Robert Kahn, Steven A. Tananbaum Senior Fellow for International Economics at the Council of Foreign Relations; Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations; and Constanze Stelzenmüller, Robert Bosch Senior Fellow of the Center on the United States and Europe at the Brookings Institution join Gary Rosen of the Wall Street Journal to assess the current state of integration in the European Union and the threats it faces from the ongoing economic and humanitarian crises. The speakers focus their analysis on the fiscal policy deficiencies and lax security controls of the EU, which represent major impediments to successful integration, particularly in times of crises.
This event is made possible by the generous support of the Hauser Foundation.
ROSEN: Good morning, everyone. I’m Gary Rosen from The Wall Street Journal. I’d like to welcome you to our third session today of our symposium on the future of Europe. This session is titled “More Europe, Less Europe, or a Different Europe.” So our discussion will assess the prospects for a deepening European integration or possibly for disaggregating in certain ways certain functions of the European Union; the potential for a possible Brexit, which is a possible British exit from the European Union, if you haven’t heard of this possible event; and the possible of revamping EU institutions.
So before we get started, I’d like to remind you, please, to turn off your various devices because they interfere with our sound system. And I would like to remind you that our session today is on the record.
So let me begin with brief introductions. We have three distinguished experts on things European here. We have Robert Kahn, who is a senior fellow for international economics here at the Council; Sebastian—I’m sorry, I’m going in the order on my page here—Sebastian Mallaby, who is also a senior fellow for international economics here at the Council; and in the middle, Constanze Stelzenmüller, who is a senior fellow at the Center on the United States and Europe at the Brookings Institution.
So I thought we would start this morning in light of the news just talking a little bit about what I think many of us are reflecting on this morning, which is security issues within the European Union and the extent to which European institutions are able to cooperate effectively in reaction to an event like this. Now, Constanze, these are—these are issues that you have focused on in your work. And so I guess I would start by asking you, in what way might EU law or even constitutional structures be changed or improved to deal with situations like this, not just the police and security work but also the sort of work that is done in terms of intelligence and in terms of keeping track of people who might be threatening in some way? Is the EU adequate to dealing with threats like we’ve seen so vividly in Brussels this morning?
STELZENMÜLLER: And this in three sentences, I take it?
ROSEN: Yeah, very brief, you—like—yeah.
STELZENMÜLLER: Right. First, I mean, the news from this morning from Brussels was heartbreaking. I flew out from Brussels on Saturday noon on United. And a lot of my friends—I’d gone to a German Marshall Fund conference there, where I used to work for 10 years; a lot of my friends were still in Brussels when it happened, and one or two, in fact, were standing in a queue, a taxi queue, just outside of the airport. So I was—I was appalled this morning, and I hope—I hope that, you know, not too many lives have been lost beyond the ones that we already know of.
As for security cooperation in Europe, I think it’s worth a reminder that 9/11 was a wake-up call, not just to Americans but to Europeans as well. After—there were after all the 7/7 attacks in London; there were attacks in Madrid; there have been attacks in Turkey, in Paris and elsewhere.
I think the security and intelligence communities across the continent are not just well-aware of the fact that what is really our most priceless good, which is our liberal, open societies, are also essentially indefensible, you know. Even if you thought the borders were closable, they aren’t. And the only way to therefore deal with this kind of internal or fast-moving security threat is to have good intelligence and security cooperation across borders and, indeed, to—well, to consider, perhaps, some architectural fixes.
I think, from all I’ve heard post-9/11, a great deal has happened to ramp up the quality, breadths, and intensity of cooperation. To those of you who listened to the news this morning more closely, clearly the Brussels police had—and the fire department and other public safety professionals—had mechanisms and processes in place. They were very—there were there very, very quickly. Everybody knew what to do. Places were evacuated calmly, et cetera. The kind of chaos and disorder that we’ve seen in other places I think is a matter of the past.
But the reality is that you can’t completely prevent these things, and the—and the fact that these attacks occurred in key places in Brussels, just opposite the European Parliament at the Maelbeek tube station and at the airport, suggest that this is an act of revenge, an act of political messaging by IS in response to the ongoing interrogation of the terrorist who was captured.
So we are going to have to expect more of this. We are going to have to expect more of it in other countries, including in my own Germany. And the only answer to this, I think, is to make sure our cooperation is as—is good and becomes better and also make sure that our societies and our democracies, our economies, have become more resilient.
ROSEN: Let me just ask you one follow-up because obviously, with these enormous flows of migrants and refugees, that—the whole idea of the free movement of peoples within Europe has come under great pressure. You know, there have been these exceptions to the Schengen area in terms of its openness. And I guess my question is, how do you keep Europe from becoming as vulnerable as its least capable border state? That is, if you have free movement once you enter the continent, how do you begin to create proper security checks across, you know, these extensive borders? So we have now some progress with this new agreement between Turkey and the EU about how those trying to arrive through Greece will be processed, but there are obviously other ways to get into Europe, and presumably, people will begin to press those.
STELZENMÜLLER: Sure. Well, what I—what I—what I’m saying is that ultimately, we can’t prevent these things happening because the price of perfect security is too high to pay. The economic costs, the social costs and the political costs, the signaling of, you know, caving in to this kind of thing I think is a price that we can’t want to pay. That’s what I meant with resilience. I mean, the irony—because you were asking about EU-level fixes, the irony is, of course, that justice and home affairs, to which this—such measures—under which such measures would fall is a topic that nation-states have tried to—kept out of European integration. I would suggest that there has to be a degree of integration there for practical purposes. But even if you—even if you have security checks at all the borders, even if you try to close all the borders, that’s not going to prevent this kind of thing. Both terrorists and security officials have a way of overcoming these things.
ROSEN: Yeah. But let me turn, Robert and Sebastian, to the things you focus on more. The headlines lately, of course, have been about these great flows of people, the security threats, but there is still this underlying problem of European economic performance and these recent measures taken by the European Central Bank, which didn’t seem to produce the desired effect. So the question, I suppose, is what is lacking now in the tools available to the European Union in terms of economic management? And is there, in some way, this ongoing tension, which people have remarked upon for years, between an economic community that has obviously important monetary tools but lacks the fiscal tools available to governments elsewhere? So Robert, why don’t you start, and then Sebastian, chime in?
KAHN: Sure. We debate a lot this, not just, of course, in Europe but in the United States because across the industrial world for the—since the Great Recession, we’ve been grappling with slow growth and the legacy of that crisis. So some of that would be the inevitable head winds that came out of that crisis, the need to heal balance sheets and to—and to fix economies, in any event.
But I think you do want to go further in the case of Europe and assign part of the blame for the extraordinarily disappointing growth, the very high levels of unemployment, and the tepid response of the economy to conventional ways of stimulating it, including the ECB. And you have to assign a good part of the blame to the incomplete nature of economic and financial union in Europe and in particularly the lack of a fiscal union and banking union as not allowing for the normal transmission mechanisms of recovery to take effect.
ROSEN: OK. OK. Sebastian, let me just—if I could, you know, put a sharper point on it: What, if you—if you—if you feel confident in answering for Robert and yourself, I mean, what are the mechanisms, particular mechanisms, changes in policies or even in constitutional structure that might give the EU more effective tools of economic management?
MALLABY: Well, I think, you know, the answer to that is that when you do have a monetary union, you typically do have ability to stabilize across a single currency zone with fiscal transfers because otherwise, one monetary policy might be appropriate for a chunk of your monetary union but is going to create a terrible recession in other parts. And the way you deal with that is through a bunch of stabilizers, partly transfers of fiscal resources. Labor mobility, of course, is there on paper already, but given barriers of language and so forth, it’s less perfect than in the United States.
So what we’re seeing is that, you know, one move towards integration, the creation of the euro, kind of technocratically implies further moves of integration of a fiscal nature. One, you know, policy of freedom of movement across the EU implies that you also need a lot of security cooperation, as Constanze was saying.
So the trouble, as I see it, is every time Europe has a crisis, whether it’s the economic crisis in the euro area, or whether it’s a terrorism-driven thing, there are two things that happen immediately: The first is that publics get fed up and blame the EU and the central institutions and don’t want anything more to do with it, and you get the rise of populism. So the ability to believe in the EU integration reduces. At the same time, the need for the same integration increases. And that’s the essence of this more Europe or less Europe dilemma.
KAHN: Can I just add one point on this?
ROSEN: Yeah, please, go ahead, Robert, yeah.
KAHN: So we could think about three broad ways in which the fiscal policy reacts in the way Sebastian was talking about. And so one is transfers across economies. And of course, the U.S. famously—the element of fiscal union is those very large transfers over time and in response to shocks between different regions of the country and different population groups. That doesn’t happen in the European case now.
There is also a provision of public goods, which in this case means using fiscal space you have in response to shocks that go out. And whether—and it can be building roads, it can be responding to a crisis by fixing banks and the like. And there too you’d have to say that the differences of views across Europe have paralyzed that process.
And then the third piece, I would say, is just the simple macro crisis response capability of making emergency loans. And we did see in the context of Greece that these—that this process worked, but it worked extraordinarily painfully and I would argue created a lot of drag along the way that was unnecessary.
The question I would ask in that regard as to whether any of these three mechanisms are working well now in the context of Europe is to say, you know, given everything we’ve been talking about here today and all the reasons why it is difficult to reach consensus, you know, if there is a fire drill, an economic crisis that requires that kind of immediate response, is the fire department able to pick up the phone as regards fiscal policy and come forward with that rescue package in a timely fashion? I’m not confident that we can do that in the same way we did even in 2010 for Greece.
ROSEN: Well, let me ask you this, because you’ve talked about the possibility not of Brexit but of Grexit as something that might not be awful. And so, I mean, I wonder if these ambitions for having more tools and a more integrated response to these crises doesn’t also require, in a way, a sort of, you know, differentiation among the countries in the EU and whether it might not in certain ways be useful to focus on, say, countries where there is more of a consensus about basic economic policy and economic aims. I mean, the great tension which everyone points to is you have—you have—you have prosperous, rich Germany resenting having to bail out, you know, poor, profligate Greece, and the Greeks being very resentful of these austerity measures coming from their wealthier neighbors. Is it—is it a mistake to assume that those two very different sorts of economies can be so tightly bound in a single union?
KAHN: I think it’s possible, if you have a complete fiscal—a complete fiscal union. We don't. We’re not likely to have one for some time. And in that regard, it puts a lot more burden on the countries themselves to introduce the kind of flexibility in their economy that they can respond to shocks. I’ve argued in the past and I continue to believe that Greece in particular is—doesn’t have either I think the political or economic capacity, really, to do that. And ultimately, claiming back their exchange rate might—is the better way to go.
ROSEN: Is that—could that in principle, though, hold for some of the other weaker economies within the EU? Does that apply to Portugal? Does that apply to Spain, perhaps Italy? I mean—
MALLABY: Or just to economies with a different political or cultural background. As we’re hearing, Britain—it’s not that Britain is much poorer, it’s just that it has a different attitude towards the EU and so won’t play the game of integration in the way that the others would.
ROSEN: Yeah. Yeah. Yeah. I’m sorry, Constanze, you wanted to—
STELZENMÜLLER: Well, I just wanted to make a footnote because Germany and Greece are always presented as opposite poles of this—of this argument. And I think that that sort of slightly deprives it of some shadings.
For one, I try to travel around Europe a lot and particularly go to the peripheries as well. And I was much struck by how—actually, if you go to the periphery of Europe, particularly the north to Stockholm or to Riga, to Tallinn, how Germany was actually taking a moderate position on a lot of things. The Scandinavians and the Balts were the ones who were really sort of furious in a very sort of Lutheran sort of way with the Greeks—(laughter)—and were—and were saying to us, you know, why do even—do you even bother? Can’t we just throw them out and continue? And—seriously, and—this is not a joke. And it was the Germans who were actually trying to hold this together by saying, no, no, no, this is a bad idea, and it’s not just about economics; it’s also about politics.
And finally, if I may say so, the German position is always described as, you know, austerity versus growth. There is actually a big internal debate with distinguished German economists saying, you know, we do have to have growth and unemployment policies here. We have to do something. But if you want to represent the German government position fairly, I think you have to say what this is about is structural reform because it is—it is the deep dysfunctionality of the Greek economy, the corruption, the political dysfunctionality that makes the Greeks so vulnerable. And the point about the integration, the degree of integration that we have is that the most vulnerable country, even a very small one with a tiny GDP like Greece, makes the other ones vulnerable.
ROSEN: Yeah. Well, let me just briefly, before we turn to audience, or rather member and guest questions here in a few minutes—Brexit. So this is a very real thing happening. In, what, a hundred days, there will be this referendum, and there is a very real possibility that the electorate in the U.K. will vote for a British exit from all of these institutions. So we have talked today about ways in which further integration would be useful, but what we haven’t really talked about in any way is something highlighted in the title of our session, which is not only more Europe but less Europe.
So one of the concerns, as I understand it, of those advocating Brexit is that there is turning no back: Once you’re a part of these institutions, the logic of them is deeper and deeper integration, less and less self-rule, less and less national autonomy. So how do you answer those who say whatever the advantages right now of being a part of the European Union, look at what is happening in this great experiment: sluggish growth, enormous tensions, lack of control of peoples moving across borders? So how would you answer, say, an advocate of Brexit, Sebastian, who says, where do we ever see the less Europe? Europe is a one-way street to deeper and deeper integration, and we should get out now?
MALLABY: Well, I mean, as I’ve already said, I think there is that logic that, you know, once you have the system, the club, you know, there is a technocratic logic for deepening it. The reality of what’s happened is that the deepening has been quite slow—in fact, arguably, too slow. So to that extent, the pro-Brexit, the guys who want to leave Europe, are exaggerating shamelessly. For example, the—you know, the EU Commission’s budget has been marginally cut and certainly held, so this notion of technocratic expansion is not actually what’s happening. It’s also the case that in some areas of regulation, there are signs of pulling it back. The common agricultural policy, which subsidizes farmers, is still very bad, but it’s a bit less bad than it used to be. So that’s one point is that the Brexit guys are going to have.
Now, you could say yes, all right, but let’s just cast it forward 10, 15 years; isn’t this logic of integration still going to be there? That’s your—that’s your question. And I think the answer to that is yes, there is that logic. But, you know, maybe it’s good. I mean, maybe this integration is what you need in a globalized world where you’re not going to wish away the problems of continental Europe, and if you want continental Europe to be managing whether it’s external challenges like Putin or migration or whether it’s internal challenges of the need for structural economic reform, better to be part of that solution than to pretend the whole problem isn’t there because it will still affect the British economy. I mean, London has thrived by having 40 percent of EU multinational companies with headquarters in London. It’s thrived by having 60 percent of non-EU multinationals who want a European base choose London. It thrives by being the services capital and provider, not only in finance but also in legal accounting and so forth, for the entire EU. So, I mean, the idea that, you know, you’re better off by cutting yourself off is wrong. And it’s worth being part of that integration logic, I think, rather than, you know, burying your head in the sand and telling the rest of the world—
ROSEN: Yeah. Constanze, yeah.
STELZENMÜLLER: No—I’d love to add something to that. I also don’t quite see how Brexit is going to work if we’re currently in the process of fusing the London and Frankfurt stock exchanges. That’s a mystery to me.
As a—as a lawyer, I would add—I—you know, constitutional and international and, indeed, European law at law school—and I can tell you that I—it’s my distinct fear that a lot of the advocates of Brexit have no idea that they are—what they are advocating is the equivalent of a ripping out an organ from a larger functioning organism. In other words, this isn’t just something where you cut one thread and then you’re off. This—there is going to be an awful lot of unpleasant bleeding, and the damage to the British economy will be extreme.
The other thing, of course, that I worry about as a German and as one of those dodgy continentals is that, you know, I want to have British voice in foreign and security policy as part of the European debate. It’s a very useful and important counterweight to the—some of the discussions that we have. I want to have Britain’s cosmopolitan attitudes. I want to have their relationship with the Commonwealth as part of—as part of our debates.
And I agree entirely with Sebastian: I think that the advocates of Brexit fail to understand that—there are three narratives of integration historically in Europe. One is peace, prosperity, and democratic transformation. And to me, the fourth new narrative, which I find compelling and I’m willing to argue, but won’t, at great length, is that right now, this is about the survival of Europe and its self-protection against the forces of globalization.
ROSEN: Yeah. But let me ask you, as a political proposition in Europe generally, but particularly in the U.K., is saying we must save Europe a way to win support? So very few—
STELZENMÜLLER: OK. OK.
ROSEN: But I’m just saying—(laughter)—but, look, but—and this is—this is the issue that’s coming up, obviously most pointedly in Britain. I mean, how many people in Europe think of themselves in the first instance as Europeans as opposed to Britons or Germans or Greeks? And I wonder if, I mean, what we’re seeing, again, most pointedly in the U.K. but elsewhere in the continent is the kind of resistance to this idea that Europe must become this ever-closer unitary state.
So we have—so Boris Johnson, you may have heard of, is the mayor of London, and he seems to have higher ambitions. (Laughter.) So he has said in coming out for Brexit, EU law is like a ratchet clicking only forward. We are seeing a slow and invisible process of legal colonization as the EU infiltrates just about every area of public policy. It is unstoppable and irreversible, and it leaves ever less room for national decision-making. But in a way, what you two are saying is, yes, Boris, and that’s the logic of it and what we should want. I guess the question is, do the people of the U.K. and do the people more generally of Europe want that as well?
MALLABY: So I’m glad you brought Boris up because, you know, Boris is, you know, this wonderful sort of charismatic blonde bombshell of a disheveled force of nature who in a slightly sort of Donald Trump-like way just has this knack of connecting with people on TV and also not enormous scruples about the sort of accuracy of what he says. (Laughter.)
Now, what he illustrates, I think, is—goes—is bigger than Britain, which is that we live in an era when trust in institutions is generally in huge decline, and in no—and particularly that sort of distant government institutions are not commanding natural connection and sort of sympathy from electorates.
So what you—the only way to bridge that divide between disgruntled electorates feeling that, you know, inequality is growing, they’ve had a bad deal from globalization and so forth, and these remote elites who are governing them, the only way you bridge that gap appears to be through charisma, through a Boris-type figure, or maybe a Trump-type figure, who has a way of cutting through, connecting with people, and suddenly you’re thinking, oh, I hate government, I hate distant bureaucrats, but this guy I kind of like, right? (Laughter.)
The problem with the EU—and, by the way, with all supranational institutions, whether it’s the World Bank, the IMF, the WTO, the United Nations—is that they don’t have charismatic people who go and campaign, right? (Laughter.)
So this is another actually instance in which, once you’ve got Europe, you kind of need more of it because—why? Because the only chance for a EU figure to come and connect with EU voters directly would be if there was an EU budget, and you could promise things like bridges and whatever, and you could say, I’m going to change your life for the better. How did FDR create a big surge in trust, positive trust in American government? How did the second world war actually also create a bigger set of trust—amount of trust in American government? It’s because the American government fixed big problems for you. If you have a small EU, a modest EU, you’re not going to get that.
ROSEN: I’m sorry, Robert, you want to—
KAHN: So just two quick things. One is that in—I fully agree with that. I—in the last several years, we—in the absence of that, here as well as in Europe, we’ve asked our central banks to do the quasi-fiscal work for us, right? And they’ve done extraordinary things. And as you’ve touched on in your opening remarks, I think we’ve now reached a point where central banks are finding diminishing effectiveness to more and more unorthodox policies. And so it—there are compelling economic dynamics to why you have to return to the fiscal question now and ask, is there anything more we can do in terms of that greater fiscal union and a more coherent Europe-wide fiscal policy to try and turn that around?
Now, part of that is Pan-European fiscal presence, building those bridges with the name of Europe on it. Part of it is just simply producing more growth. And even short of an aggregate EU policy, I would argue that countries acting together could produce a more expansionary policy in Europe, fiscal policy in Europe. And that—and I know it would go against a lot of views in Germany and elsewhere about whether that’s appropriate or not. But there’d be benefits more broadly in terms of the politics if the fiscal space that some countries have were used now to try and produce a better sense of wellbeing broadly in the market.
ROSEN: I’m sorry—Constanze.
STELZENMÜLLER: Well, I think it’s, you know, only fair to add that even if the Germans have been against expansionary fiscal policy, which I do find regrettable, Mario Draghi has more than made up for the shortfall by, you know, with—in several—
KAHN: He’s tried to.
STELZENMÜLLER: Yeah, he’s tried to, exactly. No, no, meeting with fierce resistance from the Germans, for which I apologize. (Laughter.) But the—
KAHN: No, but it’s also a question of the effectiveness of these measures as well.
STELZENMÜLLER: Sure, but I want to make a serious point and a slightly less serious point. The serious point here is that one of the ironies for me as a German now living in Washington is how many very serious and, in fact, impassioned American advocates of deeper European integration there are, both for economic and for security reasons.
Thank you. I always think it’s a lot easier to see the forest if you’re farther away.
My less serious point is the best story I never got to write for my newspaper—I was a reporter for Die Zeit for 11 years—was about Boris Johnson, because I—in 1997, the election that Labour won and that the Tories lost was, you know, a rocky—an ignored rocky reporter at the behavior, whose suggestions such as that Labour might win were not taken seriously because of how much we disagreed with them.
And so I went off by myself to follow Boris Johnson campaigning in a deeply, deeply red Labour constituency in Wales. And it was enormous fun. I’ll spare you the details, but he lost very respectably by merely 4,000 votes—and this despite the fact that he was, you know, driving across in a VW Bus, you know, with a megaphone across Welsh housing estates, you know, yelling his slogans at sort of rather poor and disadvantaged people or knocking on doors and, you know, being opened by little old Welsh ladies and saying, Madam, I’ve got some—(inaudible)—for you, and being invited to tea.
It was—I mean, it was priceless. But I thought after that, this guy really needs to be watched; he’s quite dangerous and very effective. And here we are. (Laughter.)
ROSEN: So let me now turn to our members and guests, who I’m sure have many questions. We have a microphone circulating. I would ask you please to raise your hand, wait for me to identify you, stand, and then ask a brilliant, concise question.
So, yes, ma’am. Right here.
Q: Hi. I’m Alexandra Starr with National Public Radio. This question is for Sebastian.
Can you give your perspective on how David Cameron has managed the referendum and what you think the outcome will be?
MALLABY: So, I mean, David Cameron starts with having, you know, tied one hand behind his back and beaten the other one, you know, with his—with his other foot as hard as he could. So, I mean, he really—I mean, you go into a referendum arguing that you should stay in the European Union, having spent the previous five years basically being rude about it.
And I mean, this is why, you know, Anand Menon was exactly right. In Britain, there is one camp that wants out of the EU and the other camp, which sort of wants half-out and is kind of not sure but maybe might—you know, it’s—he’s like that.
So I would fault him tremendously for taking the politically easy path in the past five or six years in the sense that it’s so easy if you’re a national politician to blame anybody’s—to channel people’s frustration towards the other institution over there in Brussels. This is what national governments do when they channel frustrations at the IMF about the fact that they’ve mismanaged their own economy. The IMF is here to help, but they’d like to blame those guys in Washington. And it’s exactly the same with Britain. This is what David Cameron—this is the game he’s played.
And as an act of sort of simply internal party management, he blithely promises a referendum, forgetting that referenda tend to be decided on the basis of random events. I mean, the sterling has fallen today. Why? Because it’s viewed by the markets as being the case that these Brussels attacks will scare people in Britain and somehow through no logical connection increase the changes of voting for out just because Europe looks scary, right.
So just to keep his own party quiet, to shut of the back-bench criticism, which tends to be very euro-skeptic, David Cameron says, just be quiet, guys; we’ll give you a referendum later. Now he’s got the referendum. He has to fight it.
So I think he’s laid himself an unpleasant bed full of nettles and thorns. And that’s his own fault.
Having said that, he is an effective campaigner like other politicians one can think of, maybe Bill Clinton. He’s expert at creating his own sort of—you know, boxing himself in and then magically escaping. He is good at campaigning. And I think that if—you know, he has a decent chance of winning. I think Anand Menon has said maybe not just on the stage, but I’ve heard you other times saying that you think the polls are basically when you quality-adjust them in favor of the idea that Britain will vote to stay in, that’s not everybody’s view. There is a turnout problem in Britain, whereby when you ask people, you know, do you want in, do you want out, you might get a roughly 50/50 split or maybe slight majority for staying in.
But the problem is the young people want to stay in Europe, and they tend not to turn out and vote. The old people want to leave, and they do turn out. The Scots like Europe and would like to stay in, but they don’t like David Cameron. So will they vote for a campaign which is kind of spearheaded by him?
Labour Party supporters tend to like staying in. But again, they don’t like David Cameron. So maybe they won’t be motivated to go and vote.
So there’s a bunch of concerns around turnout. Plus, there’s sort of just unpredictability of, you know, another terrorist attack might happen; the Greek economic crisis might flare up, as Rob is predicting; and that would turn people against Europe for economic reasons.
So, I mean, I’m saying that I think that Cameron is a good campaigner but he’s only got a 50/50 chance of winning.
ROSEN: I’m sorry, we have another question right here in front, please.
Q: Laetitia Garriott, Entrepreneurs for Hillary.
Constanze, you mentioned Europe’s security and possible fixes, architectural fixes. You said 9/11 was a wakeup call globally. In the U.S. we created the National Counterterrorism Center to help coordinate between various agencies that were not coordinating. In Europe, the idea of a European intelligence agency has been brought forward but also met with very strong resistance.
What is the shape, and what is the most ambitious yet achievable shape of those architectural fixes that you think can happen? And does the U.S. have a role to play to help get there?
STELZENMÜLLER: OK. Do you want me to answer that immediately?
ROSEN: Oh, please, yes.
STELZENMÜLLER: OK. All right. Let me tell you what I think isn’t the answer. And it’s the kind of architectural fix that the Russians keep proposing to us and have been since about 1954, when I think that particular plan was referred to by Time in a memorable op-ed as a plan with furry ears. And there have been a lot of plans with furry ears since then, but they keep coming. And in fact, Foreign Minister Lavrov just wrote a piece again that says the exact same thing. They seem not to get bored with this, which I find astounding, given the fact that the resistance to this, particularly in my own country, is—really has been quite overt and quite articulate.
But what do we need to do? I mean, the reality of—I think the reality today is that we can’t avoid the kind of silly competition that we’ve had in the past between the EU and NATO on this, you know.
So what I think of as necessary is in no way intended to suggest that these things are in some—you know, ought to weigh each other out. In fact, I think that they ought to be complementary. So what NATO clearly needs to do is attend to defense, reassurance, deterrence. There is a great deal of work to be done there. The European part of this proper, the EU part of this proper, I think, would have to look at domestic, societal, economic, and political resilience.
Now, as somebody was saying earlier in—I think on an earlier panel, this is new thinking in the EU, because we have so far tried to keep the shape of our domestic affairs outside of the regulatory powers of the EU for, you know, more or less good reasons. But I think that is something that we’re going to look at very closely, because we can see that part of the techniques that the Russians and indeed Daesh are using are addressed directly at social consensus, through social media and terror and other means, you know.
That means—and I do believe that there is scope for European integration. Again, I’m not a fundamentalist on this. I’m not a supranationalist on this. I think we should do what’s necessary and what works.
At the same time, we need to empower the nation state, but making sure—and this is key here—because of all the things that Sebastian’s been saying, you know, this fascination with charismatic figures, this impatience with democracy, with consensus-building and accountability, we have to make sure that our nation states retain their constitutional orders, which in Europe happen to be balance—premised on balance and separation of powers and public accountability. This is something that we—I fear that successive postwar generations have taken for granted and that we can no longer take for granted. The Federalist Papers are all about this, and I think that that’s something that those—that that thinking is something worth turning to now.
European intelligence agency—I don’t think that’s going to happen. The high representative, Federica Mogherini, is working on a global strategy. I personally think that that’s a worthy effort. I can think of other things. I also think that we need to do a lot on defense cooperation and on aligning defense procurement. But that’s far too detailed for this discussion, I think.
ROSEN: Another question? Yes, sir, right here on the aisle.
Q: Politically as well as economically, was the euro a mistake?
ROSEN: That’s—I think that’s for Robert—it’s Robert’s turn. (Laughter.)
MALLABY: I’m interested in Constanze’s view. She said “no.” We’ll get—we should hear that too.
KAHN: Yeah—no, but I don’t think that it’s—we should assume that it’s—the answer is yes for all the countries that are currently in it.
ROSEN: Say more. What do you mean?
KAHN: I think that Greece would have—would be much better politically and economically outside the eurozone. I have questions about some of the other countries in the periphery, whether the commitment is there to the policies, particularly in this incomplete financial union.
ROSEN: Let me ask you more there just on this question. I was trying to get at this before. So that would be a way in which we would meet our requirement here of talking about less Europe—
ROSEN: —if Greece were to withdraw from the eurozone. In what other ways might the shrinking, in a way, of the geographic ambition of European economic union allow those that remained in the core to be more effective and to really do something to jumpstart growth, to create jobs in a way that Europe is not creating now?
KAHN: Well, I hate using the term, but channeling my inner German self maybe, the moral hazard issues, I think, have had a paralyzing effect on decision-making in the European context and the extraordinary gulf across many of these countries in terms of, you know, how long people expect to be able to work for and retire and under what conditions and who should pay for that.
Many of these things, of course, have been litigated and settled in the U.S. context. Every day, my taxes, a portion of them, go to Mississippi or go to other places that have lower income and receive transfers from the federal government. But it’s not a matter of daily politics to do it.
And I don’t—I don’t—I think to some extent a narrower group of countries that had a more common commitment to a set of structural policies would make it easier to cut those deals.
ROSEN: Yeah. Constanze or Sebastian. I don’t know which of you was itching to—
MALLABY: Well, I’ll say something briefly, and I really want to hear what you say, because I’m going to say the opposite. To me—
STELZENMÜLLER: Do you know already what I’m going to say? I mean, how can you know that you’re saying the opposite?
MALLABY: Well, because I thought you—
STELZENMÜLLER: Go ahead. It’s all right. Sorry.
MALLABY: I thought you said it wasn’t a mistake. You said, “No!” (Laughter.) So listening to a word, I divined an answer. (Laughter.)
STELZENMÜLLER: All right, all right. I accept it.
MALLABY: And I would say, “Yes!” (Laughter.) I mean, it seems to me that actually this is something you can break off from the other stuff, right. You can have a common market for trade. You don’t need a common currency. Of course it’s nice that, you know, companies can move goods and services across borders without worrying about exchange rate problems.
But now that we know what we know, I think that the cost of dealing with those exchange rates, management frictions, is de minimis compared to the cost of taking away an autonomous central bank from economies that need them for crisis-management purposes and where we still haven’t created a patch that gets away, I think, in the future from the issues that occur when you don’t have a European central bank.
ROSEN: So your point is that the euro and the centralized monetary control that comes with it has had great difficulty dealing with the diversity in these economies, their different needs and expectations?
MALLABY: Yes. And then that creates huge political resentments and backlashes and—which we could have avoided.
ROSEN: OK. This is excellent. You’re meeting the mandate for saying “less.”
ROSEN: Though—but at this point it’s done. I mean, there’s no point in discussing—
MALLABY: Yes. Now that we are where we are, the cost of exit is so enormous for Greece that you have to really not care about the Greeks—
KAHN: Why do you say that?
MALLABY: Well, because I think that you—you know, you’ve completely euro-ized the Greek economy. You take away their money, their payment system. And you say, OK, now you go back to the drachma, in which nobody in the world will have confidence, right? So you’re going to devalue, you know, massively. And then, you know, somewhere down the tunnel, you know, 10 years later, maybe, you know, you’ll have devalued so much that your tourism sector will drive some growth. But by then, you know, every educated Greek has left. So I just—I mean, my view is that now the cost once you are where you are is so big, forget about it.
ROSEN: Yeah. Constanze.
STELZENMÜLLER: Well, my first response was in response to Anand’s commendably terse question, which I think ought to be acknowledged.
But in reality, my longer version, the one that’s not an executive summary, is a “yes, but,” which is, of course, that—I’m not going to disagree with the points raised here for the simple reason that I’m not an economist and know when to shut up.
But the—but I would only add that for many countries in Europe, particularly the new members, the euro was, of course, also a political project and for none more than the Balts, yeah, who ran for cover and in fact joined the euro in the middle of the financial crisis, you know, which actually required a lot of sacrifice from them.
STELZENMÜLLER: And I think that that is something to keep in mind. I still have these little bags of national currencies that we used to carry about. I kept them as a—as a souvenir. That is—you know, that’s sort of something that I really don’t relish going back to. And I agree with Sebastian that I think the cost of returning to that would be very, very high.
With that said, I agree with—I’m sorry—
STELZENMÜLLER: —Rob, I’m sorry. Forgive me. I agree with Rob that we would probably not want to stop—the flaws that are there and that are obvious to everyone need to be fixed. And those may require a degree of political integration where we’re not.
I would only add one point here, which I personally take very seriously and that I think bears with it tremendous political risk. And that is that in the current situation, there is serious thought being given to, in some capitals of Europe—and we had one member—one person at dinner say that last night—to having deeper integration among a smaller group of Europeans and perhaps sort of the Lutheran thinking, right-minded northern sort of group of original members, who can envisage deeper integration, particularly as an insurance against the exit of others.
And that, I think, would add a dynamic of fragmentation to the European project that could ultimately destroy it. I understand where that’s coming from, but I’m very worried about it, and I think it’s quite real.
MALLABY: I just think—so I kind of—I’m hearing here logic that, you know, if you believe in Europe and it’s the political project, you kind of need to do all of it and you should join the euro and it needs to be not fragment, there mustn’t be a-la-carte Europe—
STELZENMÜLLER: That’s not what I’m saying, seriously.
STELZENMÜLLER: Again, I’m not a supranationalist. I don’t think it needs to be one-size-fits-all. What I do worry about is this tendency among those who want more integration to split off. And I’m wondering, how do we find the arguments to say that that shouldn’t happen? And in fact, because I think of it as a political project, I think it needs to remain flexible, it needs to have different sizes.
And I say that as a—as a country where at least people in my tribe know—are fully aware of—that Germany was the country that profited most from the euro and therefore bears some responsibility in holding things together and to some degree of, you know, paying the price for that.
ROSEN: I’m sorry, a question here up front, please.
STELZENMÜLLER: Sorry, I interrupted you. I just wanted to clarify.
Q: Bettye Musham, Gear Holdings. Turkey.
Turkey is a major player in the crisis with the refugees, and Germany seems to have reached some kind of an agreement with them. But with Erdogan’s abuse of human rights and his corruption, how do you work with Turkey and trust Turkey?
ROSEN: I think that’s for you, Constanze.
STELZENMÜLLER: Right. Well, I can tell you that some of my feelings about this are quite inexpressible on an open microphone. (Laughter.) It’s—no, I mean, it’s an irony. Erdogan has been going, I mean, more and more off the rails, becoming more and more authoritarian. I don’t know whether anybody registered his comment of a week or 10 days ago saying that, you know, Jerusalem needed to become an Islamic city again.
Wow. Great. I mean, if you really want to—want to stoke unrest, you know, and fear in the heart of your European partners, that’s—you know, that’s the golden route to doing that. That’s just what we need in the Middle East.
I mean, the reality is that I think we—I mean, I don’t think that there is a real outlook for EU accession negotiations progressing, which is one of the things that we’ve promised, for the—not just because of Cypress opposing it forever, but because of the absorption capacities of both EU and Turkey, which I think would resist that strenuously.
The other truth, it has to be said, is that for the longest time the EU was double—was double-tongued, as it were. I’m sorry, I think I’m looking for the right work.
MALLABY: Forked tongue.
STELZENMÜLLER: Yeah, forked tongue, thank you—on this. In Germany in particular, you had the Christian Democrats saying, no, we don’t want membership, we want privileged partnerships; but many senior foreign policy specialists saying, actually this would be a good idea; and conversely the Social Democrats and the Greens being officially in favor, but many privately harboring deep reservations. And that’s just Germany.
The reality is that we, because of the Procrustean bed of the European negotiations, where in the minds of whoever set it up—foreign security policy, we’re going to come at the very end—we completely and utterly failed to have a sensible strategic conversation with Turkey when it mattered, which was 10 years ago, about the deteriorating security in their neighborhood and what that meant for Europe. We’re paying the price for that now. And you know what. That’s our fault. It was stupid of us.
Now we have to deal with—we have to have this conversation with a guy named Erdogan. All I can hope for—and it’s not a lot—is that by having to deal with this unpleasant man we can at least, you know, put some of his—you know, hold him to some of his promises, just as we will have to be held to ours, and that that will perhaps help at least manage and mitigate an otherwise unbearable situation. This is, you know, not great.
KAHN: Just one—could I just add one thing on that?
ROSEN: Oh, sure. Yeah.
KAHN: Which is, Turkey also has a vulnerable economy now.
KAHN: It is—the history of it is, it can be subject to large and volatile capital swings and swings in sentiment. I wouldn’t be shocked if—even before this most recent crisis, it was facing some pretty significant financial challenges and financing needs. So I wouldn’t be surprised if this issue of European support for Turkey becomes red-hot pretty soon. And as we saw, for example, in Ukraine recently, the debates on nonmember support can really divide.
ROSEN: We have the next question here at the back, and then I think we have one over here.
Q: Thank you. Jamie Kirchick with the Foreign Policy Initiative.
This is a question for the whole panel, I guess. But with the migrant crisis, do you think that there’s been a maybe delayed reaction on the part of Europeans that perhaps there needs to be a more proactive, maybe even militarily proactive foreign policy, and that this crisis can’t be solved through continued fruitless diplomatic negotiations with the Russians and that it’s just going to continue indefinitely unless the Europeans and the United States come together and try to solve this?
ROSEN: I hear that—
STELZENMÜLLER: I guess that’s me again, huh? All right.
ROSEN: —directed at you.
STELZENMÜLLER: Jamie, give me a break. I mean, come on. (Laughter.) Before—honestly before the refugee crisis was Crimea and Ukraine, yeah. Every general staff and every chancellery in Europe has been on high alert since then, yeah. There was the Wales summit. We’re going into the Warsaw summit, yeah. It is not as though we are not thinking about how to react to all this. And I don’t know whether anybody here in this country noticed that our finance minister, who is not the kind of man who enjoys distributing money, said that Germany was going to be able to and would increase its defense budget by 6 percent over the next five years.
In an earlier day and age, you would have had my fellow Germans rioting about—in the streets about something like that. Now everybody accepts that. The larger question is how you square the eastern-flank threat and the southern-flank crisis, yeah. I would also argue that, you know, a couple years ago, people thought, you know, we were getting—we were getting into Libya and that that was, you know, a very serious security engagement, getting rid of Gaddafi and then stabilizing the country, right. Remember that? And I thought it was a disgrace for the Germans to have abstained. Look where we are now with Libya.
I mean, frankly I’m—I have some sympathy with Phil Gordon, who’s a member of the Council, when he says, you know, we tried everything and everything failed. I still think that we need to—you know, we have to have a foreign-leaning foreign and security policy in Europe. We can’t rely on America always being there for us. We shouldn’t free-ride, and agree entirely with Anand there. But a lot is happening, yeah, and I think as you know, Jamie.
So I think that the bigger question is frankly how we square European and American strategic interests in the neighborhood.
MALLABY: You know, in all this debate—just quickly—about more Europe, less Europe, different Europe, one thing we shouldn’t do is set unreasonable tests for what Europe is supposed to achieve.
MALLABY: Keeping refugees, who are coming by the hundreds of thousands, out of your country is, as the United States knows with respect to Mexico, quite difficult. People will come in if they want to come in. So to say, look, oh, dear, you know, the refugees are coming into Europe, so that means we have to fix this. How do we fix this? Obviously the institutions are lacking. And that’s rubbish.
And it’s that kind of, you know, scapegoating of the EU and holding it to an impossible test, which I think fosters then the populist backlash later that says, oh, you didn’t—you didn’t fix this, you should have fixed this—it’s impossible to fix.
ROSEN: Yes, right here, please. Yeah.
Q: Thank you. Michael Mandelbaum, Johns Hopkins SAIS.
I want to go back to the euro. The message from the stage and from other sessions—and it’s a familiar one—is that what is economically necessary is politically impossible; what’s needed is further integration, a fiscal union, a financial union; and that just won’t fly in Europe now for the foreseeable future, from which, A, if not the logical conclusion would be, this enterprise is doomed, it can’t go on as is.
Now, in response to such a statement, one hears points that have been made, namely there’s no provision for exit, that the costs are unknown, it might be catastrophic, that Europe will always muddle through—muddled through so far. But if you think about a political future in which the north is increasingly exasperated with having to bail out the south and the south is increasingly exasperated with having to suffer austerity at the hands of the north, as they see it; and where these populist anti-EU parties go from strength to strength, they go from 15 percent to 30 percent, and who knows, even to a majority; it does seem fair to ask, how can this project continue as it is?
Now, when you raise this question to knowledgeable Europeans and knowledgeable economists, they look at you as if you’re some cross between eccentric and rude. And then they say some version of, well, breaking up the euro is unthinkable.
So my question for the panel is, can you give us a better reason than that? (Laughter.)
MALLABY: (Chuckles.) I can try. So I—look, I think you put the dilemma extremely well, Michael. And I have often said to people, look, you know, this reminds me of the chilling IRA statement after they narrowly failed to kill Margaret Thatcher in a bomb in Brighton, which is, you got lucky this time, but you have to get lucky every time.
And the eurozone is a bit like that. It survived this recent crisis. It was rescued at the end of the day by a combination of extraordinary monetary policy, a weak euro off the back of that, and very cheap oil, which all came to the rescue at once and seems to have calmed things for the moment, right. But if the project is fundamentally—has this internal contradiction, then, you know, one of these days maybe you’re right, it’ll crack up.
Now, what’s the counterargument? The counterargument, I think, is that the way you get a deepening of Europe, more Europe as the title of the panel says, is you don’t expect to do it in half an hour, right. You built federalism in the U.S. over a period of centuries—couple of them anyway. And in the same way in Europe, it’s going to take time for people to get comfortable with the idea that yes, authorities in Brussels will grow, transfers across the union will need to grow, and that—you know, they won’t accept it soon. That’s right. That’s the political constraint. But maybe the fact that in the polling younger Europeans are more pro-integration than older ones suggests that if we can survive a few of these crises and not fall off the tightrope, then it may be—
ROSEN: OK, Constanze and Rob, why don’t you each have a comment here at the end, because we’re approaching the noon hour.
STELZENMÜLLER: I think I’m going to agree with Sebastian. I’ll just add a thought, and it’s that perhaps lawyers in the room will know how deep the sort of mutual pollination, the cross-pollination over 200 years, is between the United States and Europe. And so we’re aware of how you try to fix certain problems in your relationship between the union and the states. And we’re also aware of the American problem of mob rule and of the fact that you had a civil war and that you had to have a civil war before things could go on and that you always have had, in fact, these violent swings of the pendulum between oligarchies and the street and that things have sort of always managed to swing back.
I think that in Europe, things are a little more fragile. But on the other hand, we have had—most of us have the—have living memory of—or the memory passed on from our parents and grandparents of two great wars. And that is something that stays in your cultural DNA. And we also have reaped the benefits of integration. We have seen what a common currency, what the opening of borders, and what travel for students across the continent can bring us. We have seen what democratic transformation and economic transformation brought to Poland and the other new members of the EU.
These to us have been deeply, emotionally moving moments, things of which we are proud and which we cherish and which we want to preserve. Don’t forget that I think most of us would be willing to fight for this. So I wouldn’t quite give up yet.
KAHN: Well, I would go back to the argument that says that we need to find a way to get stronger growth and meet people’s aspirations as a bridge to—because I agree with Sebastian. There’s not—there’s no great shortcuts to this.
I would argue that—two points. One is that if you look at the economic literature on how to bridge this, it’s filled with lots of clever ideas for trying to get fiscal union without actually calling it fiscal union, getting it through the backdoor through the banking system, for example. Central bank facilities are another way to go. None of these have particular democratic accountability and maybe fall prey to the same kind of, you know, critiques and forces we would argue for here. And I think a lot of them would fail on that hurdle.
The only other point I’d make—and I have to just mention kind of a memory from an earlier time when I was doing—in the policy world and worrying about Argentina post- their leaving the currency board. And you know, it was a particularly traumatic experience for them after many years in which their adherence to this was fundamental. Support collapsed. They left the board. It was an extraordinarily painful adjustment, because the policies needed to adjust so much.
Within a year and a half, they had a recovery going, something that is a feature of large, messy devaluation. The return to growth comes more quickly than through the internal adjustment we’re trying for now. And there was an active debate in countries like Brazil in 2002, should we go the same way.
And so on the one end—and you know, I think in some countries it was a close call. Now, in the end, most countries chose to sort of remain with more orthodox policies. And we are here—we are where we are now. I would just say I think that, you know, we are likely to see at least one country choose to exit and how disruptive that devaluation is. I think it may not be. Sebastian may be right. It’s empirical, may tell us more about whether or not there’s a willingness to stay the course for that long-term adjustment than anything else.
ROSEN: Very good. Thank you. Please join me in thanking our panelists. (Applause.)
We will adjourn now for lunch in the Pratt House. And then we will come back together again at 1:00 for a session titled: “Europe’s Role in a Troubled World.”