Britain's Place in Europe

Thursday, June 6, 2013
Whitney Shepardson Senior Fellow, Council on Foreign Relations
Adam S. Posen
President, Peterson Institute for International Economics; Member, Monetary Policy Committee, Bank of England (2009-2012)
Michael Mosettig
Writer, PBS Online NewsHour

MICHAEL MOSETTIG: I first of all want to congratulate the council on its good timing to set up this discussion today. We have in -- talk of Scotland seceding from the United Kingdom by 2014, the United Kingdom seceding from the European Union by 2017. We haven't had this much talk of secession in the British Isles since Henry VIII took on the Vatican. We have three-plus years of fiscal austerity. The question is, is this going to lead to a triple-dip recession? In addition, there is still, in -- certainly in London and, I think, in the rest of Britain, the shock from the second homegrown terrorist incident in seven years, this last one course being particularly gruesome, raising questions about both security and immigration policy.

But fortunately, in the midst of that, there's some good news. In a short period of time, the heir to the heir to the heir to the British throne will be born, and for the first time in English and British history, if it's a baby girl, she will not have to look over her shoulder for the arrival of a younger brother to bump her from the line of succession.

And so on that merry note -- (laughter) -- I will briefly introduce our speakers. You know them both, so I'm not going to recite their CV since graduate school, Charlie Kupchan immediately to my right, Adam Posen one step over. Both are very familiar with what goes on in the United Kingdom from frequent visits, living there as deputy governor of the Bank of England.

So Charles, let me start with you. What is behind what seems, from this distance but also, I think, up close, considerable amount of disarray in the Cameron government, especially over the European Union?

CHARLES KUPCHAN: I think what's happening in England is a particularly vicious brand of a political phenomenon that is -- that is taking place across Europe, and that is an uptick, if not an upsurge, in populist, nationalist, anti-EU sentiment.

On the continent itself, I think quite remarkably, there is not yet a single country in which anti-EU forces are in power. They've come close. If you look at the French election last year, a third of the electorate in the first round voted fro an anti-EU candidate. In the Greek situation right now, the latest poll show that Syriza, which is against the bailout, is now the number one party in the country. In the Italian election, the Five Star Movement got 25 percent of the vote. But in all those cases, France, Greece, Italy, elsewhere, you still have either a mainstream center-left or a mainstream center-right party in power, and they are still pro-EU, despite how difficult the economic conditions are.

The U.K. is the one outlier where you have a mainstream party that is increasingly skeptical about membership in the European Union, driven in part by the growing power of the U.K. Independence Party, which calls for withdrawal from the European Union, and driven by about a third of the Conservative Party itself, which is more or less where the U.K. Independence Party is, and that is, let's get the hell out. Cameron himself is a moderate and is locating himself in the -- what you might call the kind of sweet spot of saying, I would like to keep my country in the European Union; to do that, I'm going to negotiate a more distant relationship with the EU and sell that to the British public.

It's a big gamble, because I think there are three possible outcomes, none of which is unlikely, that could lead to exit. One is a referendum in 2017, and that could well be a "no" vote. Two, Cameron tries to negotiate with the EU for that distance, and his EU counterparts say, get lost, and then he has to walk away. Three -- and I think this is the most likely scenario -- they actually say yes to him, and they cut him some deals and some opt-outs, and then Britain finds itself so marginalized, so outside the European core that eventually they leave anyway because the rest of Europe is heading of toward banking and fiscal union.

MOSETTIG: I want to take up some of those things in a second. But Adam, Cameron's position now -- he -- what's going on with the party that Charles referred to, Ukip, which seems to be somewhat analogous to our tea party --

ADAM POSEN: Exactly.

MOSETTIG: -- taking over a major political party -- every move he's made since being prime minister, starting with taking the European parliamentary Tories out of the people's coalition in the European Parliament, has been aimed at appeasing the anti-EU forces in his own party, but every step seems to have backfired.

POSEN: Well, not backfired. I think every step has shown that you can't buy off ideologues if -- as we've discovered with the tea party in the U.S., that if their both vision of the world and their self-interest is defined by a very extreme position, trying to do something that meets them partway doesn't get you anywhere. And Cameron has nowhere to go because the coalition partner, the Liberal Democrats, have always been the most pro-European, most pro-integration of all the major parties in Britain. The Labour Party has always been split, nowhere near as virulently anti-Europe as UKIP, but Gordon Brown and that wing of the party has always been very skeptical, whereas the Tony Blair, more modernizing modernist ring, was more pro-Europe. And so there was no room for him to do anything.

And to the degree you think Cameron is a moderate, which I'm not entirely convinced of, but to the degree that you think Cameron is a moderate, he had to keep establishing his bona fides. So, you know, it's -- imagine that you had a tea party, and you had a George Herbert Walker Bush, who had to keep proving himself tough to the back benchers, to mix some -- mix some images.

If -- Michael, if I can just pick up on something Charlie said, I think he portrayed very accurately part of what's driving this. Another part of what's driving this, though, is that there's been a long time sort of suspicion of -- by the U.K. -- including a lot of the U.K. elites, as it were, the rich people of London, the literary classes of the EU -- (inaudible) -- they see it as a French plot, whether they see it as very in -- (inaudible) -- less graphic terms, very anti-liberal, anti-market, and just that they felt they had a stronger sense of national identity.

And so I think there is -- to make a foreign policy analogy for this audience, I think it's been a lot like either Germany during the Cold War vis-a-vis Russia and the U.S., Soviet Union and U.S., or Japan vis-a-vis China and the U.S., that your sweet spot, at it were, which parallels what Charlie was saying, is a place where you're not so close that you get dragged into what they do, but you're not so far away you're worried about being left behind.

And the other thing that's happened is the euro has come. And that's made it harder for the U.K. -- whoever would be in government to maintain this constructive ambiguity, as it were, because in line with what you were saying about moving to fiscal and banking union, that's really necessary if you're going to make the euro work. And if you end up with an EU where everybody's in the euro except basically Bulgaria, Romania and the U.K. --

KUPCHAN: Maybe Sweden.

POSEN: -- maybe Sweden, although even that's not clear; they might choose -- we don't know, but you're right. That's not a place is going to be a comfortable place for the U.K. to be, and so that gets you back in the Charlie scenario of you're either in or you're out.

MOSETTIG: We'll get to some aspects of European-wide politics in a moment, but hasn't the EU brought down every Tory prime minister -- Thatcher, it was the signal thing with her; John Major and the EMS; and now Cameron. Is Cameron -- but he's in the coalition, as you mentioned, with the liberals, who are very pro-EU. His party -- 30 percent of the party is also not just anti-EU but all in a rile over gay marriage.

POSEN: Right.

MOSETTIG: Is he going to make it to the end of the term, 2015?

POSEN: I think he will. I mean, the U.K. system makes it not very easy to call a question of confidence, not very easy to overthrow a sitting member -- I mean, a sitting prime minister. There are things -- there was the coup on Thatcher. I don't think that was just EU. There was also the poll tax that made her visibly unpopular in the country. Cameron doesn't have those kinds of negatives, as I understand the polling data. But I do think you're right to stress that it it's kind of like, to make another U.S. analogy, like Republicans on immigration and rights for Hispanic illegals in this country, that you try to paper over the split, but at some point it comes back to haunt you, and this is a fundamental split within the conservative movement in Britain.

MOSETTIG: Charles, to pick on the point you were talking about, the various scenarios for Europe and the U.K., let's start with the one that he goes to -- Cameron goes to the European Council and says, I want to negotiate on X, Y and Z. Are the partners on the other side of the Channel really ready to give him that much?

KUPCHAN: It sort of depends on, number one, how much ill will the U.K. generates, and it is generating a considerable amount of ill will, especially coming out of the British veto of the fiscal pact in -- when was that, late 2011?

POSEN: Right, exactly. December 2011.

KUPCHAN: December 2011, where, you know, he really sort of drew a line in the sand. He did so for domestic purposes, but it really set up a situation nowhere Britain took itself out of the mainstream.

And I think it's important to realize that even though Britain has not been in the euro, it is not a member of the eurozone, they have been a very active member in shaping the financial sector and the single market and the euro -- you know, very involved in giving advice about how to launch the euro. And what's happening now is that they are just -- they're backing out of having the ability to shape the European Union. And so they then find themselves attached to a union over which they have less and less influence.

I still think it's a pretty good bet that as long as Britain doesn't ask for the store, that they get a green light on certain opt-outs, particularly if it's in justice and home affairs and things that aren't considered to be red-line issues for other Europeans. But what most -- and I think those other Europeans have a strong incentive to try to keep Britain in the European Union, right? They see it as a lose-lose. Britain loses; Europe loses. But what I most worry about is that third scenario, which is that Cameron gets what he wants. And today you've got 17 eurozone members and 10 non-eurozone members. That's a comfortable second tier. But as Adam was saying, that tier is going to get smaller and smaller and smaller, to the point where it could be Britain and Bulgaria, right? And when it's Britain and Bulgaria, the Brits are going to say, we need this like a hole in the head.

And so even though Cameron at least ostensibly doesn't want exit, I fear that he is putting in motion a process that could inevitably get him there.

MOSETTIG: I want to get to the consequences of a potential exit in a minute, but in terms of Europe working -- I mean Britain working with its European partners, one example has been that Cameron and Merkel are the two leading major-power leaders on the European side pushing for the trade deal with the United States. They're in the lead. On the eve of the G-8 meeting today, the president, for the French government, reiterated its opposition to going ahead on these talks -- I mean just to start the talks, much less to finish them -- on the cultural exception. And from some of the comments that anonymous French officials were making to the FT, it was almost like, we want to embarrass you at your summit coming up in Northern Ireland.

What are the dynamics here between the U.K. and people like the French or the people like the Germans?

POSEN: I think you've put your finger on something very important, which is there is this strain that has been recurring in economic policymaking as well as other issues, but particularly in economic policymaking, where Germany is sort of a swing vote between the U.K. and France. And that's true on some foreign policy issues; that's especially true on trade issues. Even though the EU formally and in a lot of real ways gives voice and power to a lot of smaller countries, there's always the issue of the Franco-German motor, as they say, but also at times a British-German motor.

And this is why some people, particularly more principled people in the conservative party in Britain, will say -- they'll take this thing that Charlie and you have mentioned about getting it on the right term. They have these projects where ideally it will be some alliance of Nordic peoples who are pro-market and pro-property and not so interventionist as the French, and pro-trade and not so integrationist within Europe.

And there is a point here. I mean, this is one of the key ways in which it becomes lose-lose, that if the U.K. is out, they lose the weight in European affairs, they lose the weight in the global economy being part of Europe. And the Germans and, arguably, the northern Italians and the Austrians and certain people in other parts, and the people around Barcelona and Spain, many of whom are very liberal in the European sense -- free-market, Economist magazine kind of people -- they lose a critical voice.

The problem is there's this recurring fantasy that you really could have -- and unfortunately it also seems to echo racial lines, our perceived non-existent racial lines -- that you're going to have the sort of white Northern group of the Germans from Berlin and Hamburg and all the Scandinavians and maybe some Poles and the Dutch and the Brits and the Irish, and they're all going to get together and they're going to drag and shape up the rest of Europe and put a brake on European integration.

And this has always been a fantasy; I mean, not least because the Germans -- go back to your main point, Michael -- that the Germans won't buy that. The Germans ultimately -- not every German, but all the major German officials, of both major parties, want a more integrated Europe. They don't buy into this British dream, nor do the Poles, for that matter.

MOSETTIG: To follow on, take the worst-case scenario; there's a referendum, the public -- the polls, I guess, are pretty even at the moment -- but the public, somehow or other Britain leaves the U.K. What are the financial and other consequences for Britain if that happens?

POSEN: They shouldn't be exaggerated, but they're clearly all bad. OK? I don't like these notions that somehow they're going to be better off. If it comes to trade issues, they're going to be negotiating alone, not part of a larger bloc, so unless the WTO round starts again, they don't have a voice. They don't get anything.

In terms of foreign investment, there's a lot of key foreign investment -- I don't mean portfolio flows, I mean investment of plants, equipment, people, headquarters -- that are in Britain as a comfortable place, as an entry point into the EU market, that if they're out of the EU market, a lot of that -- not all of it, but a lot of that might go away.

Britain, as I discovered very much while in the Bank of England, is extremely dependent on its financial sector. The City of London, as it's referred to, is incredibly important. It will still outshine anything that happens in Paris or Frankfurt for decades to come. But there would be regulatory measures -- Barbara can talk about this -- there would be regulatory measures and other things out there to try to take a lot of the euro-based trade, trading and business and deal-making out of -- out of London, maybe to Dublin. Who knows? But they lose that.

And that's another perfect example of a lose-lose. Britain will lose this very lucrative, important high value-added business. The remainder of the EU will end up with a second-rate financial center and this weird financial center offshore, which is not an ideal scenario either.

So it's just not good in any sense. Is it the end of the world? No. But Britain is too big. It can't become Singapore or Hong Kong to Europe's China. That's too small an aspiration for it, and it's not something that that economy can survive well. So I view this as just a basically a negative.

KUPCHAN: I'd just add a couple quick points --

MOSETTIG: And Charles, you know, presumably -- feel free to add on, but I just want -- you can ask -- answer this question, too -- there are going to be consequences, as this estrangement grows and particularly if it leads to a formal break, in terms of the British relations -- I won't use the word "special" -- relationship with the United States. President Obama, because he's president, had to say it obliquely. Phil Gordon, because he is an assistant secretary of state, could say it much more directly that the United States is going to downgrade or look much less keenly on Britain as a pathway to the EU, as a voice to the EU, if -- and its influence with the United States is going to diminish considerably.

KUPCHAN: Yeah, let me just add two quick points to what Adam said and then address this issue. I agree with everything you said and think it's all bad.

We don't actually know exactly how it would play out. But you know, 30 percent of British GDP is exports. Fifty percent of those exports go to the EU. Right. That's a lot of GDP.

POSEN: Right.

KUPCHAN: If Britain leaves the EU, it then has to negotiate for market access. It has to negotiate for trade relationships with all the other parties with whom the EU has a trade relationship. All those workers who are in the City of London or who are building cars who aren't British citizens but are there because they carry an EU passport --

POSEN: Right.

KUPCHAN: -- may have to leave. I mean, you could -- you could negotiate visa agreements, but it's a -- it's not easy.

POSEN: Right.

KUPCHAN: And then there's the whole question of what happens to the city.

POSEN: Before Charlie responds to your question, Michael, I just want to -- because this is going out over the world, thanks to the council's website, I just want to amplify Charles' last point in two quick ways. First is, it's -- it is -- it is about the renegotiation, so it does depend on the terms. But even then, even if -- if the U.K. says, well, we just want what Sweden -- I mean what Switzerland and Norway have, Norway basically has to agree to all EU trade standards to have the deal they have and then don't have any voice. So I mean, even if they say, well, we just want to go back to what it was like before we were members, that still doesn't solve the problem for them.

Anyway, just to throw that in.


KUPCHAN: On your issue of the special relationship, I think that the special relationship is a somewhat less special anyway, simply because the United States isn't as engaged in Europe, doesn't accord it the same strategic priority that it used to, and if the U.K. is not part of the EU, I think that it becomes increasingly less special.

And Cameron talks about the U.K. kind of going off and becoming a global power. Well, Britain --

MOSETTIG: By itself?



KUPCHAN: But it just -- you know, I don't know how many surface ships the British -- the Royal Navy has now.

MOSETTIG: I think they're about down to 28.

KUPCHAN: Something like that.


KUPCHAN: It's not a lot.

MOSETTIG: And 1 1/2 carriers that they share with France.

KUPCHAN: Right. And they -- (laughter) -- and the defense budget is coming down. And you mentioned, by the way, Scottish secession.


KUPCHAN: Guess where Britain docks its subs.

MOSETTIG: Holyrood.

KUPCHAN: In Scotland.


KUPCHAN: What happens to the British submarine nuclear deterrent if Scotland secedes? They base them in another country. So that's yet another problem with this whole question of a potential double secession.

But you know, let me put it in rather blunt terms. If Britain does leave the European Union, it will be one of the most striking instances of self-isolation in political history.

MOSETTIG: Adam, I'd want to get back to one economic issue. I remember when Margaret Thatcher introduced a budget in 1981. The financial columnist for The Times of London, pre-Murdoch, said, at the end of the tunnel, there is more tunnel. (Laughter.)

Where do we stand with the success or lack of same with the Cameron-Osborne economic policies at this point? Is there any light there?

POSEN: No. (Laughter.) And I'm trying to think of a cute way of making the analogy that we're at the part of the tunnel where it starts going up a bit, but we still don't see the light at the end, not to be too cute about it.

I mean, the British economy has done surprisingly badly, not in the sense that anyone in their right minds expected it to be growing very strongly after the huge financial bust and given how dependent Britain was on its financial system. But it has underperformed, especially given that people like me and others at the Bank of England voted to do pretty extensive policies to support the economy.

And what seems to have happened are three things -- and they're roughly equal in significance; you can debate it. One is Europe, euro area has had terrible problems of its own, and as Charlie said, huge amount of trade, Britain and Europe, and that's been negative, and that damps things down. A second thing is the financial system in Britain, they actually have a much more messed up financial system than the U.S. did. They've got essentially four big banks and one mortgage -- one big mortgage lender. These are damaged. They're part nationalized. And so when they got messed up, there was no alternative way to get finance to business and households. And so that's kept them down.

But then the third thing, which is I think what you're referring to, Michael, a la Thatcher, is they're doing austerity in an extreme way. Now, what is austerity in an extreme way mean? It means you're doing very rapid large cuts in budget and rises in taxes at a time when the economy's already doing badly. And generally, the impact of doing that is higher when the economy's already doing badly. And the impact of doing those kinds of fiscal tightening is higher when all your neighbors are doing at the same time, which they are. And the impact of that kind of tightening is always higher when your bank system's messed up. These are general principles.

And so the U.K. is busy whacking itself on the head, and therefore, the budget deficit gets worse rater than better. If some of these conditions didn't hold, then maybe it wouldn't be so bad, but these conditions very much do hold. And there's no upside. I mean, some people followed -- there was this kerfuffle last month about debt and GDP that some people followed in the press. The key thing is, to steal a line from Krugman, there's no confidence fairy, at least not if you're Britain. If you're Ireland, if you're New Zealand, if you're Greece and you're a totally messed-up country economically speaking, and then suddenly you change your governance, then the world can wake up and say, oh, yeah, the potential that was there wasn't -- is now there -- is now coming to reality; I can put money in, and it makes a big difference. If you're already a functioning economy, which Britain certainly was, then changing the fiscal policy doesn't revolutionize the way anybody thinks about you. It's like walking home from this -- from the tube, I would see a sign, you know, quit smoking today, lose 50 pounds. And I'm, like, well, I don't smoke, so I don't get to lose the 50 pounds. (Laughter.) I'm better off no having smoked, but there's no bonus for me. And that's similarly the case for Britain. It's -- you know, they are not Greece. They never were Greece. They're not Portugal. They never were Portugal. And so therefore, fiscal rectitude is probably a good thing in the medium term, but it's not going to pay off for them the way suddenly it will for Greece or Portugal.

MOSETTIG: As we've mentioned -- and here's an interesting convergence between American -- new style American conservatism and British conservatism is in both countries, budget cuts trump defense spending. In America, that hadn't happened since Robert Taft. And the defense cuts are -- keep going and going and going at the same time Cameron keeps talking more grandly about, well, first, we did Libya, and now we're going to do Syria. And the FT had a very good editorial the other day just saying his rhetoric is running so far ahead of his military capabilities at this point. But it is an interesting development convergence.

I think we're ready to throw this open to questions. There will be a -- microphones passed around. And state your name and affiliation. And let's keep it at questions rather than statements. I see a hand up in the back.

QUESTIONER: (Off mic) -- Huntsman and Ike (ph). Wonder if you could talk about the relationship between these two secession movements. Can you see a situation in which the Scottish might want to leave Great Britain because they want to stay in or re-enter the EU? How do they -- how do those two movements play one with the other?

POSEN: Well, just -- Charlie may have a different view, but just quickly: It's very important that the sequencing be the Scottish vote before the EU vote. If the U.K. was already out of EU, then Scotland would have a greater incentive to secede. But then -- but A, there is no guarantee that just because they secede, they get entry into the EU. And in fact, if you look at a European Union that has Catalonia and Lombardy in Italy and the Basque country in Spain and France and all these various places where there are strong regional movements, it's not necessarily wanting to encourage succession (sic) and then say, oh, if you secede, you get automatically back into the EU. And, in fact, that's been said to some of the Scottish leadership.

The second thing is, unlike what Charlie was saying about the polls in -- on the EU, barring something very strange between now and a year from now, the unionists, meaning the keep-Scotland-in people, are going to win. The Scottish referendum, if it was -- it it's a bad idea for the U.K. to leave the EU, at least on economic terms, it is complete suicide for Scotland to leave the U.K. They'd be left holding up their own banking system, whose debts are many multiples of the size of the Scottish economy. Their one hard asset is the oil, which is just incredibly rapidly decreasing in production. They have a much more aged, unhealthy population that the rest of the U.K. They de facto get huge transfers of health care money from the south. They cease to have any voice anywhere.

And they would then have to either peg to the euro or peg to the pound, and they'd give up being considered in monetary affairs. I mean, when we were at the Bank of England, we had to take into account Scotland and Northern Ireland and Wales as part of the union. I assure you that if the line was drawn, Scottish conditions would not be taken into account. That's not how central banking works. So I think both politically and economically, the Scottish secession thing, goodness, is really going to not happen.

MOSETTIG: Do you think that a negative vote on Scotland -- what kind of effect do you think that would have on a British referendum, on the EU?

KUPCHAN: If Scotland votes to stay in?


KUPCHAN: I think it would -- I'm not sure it would have much impact upon the referendum on the EU. You know, the numbers over the last six months have tightened a lot. They were decidedly "no" as it "let's get out" when Cameron first talking about referendum. And they're now about 50-50. And nobody really knows where they're going to go.

In general, having a referendum in Europe is not a very safe thing to do, right? I mean, if you just look at the last six, seven, eight years when there's been a popular referendum, it's basically been a disaster, right? The Dutch no, the French no, the Irish no, and then you bribe the Irish, and finally, they get over the hump to yes. So, you know, committing to a public referendum on the EU is a dangerous thing to do.

And also just one other thing that's kind of unique about the U.K. debate as opposed to what's going on in Italy or France: I mean, this is -- this is deeply embedded in British political culture. This is not a debate that turns on, is this good for us or is this not good for us. In some ways, it's akin to a kind of libertarian impulse in the United States. It goes back to splendid isolation. It goes back to British sovereignty. And it's precisely because it runs so deep in the British political psyche, and it's not a question of somebody standing up and saying, let me give you the 16 reasons why we should stay in the EU, right? Most people couldn't care less about those 16 reasons who are against the EU membership. They want out for emotional reasons. And that's why this is a dangerous course to head down.

MOSETTIG: Your reference to the poll figures in Britain, I don't know how many of you all have seen the Pew survey across the EU, which showed, remarkably, a stronger reservoir of support in Britain for the U.K. -- for the EU than there is at the moment in France. There are not great things going on in the continent either.

In the back, please.

QUESTIONER: Hi. I'm Marc Levinson, with the Congressional Research Service. The U.S. is negotiating or said to be negotiating a free trade agreement with the EU. How would we negotiate this in the context of the possible secession of one of the EU's largest economies? What do we ask for? How do we understand the value of what we might or might not be getting in the negotiations when the other party may be breaking apart?

POSEN: Well, let me -- let me -- let me try to answer that.

First thing is the U.S. cannot take a position, the U.S. negotiators cannot make any indication that they think one way or the other about this. That would be an enormous interference into some other country's domestic affairs to the European Union's domestic affair as well as incredibly angering of people on all sides of this. So you can't do anything about it.

Second thing is the question, what are you -- what really is at stake in what's now called TTIP, the Transatlantic Investment Partnership? You know, my colleague Jeff Schott and some other people at our institute, the Peterson Institute, have done a very good study on this. What the TTIP is about -- and this is why -- remember, it was Chancellor Merkel from Germany pushing President Obama very hard to do this -- is some combination of the Americans are perceived and reorientating very much towards Asia, economically and strategically -- Charlie already mentioned that -- and this is away of drawing the attention back to Europe. This is a way of trying to get growth in Europe by some external means, since they don't want to change any of the policies that are currently killing them.

And this is ultimately about trying to get some sort of oligopoly in things like auto parts, autos, machine tools in terms of setting standards so that the U.S. and the EU shoulder to shoulder -- really Germany and the U.S. shoulder to shoulder -- can say to China, you have to accept our standards for this kind of equipment or this kind of trade.

None of that's at all anything that the British would object to. And yes, the U.K. is a major economy in the EU, but we're in a world now where between the U.S. and the EU, this really isn't about tariff barriers. They're very low. This is about these other things. And then there's upside potential. What happens if the Americans could finally get the Europeans to accept GMO -- genetically modified organisms like food, or if the Germans could finally get the Americans to accept versions of Internet privacy that the Continental Europeans would like? On all these issues, basically, I think -- I don't want to presume to talk for the U.K. on every issue, but these are issues that are not core issues for Britain even economically, let alone in the political sense Charlie was talking about.

So the bottom line is this goes forward, the British, especially if they're entertaining fantasies of, oh, we're going to have -- be part of the trade, economic integration in Europe even if we do go down this road, have nothing to really complain about, and Merkel continues this because that -- going back to where we started, that Michael was raising, this is a way to try to keep the British on-side: See, isn't it nice? If you stay in the EU, you can be part of this great project, and this great project could be a more liberalizing project, et cetera, et cetera, et cetera.

Sorry, there's one thing I forgot to mention I just have to throw in. Among all the stupidities of referenda, which is demonstrated by California as well as Europe -- (laughter) -- the most amazing thing about this referendum for me is you have Cameron saying, I'll do this in 2017, which is not only four years down the road but after the next election, were I to win that election. So you're throwing this huge specter over investment in the U.K., over strategic planning, over politics. It's going to hang there for God knows how long. You're not even sure you're going to deliver this referendum, and you're not going to resolve it for years.

And I'm sorry to jump off from where your question was, but I just think it's very important to put this out. This is not a good idea. (Laughter.) If you're going to hold a referendum and you want to have a debate, fine. Take six months and hold the bloody referendum. This is just -- this is just a particularly loony way to do it.

MOSETTIG: Well, I'll put in one little plug here for the "NewsHour" about the motto, always be nice to your interns. (Laughter.) Ed Miliband was an intern at the "NewsHour" in 1983. And so we may have a "NewsHour" intern who becomes a prime minister.

Where -- put on your Dan Balz hat or something. The outcome of a British election -- because Miliband's perceived as being a little mushy. Is -- can Labour win, or do they go in with a coalition with the Liberals? Where are -- where do you think we are?

KUPCHAN: It's too soon to say. I think that the only thing that I would say with a certain degree of confidence is that this debate is affecting the Labour Party and that just as in Continental Europe, the left-wing and right-wing populist movements, even though they're kept at bay, their rhetoric, their narrative, their policies are sort of seeping into the mainstream.

And you've seen on several occasions where Labour has actually voted with the hard-liners in the Conservative Party, number one, on the budget, where they basically lined up with the rejectionists in the Tory Party on -- this is on the EU budget, and then recently they lined up with the far right on an immigration issue. And so that leads me to believe that even if Labour were to win, this issue is not going to go away. And they may well -- it may well be that Labour commits to hold the referendum in the lead-up to the campaign because they feel that they need that commitment to compete against the Tories.

POSEN: I want to pick up on Charlie, and this is a place, actually, though, where I differ with him a little, so maybe that's worth pointing out. I completely agree with his last point, and I think this is where -- going back to the gentleman who was asking about Scotland, I think this is where the Scottish referendum really plays a role. It's very difficult to say, we can't give or we shouldn't give our people a referendum on membership in the EU if we're giving one chunk of our people a referendum on membership in our very own country. And so to me, I think it is going to be, I don't know unsustainable, but extremely difficult for Labour not to say, we're going to hold a referendum too.

KUPCHAN: You say they are going to have to say it -- OK.

POSEN: I think they are going to have to say it.

MOSETTIG: And Labour had the first referendum on EU membership --

POSEN: On the EU, long ago.

MOSETTIG: -- under Harold Wilson.

POSEN: You have good memory.

The thing where I disagree with Charlie, where I really want to get this across, is for all the talk about right-wing parties and populism and all this -- and it's very real -- the bulk of the British people, according to how they vote, how they behave, poling data, is actually quite tolerant, open-minded, cosmopolitan, liberal. Compared to U.S., compared to not just tea party but average U.S., it is far more European in that sense. I know you don't disagree with that, but I just want to be clear that the seepage into politics that Charlie was talking about shouldn't be exaggerated.

So even this horrible violent crime of pseudoterrorism that Michael was raising -- this led to a backlash in the U.K. where the so-called English Defence League, which is -- instead of the tea party, is basically the skinhead Ku Klux Klan wannabes of the U.K., came out in force and tried to drum up hatred against Muslims and foreign people, and of course there were some terrible incidents, but just as after 9/11 in this country, but even more so, there were a lot of incidents of people coming out and going across communities and being liberal and not doing this. And the EDL, the English Defence League, marched down Whitehall and tried to do Nazi salutes in front of the World War II memorials, in front of the cenotaph, and the British people completely recoiled. You know, so just to say I think there is this issue of British sovereignty but it isn't quite the kind of virulent nationalism, racism kind of thing that some parties, some fragment parties in Western Europe do represent.

MOSETTIG: Barbara.

QUESTIONER: Hi. Barbara Matthews. I want to actually pick up on that last point because I agree with it very strongly. If you think about -- I'm going to have a question at the end of this. If you think about the six things that Cameron really wanted in December of 2011, that were leaked to one of the British papers at the time, they were very technical regulatory issues, and they were all about retaining basically sovereignty and national authority over the financial system.

So let me -- I don't disagree with a lot of what I've heard, but I'm going to suggest maybe there's an optimistic outcome to some of this because since 2011, Europe hasn't exactly stood still, and the policymakers that drive the European regulatory process are all moving much more in the direction of increased national sovereignty. And, you know, some would suggest -- and I think I'm sympathetic to this -- they're gutting a lot of what the Treaty of Rome set up in many ways, and subsequent treaties after that.

So I'm wondering, can you think about a positive outcome where basically politically both Europe and -- on the continent and the U.K. end of coming to some kid of a compromise where they do have more national discretion, enough so that Cameron can sell it at home?

POSEN: Yeah. Well, I mean, Barbara, I totally take your point on the regulatory agenda. And certainly there has been some movement in that direction in Europe. And this isn't directly what you were talking about, but we're all aware now that the much-dreaded financial transactions tax, for example, is being gutted, to use your word, and is not going to be anywhere near as supernational, draconian, interventionist as people thought.

To me, frankly -- and this another place I may differ from Charlie -- I -- for all the talking about -- that we're doing tonight, I remain reasonably confident that if there is a referendum, the British people will in the end vote against even renegotiating. They will say -- a majority will say we want to be n the EU, full stop. I'm hoping that's the case. And to me that's the good scenario. And sometimes you do get more flies with honey, or whatever the expression is, and that maybe that's the way the U.K. gets to shape things in the direction you said.

The fly in the ointment -- to switch flies -- is that there is a -- sovereignty obviously is something people can choose, and it's important. There is a basic economic logic in the euro area to having unified bank supervision and unified bank resolution and unified, to some degree, fiscal policy, as you recognize. And so that gets back to what I said, that Britain had this -- I don't want to say comfortable, but reasonable relationship where they were sort of in, sort of out, and the existence of the euro makes that a less stable equilibrium, in economic speak, thank it would other wise be. And so I can see politically what you're saying, but then in that scenario, it's hard to see the euro sort of ticking over nicely.

KUPCHAN: But to pick up on that, and again mentioning this Pew poll which showed this vastly rising disillusionment on the European Continent with the EU, and in terms of marching ahead towards fiscal union and all, France, which is a key member, says it wants economic government but doesn't really give any indication of ceding French sovereignty on some vital issues. So maybe continental Europe isn't going to push ahead on some of these things as fast as they might have done.

POSEN: You know, in some ways that's the $6 million question. We know more or less what European elites have decided is the appropriate medicine, and that is more union, banking and fiscal convergence, blah-blah-blah-blah. The problem is, as the Pew poll has showed, public opinion has been running in the opposite direction, and therefore you have an enormous gap today between what I would call, you know, the European institutional makeup and the European street. And the question is, are European leaders going to be able to go out there and sell to their publics what they are doing in Brussels? And we don't know the answer to that question, but they have an uphill battle.

MOSETTIG: The most stunning thing were the figures in France. I mean, they're just running away from this like a track team.

In the back, please.

QUESTIONER: I'm Jim Gilmore (sp). A couple of years ago I talked to a high intelligence official in the United States, and he was talking about this cultural convergence of the British, the Americans, the Canadians, the New Zealanders and the Australians, and it caused me to sort of think about the world in a little different way. So I guess where I'm headed is this: I don't actually understand how the EU works at all, culturally and linguistically, as different as they are.

My question is, do the Brits have an alternative? Maybe they would be more comfortable with us than they would with the Europeans. And I wonder, has there been any discussion in Britain about a closer convergence, banking, politically, culturally and every other way, with the United States, and looking west as opposed to looking south and east?

MOSETTIG: Let me quickly interject here that if the opposition conservatives win in Australia, the fellow running that party has talked about an anglosphere. How we would craft this, I don't know, but -- I don't know whether that would fit into this --

POSEN: But let's -- I man, since the word "intelligence" was evoked, I should let Charlie answer, but -- (laughter) -- in both senses. But just quickly -- I thought Michael was going to do this -- let's remember the historical perspective here. There are two examples of Britain trying to do that. So Churchill very consciously wanted a union of the English-speaking peoples, and that's why he wrote that propagandistic history. And he tried very hard, and that's where you get a lot of this impetus for the so-called special relationship.

And that -- while there is something there, I mean, it is ANZAC soldiers who are -- who are joining Britain and the U.S. and boots on the ground in various engagements around the world, and that should never be made light of. The fact was Churchill trying to push this didn't get anywhere, and then you get all this stuff -- you can council fellow Ben Steele's (sp) piece -- book or Robert Skidelski's book -- last book on Keynes, both of which tells you how the U.S. basically trying to destroy the U.K. internationally at the end of World War II, at least in economic terms.

Similarly, the U.K. did try -- it's not quite the same, but they tried to build the Commonwealth, which is -- the Commonwealth is the former empire and all these countries that speak English and have anglosphere traditions, or -- whether they're imposed or long-standing. And again, the Commonwealth is a very interesting NGO, and it serves a lot of good purposes in the world, but it wasn't sustainable as either a security relationship or any -- or most certainly as an economic relationship as an alternative to Europe.

And through the '60s into the early '70s, there was explicit attempts by the British government, various British government, to say let's see if we can concentrate on the Commonwealth as an alternative to Europe. They're more like us. We like them. It's more global. The problem is unfortunately, even in economics, geography matters a lot. And so as Prime Minister Cameron pointed out in one of his few very good factoids, the U.K. currently has more trade and exports more to Ireland than they do to Brazil, Russia, India and China combined. So it's hard. You can -- you can think that way. You can try to make that work. But there is a historical record that that generally hasn't been a good strategy for the U.K.

MOSETTIG: Anything to add?

KUPCHAN: Yeah. I mean, there's always been talk of the anglosphere, and if it ever meant -- amounted to much, it doesn't anymore.

POSEN: Charlie's blunter than I am.

MOSETTIG: (Inaudible.)

QUESTIONER: Doug Cassel, Notre Dame Law School. I'm from Chicago, and so I want to ask what's in it for us? In both scenarios, let's suppose things really go bad, because you say it's a lose-lose situation for Britain and Europe if Britain leaves the EU, how bad will that be for the U.S. economically or in any other sense? And on the -- on the contrary, if it goes as Mr. Posen hopes and the British people come to their senses and they stay in Europe and Europe thrives, how much will that help us? Because we're not doing so well right now.

KUPCHAN: You know, if Britain leaves the EU, it's not a catastrophe, for us or for our folks on the other side. I think it is a setback for everyone and that the setback I would say for the British would be the most severe, for the reasons that we've been talking about, the offsets and the things that they would need to do to recoup and to continue to trade and to continue to attract investment and to -- and to -- you know, they now settle most of the euro-denominated trades; that probably -- we don't know what that would probably would leave. And so they would just be taking themselves out of the game.

From my perspective, the biggest downside for the United States is on the question of Europe not being able to become the partner that we would really like. And that is already in question because they're slashing defense budgets. But if you say, you know, what would it take to really give Europe geopolitical heft so that they will remain our go-to partner for the foreseeable future, it would require Britain and Germany and France and maybe Italy and Spain to really step up to the plate and do more collectively. And if Britain steps out of that, and Britain is the country with the most willingness to project power outside its neighborhood of all European countries, if they're out of that game, I think it makes it very unlikely that the United States is going to have any kind of serious geopolitical partner in Europe.


QUESTIONER: Avis Bohlen. This is a question for Charlie, but really for everybody. What is the kind of mood in Brussels and in European capitals about this debate? I mean, how much do the Europeans feel it's worth paying to keep Britain in? They -- historically, they veered between exasperation, saying pick up your marbles and go home, and more realistic assessment that for all the reasons you just outlined, EU would be worse off without Britain, without its military power and its economy.

KUPCHAN: I -- you know, I think that this is an issue that is animating debate, that is keeping people up at night. And the -- I would -- you know, I hear several different kinds of interpretations. And I would say the dominant narrative that you hear from Brussels and from leaders in member states is, we need to prevent this from happening, that this is bad for us, it's bad for them, it is a blow to European solidarity.

There is also a kind of version that is in some ways the opposite, and that is, good riddance, that the U.K. has always held us back, that we don't want at this particular moment in time to move at the speed of the lowest common denominator, and if Britain, which already has one hand on the exit, is going to set us back and bog us down at the very moment when we need all of our energies to get out of the eurozone crisis, then let them go.

And that I don't think is in any way the predominant view, but it's one that could gain traction if things in the U.K. head in a negative direction.

MOSETTIG: I think we have time for one more.


QUESTIONER: Hi. Rebecca Chamberlain (sp) at the World Bank. I just want to ask if you see any irony in asking this question of whether or not Britain might secede from the EU when the -- when actually Britain has been one of the greatest proponents of actually the countries in the -- in the eastern neighborhood, of these young democracies, of joining the EU. I myself work in some of these countries on foreign policy and find that Britain's been more active than some of -- some of the other countries in the EU in promoting them joining the EU.

POSEN: I actually -- even though irony comes cheap these days -- (laughter) -- I actually don't consider that ironic. I consider that just illustrating the lose-lose point and what Charlie was saying about -- I mean, it's just a very serious point, taking your statement as fact -- that the -- there is a force multiplier aspect to Britain leading in areas, particularly in foreign policy strategy, the EU that gets lost. And that means both Britain loses and the EU loses.

But let -- let's be clear. Whether it's Poland or Romania or Latvia or countries further east, which for the time being I don't think are joining, they much more clearly than anybody else, if they're faced with a choice of some sort of do we be nice to the U.K., who may leave, or do we be nice to the people in Berlin and Paris, who really control our fates and write us checks, it's a pretty clear choice, whatever the historical loyalties might be.

So it's not about irony. It's about -- that's just a very good illustration of the kinds of lose-lose -- to keep repeating that phrase -- that we're in when the U.K. pulls out, if the U.K. were to pull out.

KUPCHAN: And it's also -- coming back to your question, the U.K. has been good for us as a member of the EU. They have shaped a Europe that we find compatible -- that is more liberal, more open, more market-oriented -- and may have been perhaps THE greatest backer of enlargement, precisely as this last question suggested, including to Turkey, which is a quite controversial issue.

And so an EU without the U.K. in it I don't think is going to be a problem for us --

POSEN: Right. It's a loss.

KUPCHAN: -- but it may not be quite as compatible with American policy as a U.K. -- as an EU with the U.K. in it.

POSEN: Exactly.

MOSETTIG: Well, on that note, I think in this audience, at least, if they could vote in the referendum, we know which way they would vote. (Laughter.) And thank you both for a very incisive, thorough, just interesting discussion. (Applause.)

KUPCHAN: Thank you, Michael.







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