So now id like to turn over the floor to the people that are going to make that happen today, ask the tough questions, give us some answers. And id like to thank you everyone today for joining us today and hand over to tom bright from abrookings who is going to chair the panel on the economy and europes future. So, thank you. And thank you, again, everybody for joining us. Thank you. Im a fellow here with the International Order and strategy at brookings. And im particularly delighted to be able to chair the first panel. Id like to thank fionna and Jeremy Shapiro for asking me to do it. And its a particular privilege to do it at a conference in honor of clara who i knew for the past two years here, was really a wonderful colleague. And shes sorely missed. And i know several people here knew her and on the panel. I think she would be very interested in the topic today. Not just because of the events in ukraine, but also because she has such a strong passion for European UnionForeign Policy and europes role in the world. Were very fortunate to have three excellent panelists for the topic of really whats going on inside europe. The second panel looks at europes role in the world. And were trying to lock out not just europes economy, but really everything that goes on inside the box. Is europe about to get out of the financial crisis . And the phase has past and about to return to robust growth and take on a greater role in the world and complete the project of monetary integration by adding sort of fiscal federalism and all of the things that economists and others over the last decade said they need to do in order to be that stable and competitive . Or are we in the beginning of a japanstyle lost decade where at the worst of the crisis is over, but its going to be very hard for europe to get the Political Support to do it as necessary to really fix the fundamental flaws of monetary integration . And after the parliamentary elections of last week, what does that mean for the future of european federalism . Are we seeing a populist backlash whereby the politicians and the famous phrase, know what they need to do but dont know how to get reelected once they do. And maybe they wont be able to get the reforms through. And what are we looking at in terms of the Commission President and some of the key positions. So what id like to do is to turn to each of the panelists and to offer us their initial thoughts on this. And then well have a conversation and then open it up for a conversation for about half an hour. So, simon, if i could start with you. Could you begin by talking about europes sort of economic prospects . Are we really out of the worst of the crisis . And where do we go from here in terms of, you know, ensuring there isnt a new crisis and we see some sort of growth, and getting out of deflationary sort of spiral and europe can, you know, sort of begin to punch its way economically in the world again . Im sorry, i should add, as well, i apologize for not introducing properly, simon, but simon is the Deputy Director for the center for european reform that specializes in the euro zone and european fiscal policy. Thanks, tom. And good morning, everyone. Thank you very much to brookings and to kings for inviting me to speak today. I think its a lovely gesture to dedicate this conference to clara and see all of us are very, very grateful to brookings and kings to all of the help youve given us in setting up the fellowship which we hope will run for many years. To the subject, i used to argue about this point a lot with clara. She didnt disagree with my analysis. But i think for clara, it was close, almost a heresy for a colleague to argue that the euro, which is a huge symbol of europe and integration could actually become a threat to the eu and a threat to european integration. We would have lengthy discussions about this. Im going to start off by outlining why i think the economy, the eurozone economy in particular is in poor shape. Why this situation poses a threat to the eu as a whole, and why the choice really does now come down to more or less europe. Now, despite the talk of economic recovery that one hears a lot of in europe, and despite claims by eurozone policy makers that the crisis is over, the eurozone and by extension, the eu remains in a very serious mess. Its worth remembering that the eurozone economy is still 3 Percentage Points smaller than it was in the beginning of 2008. Now, even the u. S. , which is supposed to be pretty more abundant at the moment is six Percentage Points bigger. And if one breaks down the eurozone into the constituent parts, we see truly, truly terrible numbers. The spanish economy is 7 smaller. The irish one, 8 , the greek one over 20 smaller than it was six years ago. Now, eurozone unemployment has come down a touch, largely because of people withdrawing from the labor market and emigrating, but its still 12 . And much, much higher than that. In places like spain. Youth unemployment, this is the number that shocks people on this side of the atlantic is that about a quarter, over 40 initially, over 50 in spain. So were seeing truly shocking numbers, still. Now, the myth persists that these are the result of countries mismanaging their public finances. This was the case in greece, but aside from greece, it wasnt the problem. The central problem in europe was huge capital flows from the core of the euro zone, places like germany to places like spain in the periphery of the eurozone. This was interbank lending. That combined with the absence of socalled adjustment mechanisms in the eurozone is the crisis, not mismanagement of public finances. Basically, Interest Rates in the runup to the crisis were far too low to the likes of spain, ireland, other countries and too high for germanys economy. Inflows of all of this money led to booms in those economies, pushed up their wages and costs. When the financial crisis hit, the capital inflows stopped overnight. Resulting in bank crises. The capital stopped, economies bombed, the public finances hit the banks because the banks were sitting on all the government bonds. And then that depressed Economic Conditions and rebounding on the banks. The socalled Sovereign Bank doom loop. Now, the failure to predict this was forgivable. No one spotted this. This link between governments and banks on what it could do. But the weakness of adjustment mechanisms within the eurozone was predicted. This is a very large and very diverse currency. It comprises very, very different economies. So a shock, the economic shock will hit some of them very differently to others. Euro members cannot devalue their currencies as everyone knows. And they dont have what economists have a lender of last resort. They essentially borrow in a foreign currency. Theres no bank that will step in and buy their debt in the way you see here in the u. S. So without a currency and without a fully central bank, Something Else has to be flexible. Now, this means that markets for goods and services, capital, labor have to be highly integrated. So resources move to where they can be moved most productively. Within the eurozone, there is a market, a market for goods. There wasnt much integration when it comes to services which comprised most of economic activity. Capital is very slow to be allocated or to be used in the most productive fashion. So its very slow, productive capital. Frankly, slow to move from one part of the eurozone to the other. Labor mobility is very low. We have seen a lot of people emigrating from spain and ireland, portugal in recent years. But a lot of those people, the majority of those people have gone to countries outside of the eurozone. So the irish have been to britain, here, australia, canada, spanish have gone to latin america and british america. Very few have gone to other members of the eurozone. The second factor is that the European Central bank has hampered adjustment by allowing inflation to collapse in the eurozone. The inflation rate is 0. 5 , which makes it hard for countries such as spain and italy to engineer declines in the Real Exchange rates while getting on top of their debt burdens. Why this is such a risk. European central bank has also acted in a nakedly political manner. For example, by backing fiscal austerity in a slump, which ignores economic theory and history. And for exaggerating the likely impact on economies of structural fault. Three, the eurozone lacks any mechanism to transfer resources between constituent members. So with no federal budget to smooth asymmetric shocks, fiscal austerity has been the weapon of choice. The problem with this, its socalled pro cyclical. What it does is exacerbates, makes everything worse. Now adjustment based on austerity and internal devaluation, which is what europeans now call deflation is dangerous. First, low inflation, let alone deflation makes it hard to reduce real wages. Take spain, they need to reduce their real wages. But if inflations very low, thats hard to do because nominal wages do not fall. Its almost impossible to cut nominal wages. You need a bit of inflation. Two, deflation increases the real value of debt both public and private. Raises real Interest Rates. And this can lead consumers and businesses to delay purchases if they expect prices to fall further. And third, fiscal multipliers the impact of cuts in public spending. Very large when Interest Rates are close to zero. So spending reductions by governments tend to have a very big negative impact on demand. Now, what is needed against that kind of backdrop . Well, in the shortterm, looser management policy and accommodative fiscal policy. So asset purchases basically quantitative easing, big program of quantitative easing and i would argue higher inflation target at least temporarily. What would you put that on . The inflation target . Temporarily 4 . This would help prevent countries sliding into insolvency and facilitate the Exchange Rate adjustment. More investment, more Government Investment by countries that have the fiscal scope to do so would also help underpin demand. Thats the shortterm. In the longer term, its hard to see how this can work without a proper banking rather than the truncated one thats been agreed. But a proper one that includes fiscal backstops. So making the banks, removing the responsibility from banks from the National Level to the federal level. The backstop at the federal level and a common deposit insurance system for Bank Depositors across the eurozone. Another safe eurozone asset, some kind of bond. This would help break the doom loop between the banks and the government by making it easier for governments to restructure sovereign debt. Problem they cant do that at the moment because the banks are sitting on so much of that debt. And by restructuring solvent debt, they threaten to implode the bank. You need this kind of safe euro zone asset. And i would argue an element of fiscal union beyond what is implied in a fully fledged banking unit. Upon eurozone Unemployment Insurance system could form the embryo of such a fiscal union. And finally, more democratically accountable central bank for the broader mandate, something akin to the mandate of the u. S. Fed. So responsibility for price stability but also growth and unemployment. The problem with everything ive just said is that that requires more, not less europe. As time goes on, its becoming harder to make the case for more europe. Anyone following europe and political scene can appreciate that. Europe increasingly is now defined by the constraints that it places on governments. Rather than the opportunities it provides them with to improve the lives of their electorates. And the longer this continues, the greater the likelihood that we see a serious european backlash, not just europe but the eu more broadly. I think there are two solutions. One is to jump forward to a more federal politically europe within the euro zone with politics resuming at the federal level. Or a return to a European Union without a single currency and let individual countries manage their economies as they see fit. The problem is that the latter option will be hugely destabilizing. It would require capital controls, defaults in several countries, measures to deal with the ensuing financial crisis, and an agreement about how to deal with legacy debt and contracts. Hugely complex stuff. Itll be a very big crisis. But if a more federal europe is impossible, it will be better to get on with this before the politics turn seriously nasty. Thank you. Thank you. Fascinating. Simon, you said that, you know, you outlined what i think is a good sort of solution for europes problems in a number of areas. Everything from the Monetary Policy to fiscal policy to some of the politics. And you said that one of the reasons that can happen is because theres not enough support for more europe. Another reason maybe it cant happen is because germany in particular, but also the ecb and many of the leading thinkers in europe want more europe, but they actually disagree with those steps. So they disagree about a eurobond and disagree about quantitative easing. And theres been this significant philosophical gap in Economic Policy thats opened up between germany on the one hand and the United States and some other countries on the other hand. So i think its a its a tough question. Even if there is support for european integration and even if there are people in key positions who want to be forward leaning, there is this deep philosophical, you know, disagreement about whether or not you can do these things. And so id like to turn to randy henning, a professor of economic governance and really try to put this question to you. That if if we we are where we are in economic terms. There are these solutions out there that many people believe would have sort of a big bang effect of really being Game Changers and kickstarting growth. But theyre exceptionally unlikely because of german opposition and also because of rising sort of populism and the difficulty in getting it through in terms of treaty change. So what does that mean for the next sort of decade in european economics . I mean, if we cant do what simon sort of outlined and theres unlikely to be a collapse of the Currency Union for all of the reasons that, you know, people are afraid of what the alternative would be, what is the middle sort of muddling through option . How bad is it . Is it not quite as bad as we think . And what can they do within the constraints they have . Well, thank you, tom. Im pleased to be in part of this panel and happy to celebrate the life and work of Clara Odonnell in this way with you. Let me approach the questions youve posed to me in three bullet points, right . And preface this by saying on the 2070th anniversary of the landing in normandy, the United States is tied to the fate of europe, albeit thankfully in a different way in this country, i think has an abiding interest in the success of european integration. And a supporter of european monetary integration, in particular. And i want to see it succeed. I say this at the outset because were going to talk about the problems associated kind of with europe and the barriers to to success and how these but we do this in the spirit that its in our mutual interest across the atlantic to overcome them. So i have three main points. Now, the first is as the jumping off point, shapiro suggested i make this comparison to japan. So ill begin with that. Europe is not japan, but the stagnation displays some worrying similarities. And the second point ill make is the European Central bank shows the path that differs from the Federal Reserve in Monetary Policy. Ultimately going to its institutional context. And the third point would be that europe will need to do more than it has yet agreed if it is to stabilize the euro area permanently. In the long run, you will need to find a way back to the no bailout clause in the treaty. And ill use the american example to explain how and why that should be. So with respect to the comparison to japan, there are important differences between europe and japan to be sure, but the parallels are ominous. And europe wants to avoid them. So in japan, we saw the bursting of an asset price bubble, imposed losses on the banking system, regulators exercised forbearance, Monetary Policy behind the curve, deflation was allowed to settle in which created further losses for the bank, kept perpetuating a downward spiral. Italy has already suffered a lost decade in terms of growth, low inflation makes its debt deeply problematic, and italy has at best only 1 1 2 of the famous 3 arrows that Prime Minister japanese Prime Minister abe has use d. The one arrow it has at its disposal in the future. And the reform in italy progressed to yield kind of increases in growth over the longterm. Now, ben bernanke warned japan about this downward spiral that i just talked about early in the process. And his advice was not heated. The European Central bank also shows a path different from the Federal Reserve. Yesterdays announcement doesnt change that picture. The constitutional context is the reason for that different choice. Thats the subject of the second point. The interaction between monetary and fiscal authorities was famously modeled by Sergeant Wallace three decades as a contest between fiscal dominance and monetary dominance. High, maybe very high under the fiscal dominance scenario. Whereas their low under monetary dominance. In the euro crisis, this game took the form of chicken. Creditor governments could create a financial facility and bail out the debtor,