe, who is probably the reflection of establishment in Europe. So Fillon somehow fits there in between. Does it raise the potential for Le Pen? Probably not. It might be good news for us, because if you would have had Sarkozy and Le Pen, people would have probably chosen the original when it comes to the—to nationalist thoughts and other things.

TUCKER: Yeah. Yeah.

ZU GUTTENBERG: So this whole thing is something which is not a healthy construct of the European Union. Where I differ a tiny bit from what Paul has said before is the European Union is already a European Union of concentric circles. The European Union is a European Union of different speeds. We have lived in an illusion now for many, many, many years in Europe where the—where the—where the treaties just don’t reflect the realities of the European Union. The European Union as such is something different than what the treaties are.

So the one thing I don’t see right now is a single political mind or politician in power who does what you’re actually asking for, think for the next 15 to 20 years. I’ve never seen a European politician doing that. It’s about the next election. It’s as simple as that.

TUCKER: Well, not—well, not for—well, not for a while.

ZU GUTTENBERG: Not for a while. And so it is about the next election, nothing else. And we are missing the chance right now in Europe to actually use the opportunity of the decision of the—of the people in the U.K. last year to finally come to terms with the realities of a—of a fragmented, de-solidarized, and weaker Europe than ever. And that’s the reality for the next year to come.

So I’m quite worried, to be honest. And I’m worried in that regard that I see a year—we could see even more nationalism popping up in Europe, even more fragmentation; and a Germany which is not capable of moving, France which is not capable of moving for the first couple of month. Then it would need Germany to align to some kind of a solution. And I think the situation is deteriorating right now.

TETT: I spoke last week actually at an event with a number of key financial players, with a couple of very senior European politicians who’ve been absolutely iconic in Europe over the last couple decades, few decades. And one of them said to me that—I asked them the inevitable question: Can you imagine a scenario where European Union would end up breaking up as a result of all of this? And he said, if you asked me that six months ago, I would have—I would have laughed at you, and now I dare not say never—or rather—that’s a rather messy work but, you know, yes, I can imagine that.

Is that the fear that’s haunting you, that actually the path we’re on of these different nationalisms rising up and this very messy, fragmented situation, a sense of drift, could end up with a breakup of the European Union?

ZU GUTTENBERG: It may sound absurd if I say my most—my comfort zone is that I think of a Europe that was most successful with its culture of muddling through, of kicking the can down the road. I once said it’s actually more kicking the can up the road, keeps falling down to our feet, and we still call it progress.

And—but it’s—so let’s put it that way. I don’t see Europe breaking up immediately, but I see us in a rather unhealthy process. And muddling through as such is not enough any longer. So again, if we look at the realities, if we look at what the wider framework would like to see Europe being shaped as, there’s a—there’s a growing discrepancy. And I’ve said it a month or two month ago. I said we’re actually on the verge of a procedural collapse if you don’t come to terms. And yes, I’m afraid. I think we could come to situation at one point we might break up.

TETT: Paul.

TUCKER: So I think yesterday made this less likely. I—

TETT: You think Fillon is less likely to—

TUCKER: I think Fillon is less likely to lose to Le Pen than Sarkozy was likely to lose to Le Pen. I also think that if Fillon becomes the French president, depending very much on the National Assembly elections, which I think are three months later, there would be greater chance than today of reforms in France. And were they to occur, I think they would unlock a—could unlock a debate with Berlin about what needs to be done to put the monetary union on a firmer platform. But that’s balance of probabilities rather than certainties.

TETT: Just on—before we turn to Karen, I wanted to really ask, you know, aside from us all becoming now fans of Fillon—(laughter)—

DONFRIED: New tag line. (Laughs.)

TETT: Fillon fandom, here we come. What do you think Germany itself wants from the Brexit negotiations, to come back to the key question here? You know, do you think Germany is agreeing with Danish officials—I don’t know if you saw this piece today—about the fact that actually as time passes, when governments look at their national interest, they will increasingly decide they have to have a hard Brexit with the U.K.? Or do you think Germany wants to try and negotiate a soft Brexit with the U.K.?

ZU GUTTENBERG: No, they don’t want to. It’s the greatest nightmare for Germany right now actually to create a situation driven by a—by a German chancellor that—where other European countries will start to renegotiate their position in the European Union. And that could—that could happen in Poland, that could happen in Hungary, that could happen—where you also have quite interesting fellows on top of the governments or behind the respective governments.

So at the very moment it’s all about hard Brexit, out is out. Having said that, we have—I cannot remember a single European step where the European Union at the end of the day actually was sticking to its first impression they gave. And again, you have to have 27 member states in line. And then a couple of other question marks occurring—and there is more and more debate about that—for today or yesterday, one of—one of the—one of the leading judges of the European Court of Justice actually saying, well, wait for the moment when the whole thing lands on our—on our desks.

And so that could—that could take forever. And that usually leads then to all the lousy compromises we have seen in the European Union for the last couple of decades. Germany has an interest in a hard Brexit. That’s for sure. Will it happen? Depends on the willingness on a couple of others, not only France and Germany.

TETT: Right. Karen, what on earth is America going to do about this mess? I mean, put it this way. Imagine that tomorrow you were suddenly named as secretary of state, there was a vacancy. What would you do?

DONFRIED: So we’ve seen the U.S. position on this change fundamentally because of the outcome of our election. So we remember President Obama going to London in April and making the case for a strong U.K. and a strong EU, which certainly didn’t have any positive impact. It’s not clear if it had a negative impact. And then you have Donald Trump as president-elect who supports Brexit, and his first foreign visitor was Nigel Farage.

So the idea that the U.S. might play some brokering role because of its special relationship with the U.K. and its longstanding commitment to the European project is gone.

So I think the U.S. role in this has changed very much because of the outcome of the election. It’s complicated things for Theresa May as well because of how she saw the U.S. playing a role for her and perhaps negotiating a free trade agreement, where she now has a president-elect who has foresworn new trade agreements.

So the U.S. side has gotten more complicated. And I think the European side certainly, as seen from U.S. perspectives—you know, we’ve talked about the timeline. December 4th is not only the Italian referendum on constitutional reform that Renzi may well lose. There’s also an Austrian presidential election—

TUCKER: Yes, absolutely.

DONFRIED: —where we believe a far-right candidate, Hofer, will win. So that’s going to be the first block on—the first two events. Then you have the French election. Then you have the German election. And I think when Germany looks at this, while Merkel is pragmatic and would like to negotiate the best possible deal with the U.K. because of German relations with the U.K., not only the trading relationship, but on the other hand she’s going to be much more concerned about cohesion among the 27. There is no EU member state for which European integration is more important than Germany.

And so the idea that it’s just France that wants the U.K. to pay a price—it’s that Germany wants to keep the other 27 together, whether it’s Denmark or whether it’s Italy.

ZU GUTTENBERG: But not by lousy compromises. And that’s the risk we run.

DONFRIED: I think that’s why she can’t compromise. That’s why the four freedoms are indivisible.

ZU GUTTENBERG: Right.

TUCKER: So there’s a very nasty short- versus long-term tradeoff here, which is—where this argument goes is hard Brexit so as to deter others from leaving, and in the medium term making EU membership a constitutional prison will not endear the EU to the people of the various countries that—the—if you—if you want to get to a sustainable, steady state for the EU, raising the barrier to leaving so high that it is impossible will not promote cohesion within the EU.

So—but I—but I’m not disagreeing with you about the short-term incentives, but we have to separate the short-term incentives from the long-term interests.

TETT: Karen.

DONFRIED: I also wonder, Paul, if at the end of the day it will be a negotiated settlement. When Theresa May invokes Article 50, the clock starts ticking. So two years after that, the clock stops. Nobody thinks two years is enough time, particularly with the French and German elections, to negotiate a deal. So what happens at the end of that two years? You talk to some Brits, and they say, well, we’ll just ask for an extension. So we think the other 27 EU member states will readily agree to an extension of those negotiations?

So it’s not at all obvious to me that at the end of that two years you have a negotiated settlement that works for all. I mean, you could just have a U.K. leaving the EU at that point.

ZU GUTTENBERG: Well, I agree with you. I think the two years are sheer illusion. It’s—there is—the amount of the complexities is so vast, it cannot be resolved in de facto one year, because the first year is not a negotiated year. It will be after the elections.

So you have one year left. And then you need a unanimous decision to prolong. And so it could lead—and that would lead into—potentially in a rather nasty situation, which is not all too nice to all players involved.

So I’m with Paul here. I think at the same time, the stricter we are to European EU plus euro zone member states regarding their option to opt out or not, the harder it will be to find a solution of keeping Europe together. And there are a couple of interesting ideas. You wrote an interesting idea a couple of weeks ago with a couple of colleagues, and we have had already that debate about a decade ago when it came to the question, how can we integrate Turkey at one point, yeah.

TUCKER: Yeah. Yeah.

ZU GUTTENBERG: Will it be—will it be a member state at the end of the day, or will it just be a privileged partner, or will it be someone where we form another concentric circle within or around the European Union that might be attractive for weaker members to join or might be attractive for others to come close to the European Union?

But set such things up, you need—you need an amount of leaders and leadership in the European Union, which we don’t have at the very moment.

TETT: But that was—because, I mean, the paper you’re referring to, those of you who haven’t seen it—and I would recommend it—it’s called “Europe After Brexit: A Proposal for a Continental Partnership.” And it has a cast of thousands who have contributed to it.

TUCKER: No, five—four—

TETT: Five, OK. (Laughter.) Well, OK.

TUCKER: Which is—which doesn’t even reach the first order of magnitude of 10.

TETT: OK, well the point is, it’s a lovely spread across Europe in terms of people who have contributed to it. I think you’ve got French, German, British, and a whole range of—

TUCKER: It’s worth saying that one of the Germans is the chair of the Bundestag foreign affairs committee and one of—and one of the Frenchmen—

TETT: Right.

ZU GUTTENBERG: A dear friend of Angela Merkel.

TUCKER: —runs a think tank which advises the French prime minister.

TETT: So this is an incredibly sensible proposal for concentric circles, as you say, which, if everyone was sitting around the table and singing “Kumbaya” and being grown-up and thinking long-term, is clearly the solution.

But to come back to K.T.’s point, is there anybody on the European stage today, since the Americans clearly can’t do this now, who’s actually going to show leadership to actually create this type of sensible proposal, let alone engage in a sensible—(inaudible)—negotiation? I mean, would Angela Merkel take that role on herself?

ZU GUTTENBERG: Well, if you took—if you take the impression people have over here in the U.S. of her and about her, you would think so. But—I’d like to work with her a lot, but she’s definitely not the leader many see in her. She is—she is a fantastic leader from behind. Whenever she chose to lead from the front, it—she did not create, let’s say, the most marvelous success stories. Domestically, one example is her energy transition that’s led to more or less a disaster. The second domestic thing where she actually bravely tried to lead from the front was how she dealt with the refugee crisis.

So these are two example where it didn’t work very well. Point where it actually worked was how to deal with Ukraine and her stance towards Russia. This is, I think, a positive example. But she is one who would always—she’s probably the most skilled ad hoc decision-maker I’ve ever met, extremely, extremely well-positioned to—I once called it the art of being “Merkel-iavelli”, so it’s—not Machiavelli but “Merkel-iavelli.” (Laughter.) It’s—

TETT: Up there with “naked Brexit,” there’s a new term we all need to learn.

ZU GUTTENBERG: And I don’t say that disrespectful, but it follows a couple of principles that actually held the European Union awkwardly together. The first principle is to hesitate vigorously. (Laughter.) That’s something that worked fantastically for her for quite a while. Second is to keep all options open but do it decisively. And—but with that—with that thing, she actually contained somehow the Greek crisis—and be mother at home and mother-in-law abroad. It’s—so it’s—that was an impression where she lived it very properly.

And a third—and a fourth element—and that’s a political style which kept her from being overwhelmed by populists and others so far in Germany, although we have a worrisome movement there too—is that she would—she is a brilliant analytical mind, and she would keep the things as complex as anyhow possible. She would note every single detail of a complex problem.

But she could build a façade of complexity where you could do your 170-degree turns behind as often as you want and neither the press nor the public would actually realize what’s happening. So that’s—and it has to be 170. If it’s 180, you would land on the same spot and it would be too obvious after the second time.

TETT: Right.

ZU GUTTENBERG: But this is—that somehow added up to a leadership style that is not visionary. It’s one where—she’s probably the most capable leader in dealing with a problem that falls on her feet that very morning. And then the next day she’ll take care about the next problem.

But it’s—she—we never discussed also in cabinet things with her, how would Europe look like in 10 or 15 years?

TETT: Right.

ZU GUTTENBERG: It’s about resolving the issue of today. And as simplistic as this may sound, it is a leadership style you find a lot in Europe. And of course it’s a breeding ground if you’re not part of this complexity circuit for populism, for nationalism. And Europe is too abstract for many people and the achievement of the European Union taken for granted by the people in Europe.

And that’s the lack of leadership, I see. There is not a single charismatic figure in the European Union that could actually drive the ideas you’re laying out that could actually stand up and say, that’s the narrative that we need for the younger generation, that’s something which is more than just pointing at the peace dividend, which is fantastic in Europe. But they take it for granted.

TETT: Yeah.

ZU GUTTENBERG: And so that makes it so hard.

TETT: That’s why we have a comedian who may well win the poll next month in Italy, those—I mean, I’m going to turn to the audience and ask some questions in just a moment. Before I do, though, I’d like to quickly touch on the economic cost and the foreign policy cost of this.

Paul, would you like to say a few words about the economic cost to this? Because the scenario we seem to be talking about is that basically a year of drift, where almost nothing happens, there’s shadowboxing; and then a year of frenzied attempts to try and get some kind of negotiations in place before the deadline runs out and then the deadline runs out and who knows—but that cannot be good for economic growth or planning or business confidence.

TUCKER: I don’t think this is the biggest issue that will affect economic growth in the Western world. And I also think that all that matters about economic growth is the medium- to long run.

So say all of this were to shift the path of growth down by 5 percentage points. It sounds like an awful lot, but we’re on a parallel path. Well, over a period of 25 to 50 years, that’s like losing two years. That isn’t—if it changed the slope of growth, that’s massive. But the big issues around changing the slope are what can drive productivity growth again in the United States and in continental Europe, not the terms of Brexit.

I think that what matters in the very long run—well, the long run, not the very long run—the long run for our citizens in Europe is whether the key capitals recognize their shared interests and where those shared interests run deeply. I completely agree with Karen that Washington—and I would add Beijing, Delhi, and Tokyo—are going to make a great deal of difference to that.

But what the Washington approach to this is will depend upon events over the next 18 months. I mean, presidential administrations often kind of start off with one slant on economic—well, geopolitical policy and find themselves adopting another.

Can I—can I just say one final thing before we open up, which is you’ve repeatedly characterized it as sensible and not sensible. I don’t want to be—I don’t want to be acquiescing in soft Brexit is sensible, hard Brexit is not. I think that’s a really bad way of framing the debate actually.

TETT: Right. OK.

DONFRIED: Do you want me so say anything on foreign policy?

TETT: Do you want to say something about the security implications of this? Because I know Richard Haass, the president, is very keen to hear about the implications in terms of, you know, security issues because we are at a very fragile moment.

DONFRIED: So what breaks this down in even the debate leading up to the June 23rd referendum has cemented Germany’s dominance in Europe. Germany was already dominant on the economic side, largest economy in the EU, the U.K. the second-largest. But Germany had always been in the shadow of the U.K. and France when it came to foreign and security policy. And that already changed before June 23rd because the U.K. was isolating itself from Europe and France has been so weak under Hollande.

So you saw in the case of Ukraine after Russia illegally annexed Crimea that it was Germany that stood up and led the EU on putting in place sanctions in coordination with Washington. So it cemented Germany’s weight also in the foreign policy side. And now post-referendum, I think it suggests the EU is not going to play the role on foreign and security policy that many EU leaders had been hoping it would, because you’ve lost Europe’s most capable military in the European Union.

So I think it’s going to be very interesting to see what happens with NATO. The argument in Washington had been that, oh, it’s a good thing if the EU moves on security and defense policy because maybe that will gin up the political will among European countries to spend more on defense.

Now I think everyone is looking to see if Donald Trump will gin up the political will in Europe to spend more on security and defense.

So I think you may see European countries standing up, saying, oh, we know, every successive U.S. administration has asked us to spend more on defense, we haven’t done it; but look, we’ve been doing it since Crimea. And it’s true. I mean, defense budgets aren’t declining anymore. They’re either stable or growing. And I think you’re going to see the Europeans want to demonstrate to an incoming Trump administration that they take their own security seriously. But I think we’re going to see that happen in a NATO context rather than in an EU context.

ZU GUTTENBERG: Yeah, we have been through that debate actually for decades. And you remember that as what we once called the ghosts of Tervuren. There was a Belgium town where there was a lot of talk about separating or having a European defense entity as a counterweight to NATO, which I always thought was utterly nonsense—or utter nonsense in that very regard.

So, yes, I think we have a dual wakeup call right now. And although you hear a lot of skeptical voices in Europe in respect of the election over here Tuesday a week ago, it might push the Europeans now into the necessity to do more, because the one thing they do realize—and they have heard the voices during the campaign. They really have heard them. It was not only the Trump camp. It was also Hillary’s camp that said it’s—we are not willing just to do everything, more or less, within NATO if Europe doesn’t stand up.

So a good amount of the global mess is around the European borders or even within the European borders. Having said that, don’t expect too much already in the next year to come. Again, we are in an election year. So if you—if you try to win an election in Germany by telling the people we have to spend more for the military, you have lost the election already. It’s over. It’s not—it’s not going to work.

But I think Angela Merkel knows that more has to be done here, and she has stepped up in many regards. It’s very often forgotten that it was quite a history also in Germany the last 10 to 15 years to become the third-biggest troop supplier in Afghanistan, to be engaged in Northern Africa, to be engaged in Kosovo, to be actually more and more a leading factor also in out-of-area missions.

We did it too silently because we were dead-afraid of the reaction of the German people. And there is still a culture of reluctance there. People don’t want to be engaged abroad. They don’t want to be connected to the quote, unquote, “dirty work.” And of course then there was a healthy factor that for the dirty work, still the U.S. is fine, is good to do. And if something’s wrong, it’s easy to blame them because they are the ones responsible for the mess in Iraq and in Afghanistan, all the things. I’m just quoting here. It’s easy—it’s easily been forgotten that it could have been also a role for Europe to take care of whatever’s happening around our borderlines.

So all together, I think it is—there is an opportunity and Brexit actually helps that to a certain extent.

TETT: Right. Well, thank you, K.T., for giving us a reason to be cheerful.

TUCKER: Finally.

TETT: Finally, given the rest of the debate.

I’m now going to turn to the audience for questions. Now—sorry, to members for questions. You’re not “audience”; you’re “members.” I have to remind you that this is on the record. Please wait for the microphone, and speak into it. It will be courteous—and in fact, I think under the CFR rules it’s actually compulsory—to say your name and affiliation. Please limit yourself to one question, and keep it very concise because I’m sure there’ll be lots of questions. And if you go over that, I will cut you off.

So questions. We’ve got a question in the front.

Q: Warren Hoge of the International Peace Institute.

Question for Paul Tucker. Now that we’ve decided that parliament will have a say, what can parliament do to shape the kind of Brexit that Britain will be seeking, and what do you think it will do?

TETT: Great question.

TUCKER: You want to take more or answer it now?

TETT: Why don’t you—

TUCKER: So there are two questions. There’s the immediate short-term legal question on whether parliament has a role in triggering Article 50. I’ll put that on one side. What matters is how they will influence the final package.

There will be a national debate on the final package. And given the timeline that has been set out here, that national debate will be occurring in the run-up to the 2020 general election. So—and I think this is a very healthy thing. I mean, the British people are going to—there are lots of different models, they’re quite complicated, and they will get presented to the British people but will get played out in parliament, particularly in the House of Commons.

The big tradeoff in the U.K. debate now—and I don’t think this will go away—is do we have to choose between some form of control over immigration on the one hand and the terms of access into the single market? And today’s opinion polls reveal a nation, a people that are—understandable don’t know which—how to cast that tradeoff.

So I think it’s something like 70 (percent) to 80 percent of the people think it’s important or very important that we stay in the single market somehow. Around 60 (percent) to 70 percent of the people think it’s important that we control immigration. That is exactly why we have democratic politics. I think this is the big underlying question that the British people and the British parliament have to face. I don’t know where they’ll come out. I think it’s absolutely healthy that that debate is going to occur.

TETT: Do you think—I mean I’ve got to ask on that, just to clarify for the audience: Do you think there’s any chance that parliament will block Brexit?

TUCKER: No. I think—I think if—I think there’s—in the near term, I—when they take a vote most likely on Article 50, I think that nearly all members of the House of Commons will vote in line with how the constituencies—in U.S.-speak, the districts—that they represent voted. And that would mean an overwhelming vote for leaving.

In the second chamber, there are mutterings that they may try and muster a majority to vote against. I think if they do, we would have a constitutional crisis around the place of the second chamber. Whilst I disagree that the judges have stepped out of line in making the judgment that they made a couple of weeks ago—it’s now going to our Supreme Court—I do think our—I don’t think that they stepped out of line at all. They were just interpreting the law that they saw it. I do think our second chamber would be out of line if they went against the wishes of the British people as expressed through the recent plebiscite.

TETT: Got a question over there and then there and then back.

Q: Thank you. Paul Sheard, S&P Global.

There have been—hasn’t been any mention so far of the European Commission or, for example, the president of the European Council, Donald Tusk. When you do get around to negotiating Brexit with the Europeans, who is going to be on the other side of the negotiating table?

ZU GUTTENBERG: On the European side?

Q: On the European side. Is it the commission? Is it the council? Is it the individual member states? How do you see that playing out?

ZU GUTTENBERG: Well, officially it always is the commission and to a certain extent the council. And behind that, it is the strongest member states.

TUCKER: Yep.

ZU GUTTENBERG: So to put it very bluntly, we always took care as Germans, as French, as U.K. politicians to install the least-shining figures at the top of the European institutions so that we could actually influence it even better.

And so the top pick of the negotiator on the European side now is Michel Barnier, an interesting character. He had his career in France. He had his career in the commission. There were rumors now over the weekend that he might actually lead—and it already shows where we are already, there is potential for frictions—that he might lead the negotiations in French. (Laughter.) And—(laughs)—which won’t take place. So you had a—(inaudible)—within a nanosecond. But it just—it just shows how iffy it is.

So the official part will be a European institutional negotiating party, unofficial powerful part will be the strong member states behind it. And that means Berlin has a say, Paris has a say, and it very much depends who is pushing.

TUCKER: Can I just say about Michel Barnier that I dealt with him a lot. I was chairing various G-20 committees on financial reform from 2009 to the end of 2013 when he was the EU commissioner for that stuff in the EU. And I found you could do business with Michel. Sometimes a tough negotiator but a grownup.

ZU GUTTENBERG: He’s a good pick, definitely.

TUCKER: Yeah. Yeah.

TETT: Oh, yeah. No, he’s a—

TUCKER: And experienced and knows about the—knows about some of the issues that the U.K. government will care about.

TETT: Yes, absolutely. Got a question over there, I think. No? Question in front then. Then we’ll go to the—then we’ll go to the back.

Q: My name is Donald Shriver. I’m the former president of Union Theological Seminary.

My World War II generation looks at this eruption of more nationalism with the usual anxiety of whether or not Europe stands any chance of going to war again. And I’d like to know whether you think these various nationalisms, as you say are on the increase, have any potential for another European war.

TETT: K.T., is that one you’d like to address?

ZU GUTTENBERG: I think it is—if there is—if there is any—if there is one element that will keep—that will keep the protagonists from sliding into a total disaster, then it is what you have just mentioned. So that’s what keeps the European Union kicking the can down the road but unfortunately not more than that.

So I think we’ve seen and we have witnessed one of—the longest peace project in Europe for centuries. And the problem is—it’s what I’ve mentioned before and what you’re hinting at as well—is that it is—so it’s extremely hard to convince the younger generation that grew up with peace around them more or less in the European Union that one of the main driving factors for that was a multinational approach and was a wider political approach in the European Union, and therefore there is a certain risk. And it cannot be addressed often enough.

And so it’s certainly—it’s certainly important to warn the people that something like that could happen and that we’re dealing with human beings and we’re dealing with nationalists. It’s—but I don’t see it happening at the very moment, definitely not, also in the near future.

TETT: Paul.

TUCKER: I don’t see—just speaking for the U.K., I don’t see burgeoning nationalism in the U.K. Our current prime minister and her government are not nationalists. There were—there were nationalist elements in those that campaigned for Brexit, but I don’t see them as being a majority of that. I don’t think the character of the British people or particularly the English people has changed.

Our part of the world, Western Eurasia, is more dangerous than it’s been for a long time, essentially because of what’s happening in the Near East and in Africa. And that’s going to go on for many, many decades. We could be facing the largest movement of people, migration, that we’ve seen since the Slav migrations in the eighth and ninth centuries. These are formidable issues that we face as a region of the world at the same time as the monetary union, which doesn’t have firm enough foundations, is struggling to recover.

So it’s a dangerous time, and it’s why each of these elections matter so much. But in terms of the transfer of power in the U.K., it’s no more nationalist than it was 12 months ago or five years ago.

ZU GUTTENBERG: Allow me—maybe allow me a footnote just on that very point, I think, which is also important. We have to be very, very careful not to come into a situation where we have been before, that certain European member states are in a situation that they may have to choose between leaning more eastwards—

TUCKER: Yes.

ZU GUTTENBERG: —and leaning towards a Western scheme of partners. And in that very respect, it is of utmost importance what signals we will get as Europeans from over here in the next month to come.

TUCKER: Yeah.

ZU GUTTENBERG: So any signal that Europe doesn’t count any longer and that it is the weak part of a Western coalition, of an alliance, or whatever will drive more and more people into the greedy arms of a guy sitting in the Kremlin and of someone who is playing with rifts within the European Union from Ankara. And there are a couple of others. And that makes it quite risky.

And so it is—that’s why it’s so important that we don’t slide into a situation where we suddenly have to choose between Moscow—some of them are in that situation already—or Washington. So this is why I ask my American friends to do whatever they can to strengthen that relationship.

TETT: So would you like to see the president-elect go on a grand tour of Europe?

ZU GUTTENBERG: Yeah, maybe not starting with Farage again—(laughter)—or Le Pen.

TETT: Or—

DONFRIED: But he will go—President-elect Trump will go to Europe three times in the first half of next year. We had the conversation with the NATO secretary general last week in which he agreed to attend the NATO summit. And Italy has the chairmanship of the G-7. So that meeting will be in Italy. And Germany has the chairmanship of the G-20.

ZU GUTTENBERG: G-20.

TUCKER: Yeah. Yeah.

DONFRIED: So you’ll have three presidential trips to Europe in the first half of next year.

TUCKER: This is good timing.

TETT: We have a question right at the back of the room.

Q: Andrew Gundlach, First Eagle Investment Management.

Paul, what makes you think that Theresa May will hold power until the elections and also hold the Tory Party together? Why not a vote of no confidence before? I say that question because all of us here have either met her by—Theresa in person or know people, especially in the business community—people come back singularly unimpressed. Her treatment of Osborne is frankly shocking.

How would you change—first of all—and I don’t know enough about domestic politics in the U.K. to know if there is a viable Labour Party that can challenge her, but what are the odds of that, and how might your answers on Brexit change?

TUCKER: The—I’m not a—I’m not a political pundit. I was a central banker. (Laughter.) What I observed over nearly 35 years in public service is that the Tory Party is quite disciplined in seeking and holding onto power. In the House of Commons, a no-confidence motion would arithmetically require the Tories to split and try and push her out of office. It seems to me unlikely that that will occur. I think it’s—this isn’t my own view—I think it’s pretty well established that she has a fairly strong base in the Tory Party itself. It’s a party that she kind of worked her way up through and kind of—whether she knows exactly which buttons to press, we’ll find out.

But—no scenario can be ruled out, but I shouldn’t think the scenario you paint is the most likely one as of today.

TETT: Since I’m not a central banker, I can bit more—bit less diplomatic and just say that right now the opposition Labour Party is in quasi-meltdown in many ways. And Theresa May has a formidable grip over the Tory Party and, I’d say, over a lot of the public discourse and debate. I sometimes say that what we have right now in the U.K. is rule by Daily Mail. Daily Mail is one of the main—

TUCKER: Rather than rule by the FT.

TETT: Both rule by the—(laughter)—you’d prefer it. Well, anyway. But we basically have—you know, she has been extraordinarily adept in capturing the public mood and playing it very well.

TUCKER: And I—that’s just who she is, by the way. I don’t—I don’t think—

TETT: Yeah. She’s exceptionally—

TUCKER: I do not think that she—my impression of her, for what it’s worth, is that I don’t think she gets up in the morning and thinks, where’s the mood today? I think this is who she is. She’s been in politics for a very long time.

TETT: She’s very, very competent. Any more questions? OK, question there.

Q: My name is Charles Frank. I’m related—with the Brookings Institution.

Would it be possible for Europe to grant terms to Britain any more favorable than the terms that Norway has in its relationship with the EU? And if not, what—where is the room or what kind of room is there for a soft Brexit?

TUCKER: So my view and that of my coauthors—two of whom are German, one Belgian, one French—is that none of the Norwegian, Swiss, Albanian, or other models will end up being or should end up being the model for a U.K.-EU relationship, simply given the relative size of the U.K. now and our position in the Security Council, the IMF, the G-7, and elsewhere; that the balance of interests is different.

But for that very reason—and we both referred to concentric circles—I and my fellow authors think that actually whatever the model is, ideally it will be a model that a number of European countries outside the EU could fit into. I mean, there is quite a lot of tension between Switzerland and the EU over the Swiss model, which is essentially a set of bespoke agreements.

And Turkey—if you—just forget the U.K. for a while. I mean, Turkey have done an incredible thing in many respects over the last 18 months, which is they have reduced the flow of immigrants from the Near East to Western Europe, Eastern Europe as well by about half to three-quarters of a million. So far, the kind of—the exchange has been in relation to money. But underneath there is the question of what will Turkey’s eventual relationship with Central and Western Europe be?

On the one hand, there are lots of people that would like a deeper trade relationship, not least because we think that Western Turkey is part of our heritage and we are part of theirs. But capitals are extremely unlikely—I mean, vanishingly close to zero—to sign up to freedom of movement of workers for Turkey. And that’s one of the many reasons which I and my fellow authors think that over the medium run, Europe, if it survives, will gravitate towards some—an inner circle of the monetary union with some kind of fiscal union, some kind of federal politics behind it; and an outer circle, which is an integrated trade area with three freedoms but not four, because in terms of the economics, to get the gains from trade you only need freedom of movement and one factor of production, not two. For a monetary union, you need mobility of people as well.

ZU GUTTENBERG: Although Turkey is drastically and swiftly moving away from any circle right now. It’s—

TUCKER: Yeah, that’s absolutely true. That’s absolutely true.

TETT: Yeah.

TUCKER: But that’s a problem.

ZU GUTTENBERG: Which is, yeah.

TUCKER: That’s a problem.

TETT: Yeah. Karen, do you—

DONFRIED: Just to jump in on this, I think that what’s complicated is where the trade space is right now for that singular arrangement. And it’d be one thing if it were a concentric circle that would work for the U.K. and countries that are not EU member states. I think the deep concern that particularly the Germans have is that it becomes an appealing option for current EU member states.

TUCKER: Right. That’s absolutely right.

DONFRIED: And so because right now, as Paul outlined, what the Brits want is this tradeoff between free movement of people versus single market, that’s exactly where Angela Merkel is saying, I’m not interested in a trade, because to her that’s cherry-picking.

TUCKER: Yeah.

DONFRIED: And then you’re going to have current EU member states who want to renegotiate the deal that they have. And I think that’s why the devil is in the details.

TUCKER: Right. I think that frames it really well. And again, taking a kind of—a decade-long horizon, a big issue is those countries in Central and Eastern Europe—take Poland, the biggest—they have a treaty commitment to join the monetary union. One day they’re going to have to decide whether to join the monetary union or actually be part of a different kind of relationship with the EU. That moment is not going to be reached soon, but one day it will be reached.

ZU GUTTENBERG: And we might be left out at one point just with the weak member states and Germany trying to avoid any reason to be accused of being the gravedigger of the European Union. That’s a nightmare for—nightmare scenario for Angela Merkel and for others of that generation.

TUCKER: Yeah, I agree.

TETT: Absolutely. All right. We have time for one last very quick question.

Q: Stephen Blank.

Following on an earlier comment, what is the Russian take on all of this? What are the Russians likely to do in the next year? And is this a moment for more aggressive Russian probing into, say, the Baltic area?

ZU GUTTENBERG: Well, for Vladimir Putin, it was a year where he—where he encountered actually Christmas a couple of times. (Laughter.) And so it started off with the Brexit.

TUCKER: Orthodox and Catholic.

ZU GUTTENBERG: And then actually I wouldn’t say the elections over here but the European reactions on the elections over here. And whatever widens existing rifts within the European Union is the most wonderful gift he can—he can—he can achieve and—or he can get.

So at the very moment, he doesn’t have to provoke very much. It’s—we’re taking over his business. And so he still has a lot of options if he needs to provoke to provoke at the European borderlines. So it’s—in Ukraine, he’s not—he has not created—he has not created a frozen conflict. It is a lukewarm conflict. It’s—and one he can—he can tamper with whenever he wants to.

I don’t think we are that far yet when it comes to Russian behavior that he might move even further westwards. He doesn’t have to right now. He’s outwitting all of us in Syria and other places because we are as disunited as we are—

TETT: Right.

ZU GUTTENBERG: —as an alliance, as a European Union. And we are not acting properly. So I think next year will be one where he will still be testing wherever he sees some tiny little opening. He’ll try to widen it again. That’s my take on that.

TETT: Well, sadly we are out of time. It’s been a fascinating debate, I mean, really fascinating. I must say I’ve taken away several key points, firstly that we started by talking about Brexit and we quickly moved into “Frexit”—I don’t know how you’d say Netherlands—“Nexit”—(laughter)—a whole series of potentially profound instabilities, challenging not just the U.K. relationship with Europe but Europe as a whole. That’s the bad news.

The good news is, anyone who wants a sensible outline of how you could fix it—(laughter)—I recommend Paul’s paper written with four other colleagues from all over the European Union.

TUCKER: Yes, absolutely. Thousands of them.

TETT: Exactly. (Laughter.) It does offer a very, very sensible blueprint for how you could actually resolve this. But sadly, the question of how you get from this mess to a sensible outcome is extremely unclear. Europe does has a—have a history, as K.T. says, of always muddling along and looking as if it’s going to go off the edge of a cliff and pulling back at the very last minute. Let’s hope this happens again. But what is needed right now clearly is leadership.

And one last note I would say is that K.T. said that what’s missing from the scene right now, sensible, thoughtful, charismatic European leaders who can present the case for Europe for the next generation. So for my vote at least, we all ought to be looking to K.T. (Laughter.) (Applause.)

(END)

"It's a two-year process. And most of that two years will be after both the French election and just as importantly after the German election...I just don't see how anything can happen quickly when you don't know who the French president is and you don't know who the German government is."
- Paul Tucker
"...We are missing the chance right now in Europe to actually use the opportunity of the decision of the...people in the U.K. last year to finally come to terms with the realities of a...fragmented, [de-solidified], and weaker Europe than ever."
- Karl-Theodor Zu Guttenburg
"[The outcome of the U.S. election has] complicated things for Theresa May...because of how she saw the U.S. playing a role for her and perhaps negotiating a free trade agreement, where she now has a president-elect who has foresworn new trade agreements."
- Karen E. Donfried

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