Alexei Monsarrat

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  • Transcript: Europe's Unfinished Currency

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  • The Eurozone Crisis After the Greek Elections: Transcript - 6/22/12

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    The Atlantic Council of the United States

    The Eurozone Crisis After the Greek Elections

    Welcome and Moderator:
    Frances G. Burwell,
    Vice President and Director,
    Transatlantic Relations Program

    Ulrike Guérot,
    Senior Policy Fellow,
    European Council on Foreign Relations;

    Jacob Kirkegaard,
    Research Fellow,
    Peterson Institute for International Economics

    The Honorable C. Boyden Gray
    Former Ambassador to the European Union
    and Vice Chairman
    Atlantic Council

    Location: Washington, D.C.

    Date: Friday, June 22, 2012 

    Transcript by
    Federal News Service
    Washington, D.C.

    FRAN BURWELL: Welcome to the Atlantic Council. I’m Fran Burwell. I run the Transatlantic Relations Program here. I want to extend a welcome both to those of who are here in our audience, and also those who are watching on C-SPAN. This panel was organized with our Global Business and Economics Program as well. So I want to thank Alexei Monsarrat and his team for their help.

    For the last two years, it seems that Europe has been synonymous with the – with economic crisis. Within the eurozone, one country after another seems to go through either a banking crisis or a sovereign debt crisis, and sometimes both. Numerous forecasts that the eurozone will break up have been made, as well as some that even the European Union will meet its end.

    Niall Ferguson and Nouriel Roubini have recently raised the specters of a 1930s-type economic crisis. Knowledgeable and very involved experts disagree about the future. We hosted here at the Atlantic Council Josef Ackermann a couple of weeks ago. Until recently, he was the CEO of Deutsche Bank. And he expressed confidence that Europe will make it through this crisis with the eurozone intact. The same week, we hosted Christine Lagarde, former French finance minister and now head of the IMF, who was arguing for a much more urgent approaching, saying that time is running out to avoid this becoming a much broader crisis.

    EU governments have responded to this crisis with a series of new fiscal policies and institutions. We have new rules on hedge funds and other forms of financial interaction that are believed to have caused some of this crisis. We have the so-called six pack of new measures designed to return discipline to European debt and deficit levels. We have the establishment of the European stability and financial facility – European Financial Stability Facility and the European Stability Mechanism to provide emergency funding. We have enhanced banking supervision, including a new agency in London. The fiscal compact, which reinforces the six pack, is now in the process of being ratified. Ad we have two new responses currently under discussion: even greater banking supervision to the point, perhaps, of banking union, and the mutualization of debt.

    But despite all this, the crisis persists. Indeed, as one phase seems to ease, one country moves away from the brink, another comes to the fore. If not Greece, then the next day it’s Spain or Italy or perhaps even France. The market seems unconvinced that Europe will succeed. On one level, the persistence of this crisis is surprising. The eurozone as a whole has some strong economic fundamentals. The deficit as a percentage of GDP is only 2.8 percent, as opposed to ours in the United States of 8.7 percent. The debt as percentage of GDP is not far off – 87 percent versus 70 (percent) or so.

    But as countless observers have noted, fiscal decision making in Europe is still based at the national level. The healthy overall figures mask a very wide range, from Estonia with a debt of only 6 percent and Denmark – actually not in the eurozone – but Germany with a deficit of – in the 2 (percent) to 3 percent and a 40 (percent) to 60 percent debt to Ireland, Greece, Italy, Portugal, with debt as a percentage of GDP of over 100 in 2011. As a result, for two years now the crisis has ebbed and flowed, while dominating discussions both within and about Europe. It has dominated elections and government crises in Spain, France, Portugal, the Netherlands, Italy and, of course, Greece.

    And that brings us to today. Even if you’ve been following this crisis from the beginning, the last six weeks to a month has been particularly harrowing and uncertain. We have a new French president and parliament who are now arguing for a different tack for Europe to take, one that is less austerity and more growth – at least that’s the rhetoric. We have a bailout of Spanish banks, with growing concerns expressed about Italy. And yesterday Moody’s, of course, downgraded 15 banks, some of which are large European players.

    Above all, of course, the Greek election – perhaps I should the Greek elections, since we’ve had two of them so close together. But the one this past week was a narrow victory for those who support the bailout. We now have a very tentative coalition, but they’ve also made clear that they want to renegotiate their arrangements with the EU. And it’s also become clear that they have basically lost two months in terms of implementing the reforms that they promised earlier.

    We now also face a series of EU meetings. Finance ministers met yesterday and heard from Lagarde that they need to do more. Today Merkel, Monti – Chancellor Merkel of Germany, Monti of Italy, Hollande of France and Rajoy of Spain are meeting. And next Thursday and Friday will be the next European summit, where we are hoping that key decisions will be made.

    To discuss where we are in this crisis and what the future may bring, we have an excellent panel. And I’m going to introduce them in reverse order of go. Ambassador C. Boyden Gray is one of the top U.S. regulatory lawyers, and most importantly for this panel, was the U.S. representative to the EU in the last administration. He also is an Atlantic Council board member.

    Dr. Ulrike Guérot is a senior research fellow at the European Council on Foreign Relations based in Berlin. She has worked previously for other think tanks in Germany and is one of the most prolific commentators on the politics of European integration and the Franco-German relationship.

    Dr. Jacob Kirkegaard has been a research fellow at the Peterson Institute for International Economics since 2002. From Denmark, he’s written extensively on workforce issues and pension reform, both in Europe and elsewhere, and for the last few years has focused on the crisis in European economic reform.

    So, let me start with Jacob, and let me ask, where are we now? How close are we to the edge of the cliff – is the European economy?

    JACOB KIRKEGAARD: Well, I guess, let me start by quoting President Obama when talking about this, and say that the euro area, if you get the diagnosis of the crisis right, it’s doing just fine. And what I mean by that is that there’s no doubt that the euro area faces a whole host of crises. We’ve got a banking crisis in a number of countries, we’ve got a competitiveness crisis across the southern periphery, and we clearly have got a fiscal crisis in a number of countries. But the overall diagnosis of what the euro area is suffering from is an institutional crisis. It’s essentially a crisis of the design of the euro area itself, which, as it was created in the Maastricht treaty in the late 1990s, is a flawed design. It basically does not work when you have a major financial and economic crisis as we have right now.

    What that means is that it’s fundamentally a political crisis that Europe is facing because it’s about the process in which national sovereignty – and deep national sovereignty of the kind of national sovereignty over banking regulation and fiscal policy that governments were not willing to hand over to European institutions in the 1990s – are now in the process of being transferred to the euro area. And it’s important to understand that this is not cooperative game, that, as you know, as economists, we can all sit down and say, look, this is not – this shouldn’t be very hard. We can all agree what is the optimal approach. But the basic reality is because we’re dealing with a handing over a national sovereignty, which is a commodity that no government, even in the euro area, will ever part with voluntarily, you basically need the level of acute crisis that we’re seeing right now for this process to happen. And this is also important to understand that the design of the euro area which leads – or at least at the beginning of the crises had led sovereignty over banking and fiscal issues, which are really the key policy levers in a financial crisis at the national level – means that the crisis response is fundamentally dictated by one single element, which is that of political moral hazard. It is moral hazard that dictates that when you are, unlike here in the United States, when we passed the TARP, where because Congress is sovereign – well, the European Council is not sovereign. It cannot dictate the policies of recipient governments for such bailouts, which is another way of saying that the bailouts will always be partial; they will always be conditional. And those of you who believe that Europe needs a – that Europe will ever put together a fully credible and big enough firewall are wrong. That will not happen because if it did happen, it would have very direct and negative adverse effects on the incentives for the Spanish and Italian, for instance, parliaments to pass the kind of reforms that are needed.

    So where we are in the crisis right now is we’ve already had essentially – or this moral hazard-dictated process basically relies on political brinkmanship, which means that we take a crisis and you go very close to the edge of having a disaster – and a disaster that everybody agrees is a disaster, which is of course the collapse of the euro– you go right up to the edge to basically coerce the other players into giving you concessions. So it’s basically a game theoretical exercise, if you like. And the main players here are the core governments led by Germany, the European Central Bank, and the peripheral governments, and then occasionally the rest of the world through the IMF.

    We saw this, you know, in May 2010 with the first Greek bailout. We saw it in August last year, when the ECB squared off against the Spanish and Italian governments. We saw it very clearly in December last year, and we’re going to – we’re in the process of seeing it again right now. And it’s essentially a game – it’s a – it’s a repeated game of chicken that’s being played out.

    And the response function is very clear that Germany and the ECB will never agree publicly to state that they stand fully behind the euro because if they did, as I said, they would be subject to moral hazard. But don’t make any mistakes: There’s actually plenty of political willingness to do what’s necessary, and in the case of the European Central Bank, there’s also plenty of financial firepower if the – in the ECB. So there is a firewall for those who are concerned about these issues. It’s called the European Central Bank.

    And what I mean by a firewall is consider that, to date, the European Central Bank has bought only about 3 percent of actual assets as a share of euro area GDP in the form of security market purchases and the two covered bond market programs that they have. What that means is that if the ECB, in a crisis, in an acute situation, had to buy a trillion euros worth of Spanish and Italian debt, they would, after that process, only own about 14 percent of euro area GDP in outright assets. That is less than what the Federal Reserve already owns, and it is much less than what the Bank of England owns as a result of quantitative easing. So you should ask yourself, is it really credible that the ECB would not want to do this and have the euro area collapse? I absolutely believe that’s not the case, but again, this is a noncooperative game that relies as a – on a repeated game of chicken to coerce governments into handing over national sovereignty to new euro area institutions. But it’s actually a lot more stable than what is perceived and generally misperceived by financial markets.

    MS. BURWELL: Let me follow up on this. I mean, you are arguing that this is a bargaining game, and one can see that. But one also sees the market constantly raising the stakes in Europe. The market seems unconvinced that there will be a resolution in the end. We also hear from economists that, for example, the Spanish bank bailout eventually will add to Spain’s sovereign debt and raise this to a dangerous level and that Spain’s bond purchases now are being done at interest rates that are unsustainable for them. So, I mean, it does seem like there are serious economic positions that are being taken that is – can the EU constantly just ratchet up and meet those, bit by bit, or is there a point where the whole edifice comes down because the economic fundamentals are not there? You mentioned the ECB serving as the firewall; but there are limits, legally, on what the ECB can do, not only politically, given the German view, but there are – there are limits. So it’s sometimes said that if the Europeans had gotten out in front of the market, this would not have cost as much; it would have been over quickly. Do you agree with that and are we coming to a point – is there a point beyond which they cannot recover?

    MR. KIRKEGAARD: Well, no – I mean, look, there’s no doubt, as I said earlier, if you had done this as a cooperative game and gotten ahead of the market, it would have been a much – it would have been much cheaper, no doubt about it. But, as I said, the reality is that it’s not possible for governments to hand over the kind of sovereignty that that would entail. That’s the problem. That’s the process that we’re in.

    Now, do I believe – I mean, in the case of Spain for instance, think about what is about to happen. First of all – and this is an illustration of how this game works – Spain for years denied that it had a serious banking problem because it had the sovereign ability to do so. Then, finally, as it became increasingly clear that they were, you know, really in a bind a couple of months ago, Mariano Rajoy decided to begin begging the European Central Bank for – to buy his bonds so that he could finance the debt himself. The ECB said no. Finally, the Spanish government were essentially forced to hand – to exempt the kind of official bank sector bailout, including official conditionality, et cetera. And so – again, it’s an iterative bargaining game.

    Now, what has just happened today, which I actually think is even more interesting, is the fact that we are now finally getting to the point where the Spanish government, rather than actually accept to pay the full bank bailout, is thinking about imposing losses on bondholders, which again is something that’s politically very, very painful for Mariano Rajoy, because many of these bondholders are basically his political supporters in Spain. But again, it’s the choice between do you want to have more sovereign debt, or do you want to impose losses on your political allies? So this is a game that can go on.

    With respect to the – there’s no doubt that there are real macroeconomic costs to this. But I take the view that, you know, it is not yet at the point of no return. I believe, basically, in the mainstream forecasts for economic growth in the euro area, which suggest a mild overall recession this year, and a turnaround in the second half of 2012 – 2013. And this, in my opinion, given the longer-term handover of sovereignty that are involved in this process, is, for lack of a better word, collateral damage that I am perfectly willing to pay for this. I understand that, of course, an administration that has an election in November may feel very differently about that.

    MS. BURWELL: Thank you.

    Let me turn to Dr. Guerot.

    You’ve been a longtime observer of the French-German relationship, and we now have a new French government. They’ve had a couple of meetings with François Hollande and Chancellor Merkel. François Hollande came to office with a different approach to the eurozone crisis. The Franco-German relationship in the past, although difficult with Nicolas Sarkozy, was key to what was happening in Europe and the decisions that Europeans made in this crisis. Do you expect Hollande and Merkel to have the same strong relationship? Will they work this out? What does this mean for the meetings that we’ll see, both today and then next week?

    MS. GUEROT: Well, thank you, Fran.

    I happen to be pretty optimistic because my argument is that the Franco-German engine works best for Europe if actually it disputes. And we have seen super-symbiosis – Merkozy (would have said ?) more than a super-symbiosis between two people in a name – and actually was very bad for Europe. It was very bad. And it was bad not only because this couple took various wrong decisions on private sector involvement and so, which derailed the crisis – I’m sorry for the mic problems – but essentially, when you have too big symbiosis in the Franco-German tandem, you don’t give ownership to the smaller countries. And the smaller countries need the struggle, the fight and the deliberation process between two poles coming together to find the space and the place in the European compromise. And I think this has been largely overlooked. And if you come from Europe you have been traveling through Europe in the last sort of Merkozy years, what you would hear from the Dutch to the Austrians to whomever, they would just be fed up. Because the moment you have too great symbiosis, actually, it starts to be a dictate for the others and it’s not good. So whatever that fight will be – and, you know, I mean, there’s a lot of struggle between banking union, political union, between France and Germany today. But the very fact that there is fight and strife and political struggle, actually, I find this very positive. I am very confident that there will be compromise, and it’s the best that Europe can – (inaudible).

    Be reminded – I mean, we also have always these rosy ideas about Franco-German tandem and engines. If you look closer at the ’90s and you saw the Maastricht making, you saw what happened in ’92, of the fight, whether we call the currency ecu (ph) or euro, or whether we place ECB to Frankfurt or not. I was pretty close to politics these days, you know, but it was just not fun. I mean, anything – there was a book – to give you that title – there was a book written in the ’90s in France by Andre Richie (ph), who was a journalist for Libération, and the title was “La Guerre de Sept Ans,” “The War of Seven Years: How France and Germany made the Euro Happen.” So that gives you a little bit the thing that the more they fight, actually, the better are the compromises – that you have a compromise that works for Europe. So on that, I am pretty confident that we will see a compromise. And I am along the lines of Jacob on this. We see a pretty interesting arm-wrestling now between France and Germany, which is Germany says political union, France says banking union, and basically Germany replies, we can do more moves on fiscal union, we can do more moves on banking union, we can do that little step into mutualization of debt, but please be aware of the fact for the German, this requires huge steps into losing sovereignty, into political union, into legal things. It requires a quantum leap in political integration. The French need to get it.

    And last sentence on this – I happen to have been in Mr. Schweibler’s (ph) office in ’92, ’94 when we did this – (inaudible) – paper. It was all there. The German argument about political union is a very old argument, and for all those who want to go back in history and read the ’92, ’94 Times, this – (inaudible) – document has it all. Everything that is now out in terms of we need to improve the European Commission, get a direct-elected president, have a different – (inaudible) – it was all set in the ’90s. The French didn’t accept. I think today they will need to accept a little bit of this.

    MS. BURWELL: So what does this say, though? I mean, you’re making the argument that there is a past to this relationship, which clearly there is, but what does it mean for the future? I mean, there have been a lot of predictions that the EU may even fail. If it does survive, it will be smaller; it will be more of a core Europe. Do you believe that – there is this saying, if you will, among those of us who watch the EU – that out of crisis comes more Europe, not less? Is this another case of that, or this the exception?

    MS. GUEROT: Well, I think it’s pretty true, and if you see what Foreign Minister Westerwelle came up last Tuesday with, which was a big study group proposal for more Europe – the “more Europe” group – document, which was interim report, because he consulted with 10 like-minded foreign ministers on political future of Europe. The document’s, by the way, out there for grabs. And it shapes, in a way, a new democratic European system at large, yeah? It’s a power division in the European system with a very different setup of a European parliament, a very different type of two chamber and so and so forth, which is what the Germans call more Europe and call more political union. I think this is really important.

    So if we come back to France and Germany – at large, what France and Germany need to succeed now, to be very sort of brief on this – but I think they need to achieve a new social contract for Europe. This is what the whole arm-wrestling is about. And I think this whole social contract has two components. One component is to refix the state-market relationship on the European level, and the other is to refix the labor-capital relationship within Europe, right? If France and Germany should succeed in that work – because they come from very different socioeconomic traditions – then it would, actually, I think empower the European Union to have a pretty good consensus model where most of the countries can chime in. And I think this is what they both knew. Of course, this is now pretty, you know, disputed in arm-wrestling, but I think they both are aware of this. And again, it’s a chicken game, but I think we see a little progress on this.

    MS. BURWELL: Well, forgive me, though, for challenging, but we’re in the midst of this economic crisis. A very uncooperative game, I think was the term you used. And is this the moment to be thinking about grand political designs? And one of the things that I’ve been hearing is that we will see a permanent division between north and south. France seems to be somewhere in the middle there, but there will be a very different Europe going forward in terms of splits and divisions, perhaps even the threat of some domestic extremism in some countries, given the economic crisis. Certainly when I was in Europe earlier this week and talking to some of my north European colleagues, they did not see much of a future for the south of Europe with them, at least in the eurozone. So is this a moment to be thinking about this?

    MS. GUEROT: I mean, that’s two discussions. The one discussion is that basically everybody is saying we need a fire extinguisher on the German side; we need a new architecture. You know, that’s one – (inaudible) – of a discussion that Germans want – a very bold reshuffling of the European architecture, which would (pass the way ?). I mean, this is what – I know that this is hard to make explain, but for the Germans, if there should be ultimately that mutualization of whatever kind, for the German this means a fundamental reset of the European institutional system, including treaty change. This is a given. And the other countries, I think, should come along accepting this, because the negotiation game is that if you give us something of that, then perhaps Germany goes into banking union and ultimately banking – a debt mutualization of some sort, or we may start with a redemption fund or whatever. But I think this is the game.

    And for many legal reasons that I do not want to detail here – the constitutional code and so on, so forth, the very setup – because that mutualization means erosion of national budget sovereignty, you need to rethink the democratic system of Europe in a different way. And that is a game-changing moment. And I think to understand, for all the other countries, that you go along with that thinking of a game-changing moment, and then we may think about debt mutualization, this is one thing to definitely understand, and I think the other countries are coming there. And that’s a discussion – fire extinguisher now was these big architectural plans from the Germany side.

    The other is – to be very brief on this – core Europe – I think there’s no core Europe beyond, sort of – I mean, they have been talking about this northern currency union, the Germans with Austria, Netherlands and soon. This is, I think – this would not fly. Historically and politically, it’s just nonsense, right? Europe is France and Germany. So I agree; France is tipping point, and France, at some point, will perhaps need to decide whether it goes north or south. But if you split France and Germany, then I would argue Europe is finished. That dynamic for 50 years holds true, so you don’t see politically, strategically a sort of big northern currency union which is constructed around Germany, which is, I think, in also a trans-Atlantic perspective, completely absurd, right? So either France holds – and this is why this actual arm-wrestling now between France and Germany is of crucial historical importance, yeah? And I feel like the French need to come along, because why? In the historical settings, the Germans came along first. I mean, we did monetary union in ’92, we gave up the currency, we wanted political union, the French didn’t give it to us. Today, we come back and say, look, further step requires further jump into political union. And seeing over 20 years of history, this is pretty much what is now happening. And I think the French are getting it.

    And to give you that one sentence, if you look at the system of the European Union, last – or yesterday’s discussion was the discussion between federalism and intergovernmentalism. The French were intergovernmental, the German federal. Tomorrow’s discussion, my bet is, executivism versus parliamentarism, right? And then you have the French sort of executivist, president – (inaudible) – versus a German more parliamentarian thinking, and that gives you – I said France and Germany need to come along on a different social contract for Europe, but they also need to come along on the design of a political system that holds true for both. So we will need to merger the presidential tradition with the parliamentarian tradition of the Germans. The Germans had Frau Merkel; she was nine times into parliament to get all these rescue umbrellas through the Bundestag. Sarkozy, none – no time with the l’Assemblèe Nationale.

    So parliamentarism will be needed at some point. We will need to revamp the parliamentarian component of the European system, and the French will need to understand this.

    MS. BURWELL: Great, thank you.

    Ambassador Gray, you’ve just been hearing about a very uncooperative game within the EU – a lot of high stakes, high wire act bargaining, if I can put it that way. So my first question for you would be, is this the EU that you saw? Does this sound familiar to you in terms of your experience in Brussels, but also, perhaps more importantly, why is this important to us? Why are we here in Washington talking about this? President Obama clearly thinks it’s important that the eurozone move forward and resolve this crisis. What is your argument about whether this is important to us or not?

    CLAYLAND BOYDEN GRAY: Well, we have two economies that are highly integrated. Very few people know the extent of it. It’s – I don’t know what the data are now – it’s 40 percent of world trade, 60 percent – 70 percent of investment flows, 35 percent of world GDP. I mean, it’s – they’re hugely integrated, and we forget. When I first went to Brussels, I was given a dinner by our ambassador to Belgium, Tom Korologos, and I walked in. It was very nice. It was so friendly. The greatest thing was a Belgian came up to me and said, I’m so glad to meet you. Where are you from? And I said, I’m from Washington, D.C. He said, no, no, no, no; nobody’s really from Washington, D.C. Where are you really from? And I said, I’m really from North Carolina, whereupon he hugged me. (Laughter). And I sort of wondered. I said, to what do I owe this show of respect? And he said, because we own Food Lion, and you’ve been very good to us. Now, Food Lion is the largest supermarket chain in the Southeast, in North Carolina. I didn’t know that; I grew up there and didn’t know. But the Belgians own where we bought our food. (Laughter.) And a lot of us don’t know this. There are 7 (million) or 8 million jobs on each side, depending on the investment from the other side. I think many of the BMWs – the bigger BMWs that Europeans drive are actually made in Spartanburg, South Carolina.

    There are many – and too many regulatory disconnects, that should be a total – I think it should be one internal market. The European internal market still isn’t finished – that’s one of the keys. If there is any key to Europe, it’s the formation of an internal market. We shouldn’t get very uppity about this, because it wasn’t until about five years ago that we could ship wine interstate, and we still can’t do that very well. So we have our problems, too. We shouldn’t be, you know, throwing rocks at Europe so much, because there are things we need to do, which they can help us with.

    But the two economies are really, really intertwined, and it’s not so much that our banks would fail if some of their banks – because our banks would pull back. It’s not that. It’s not necessarily that exports would drop – which they have, which on the margin hurts us, because we don’t export that much to Europe. It’s the overall picture of investment confidence. And what the Europeans want now from us is their – almost their first priority, and is led by the Germans. And you can correct me if I’m overemphasizing this: What they want is a more focused look on regulatory harmonization or mutual recognition, and they’ve put it – cloaking it in the – in the – in the – in the guise of a free trade agreement between Europe and the United States. This is not progressing very well, but I – wait till after the election and let’s see what happens. I was disappointed to see that even the Obama – I mean, the Romney administration’s saying it’s not really a good idea – administration campaign saying it’s not really a good idea. So I hope that we all can get forward.

    Why is it important? Well, it’s important because if Europe cannot find the key to the kind of dot com innovation that we’re used to – Facebook, Google – then we suffer. We suffer and they suffer. If we both can get rid of these regulatory inhibitions, that’s a point or two of GDP growth on both sides. We are going to be at 2 percent, maybe lucky, and no one would be complaining if we were at 3 percent. If Europe were at 2 percent or 3 percent, there wouldn’t be a problem there; Europe wouldn’t have a problem. What are the – what are the difficulties? You can trace, almost, the price of bonds in Germany, depending on – in Italy, depending on the progress of Monti, who was a very free market guy. He was – had a competition in the commission. You can trace the prices almost in tandem with progress, or lack thereof, of getting his reform program through the Italian parliament.

    Now, what is – what, to me, is the key of all this? So I asked this rhetorical question, sort of a trick question, when I first went to Europe in January of 2006: Who was – how many people know this? Who was the sick man of Europe when I first got there? What? Germany, yes. (Laughter.) Germany’s growth was slower than Greece, Spain, Italy, Ireland, whatever. And what happened? What did they do? Well, they did the so-called Hartz reforms under Schroeder. He never really benefited from it; Chancellor Merkel has had a huge benefit from it. (Laughter.) This is not the first time. President Bush 41 cleaned up the banking system, lost in part because of it, and Clinton had a great run, you know. (Laughter.) But that’s life. That’s just life. And – but Germany responded very, very fast. The key part of this reform wasn’t adopted – it didn’t go into effect until January of 2005, and within 18 months Germany was the colossus of Europe from the sick man of Europe.

    And in a way – I’m oversimplifying – what Merkel wants from the rest of Europe is, God, if we can do it, there’s nothing unique about this. If we can do this deregulation – a little Reagan-Thatcher, a little Clinton labor law – welfare reform sort of mixture, relaxing the rules on hiring and firing – if we can do that, certainly you can do that. But Monti’s given up, and so the price goes up of the bonds, while the interest goes up when he gives up on the notion that he’s going to eliminate the requirements, because you can’t lay off anybody in Italy without a court approval. And I said this to one of the more liberal judges of the D.C. circuit, a Democrat, he said, you cannot do what in Italy? (Laughter.) And I said, you cannot fire anybody – it’s also true in France – you cannot fire anybody – except six months in France – you can’t fire anybody without a court approval. Without my approval, he says, the judge, and I say, yes, that’s what – he said, that’s insane. Well, it is insane.

    Today we learned in The New York Times that the European Court of Justice has rule that if you get sick on vacation in Europe, you get to take your vacation over again. (Laughter.) It used to be that if you got sick before vacation, you could postpone it and take it over again. Now they’re – they’ve just ruled – I mean, I’ve got it right here; you can read it in today’s paper – that if you get sick during vacation, you get to have it all over again. Gee, whiz. What a great – what a great racket that is. In any event, I hope to get sick in August – (laughter) – you know, and then I can give myself a vacation in September, because it wasn’t very good in May.

    MS. : Ah.

    MR. GRAY: So what we need, I think, is to take a look at these things that made Germany a success. There is a(n) effort afoot to try to do this with our help and with our cooperation. I think that would add to it. And then I think Europe would be under a whole lot less pressure if they had a whole lot more growth.

    MS. BURWELL: Thank you very much. I do recall, I think it was Jean-Claude Juncker once saying that we European politicians know exactly what needs to be done, we just don’t know how to get re-elected after we’ve done that. So –

    MR. GRAY: There is the problem –

    (Cross talk, laughter.)

    MR. GRAY: – the principal and take your lumps. And if you’re like Schroder or Bush 41, maybe it means you don’t get re-elected, but you’re treated well by history.

    MS. BURWELL: Yes. Yes. So I think what we’ve heard from this panel is a different view of the eurozone crisis, one that looks at this as a bargaining enterprise and a not very pretty or nice one, but one that requires crisis to work. We have a Franco-German relationship that does better when they’re having arguments. And we have politicians who commit political suicide to – in order to get these reforms through. And so, of course, no one in the current crop really wants to do that very much.

    So it’s not a – it’s not a very cooperative environment. It’s not an environment where everyone can simply make a rational decision and move forward. But we do have this great impetus of the economy pushing people forward, debt levels – deficit levels pushing decisions to be made, action-forcing events, if we will. And we have the meeting on next Friday, which we hope will have some decisions.

    I’m going to open this now to the audience. And I think we have some microphones here. Claire (sp)? OK. So yes, back – wait a – yes, that’s right. And please say who you are and your affiliation.

    Q: I’m Kris Bledowski from Manufacturers Alliance for Productivity and Innovation. I –

    MS. BURWELL: Could you stand please so that – because you’re hiding behind the person in front of you.

    Q: Yes. I hold Ulrike and Jacob in extremely high regard. In fact, I think these are some of the best brains that euro-Atlantic community has today. And I read their stuff and I value that – their writing very highly. I will be somewhat blunt, maybe impolite by challenging their views today.

    On the one hand, we’ve got a game of chicken, which is trying to subtract sovereignty, which is given to any group of countries. On the other hand, we’ve got a conflict that Ulrike says is almost needed in order to advance integration. So what we have effectively is a conflict that is needed in order to deepen the integration that is supposed to avoid a conflict. So you’ve got a conflict that is supposed to amend a conflict. I think the search for first-best solution that we have, an inability to concentrate on plan B, the second-best, and have that second best as a viable option is causing this crisis that we have, where markets are not convinced that first-best is achievable, but second-best is not being attempted or spelled out. And this in-between grey area is causing this crisis that keeps going. Why do we have to have a crisis in order to solve a crisis? Why can’t we go back – step back, climb down and accept the plan B, spell it out to the voters and, at the price of the diminished credibility, regain the credibility down the line and build what is viable? I’m sorry I can’t put it any other way, but I’ll finish there.

    MS. BURWELL: Is there a plan B that would work and that is something that everyone could agree on? I mean, the Europeans are often accused of not finding the big solution, that we’re not going to wake up and suddenly see that the crisis is over, but rather of muddling through.

    And let me add to that for you, Jacob. There’s a timing issue, too. How long does this game take to play out? And how long does it – would we be better off having less of a time distance to get to the goal and be able to have something, a win of some kind? George Soros, who has made a lot of money in currency speculation and investment, had a speech about a month ago where he gave Europe three months. And he wasn’t –

    MR. : He also said last year about three months. (Laughter.)

    MS. BURWELL: Yeah.

    MS. : Two weeks, last year.

    MS. BURWELL: Two weeks, last year. And OK, so – and there are others as well who have said this.

    MS. : Yes.

    MS. BURWELL: But what’s the timing? Can we get a – is there a second-best?

    MR. KIRKEGAARD: Well, I mean, I think that we have to be clear that, you know, this is second best in many ways. I mean, muddling – as I said, if we could have a cooperative solution, you know, it will be much cheaper and it will be much quicker. But that’s not possible because of the sovereignty issues involved. So we are in a second-best solution here.

    And with respect to the timing issue, what I guess – the way I view it is perhaps slightly broader, because remember what the European Union is – or the euro area, at least, is trying to achieve here. It’s trying to unify a continent from the bottom up by voluntarily pooling sovereignty from the unions to a new center that’s being created. That’s infinitely harder to do than the way continents are normally being unified, which is, of course, through military conquest historically.

    But remember that we in the United States – you know, we have states versus federal discussions about who does what, who pays for what, these types of issues between the center and the periphery; it goes on all the time. This is essentially the same that Europe has, the same discussion about, you know, in here we call it states’ rights issues; in Europe, they call it the principle of subsidiarity. But it’s essentially the same thing.

    What is different is, of course, that Europe does not yet, in my opinion, have a center that everyone agrees will hold. Now I believe it will, and that we, in fact, have crossed the point of no return in the sense that it’s going to be much more expensive for everyone involved to dissolve the European Union than go through this process that I have already sketched out and then that Ulrike was also talking about.

    So what we need to do is to get to the threshold where markets are essentially convinced that the center will hold. Once that’s established, we can go on forever to have these states’ rights debate internally in Europe. When will that happen? I mean, I think that’s a – that’s a very good question. Do we need – we clearly, in my opinion, need a banking union. We will get a big step towards that next week.

    MS. BURWELL: Yeah.

    MR. KIRKEGAARD: We clearly also need a partial debt mutualization of sovereign debt, which is something that I believe can be achieved, you know, maybe in a – in a five-to eight-year timeframe.

    So that is the timeframe that I’d be looking at. But that doesn’t meant that we in the meantime cannot have a quieting down of the sovereign debt market or the sovereign bond market instability, because essentially the way the way the ECB works, the political response function of the ECB is it lends its balance sheet every time there’s a step forward towards European integration. And I would expect that, quite frankly, to happen after next week’s summit as well.

    MS. BURWELL: Ulrike, second-best plans? And what looks – what does this look like between France and Germany? And if they agree on something, do the other countries who are not so much part of a – at least, the initial decision-making process, is it second best for them? And I wish you’d say a little bit about the incentives for Germany to compromise and particularly Chancellor Merkel. She has been – she has a favorability rating of somewhere between 55 (percent) and 65 percent consistently since the beginning of the year.

    MS. GUEROT: Second best in the sense that politics is the art of the possible, right? And I would agree. I mean, the question was more or less sort of how long do we go with this half-pregnant situation, right? And I think the answer is – Merkel has been issuing a couple of speeches just in recent days, where she said that we will take five years to overleap the fiscal compact legislation into the institutional setup. So that’s the first legal work to do, that much of the things that have been more or less outside of the treaties will be conveyed into the real institutional treaty work. Don’t forget that we have new elections of the European parliament 2014 and the new budget, so this opportunity will most likely be seized to do something of a refundamental work in the institutional setup with respect to discretionary means for the EU budget, but also probably with respect to how the European parliament functions and whether we can work on more transnational European parties. Don’t forget that January 2013 next year, we have 50 years of Franco-German anniversary of Elysée treaty, and I’m deeply convinced that France and Germany will take that opportunity to do a huge quantum leap in political integration just to seize the symbolics of that thing.

    And then what is in for the smaller countries? I think what is in for the smaller countries is that – I mean, I don’t want to say they don’t have much other choices, right? But, I mean, Austria and the – I mean, you know, the smallest – the smaller countries of the EU are the largest benefitor from a strong European Union, yeah? They don’t have a European foreign policy. They benefit from a European foreign policy. They benefit from a European energy policy. They benefit from a strong set of values and so on and so forth.

    So the smaller countries, as long as they have ownership in the system – and it will therefore be very important how we work the institutional setting of the – what you can call – let’s face it: I don’t like these discussions about federations any longer, and I don’t like United States of Europe because it’s too much comparing with the United States. I like European Republic because that’s more or less what it’s about. We will need to have a sort of Hamiltonian moment. European republic resonates plenty of our values. Most of the European countries are anyway republics, right? So it would also suit the French. And I think there must be something like creative more political thinking, and then I’m convinced there is a lot in for the smaller countries.

    MS. BURWELL: Ambassador Gray, do you want to comment on this?

    MR. GRAY: Well, you know, this all sounds vaguely familiar, if you know American history. (Laughter.) I used to say when I was over there, you know, take it from us. We are the old country. You’re the new country. I mean, you know, my state, a lot of states, older than Greece, I mean, older than Italy, Belgium, even Germany. So we’re the old country. That is – (inaudible).

    We used to – this is not an unfamiliar thing we’re going through. And remember – many Europeans say, well, gosh, why shouldn’t Germany pick up the debt the way – the way Hamilton did in 1789? Well, he did that in 1789 when it was formed, you know. There was a huge debt crisis in 1837 when the states bet on canals and got overtaken by the railroad, so there was a lot of investment that went belly up. And the states went to Washington saying, will you bail us out, and Washington said no. And therefore we got some 39 or 40 state balanced budget constitutional provisions, which has helped a lot in this country.

    So, you know, we’ve seen this movie before. And I’m – you know, I – and I used – also used to say, Brussels needs to get stronger before it can get weaker. There needs to be more of a democratic element. Either the – either the parliament’s got to be more representative – I mean, the EU parliament – or the president of the commission, of the council, got to be publicly elected. I mean, there has got to be this element of it, which has got to be added.

    The French are going to resist this because the French – and I’ve got to be careful how I say this – (laughter) – Madame Lagarde, I think, is out of the country – (laughter) – I got to be careful how I say it – when – my experience was that the French really knew how to run the European Union. I used to say to my British friends, who dominated the staff – English being the principal language, of course, and the Brits being so good at this and so articulate – and I say to my English friend, boy, you really do dominate the commission, don’t you? And they say, no, no, no, no, no. No, no, no, no, no. It’s the French. The French dominate everything.

    And I think they’re losing some of that. But this is a problem. The French don’t want their secret behind-the-scenes power deluded anymore by, you know, Eastern Europe, for God’s sakes, let alone the United States if we were to be more integrated in terms of our economic regulatory relationship. So I’m putting a different spin on what you’re saying, but I think the French do have to come along on this.

    MS. BURWELL: Yeah. Yeah. Yeah.

    Jacob, you had one small –

    MR. KIRKEGAARD: No, I mean, just very – just very quickly on this issue of the pooling of the sovereignty. It’s very – I think it’s very important to distinguish between the timetable for fiscal union and the timetable for banking union, because banking union has the quote-unquote “political advantage” that you can pool sovereignty in a bureaucratic, technocratic institution, much like the European Central Bank, to oversee that. You cannot do that with fiscal policy because it’s, you know, inherently political in nature. So you need to create a new political institution to have a fiscal union, which will take the timeframe that we talked about. So I do absolutely not believe that a banking union is that far away. I actually believe we’re very close to one.

    MS. BURWELL: Next week?

    MR. KIRKEGAARD: No. I think we will have an announcement of one next week that again will have this proportionality between, you know, pooling of sovereignty and pooling of – in this case, not debt but contingent liabilities is what we’re talking about. But the principle is essentially the same.

    MS. BURWELL: Right. Question here. (Inaudible.) Can I get a microphone here? You have one, right?

    MR. : Yeah. Right.

    MS. BURWELL: Yeah. And then –

    Q: I’m Harlan Ullman at the Atlantic Council. First, I want to thank and congratulate the panel for a very lively and a very provocative series of comments. I wanted to enlarge the discussion, however, along the lines of a headline I remember reading years ago in London in the Express or the Mail that read, channel fogged in, continent cut off. (Laughter.)

    We’re looking at this in isolation of Europe. And there are a lot of other moving parts, let alone a collapse of the new Greek government, what’s happening in Syria, what’s happening in Iran, when the Supreme Court decides to rule on the Affordable Health Act here; if they do, you can imagine what’s going to happen to the stock market. So there are a whole series of exogenous things going on that have not really been considered that are going to have a powerful influence. I wondered if the panel might address some of those, and how they might be dealt with, if at all.

    MS. BURWELL: So at first I thought you were going to actually ask – (inaudible) – new political – (inaudible) – but –

    Q: Something much broader.

    MS. BURWELL: Something much broader than that. We have had in Europe, I think, a bandwidth issue in terms of – this has really dominated the discussions. The amount of leadership time that has been put into the euro crisis has been phenomenal. And Ulrike, why don’t you start?

    MS. GUEROT: I think there is a very easy and, in a way, sad answer. We are trying to shift a system a nanocentimeter away from the others, right? And we are doing this for all the reasons that Jacob mentioned of conditionality, pressuring the system, getting the cohesion and so on and so forth. But if you shift the system a nanocentimeter from the others without gaining ground, then the risk is always there that at some point, you lose it, right? So let’s face that.

    I’m, by the way, convinced that markets already got the story. I’m convinced that markets got the story that we will succeed and we go for what I call, say, European Republic, to make it short. But your point is a valid point, which is that what we don’t price in in that happening is the unknown risk, because we try to price in the known risk, but we don’t know about the unknown risk. And what we don’t price in is the law of unintended consequences, yeah?

    And we have been seeing this with LTROs and, you know, sort of movements where a good intention of private management led to other consequences, which were unintended but brought us other difficulties. So is there any chance that we – I think we just need to have that in mind. We are dealing with unknown risk, and we are – with unintended consequences. And just we need to be careful at any step now.

    And there is a problem because the problem is that we will – if all this goes right, we will be basically keeping a whole political system under strain for the next five years to come, to put it mildly. And the strain on political elections and how you have, you know, the narrative right and the press not overshooting, you know, like, Nazi articles and whatever, Germany-bashing articles – what is poisoning the atmosphere, right, and then you poison also electoral things and – this is a risk, I agree. But again, is there any other chance out there than to be careful and to still do it?

    MS. BURWELL: Well, I think the other issue as well – and I’m not sure if you meant to include this as well – is as we look from here, from Washington, and there is this discussion about the pivot to Asia in U.S. policy is the eurozone crisis making Europe a partner that is less of a partner for the United States in addressing global issues and in the way that we are seen in – Europe is seen in international institutions such as the IMF, the World Bank, et cetera. I mean, is this something that, from an American perspective and – we have to think about in terms Europe’s capability to act elsewhere, not necessarily militarily, but even to get the diplomatic bandwith?

    MS. GUEROT: Fran one sentence on this. I feel the inverse. I mean, honestly, all this talk about the U.S. – sort of Europe’s going down the toilet and how many times – 20 years I’m listening I’m listening to this, and Europe is still alive. And I never saw the U.S. so actively commentating and looking on Europe and – like now. I mean, I’m now an at NYU fellowship in New York. I mean, all – the whole city is about Europe and Germany trying to get the political economy of Europe. I think that this country’s just reactivizing all its brain and thinking about Europe and realizing that we are the utmost, most important partner on earth for the United States and that you have stakes in what is happening. (Chuckling.) And I think that this is one of the best sort of unintended consequences of the euro crisis, from a trans-Atlantic perspective.

    MS. BURWELL: Boyden, do you want to comment on this?

    MR. GRAY: Yes. I mean, I’m sort of a broken record on this. This discussion – you just don’t read anything in the – you know, Josef Joffe had a great piece the day before yesterday.

    MS. : Yeah. Yeah.

    MR. GRAY: I’d encourage you all to read it. I think I – make sure you have copies here or can make copies.

    MS. : Yeah.

    MR. GRAY: The – if we don’t – and it starts with economics, I mean, unfortunately. My old man used to say all the time I was growing up, money isn’t everything; it’s just about everything.

    It starts with economics. It starts with, you could say, the internal market and the internal market has to be trans-Atlantic. And if you don’t have that, if you don’t have the economic growth, you can’t pay for anything else. And you can’t do the things that we’re talking about here. You need the economic growth, and that’s where real liberty comes from and real opportunity comes from.

    We can that, but it has to be part of the debate. I just want to insist on that. If we don’t – this is from Jürgen Thumann, who came here and said that – the head of the – of Business Europe and a leading German finance figure, business figure – if we and Europe don’t get our act with our common values, different as they may be, in some respects – if we don’t do it, you know, Asia’s going to drive right through, and the whole game is going to be lost. And so what happens between us and Europe, is really critically important for the future of the world economic order. It’s absolutely essential. And if we don’t get our act together, we don’t hang together, we will, as they say, hang separately.

    MS. BURWELL: Thank you.

    Let me bring in another voice. (Inaudible.)

    Q: Hi. I’m Kathryn Hauser with the TransAtlantic Business Dialogue, and my question really was about the role that the U.K. will play in all of this. I think when Americans think of Europe, we naturally think of the U.K. – and most of our exports go to the U.K.; it’s the first country companies export to – the close relationship we have with them. And I’d be very interested in the panel’s thoughts about the role or trouble the U.K. may cause in all of this.

    MS. BURWELL: Jacob, do you want to start on the economics and the December decision?

    MR. KIRKEGAARD: Yeah. Well, I mean, I think this is, first and foremost, a problem for the U.K., quite frankly, because I think that what you will see is increasingly – I know that there’s talk of multispeed Europe, et cetera, but in the long run, because of the benefits that Ulrike talked about for the smaller countries of actually being part of the European integration or continental integration, I guess – y’all, I’m sorry; I forgot about the Irish – but I think that in the long run it will end up being 26. I feel very confident about that. And I will just say, you know, if you think about why that is, Poland is a member of the group, Westerwelle’s group, that Ulrike mentioned in the beginning. So this is very much not a, you know, EU 15. It’s a very – a group with everyone in, basically.

    And you know, once Vaclav Klaus is out of office in the Czech Republic, you know, who knows what the Czech Republic will do? And then we’re into a situation of 26 vis-à-vis one.

    So in the long run, I think, unfortunately, the politics of the U.K. is almost certain to keep it out of these deep sovereignty issues. How that is going to be squared away with – vis-à-vis particularly, of course, these financial markets and the role of the City of London, is a really good question. I mean, I guess I have some faith in the fact that at the day, as was – actually came out a couple of weeks ago in a Euroskeptic think tank, Open Europe, had a report on, you know, what should the U.K. do in this.

    MS. : Yeah.

    MR. KIRKEGAARD: And they actually came out and they said – and these are people who, you know, are Euroskeptics – saying that at the end of the day, the U.K. had more to gain from being inside than outside. So I think they will remain member of the EU, but whether or not it will be more sort of a special relationship than a full member – I think that’s very much up to debate. But they will not be part of the core in the long run, I think.

    MS. BURWELL: They have – the Cameron government has been quite concerned about their ability to have influence over regulations on financial services, obviously because of the City of London. Do you think – even though that’s not a eurozone competency, it’s a single market – decisions made at the whole of the EU, rather than the eurozone level – but do you think they will be able to protect, if I can use that word, their interests in financial regulation?

    MR. KIRKEGAARD: Well, certainly if they do it for the narrow party/political reasons that David Cameron chose to stay outside the fiscal compact, they will fail. I think it was a very stupid thing he did, because he basically chose to have a couple of good headlines in the Daily Mail and the other tabloids, rather than think about that decisions about financial services in the internal market already is taken by qualified majority, which means that David Cameron, in order to protect these things, actually needs allies the European Union already. And by staying out of the fiscal compact, that’s not a way to gain and get a lot of friends. So he made a strategic mistake for short-term gains.

    Will they ultimately succeed? I think they will, because I think within – there will be allies for the traditional open market model that the U.K. has associated with – free trade, et cetera – and also because, you know, the U.K. is not associated with light-touch financial regulation anymore. (Laughter.) So I think there’s room.

    MS. BURWELL: OK. Let me – Boyden, go ahead, and then – brief comments from you both and then we’ll go back to the audience.

    MR. GRAY: Well, let me ask a question of you. What is the principal dispute between London and Brussels over financial regulation?


    MR. GRAY: Yeah, or anybody. Anybody.

    MS. BURWELL: The level of regulation –

    MS. GUEROT: Financial transaction tax.

    MR. GRAY: What?

    MS. GUEROT: Financial transaction tax.

    MR. KIRKEGAARD (?): The financial tax –

    MR. GRAY: No, no, no, no, no. (Laughter.)

    MS. GUEROT: Sure.

    MR. GRAY: Well, I get that they don’t like that. That’s –

    MS. BURWELL: That’s true.

    MS. GUEROT: That was the December council sort of –

    MR. GRAY: But they don’t like that. That’s true. I don’t think we should like that either, but –

    MS. BURWELL: What do you think it is?

    MR. GRAY: Well, I think I know what it is.

    MS. BURWELL: OK. (Laughter.)

    MR. GRAY: And then we had Josef Ackermann address this.

    MS. BURWELL: Yeah.

    MR. GRAY: So I feel – I mean, I’m quoting him. And he’s the expert, right? The issue – probably you all think that the issue is that the Brits want to have less regulation than Brussels. And if you think that, you would be wrong. What the Brits want is higher capital standards for British banks, which the Europeans don’t want, because they want British banks to do more lending in Europe. Of course the British taxpayer has to pick up the tab if something goes wrong. So there’s a tug of war, a little subsidy going on here argument, but it’s very counterintuitive, and nobody in America knows this because the press doesn’t report it.

    But I’m just going to repeat: Europe – England wants tighter – you could say tighter regulation. I’m not sure I, as a regulatory lawyer, I’d say higher capital standards mean tighter regulation. Higher capital standards mean you don’t have to do any other regulation. But that’s what England wants, higher capital standards, like we have over here. The continent doesn’t want to do that.

    And I’m going into some length on this because the regulatory details really matter, and they are also really boring. (Laughter.)

    MS. BURWELL: Ulrike.

    Thank you for that.

    MS. GUEROT: I just wanted to drop a little bit of vinegar into the wine of Euro 27. I would rather argue that if push comes to shove, and we will need a moment of what I call an institutional game change, right, in which we refix the institutional nature of the system in a way that we can probably not go with unanimity there, yeah?

    MS. BURWELL: Right.

    MS. GUEROT: I – somebody American told me that Rhode Island didn’t do the Hamiltonian moment neither, and they dropped out and only voted three years – so, see, we will not do the institutional game change, ever waiting for a Danish yes or no and an Irish yes or no, whatever, right? And so that game change cannot come at British conditions. I think that’s the point, right? And we gave them a first clap in December, when we said we will not always wait for you guys, right? That does not say that nobody wants to have the U.K. on board, we all want – it’s a very important country, City of London, so on and so forth. But when push comes to shove, my argument would rather be that the German government, I would argue, seems to be more decided to go EU-17 at the detriment of EU-27 with the hope that those who want to join then come, but at the conditions of the EU-17. And that the Poles will do that, and the U.K. can do it if it wants.

    MS. BURWELL: Thank you.

    I saw a question over here.

    Can we get a mic?

    Q: Thank you, Fran.

    I’m Scott Harris, a member of the Atlantic Council, but until recently I was running the European office of Lockheed Martin for the last 10 years, including when Ambassador Gray was there, and we had several pretty interesting adventures together.

    I want to thank the panel for an interesting discussion. But I have a concern that I’d also like you to think about addressing, and that is, always when we have these institutional discussions about mutualization and building deeper and treaty changes and things like that, we assume that the governments of Europe can actually do what they say they’ll do. And I’m concerned that especially three Southern European governments are going to be forced to and will sign up to things that they actually can’t implement. Can the Greeks really reform the state sector and collect taxes? Can the Italians reform the labor market, which was mentioned, and deal with corruption issues? Can the Spanish get the regional governments to not run deficits? In other words, there are these political problems that are very deep and cannot be solved by a dictation from Brussels. Do you share that concern at all?

    MS. BURWELL: I think in many European discussions this has come down to either Germans pushing everyone to become Germany, to be blunt about it, and whether some of the long-term institutional factors in many of these other countries can change.

    Ulrike, what do you think? I mean, is this something that – how much room for diversity will there be in these – in this post-fiscal compact Europe?

    MS. GUÉROT: I mean – (inaudible) – I’m with you that the inertia on the ground is enormous. And if you look closer at, say, Germany, for instance, we also are now having the Länder waking up to all this Greek rescue umbrellas. I mean, for instance, Bremen is indebted as high per capita as the Greek, but Baden-Württemberg is not, you know, see? So there are huge regional inertia things here at work, and same in Spain, same in Italy – north Italy, south.

    I give you another point which is my biggest problem how we make this all work – transnational democracy – and so – it’s language, yeah? If you want to take really crucial decisions on how do you spend your money for and you want to take this together in a collective deliberation process and you don’t speak a language, it’s not so easy, right? And this is why we’re heating up the press, busy Germans versus lazy Greeks, instead of discussing who pays for the crisis: the Greek shipowner, tax free in London, or the Greek harbor worker? And you could see sort of different policy schemes here with French socialist (solidarity ?) rising with the Greek workers rather than having France versus Greek or Germany versus Greek discussion. You understand my point.

    So I don’t know. I think the reality is to be – a little bit reality check here, that if you look at elections and you look at populism in Europe, we have something like a 30-70 percent divide in most of the European countries. And what I mean by 30-70 divide is that in terms of populism or so, you can measure that you have an average populism – latent populism of something like 30 percent in the Netherlands or in France, you know, like, left and right pulled together, yeah – populist pressure. And that is obviously most often the regional pressure, and it goes against the sort of more Europe argument in the electoral constraints. So that is one point.

    For the rest, that’s one economic argument, which is how much diversity we can allow in an aggregated Euroland economy, and I hope we can make this discussion because this – I mean, if we win this discussion, we have won the future. What I mean by here is not all Germany is rich. East Germany is really poor; has (in tendency ?) something like 40 to 50 to 60 percent unemployed regions, right? But still we have a solidarity concept here, and we don’t (price it ?) that way, and we don’t compare trade to export figures between Saarland and Baden-Württemberg, yeah? So if we could intellectually, mentally shift the European system in understanding Euroland as one aggregated economy and then say, what we do is fiscal transfer from wealthier regions to less wealthier regions, rather than doing it (also ?) in the negotiations scheme, sort of German money to Greek money fiscal transfer, then I think we would have won the intellectual and mental game. I’m not saying we are there, but I think we are preparing the ground, that it’s much more about wealthier to nonwealthier regions. And the moment we have gotten this, I think we will be able to recognize that not everybody’s equal in the EU; that we will need to accept poorer and richer regions; that the periphery cannot perform as Germany; that you cannot build industries on the Greek islands like you have in ThyssenKrupp, Germany, yeah; and that the – everybody can be different, but we are still (once ?) and united, argument can fly. That’s the work we will need to achieve, and it’s a big work. It’s a big work.

    MS. BURWELL: Boyden, did you want to –

    MR. GRAY: Yeah, just – I don’t know; my daughter’s first reporting was through the European Voice, and she used to say that if you didn’t get catch a Greek bureaucrat or citizen before noon, it was too late; I mean, you just couldn’t reach them in the afternoon. She never had trouble reaching anybody in Germany. But – (laughter) – I’m sorry; I shouldn’t – that’s personal.

    But just let me – just read to you just a couple of figures from Charles’ (ph) article: Throughout the decade of the euro, German’s unit labor – Germany’s unit-labor costs, notwithstanding or taking into account East Germany, was 7 percent. They rose only by 7 percent. In Italy, it was 30 percent; in Spain, it was 35 percent; and in Greece, it was 42 percent – unit-labor costs. That’s almost where the problem begins and ends. And so –

    MS. BURWELL: Jacob, how much diversity can we get under the fiscal compact and is this a transfer union that we’re talking about?

    MR. KIRKEGAARD: Well, I think eventually it will have to – you will get there. But I think there is a very important distinction that I would make for this, which is – and where – whatever the European fiscal union looks like, it will be very different from that of the United States because the euro area, in almost any conceivable shape or form that I can conceive of – and I’m very optimistic, remember – that will not have a sizeable federal budget, like in the United States. And the reason is actually quite simple. It has to do with people’s self-identity. Because of the fact that Europeans continue as the – self-identify as, you know, French, Germans, Belgians – maybe – (inaudible) – Belgians actually – (laughter) – but – (inaudible) –

    MS. BURWELL: Well, there are no Flemish.

    MR. KIRKEGAARD: But the point is that you will only accept to be taxed at the level in which you self-identify, which means ironically – and I always like to make this point – that when you say that Europeans are much more willing to pay taxes than the United States – than Americans, that’s true, but not at the continental level. The willingness of Americans – and this follows Boyden’s argument that actually the U.S. is the old country here – the willingness of Americans to pay federal income tax is much higher than the willingness of Europeans to pay taxes to Brussels because that willingness is very close to zero. (Laughter.)

    So what it means, in the long run, is that – particularly also keeping in mind that the public sectors in Europe are larger or – than in the United States – that the overwhelming amount of public spending is going to remain at the state level, much more so than here in the United States, where the predominant taxing power of course resides for the federal government that then, you know, either spends it directly in the form of benefit systems or give it en grosse to the – to states.

    That system in Europe is going to be very different. You’re going to have it – the money raised and spent at the regional member-state level. But then I will say that you will have some sort of – you know, that’s why the recent focus on fiscal rules, basically how you spend the money that you yourself raise at member-state level.

    So I think that there’s quite a lot of room for diversity within this system because it’s necessary, because there’s not the possibility of a large, you know, 10, 15, 20 percent of GDP federal budget –

    MS. BURWELL: No, no.

    MR. KIRKEGAARD: – does not, in my opinion, exist in Europe.

    MS. BURWELL: So I’m going to ask the questioners and the panelists now to be a little bit briefer because we’re coming down to the end and we have several questions still out there.

    So this gentleman right here in the front, and the next is way in the back there.

    Q: Thank you. I’m Ben Carliner from the Economic Strategy Institute. And thanks very much for a very interesting discussion. I have a question, though; I think that there’s a very compelling description of this being sort of a high-stakes game of chicken over and over again in the European Union. And given the stakes of the sovereign issues that are involved with a banking union and a fiscal union, it’s not hard to understand that.

    But given the timeframe that people are talking about in terms of setting up a banking union, setting up a fiscal union, my question is how credible is it that the ECB can keep the pressure on – because it seems like the ECB is the key institution that is keeping the pressure on sovereign governments here by not stepping in and being a lender of last resort, not doing more quantitative easing.

    And if, for example – imagine a scenario where French sovereign bond yields start to rise because the markets get a little bit worried. It’s hard to conceive that the French would accept that. And they wouldn’t go and say, listen, you’ve got to do something at the ECB. And so how much of an esprit de corps is there among the board members of the ECB? And can they maintain the pressure?

    MS. BURWELL: And I think also, how much longer can analysts like ourselves – (chuckles) – continually be wondering if this is the week that the crisis will be solved? (Laughter.)

    MR. KIERKEGAARD: Well, as I said earlier, I believe the actual firepower of the European Central Bank is quite a lot higher than what is generally perceived by the markets.

    And with respect to what they would do in the case of a spike in French bond yield, well, I think it would be very – then we would go back to the issue of conditionality, because you wouldn’t, I believe, have a situation where – what – probably – recall what happened in August last year, when the issue was whether or not Trichet and Draghi would buy Spanish and Italian debt. Well, they sent these sort of not-very-secret letters to Zapatero and Berlusconi and told them, look, we’d like to buy your bonds, but this is the list of stuff you had to do.

    The same thing would happen in the case of France, where essentially they would be met with some degree of explicit – implicit conditionality, in terms of whether it’s labor market reforms or whatever, in return for those types of purchases. So it will be, in my opinion, the kind of repetition or the types of games that we’ve already seen.

    But I think more importantly – and this also goes to the market psychology – what you need to have is the market circumstances in which a convergence trade is once again feasible. And what that entails is – because when you have that, then markets are all of a sudden going to buy these bonds because they think they’re going to converge; they’re going to fall.

    And so – and that, again, is contingent upon the need to have – convince the markets that the center will actually hold, because once that happens, then the markets will actually help you in the way that they “helped,” quote unquote, the European integration much too much in the run-up – you know, in the early years of the European or the economic and monetary union, where of course there was excessive convergence because it basically led to complacency at the policy level.

    So the point, again, is you’ve got to reach this sort of threshold, and then the sort of divergence will actually, in my opinion, become converged. And I think the ECB is perfectly capable of that.

    MS. BURWELL: Let me go way to the back of the room. And then we’re going to lump together another question here. Oh, yes, OK. We’ll get the last questions on there.

    Go ahead.

    Q: I’m Randy Henning at American University and the Peterson Institute. I wanted to thank the four of you for a really interesting session this morning.

    And a follow-up on Ulrike’s points about the transformation of European politics as we move forward from here, which I thought were very intriguing. The – and in particular I wanted to ask you a little bit about the development of trans – pan-European political movements, because I think these are going to be an important complement to the kind of institutional transformation that you’ve discussed.

    And to put a fine point on it, I’d like to ask you – because I think you’ve looked more closely at this than most of us have – at the – I’d like to ask you about the cooperation between the French Socialist Party and the German SPD. I had thought, from my standpoint, the challenge for them has been to come to agreement on what to ask as the quid pro quo for moving forward with the fiscal compact and the stability treaty. It doesn’t seem to me that they’ve come to much of an agreement on this. I’ve been disappointed that the SPD has gravitated to the financial transaction tax, which doesn’t help move fiscal union and banking union forward, in my view.

    So I wanted to ask you about the basic – the fundamentals of the cooperation between these two parties and some of the negotiations between them over the last couple of weeks. Thank you.

    MS. BURWELL: OK. Let me quickly get a mic over here.

    Q: Thank you. Peter Rashish –

    MS. BURWELL: And the final will be down in the front.

    Q: Peter Rashish from the U.S. Chamber. I wanted to ask whether the panelists believe that they think the markets share the implicit concern, I think, in Scott Harris’ very good question about the distance that these countries can go in reforming. After all, let’s remember that even in some of the core countries, Germany and Austria, the services sector is very sticky. And there may be – maybe there is a limit to how much reform you could have.

    If that is the case, and markets are asking themselves on that same question – and let’s remember, we had a pretty close call in Greece – doesn’t that argue for something very big pretty quickly – along the lines, say, of a redemption fund, which did work very well to help us get from the Articles of Confederation to the Constitution?

    MS. BURWELL: And up here in the front. Final question. He’s right there.

    Q: Thank you. Antonio de Lecea, European Union delegation to the United States. Jacob, you have represented the situation as a noncooperative game where the valuable – the main valuable piece is the transfer of sovereignty. Now, I wonder whether this should be better represented as a positive-sum game, because in the end the European Union is based on a positive-sum game and a cooperative game. But we’ve also presented or represented or perceived as a noncooperative one. And this is based, in my opinion, on some misperceptions.

    For instance, the issue of – that smaller countries benefit more from the EU than larger countries – I think this is the misperception. Large countries benefit as much as the others. The point that Germany pays and the others don’t – well, Germany pays its fair share, but the others do pay as well. The issue of the unit labor costs have been diverging and that they cannot converge again – the last two years or three years have shown that they converge again.

    So don’t you think that – and clearly the perception boils – and is related to the elections and to the democratic process. But in the end, don’t you – wouldn’t you agree that leaders realize of the nature of a cooperative game and in the end actually act and find the solutions that are cooperative?

    MS. BURWELL: Jacob, do you want to finish with that? And then we’ll go to Ulrike.

    MR. KIERKEGAARD: OK. No, I mean, very quickly on that. No, I mean, I would largely share that. I mean, I don’t think there’s any doubt that viewing this game as in an in-state description it’s a plus-sum game. There’s no doubt about that. But when I talk about a noncooperative game, I mean, that – again, it’s a game-theoretical idea that you basically have to have this game of chicken before it unfolds. So that’s more of a process element. And I certainly agree that as an in-state, it very much is a plus-sum.

    And I also agree that – with what you said, that you know, these diverging labor costs and unit labor cost that was referred to earlier – well, they are rapidly converging. And we shouldn’t – we should also be careful not to have too much of a unit labor cost fetish, because they do not actually represent actual export performance in many of these countries. So they are not equal. They do not dictate national competitiveness. So I think actually I’ll stop there. (Inaudible.)


    Do you want to comment on the socialists and other pan-European political movements?

    MS. GUEROT: Yeah. Perhaps I should also say this. I’m from the area of Cologne, which has a beautiful cathedral and which was under construction for 600 years, but it’s actually pretty beautiful. And I think European Union is like this, right? (Laughter.) In a way, it will never be finished, and when it’s finished they will start at another angle to do construction. And I think this is to be understood.

    The crisis in a way is over. It has just left us with craters of construction work, and this construction work is now taking on. And it’s the political construction work, it’s an economic construction work, and therefore I think sort of this question, when will it be over, is no longer the question. The crisis in a way is over. And I think the commitment from the German government is that sentence: The German government is committed to do at very point of the crisis, the very – at each step of the crisis the very necessary to prevent the euro from collapse. And I think markets have understood that. And what that very necessary is in a given moment, we will see. It might well be that in a week’s time it’s a banking union, and then the Germans will do it and they will fix the details. And if it’s three weeks later, it’s the redemption fund, it might be the redemption fund. And it’s – you know, but then you get a little condition and – you know. So that’s how I see it. It’s – we’re already in a big-architecture thing here.

    To me more precisely on the PS/SPD, I think there’s another misunderstanding here, which is that the German SPD is much more German than it is socialist, yeah? (Laughter.) And I wrote a paper with my colleague Sebastian Dullien, which I called “The Long Shadows of Ordoliberalism,” and I tried to match economic thinking of German parties with respect to sort of mainstream international thinking. And we – we clustered it. And what you can see in this paper is that even if you go into deep-hearted social German democrats, they would still be for ECB only stability, they would not be on the sort of French growth argument. They would still think that stability is it, that you don’t get financed growth and so on and so forth. Yeah?

    So of course the SPD was in a way as Greece in recent weeks, because it wanted to show solidarity with Hollande, so it did not want to just go for vote with Merkel on the fiscal compact; it wanted to renegotiate some element of the fiscal compact because Merkel needed to assert majority in the Bundestag to get the fiscal compact through, which happened yesterday, right? So she needed the vote of the SPD, and the SPD wanted to do Hollande a favor and renegotiate some points, which actually did not happen.

    But it makes you understand that the German – I mean and that’s also what I want to give you. We have elections next year. I’ve been so many times told, OK, what would change if election in Germany, and let’s assume you have a (great way ?) majority. The answer is, it will not change much. Even with an SPD-elected coalition, which I, by the way, don’t think is likely, you won’t see game changes in the German mindset of how this crisis is to be solved, and you will be hearing the ever-same messages of stability, structural reforms, no debt-financed growth, and so forth.

    But here’s the thing. The moment, the SPD and the PS has been talking very closely, and discussion started again since two years. And they did the work not only in economic politics but also on foreign policy. They had working groups and so. This is what Europe is about tomorrow, more cooperation, and you get into the thinking of the other. So this is the good side of the very close cooperation.

    MS. BURWELL: Final word?

    MR. GRAY: Just one quick word. American history example again. Don’t – Europeans shouldn’t invoke the example of the redemption fund, Hamilton assuming the debts, without understanding that the quid pro quo was the internal market, and which he relentlessly – and then followed by Justice Marshall –Chief Justice Marshall – relentlessly squashed the member states from interfering with this internal market. So there is a quid pro quo – there was. And if Europe wants to invoke – the people who want Germany to bail out everybody – if Europe wants to invoke that model, they should also accept the internal market deal.

    MS. BURWELL: Well, I want to thank the panel. I think Jacob started out by pointing out that This was a – that the euro zone crisis is a political animal and a political disagreement. And I think that the range of topics that we’ve talked about, from the future political construction of Europe to the building of the – the political building of the United States, just demonstrates how accurate that was.

    I hope that you all have found the view of this – of the eurozone crisis as a bargaining enterprise, if I can put it that way, to be helpful in understanding what is happening in Europe. And this evening we will have the ultimate uncooperative game in Europe, or we hope it won’t be too uncooperative, which is the Germany-Greece football match – (laughter) – played in Gdansk starting in a couple of hours. So we’ll all be watching and seeing how that comes out as a metaphor for the future of the eurozone.

    But thank you very much. (Applause.)


    Read More
  • A Greek Exit From the Euro Would Lead to Chaos

    A few weeks ago there was a wild rumor that Greece's debt crisis had been dealt with. The hope was that with enough debt relief and a "managed" default, Europe had bought time for global growth to lift the Greek economy, and Greek politicians would wring the country through massive austerity. This was a misread of the strength of global economic recovery, Greek voters, and financial markets.

    Greek voters made it clear they don't see the benefits of austerity, and believe Germany and the rest of Europe is punishing them for their government's mistakes. The French and Dutch, and even parts of Germany, seem to feel the same way and have thrown out their governments. Interest rates on debt have spiked and markets have tanked. This has sparked renewed hope that Greece's exit can stanch the bleeding.

    The argument for a euro exit runs basically as follows:
    • Greece's economy has structural problems that will kill growth absent a flexible currency.
    • Toughness from the European Union, International Monetary Fund, and European Central Bank will force reforms and leniency, allowing Greek politicians to dither.
    • Contagion effects for the rest of Europe have changed, so a Greek exit will no longer force Spain and Italy into the same position.

    This is another misread. If Greece leaves the euro the costs of using its own currency will push the country into chaos. Banks will fail, businesses will face massive euro-denominated debts they'll have to pay with a nearly worthless drachma, and the costs of basic necessities will skyrocket. Far from solving the problem, Europe will have a failed state on its hands. Markets will know this, and will immediately turn on the other weak economies. The failure of Europe will be close behind.

    The solution, much like the root problem, is political. Europeans must make a bold choice to commit entirely to European integration. Put somewhat over-simply, Germany must recognize it hugely benefits from a single market and pay far more to keep it. That will include direct financial support as well as measures to rebalance growth within Europe. Doing so will soften Greek anger at being cast as failed Europeans, and reassure them they have a future in Europe. Greeks must then unequivocally support a responsible government, rather than acting out their frustrations in the voting booth.

    The road back to growth in Europe, as in the United States, will be long, difficult, and largely unglamorous. But shedding Greece and hoping no one understands the true implications is just more wishful thinking.

    Alexei Monsarrat is the director of the Atlantic Council Global Business & Economics Program. This piece originally appeared on theU.S. News Debate Club. Photo credit: Getty Images.

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  • Turkey's Perspectives on the G-20 and Global Finance: 4/20/2012 - Transcript

    Back to event page 

    The Atlantic Council of the United States

    Turkey's Perspectives on the G-20 and Global Finance

    Welcome and Moderator:
    Frederick Kempe,
    President and CEO,
    The Atlantic Council

    Lieutenant General Brent Scowcroft,
    Atlantic Council's International Advisory Board

    Turkish Deputy Prime Minister Ali Babacan

    The Atlantic Council of the United States,
    Washington, D.C.

    Date: Friday, April 20, 2012 

    Transcript by
    Federal News Service
    Washington, D.C.

    FRED KEMPE: (In progress) – who are here in attendance. It’s terrific to see such a great audience, particularly on a Friday evening. Mr. Deputy Prime Minister, I think this is very much a credit to you and of course the growing influence and dynamism of your country.

    I’d also like to warmly – oh, I particularly want to greet the Turkish ambassador, with whom we’ve enjoyed a wonderful relationship; and also Kemal Dervis – where are you sitting, sir? – who did so much to set the Turkish economy on the right path in a previous – in a previous government. So it’s great to have you here as well, sir.

    I’d warmly like to thank Frank Kelly of Deutsche Bank and Deutsche Bank for their ongoing sponsorship of the Mapping the Economic and Financial Future Speakers’ Forum. We’ve hosted so many economic and financial leaders throughout the series, so I’ll just name a couple: Christine Lagarde, Bob Zoellick, and most recently this week, U.S. Chamber of Commerce president Tom Donohue. So Deputy Prime Minister Babacan, you’re in good company.

    I also wanted to add that tonight’s event is a great example of the collaborative strength of the Atlantic Council’s regional programs and thematic programs. We have nine programs and centers at the Atlantic Council. This one is co-hosted by the Global Business and Economics program, directed by Alexei Monsarrat, and the Dinu Patriciu Eurasia Center, run by Ambassador Ross Wilson, former ambassador to Turkey and to Azerbaijan.

    We do a lot of this sort of thing. We have now our Rafik Hariri Center for the Middle East, and it partners very closely with the Scowcroft Center, the Center for International Security at the Atlantic Council. We have an Energy and Environment program; it can work together with our Africa Center. And so this is the way that we get a lot more done at the Atlantic Council, by working both globally and with our trans-Atlantic base on a mixture of issues.

    I also wanted to say how proud we are to host the Turkish Deputy Prime Minister, Ali Babacan, tonight, who is both one of the world’s more successful economic policymakers and also a very good friend of the Atlantic Council. Mr. Deputy Prime Minister, we’re grateful to you for accepting our invitation today.

    But we’re also very grateful for the time and support you have given to our Black Sea Energy and Economic Forum, both in 2010, 2011. This has now found its permanent home in Istanbul. The Atlantic Council’s first international office is in Istanbul, underscoring the importance of your country. We look forward to hosting you again at this year’s event, renamed “The Atlantic Council Energy and Economic Summit” – since Turkey didn’t want to be limited by the Black Sea, we decided we wouldn’t be either – that will take place November 15th, 16th in Istanbul.

    Turkey is one of the world’s outstanding success stories. The poor, inflation-ridden and often ill-managed Turkey of the past has been transformed. Economic and political openings dating back to the mid-1980s, plus the country’s response to a terrible financial crisis in 2001, are part of the explanation. But among other key factors, none has been as important as the strongly pro-market, pro-financial management and pro-globalization hand Turkey’s current leadership has had, and in particular that of Ali Babacan.

    The country is not without its problems. And I’m sure the deputy prime minister will address these. Current account deficit which rose to 10 percent of GDP before falling back in the recent months is unsustainable and it represents an obvious vulnerability. But the story underlying that is nevertheless dramatic.

    To formally introduce Minister Babacan, it’s my pleasure to introduce my mentor and in many ways my inspiration, the chairman of the council’s International Advisory Board, General Brent Scowcroft. Though General Brent Scowcroft is a man who needs no introduction, I’ll nevertheless give a very brief one. But before I do that, I do want to ask that when we finish the question-and-answer session that if you remain seated to allow our guest to depart, and I really appreciate it if you would do that.

    Brent Scowcroft has been a valued counselor to every president since Richard Nixon, including serving as national security adviser to Presidents Gerald Ford and the first President Bush. As I said, he’s chairman of the International Advisory Board of the Atlantic Council, former chairman of the Atlantic Council and a long-time board member. From these positions he has faithfully and ably led the Atlantic Council for many years, including now importantly lending us his name.

    This fall the council will open – will formally open the Brent Scowcroft Center on International Security, which is really already operating as the international security program of the Atlantic Council. And it will carry on what we consider the Scowcroft appeal, an approach to foreign policy that includes reaching across political aisles and lines, which we think will again become fashionable, to build effective solutions, strengthening existing partnerships and forging new ones, all thoughtfully equipping the next generation to tackle the problems of tomorrow.

    So I’m honored to be able to call General Scowcroft my inspiration and friend. It is my great pleasure to introduce him here tonight. General Scowcroft. (Applause.)

    LIEUTENANT GENERAL BRENT SCOWCROFT (RET.): Thank you. Thank you, Fred, for that over-the-top introduction. I didn’t deserve it, but I enjoyed it. (Scattered laughter.) This is a very special afternoon for me, a particular pleasure. I first met the deputy prime minister when he took office in 2002, in the first AKP government. And he was 35 years old, young, taking over at a very difficult time. This was not just a simple change of government; this was a fundamental change in Turkey. And he has done a fantastic job.

    He – when I met him he was minister of state for the treasury, as I say, in the very early years of AK Party governance. Ali Babacan was a point person for taking the initial pieces of the banking and financial recovery forum that was developed by Kemal Dervis in the previous government to lay the groundwork for a very difficult crisis in 2001, but preceded by difficult years of inflation. The Turkish economy was not a model of stability and progress.

    But he took that – took the plans laid in by Kemal Dervis and both implemented them and building from them the pieces that would bring about the real prosperity that Turkey now enjoys. The results, as I say, are manifest and dramatic now. He also played a key role in the opening of accession negotiations to join the EU in late 2005. And that also contributed to the economic reform program, and in overseeing the initial preparatory work in diplomacy as well.

    Ali Babacan fulfilled these roles so successfully that following the AKP’s re-election in 2007, Prime Minister Erdogan made him foreign minister. As foreign minister he helped take Turkish diplomacy in some new and promising directions, of which for the United States particularly pleasing was the effort at rapprochement with Armenia and their typical – or their long-standing problems in the region.

    In 2009 a mid-term cabinet reshuffle brought Ali Babacan back to the economic side of the house and into his present – current position as deputy prime minister responsible for oversight of the economy. If his first stint was dominated by the internal legacy of the 2001 economic crisis and getting EU accession started, his second term has been marked by the economic problems and issues created for Turkey and the world by the financial and economic problems that first appeared in the United States in 2008 and became a contagion in Europe that endures today. His success in those efforts, I think, are manifest.

    Minister Babacan brings a strong Turkish model to the table, and also now an unusually experienced set of hands to the G-20, where he is now a prominent member. Fred mentioned Minister Babacan’s friendship toward the council and our annual Energy and Economic Forum as – in Istanbul. As a Fulbright scholar at Northwestern University’s Kellogg School of Management, he also became a good friend of the United States, as well as of the Atlantic Council – a twofer.

    We are very fortunate to have this wise leader playing such an important role for Turkey and in the high circles of global financial government. Please join me in welcoming Deputy Prime Minister Ali Babacan. (Applause.)

    DEPUTY PRIME MINISTER ALI BABACAN: General Scowcroft, President Kempe, Ambassador Wilson, ambassadors, ladies and gentlemen, distinguished guests, it’s a great pleasure for me to be here today with you all. And also it’s a great pleasure to see so many old and good friends in the room.

    At the outset of my speech I would like to extend my sincere thanks to the Atlantic Council for organizing this event here in Washington, D.C., but also for the council’s contribution to the Turkish-American relations. And I would like to comment on the Atlantic Council’s work for energy and economy initially for the Black Sea region, but now it’s become a regular, periodical event in Istanbul, turned into a summit and also almost a global organization nowadays.

    And allow me also to start my remarks – to touch a little bit about bilateral relations between Turkey and the United States. Turkey and the United States are two countries which are friends, partners and allies. We have stood together in many international challenges, strongly together. What’s more, major international issues that our countries have to deal with at present are very much overlapping. These issues include Iraq, Afghanistan, Pakistan, Middle East peace process, North Africa and Balkans, Caucasus, Central Asia, energy supply security, fight against terrorism, prevention of nuclear proliferation and also tackling the global financial crisis.

    When I first started my position as minister of foreign affairs, I asked my counterpart back then, Secretary Rice, why don’t you just list the top 10 foreign policy issues of the U.S., and I will list mine, and let’s compare those lists. Almost every single of those 10 items are identical. Although we seem to be far away on the map geographically, the kinds of subjects that Turkey and the United States are dealing with, internationally and regionally, are so overlapping.

    Ours is a time-tested and real partnership. It has witnessed several political and critical phases, I would say, in recent history. And today our partnership immensely is relevant not only for our countries but for a very wide region. Recent developments in the Middle East and North Africa once again highlighted the significance of Turkish-U.S. cooperation. Turkey and the U.S. have been consulting very frequently and exchange views on the events in our region and beyond. Continuation of this close cooperation and coordination is very much essential.

    Ladies and gentlemen, Turkey and U.S. share and promote the very same values around the world: democracy, fundamental human rights, freedoms, rule of law. And we share the very same targets: peace, stability, security and prosperity for all.

    When Secretary Clinton came to Turkey as one of her very first overseas trip, and when we had the joint press conference, she described Turkey and the U.S. as two countries which have a sense of global responsibility. And when we had our very first meeting with President Obama, after he came to his job – to his new position, he called our partnership a model partnership – a partnership which can be a good example for other countries as well.

    We started a framework for strategic and economic commercial cooperation. We first had meetings here in D.C. in 2010. The second set of meeting will take place in June this year. We have formed a business council between Turkey and the U.S. It’s the first time in our history that the economy and commercial subjects are being taken at very high level – at Cabinet level by two Cabinet members from two sides.

    In 2011, our exports increased by 22 percent – our exports to the U.S. – and our imports from U.S. increased by 30 percent. So the momentum is already growing when we look at the trade figures. And last year we received 675,000 U.S. citizens as tourists to Turkey. So this is also very important – human-to-human touch is also an important aspect of our relations.

    Ladies and gentlemen, distinguished guests, Middle East and North Africa – the region which Turkey is centered in – is going through a historical transition process. And this process is long overdue. It is a homegrown process. And this is quite an irreversible process as well. The process is quite unique for every country and will probably go through several phases and stages.

    The will and the aspirations of the people is being better and better reflected to the way how these countries are governed. Turkey is doing a lot of work in many of these countries. And most of our work is simply sharing our experiences – our experiences of our own democratic transformation that we have gone through, and we are still going through to a certain extent, and also our experiences of the economic transformation that we lived through.

    We believe that a functioning example is probably much better than prescriptions written somewhere else outside those countries. I’m just actually coming from a G-8 meeting called Global Partnership – a meeting – (inaudible) – all the G-8 countries with some – several more countries and help the countries in different phases of their transition. Better private sector involvement and strong economic programs, multiyear programs to bring predictability is going to be very important for most of those countries.

    When we talk about Middle East and North Africa, I would like to touch a few points about Syria. Right now what’s going on in Syria is a serious human rights crisis. Escalations of violence has caused the deaths of thousands of people. It’s a humanitarian tragedy that’s going on. We hosted the second conference of Group of Friends of the Syrian People in Istanbul at the beginning of this month, on 1st of April.

    Eighty-one countries, as well as many international organizations, joined the conference. We made an urgent, comprehensive and immediate implementation of all the elements of Kofi Annan’s plan – the former secretary-general’s plan, who is now the representative of not only the U.N. but the Arab League as well. Syrian National Council, the one and only serious and credible opposition formation of the Syrian people, has been given legitimacy in the Istanbul meetings. Recognition as the representation of the people of Syria was very important for the Syrian National Council.

    We need to see visible, verifiable and indisputable signs of change on the ground. Primary responsibility to end the violence rests with the Syrian regime. We welcome the resolution which was adopted on April the 14th by the United Nations Security Council. The message was, at least finally, the international community stood up with one single voice. It’s a step in the right direction.

    The resolution envisages a U.N. supervision mission. And we are pleased that the advanced team is already on ground. We believe that a sufficient number of observers should be deployed as soon as possible. And the key indicator at this stage is whether peaceful demonstrations can be held free from violent repression. So this is going to be an important test on ground.

    We are expecting the Syrian regime to fully and visibly fulfill its commitments in their entirety, in accordance with the set Security Council resolution. Turkey has already adopted an open-door policy for the citizens of Syria who have been actually fleeing from the operation and the violence. We have set up eight camps in which right now approximately 25,000 Syrian citizens are living temporarily.

    Egypt, orderly and timely conclusion of the democratic transition is essential for this country. It will have important repercussions for the entire region. Egypt is the most populated and probably the most important country in the Arab world. And what happens in Egypt is going to set a very important example for many countries to follow.

    Conclusion of the elections for the People’s Assembly and the Shura Council as well as opening of the new parliament represents a significant phase in Egypt’s democratic transformation. Yet as the transition process gathers momentum towards the presidential elections the tension has started to rise. Delays in democratic transformation would bring back people’s frustration and resentment.

    The Egyptian people have been, for a very long time, aspiring for a full democratic system. Economic reforms and austerity measures are also very urgent for Egypt as well as for many other countries in the region. If the political transformation is not accompanied by the economic transformation, then it may be a big setback for the citizens of many countries.

    Yemeni government and the opposition in Riyadh on November 23rd last year embarked the political transformation process. And all parties in Yemen, if they just fully implement the terms of this agreement, it will be very crucial for that country. We welcome the presidential elections and we think it’s an important step forward.

    Now the Yemenis should convene an inclusive national dialogue conference with the spirit of reconciliation and solidarity, reform their constitution, reorganize the military and security forces and hold the presidential and parliamentary elections by 2014 latest. We attach importance to the Friends of Yemen process, and we will actively participate at the next meeting, which will take place in May in Riyadh.

    Bahrain International (sic\Independent) Commission of Inquiry on the recent events was a good example upholding the principles of the rule of law and accountability. We welcome the reforms that has been in the area of security, judiciary, media and education. The opposition should be encouraged to act with a spirit of reconciliation, common sense and reason. The risk of sectarian confrontation is still valid and all sides need to act with common sense.

    Tunisia and Libya, two countries which we should also try to help during this post-revolutionary period. Tackling the economic situation is a major challenge in Tunisia. There is an urgent need to restructure the Tunisian economy, and we are working on joint projects and we are sending teams, receiving teams for technical support.

    Libya is definitely a much more difficult case. The restructuring of the Libyan National Army and police, reintegration of the militias into the society and preparations for National Congress elections are the main challenges ahead. Also, uncontrolled weapons in the hands of Libyan civilians and other possible smuggling to neighboring countries pose a real danger to the stability, not only for Libya but also for the countries across the region.

    We hope the elections for the National Congress could be held as scheduled in June this year. We are engaged with the interim government and actively assisting them in various fields. So far, we have offered technical training programs to more than 3,000 Libyans in various fields during the course of this year, and we will help to convert 1,500 militias into law enforcement officers. We are also planning to contribute United Nations Special Mission in Libya in the field of effective implementation of social services.

    On the Middle East peace process, Turkey has always promoted a two-state solution that would create a state of Palestine living in peace and security with the state of Israel. We support the efforts for the resumption of the negotiations between the parties, yet the Israeli government’s continued intransigence on the settlements remains a major obstacle for the peace process. Indeed, the recent efforts of the resumption of the peace process did not yield any results either.

    Talks should not be expected to make progress unless it starts with a serious commitment from the Israeli government to respect the existing parameters, particularly on the 1967 borders. President Abbas, during his visit to Turkey in February, confirmed that the Israeli position during the exploratory talks in Amman was mainly focused on altering the established parameters, which we think is a step in very wrong direction.

    Ladies and gentlemen, distinguished guests, Turkey is now a provider of economic and logistic support through our different agencies. And our official development aid last year exceeded $1.3 billion. I’m thinking that Turkey was an aid-receiving country until the year 2004 and now we are an emerging donor country is also a sign of how things have actually changed. And actually last year across the OECD countries, we were the country which increased its ODA with the highest percentage – 38 percent increase over the year of 2010.

    We have now development programs in more than 100 countries across the world. In Africa alone, we increased the number of our embassies from 12 to 27. But back in 2008 we targeted for 34, and those 34 embassies will be completed by the end of next year. Turkish Airlines already fly to 19 African states nonstop. Turkish Airlines now is, by the way, third largest airline in Europe, with more than 190 destinations worldwide.

    This could be probably a good transition to now what I will be telling you about the Turkish economy, an economy which really went through a very serious transformation process. Before the 2008-2009 crisis, we have made many important reforms in Turkey. In 2004, (200)5 and (200)6, we made major reforms in our banking sector – a brand-new banking law, a brand-new saving-deposits insurance fund law, a brand-new mortgage law, credit card law.

    These laws all introduced very forward-looking aspects for our banking sector. We have strengthened supervision, we have strengthened regulation and we have implanted – we have implemented the rules with no exception. We have gone through important reforms in our Social Security system, that was 2006. We have went through a very important health care reform, universal health care coverage which has low cost but very high satisfaction level. Our public financial management went through a very important reform in 2004.

    So in a way our fiscal adjustment efforts was very, very important. So before this 2008, 2009 crisis, we were able to bring down our budget deficit, we were able to bring down our public debt. So the two major source of crisis, banking and public finance, were actually our social strengths before the crisis of 2008, 2009. That was one of the things which actually differentiated us from rest of Europe. What we have done during the crisis was also very different.

    In 2009 when many countries were announcing fiscal stimulus programs to stimulate growth in their economy, we followed the other way around. Although in 2009 our economy was shrinking at 4.8 percent because of the reduced exports to the European Union, we announced a fiscal consolidation program that sounded very counterintuitive for many. They said: What are you doing? During the time of a shrinking economy, you should just spend more.

    But our position was very clear. We said that if our economy is going to grow, this is going to be by the activity of the private sector, not by the activity of the government. Government spending is only about 20 percent of the total spending in Turkey. Government investments are also only about 20 percent of the total investments in the country. So a country – for a country where public debt can always be questioned, fiscal stimulus programs probably won’t work. So that was our position.

    And we announced a three-year program – not just a one-year program, but a three-year program – of fiscal consolidation to bring down our budget deficit even further down and also to bring down our public debt even further down. That worked out excellent for us. The confidence came back very fast. Our banks continued to lend. Our consumers started to spend. And our private sector started to invest.

    And by high lending, high investments and high level of domestic consumption, we had a growth rate of 9.2 percent in year 2010. This was followed by 8 ½ percent growth in year 2011. During last two years, we were able to create 3.7 million additional jobs. And also our income distribution improved dramatically. The Gini coefficient in Turkey has dropping systematically for the last decade or so. OECD announced a report at the end of 2011: Across the OECD members, Turkey is the country which was able to decrease its Gini coefficient with the highest magnitude.

    This was a result of targeted social policies. This was a result of our new income tax regime, which we introduced back in 2007. And also this was a result of competition, working in Turkey better and better. So no longer privileges or special protection areas for certain companies or families; it’s a fierce competition going on inside the country. So no more making easy money.

    And our companies which are competitive in the country, in Turkey, are becoming very strong competitors in Europe and elsewhere. So in a way, learning our companies to stand on their own feet and to survive and make money by only being more efficient and productive, those companies are now becoming regional and global companies

    Our banks also stood very strong all throughout the crisis. We didn’t have to transfer any government funds to any Turkish bank. We didn’t even change our guarantee scheme, although across the EU the guarantees for deposits were increased 200,000 euros at least. In some countries, it was a blanket guarantee. We didn’t even touch our guarantee scheme.

    And as it was proven in our stress tests, which we have been doing periodically since 2004, every single Turkish bank and every single balance sheet stood very, very strong. So in a way our strengths before the crisis were different. Our policies during the crisis was different. And our results are also quite different from what has been going on in most of the European countries.

    But this success also came with some side products. Inflation is now slightly higher than what we would like to see. And also current accounts deficit of Turkey is also quite high. And in order to have a growth, not just a high growth but a sustainable growth, we have decided to continue with our tight fiscal policies. Our budget deficit last year was only 1.3 percent of our GDP. This is one of the lowest across Europe. This is quite low by any measure. Our debt to GDP decreased to 39.4 percent of our GDP. And our public debt will go down to about 32 percent by year 2014.

    We are going to continue to use the macro prevention measures with our banking system in a very careful way. Because of high current accounts deficit, we have started to tighten the banking policies since the end of 2010. And since the middle of 2011, our central bank started to tighten the monetary policy as well.

    So the tight fiscal policies are now also accompanied with tight banking policies and also tight monetary policies as well. So this year’s growth, we expect it to be at around 4 percent. That is intended because we wanted, as I said, this growth to be a growth which will continue towards the next years, not just have high growth for few years and see a difficult situation after that.

    Structural reforms is going to be at the core of our policies for many years to come. Labor market reforms, which we are now working on to bring more aspects of flexibility, to give more elements of competiveness for our companies, is going to be very important. Enhancing the investment environment, giving more reasons for the private sector to invest in Turkey, which is already happening but we want to see it to reach better figures.

    Increasing the saving rates in the country is also a very important target for us. Because of the very high consumer confidence level in Turkey – mainly because of that, but there are also other reasons – the saving rates in Turkey dropped to 12 percent of our GDP. So people have their full trust for future. They tend to spend, but not to save. And that’s why now we are coming up with new measures to give more reasons for our citizens to save – not forcing them, but in a way giving incentives to them – incentives to save.

    It is also going to be an important target for us to make Istanbul one of the leading financial centers globally. And we have an action plan, and we are in the phase of implementing that action plan and heading for the hundred-year anniversary of the republic. And that date we would like to see Istanbul as one of the 10 leading financial centers globally. Many steps being taken towards that direction.

    And we have the luxury of having a good business environment with low taxes for a foreseeable future. In many countries in the developed world, taxes are going to be increasing very fast inevitably. There is now a talk about a financial intermediation tax which could be implemented across Europe or more countries. But in Turkey, since our budget and our public finances are in such a good shape, that we are going to have the luxury to keep our taxes low for a very long time.

    Energy is also another important item. We are too dependent on energy and oil imports. And that’s actually one of the main reasons of the high current accounts deficit. If today we didn’t important any oil or gas, our current accounts deficit will be a very negligible number. So are moving into nuclear energy now. We are moving into more renewables. And energy efficiency programs are also in our agenda.

    Let me just look around us and look at Europe and what is going on there, because eurozone nowadays seem to the be the most crucial region, let’s say, when we look at the global economic outlook. At the core of the issues, we have weak banks. At the core of the issues, we have very high public debt – public debt which is almost as high as the levels that we have seen during the second world war.

    So far ECB has been working a lot. But only by more liquidity, only by printing more money, the problems in the European economy is not going to be solved. ECB’s work can be only regarded as a work which gives an opportunity window for the governments to do the real job, to do the fiscal adjustment, to do the absolutely necessary structural reforms – reforms that will bring more competitiveness, reforms to deal with the social security system which is heading to bankruptcy in quite a few number of countries.

    And also in the European Union, we need a strong common fiscal framework. Euro started almost a decade ago, so there is one common currency. But every country used to have very different fiscal policies. And now it is time, we believe, for a strong fiscal union, not just a political union or a monetary union, but a fiscal union as well. The six pack, the fiscal compact – these are all good steps forward. But implementation is going to be the key. So 2012 is going to be an important test year for many of our European neighbors for the implementation of what they have already promised.

    Strong political leadership and strong solidarity within the European Union is absolutely necessary nowadays. Solving the eurozone’s problem will be long time, will be complex, will be very challenging. 2012 is important for EU, for eurozone, but 2013 is going to be probably at least as important for the global economy for what we are going to be observing in the United States, especially after the elections this year. Markets, the business world and all of us, I would say, we are expecting to see some concrete steps forward next year.

    For the U.S. also, Fed has been working very hard. But if it is only the Federal Reserve trying to resolve the problems, it is probably not going to work out eventually. There is now hope for better employment figures, better prospects for growth but this is not sustainable unless it is – it is accompanied by serious measures on the fiscal side. And now there’s probably credit given by the markets until the end of this year, but 2013 is going to be a very important test year for the U.S. economy and policies that will be implemented by the administration next year.

    Ladies and gentlemen, distinguished guests, it just – as final words, Turkey has a dynamic society, a young society and a robust free market economy, a democratic political system and, well, a social tradition of reconciling modernity in with our cultural identity. Considering the great shift that is happening globally, considering the historical transitions that’s happening regionally, considering the relentless search for a new balance in economy, in geopolitics, the common denominator between Turkish and American interests and objectives just keep growing. We are ready for a deeper partnership in many, many fields. Thank you for your attention. (Applause.)

    MR. KEMPE: Deputy Prime Minister Babacan, that was a – that was a – really, a fine speech. And I think the topics you hit just show the breadth of responsibilities you share. We have a few minutes for questions, perhaps about 15. Let me just quickly ask one or two of my own and then if we have time, we’ll go straight to the audience.

    First of all, you’re one of the longest-serving economic managers, leaders, of the G-20 now, even at not such an old age. And I wonder if you could tell us, of those items you hit in your speech, what are going to be agenda items – you’ve had your meetings; you had some meetings already with the other leaders – what’s going to be the most important thing this weekend, agenda item one, agenda item two? And then on Europe – and maybe it’s one or two – are you more optimistic than you were last year? Less optimistic than you were last year? How are you looking at Europe and the eurozone crisis?

    MR. BABACAN: We actually just completed the G-20 ministerial meeting at 2 p.m. today in the afternoon. And we have already published a communique. But what we have discussed mostly behind the closed doors was about the banking reforms, the need for deleveraging and how it should be managed – how it should be managed so that this deleveraging is not going to hurt growth in developed countries. We as Turkey – we always say that the banks should have just more capital. They should not shrink their balance yet but should have more capital for their – for their balance sheets and so forth.

    And also another important subject was of course the resources of IMF, because IMF has now about $400 billion of resources. And they will need probably at least that much additional, and how to reach that figure. The Europeans have already increased the size of their firewall, but that size was probably at the lower end of the expectations. And now IMF is having more resources by commitments from quite a few members already. So anyway, these are going to be – the European firewall and the IMF we can also call the firewall, is going to important to be ready for some casualties within the next several months or even several years. So this was also another important topic for the G-20.

    MR. KEMPE: And some disappointment about willingness of the U.S. to increase as much as some would like it to increase its IMF contribution.

    MR. BABACAN: Well, I think from there is a fair understanding that this year is a sensitive year for the U.S. So I think we are going to have the patience until the next year and see what can be – what can be done. But the U.S. has been the major shareholder of IMF and the World Bank, and has always had a fair share of the burden and the cost whenever it was necessary globally or regionally. So I think the general expectation is that eventually U.S. is probably going to do their own share. But this probably is a matter of time; that’s what we expect at least.

    MR. KEMPE: And the view on the eurozone crisis and where we are now in the –

    MR. BABACAN: The eurozone crisis, I have already touched during my remarks, is now – it’s a wait-and-see phase that we are in, because decisions have been made. Political statements have been made. The leaders have already committed to many promises. Now 25 out of the 27 countries will make changes in their constitution to have a fiscal rule and to target very tight budget figures in order to have debt sustainability. But then these will have to go through parliaments. And we will see if all those 25 countries will be able to make these constitutional changes and commit in such a firm way for their fiscal adjustment processes.

    So we will – I think it’s not easy to prejudge what will happen. And I believe that many investors, markets, players – they are also waiting and following what will – what will happen, because the developments in the markets (ph) indicators after the promises, after the declarations, were not really dramatic. So I think there is a chance of slippage, which the markets are already taking into account.

    MR. KEMPE: Well, I think that’s it. The markets have always believed, or have believed for a long time, that the European Union has been a day late, a euro short. And I wonder if you believe that – reaction to Spain is showing some of the same – do you in your position, where Turkey is so much a player that’s affected by this – are you – are you satisfied with the pace of change of Europe? Or do you still feel that it’s a euro short, a day late?

    MR. BABACAN: Well, I think what’s happening – and this is more of a personal assessment, I would say, but the – many European countries, when we look at the period after the second world war, has not really faced a serious crisis. So when this crisis hit, probably there was quite a lack of experience of how to deal with a crisis and what kind of steps to take and how fast to take those steps. And during times of crisis it is very important to do it big and to do it soon. And especially for the new elected governments, it is very, very important to do what is necessary in the first few months. So this has not happened in many countries.

    So now we have technocrat governments in Greece, in Italy. They also have some opportunity window to move, but if they wait too long, then people will start to ask, well, I didn’t vote for you. And you are asking me to sacrifice. So that is going to be probably a difficult period, which we lived in Turkey to a certain extent in our recent history. So technocrat governments are OK, but for a short time to get things done. But eventually elected governments should come in and just explain people what is necessary, why it is necessary, and also ask for sacrifices.

    It’s not – it’s not easy, because many European countries have been probably living a wealthier level above what they could afford. So they borrowed, spent and had an artificially high level of welfare. And this welfare level – it’ll have to drop in many countries. And it is going to be painful. It’s going to be costly. But this has – this needs a very open communication, and tell the very open truths to the citizens about what is needed to be done, because if this is not done by the hands of the governments, eventually it will be done by markets but in a very severe way. So the market adjustment is going to be very dramatic and probably dropping the welfare levels much faster and much stronger than it would be otherwise.

    MR. KEMPE: Thank you for that answer. Quickly on the Middle East and North Africa: Your outstanding economic performance, growing political role, prompted Time magazine to rank you and Foreign Minister Davutoglu among the hundred most influential people in the world. You talked a lot about the Middle East and North Africa. How do you want to use that influence? And maybe drill it down with the specific example of Syria: what a difficult situation, a new time of influence for Turkey – how do you want to use influence there? What are you calling upon, or what would you like your American and European friends to do with you in Syria?

    MR. BABACAN: Well, what – I think our influence is mostly coming very naturally from what we have done in Turkey, because what we have done in Turkey has become a source of inspiration for many countries. In a way we were ready to prove that Islam, democracy and secularism can coexist and function in quite a good way in a country where 99 percent of the population is Muslim.

    So in a way, the old rhetoric about, this cannot function; or the old rhetoric about, if you want security you need more of an autocratic regime; or if you want stability, you know, democracy is not going to bring any stability, so I will bring to – stability for you. So that was the rhetoric of the leaders for many, many decades. So I think what has happened in Turkey has changed the mentality in many, many countries. And also what’s happening in Turkey is a – is a home-grown process. It is based on the will of the people. It is based on the trust of the people to an elected government. And this has been confusing the minds of many, many young people in the – in the region.

    And what is happening in Syria is – (inaudible) – quite a tragedy, because – mostly because I would say the international community did not stand as a united front. In the case of, for example, Libya, the situation was different. In the case of other countries, we had case-by-case very different transition processes. But for Syria the regime was able to find supporters, supporters of probably not what they are doing, but supporters for the continuation of the regime, because in some – for some countries they had a keen interest to have the regime in Syria continuing, because the alternative would probably hurt their national interests.

    So that was a big problem for a long time. So that’s why I think the 14th of April Security Council resolution was a good, important step forward. The – Bashar Assad and his companion – I think they have total lost their legitimacy, because when a regime kills its own citizens by masses – not by targeting individuals but bombing cities by navy ships or using tanks to bomb houses – and this is happening in their own country for their own citizens – then probably they will find it very, very difficult to survive. It’s going to be just a matter of timing that things will change in Syria.

    What was happening was – until recently, was there was not a credible alternative to the current regime, because if we asked the regime to go, OK, what’s going to happen? But now a credible alternative is also being built up, a very representative and stronger and stronger national front being more in charge of what is going on in the country. And we expect that the domestic dynamics of Syria could make many, many changes if the violence stops.

    MR. KEMPE: We have this –

    MR. BABACAN: So that’s why these observers – U.N. observers are going to be very, very important, because if those observers are over there, and if the violence will stop, then natural domestic dynamics will do the rest of the job.

    MR. KEMPE: What’s your advice – Syrian National Council – our Rafik Hariri Center next week will be hosting the chairman and other members of the council at the Atlantic Council. What’s your advice to them? What’s your most important piece of advice to them?

    MR. BABACAN: Get united. Be very representative, so that you should have all the ethnicities, all the religions and religious sects in the country with you, and make sure that the international political legitimacy is there and finally legal legitimacy IS there for the – for the opposition. So it’s – maybe this is – OK, we are calling them opposition, but as I said, there is a need for A credible alternative TO the current regime. And that’s very important for the future of Syria.

    MR. KEMPE: We have to be very cognizant of your schedule. You’ve been very kind to work us in. Let me just take – I’m really sorry, but let me just take one question, one question. That’s all. If you could ask them very briefly, and then the deputy prime minister can answer briefly. Thank you.

    Q: John Roberts of Platts. Can I just ask Mr. Babacan, Turkey was instrumental in getting the intergovernmental agreement for the Nabucco project when that was live. Now you are promoting the – (inaudible) – project. Will it be regulated on the same principles as the IGA thought out for Nabucco? In other words, is it going to meet all the kinds of terms that the European – that made the European Union so happy with Nabucco.

    MR. KEMPE: And, Mr. Deputy Prime Minister, we’ll take one more and then you can answer that very complicated question in one minute or less. (Laughter.) Yeah.

    Q: Hi. Mustaf Assauge (sp) from the Representative Office of the Turkish Republic of Northern Cyprus here in Washington, D.C. The Cyprus problem have been one of the hardest to solve problems in the political agenda since more than 40 years. While it was like that, our Greek Cypriot neighbors in Cyprus, they were accepted as full members to the European Union. And they will be taking over the EU council presidency in summer. How would you evaluate this, how it will affect the relationship between – relations between Turkey and the European Union? And would it affect the economic relations in any way? Thank you.

    MR. BABACAN: Well, the Cyprus problem has been there for many decades already. And there were several very serious attempts to solve the problem in a comprehensive way. The last attempt – the serious attempt, I would say, was in 2004 when Kofi Annan – when he was the secretary-general, he came up with a very comprehensive plan negotiated by all the relevant parties and accepted by the governments – governments meaning not only the Greek Cypriot but also Turkish Cypriot governments – as well as Turkey, Greece and U.K. has grantor countries.

    But this plan then was offered to a referendum. In the north of the island, Turkish Cypriots voted yes by a majority of 65 percent and the Greek Cypriots voted no by a majority of 75 percent. The Greek Cypriot leaders unfortunately, right after their agreement around the table, they went back and started a negative campaign for the plan.

    So that didn’t – that didn’t work out. But what happened is right after that event, Greek Cypriots were accepted as a member to the European Union and Turkish Cypriots were isolated by the European Union. And that is the case for the last eight years. And we believe that that is not fair. Turkish Cypriots were the ones trying for a solution, trying very hard to get out of this complex situation because they have incentives for the solution.

    But the Greek Cypriots – we believe that they don’t have many incentives, especially after they became part of the European Union, they are using all the EU funds exclusively for the south of the island. They enjoy the privileges of being a member of the EU, as being the theoretically sole representative of the island and so forth.

    And in any kind of solution, they will have to share what they have. They will have to share the government, because there will be partnership – state and partnership government at the end of the day. They will have to share their EU membership. They will have to share the resources, funds flowing from the EU. And what they will get at the end is probably not that much.

    So the big mistake, not only in my view but in the views of many of our European colleagues, was to accept them as a member before resolving the problems. And it’s the first time that a new member has a huge dispute of borders. The island is literally divided into two. And you are taking this semi-member, let’s say, in the EU. And that problem is now a European Union problem – within the European Union.

    We have not recognized the Greek Cypriots as an official state or as an official counterpart. So during the term presidency of the Greek Cypriots, we are not going to attend to the political-level meetings which they chair, but our relationship with the EU is going to continue at the technical level. We are going to represent it in all the technical circles or platforms. We are going to continue with our relations with the commission.

    And so for just six months, you know, we are not going to be sitting around the table of politicians, let’s say. That’s about it. We are committed to the EU membership. We are committed to the process. It is very crucial for our domestic reform processes and also it’s a very important strategic target, important not only for Turkey but for the EU as well. So we have every reason to push the process forward for our own Turkey EU accession process.

    For the – for the question on the energy pipelines, Nabucco was, of course, a very crucial project, and is still a crucial project, giving an alternative route for the energy needs of the European Union. And the problem – there are I think two important problems with Nabucco. One of them is just there are so many countries involved, and if even one single country in the chain has a kind of a problem, then the project doesn’t go forward.

    And the second problem is that we still don’t have sufficient amount of gas to fill the pipeline. So if there’s going to be the pipeline, there has to be sufficient amount of gas. And this has somewhat to do with the relations between Turkmenistan and Azerbaijan, the disputes on the Caspian Sea. But that has also to do with what will happen in Iraq because it was also one of our ideas to have some Iraqi gas in the Nabucco pipeline.

    And the situation in Iraq is also quite complicated nowadays. The rift between the Iraqi Kurds and – (inaudible) – government is growing, mainly because of the politics of – (inaudible) – policies of Prime Minister Maliki himself, I would unfortunately say, following a very sectorial line, not actually doing things for all the ethnicities, religions, religious sects of the country, but a very shy extent of policies, I would say, is hurting the national reconciliation efforts in Iraq. So the Iraqi domestic dynamics also is making it hard, at least for now, to supply gas for Nabucco.

    So when Nabucco is getting late, then the south stream is moving on phase by phase, which Russians came up with. But for any project in our region – any energy project, I think it’s very important to have an inclusive approach towards Russians because they have an important role and also many different tools and ways and means of effecting different projects.

    So actually when I visited Sergei Lavrov back in 2007 the first time, I even asked them why don’t you become a partner in Nabucco? They were quite surprised at the beginning, but as I said, seeing Russia as – not as a competitor, but as a partner in the major energy projects in our region is very, very important, I believe. Otherwise, many, many things are being tried but then being blocked one way or another.

    MR. KEMPE: Mr. Deputy Prime Minister, as you can tell by the audience, we could go on another hour. The problem is you can’t. So I’m going to ask the audience to applaud you. I would ask you all to stay in your seats, let the Deputy Prime Minister depart, and please stay in your seats until he’s been able to leave the room. But thank you so much. That was a wonderful speech and a very engaging conversation.

    MR. BABACAN: Thank you. (Applause.)


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