Audio/Video: Global Economy

Will The European Union Survive?

The EU’s economic crisis has brought its member nations to a historic moment. The present limited pooling of sovereignty is failing. Either the Union moves closer to becoming the United States of Europe, or it risks breaking up altogether. Unfortunately, Europe’s citizens don’t like either choice.

Speakers: Beppe Severgnini, Clive Crook, Simon Johnson, Richard Haass

Festival: 2012

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Will The European Union Survive?

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THE ASPEN INSTITUTE

ASPEN IDEAS FESTIVAL 2012

WILL THE EUROPEAN UNION SURVIVE?

Greenwald Pavilion

1000 N, Third Street

Aspen, Colorado, 81612

Thursday, June 28, 2012

LIST OF PARTICIPANTS

BEPPE SEVERGNINI

Columnist for the Financial Times, Writing for the

Corriere della Sera since 1995.

CLIVE CROOK

Senior Editor of The Atlantic and a

Columnist and Editorial-Board Member at Bloomberg

View.

RICHARD HAASS

President of the Council on Foreign Relations.

SIMON JOHNSON

Ronald A. Kurtz (1954) Professor of Entrepreneurship

Professor of global economics at Massachusetts

Institute of Technology, Sloan School of Management.

Senior Fellow at the Peterson Institute for

International Economics, Member of the Congressional

Budget Office's Panel of Economic Advisers.

* * * * *

P R O C E E D I N G S

(9:00 a.m.)

MR. CROOK: Okay, well, thank you very much for

coming along to this session, "Will the European Union

Survive?" I'm Clive Crook and a writer with The Atlantic,

and with Bloomberg, formally with the Financial Times, and

The Economist.

I'm going to introduce the members of this panel

in just a second. But first of all, one of the members of

the panel, Richard, I'll tell you right now urged me to

begin by saying something about why this subject matters.

And I confess that is something I hadn't thought necessary.

(Laughter)

MR. CROOK: But maybe it is. The European Union

is in the midst of an extraordinary financial and economic

crisis, and has shown up to now a stunning inability, I

would say, to get to grips with the problem. A summit

meeting of EU leaders is happening today. And we believe

it's the 25th such meeting since this crisis began. Maybe

they're moving towards a solution to the crisis, maybe

not. This is among the things we'll discuss in a moment.

But the point is that if they don't get to grips

with this crisis, and if the eurozone, you know, the

European Union's currency system splits apart because of

problems in Greece, and Spain, and Italy in particular,

and because of the political challenges Germany is facing

and confronting this problem, if that worst-case scenario

comes about it will not only be catastrophe for Europe,

but it will be an extremely serious matter for the U.S.

and for the rest of world.

Because an even deeper recession, an even worse

financial collapse with proliferating consequences for the

global banking system, that will be horrendous for Europe,

but the U.S. would not be able to cruise past that. The

U.S. economy is in trouble. We have a slow recovery, a

faltering recovery. And the worst-case-scenario in Europe

might very well be enough to tip the U.S. back into

recession. So I urge you -- well I should say, I

congratulate you for deciding to attend this session.

(Laughter)

MR. CROOK: Those other guys, you know, who

knows what they're talking about, but this is the most

important subject on the global agenda right now.

Let me introduce the speakers on the panel, and

we're very fortunate in who we have up here. First a word

of apology, we have to Brits, now I know that's not right.

Admittedly we now speak with mid-Atlantic accents. So I'm

not quite sure how we score. I'm a Brit.

Simon Johnson is a Brit though he's lived and

worked in the U.S. a long time. Formerly chief economist

of the IMF, a distinguished scholar, the author of an

absolutely fantastic book on the American financial

meltdown called Thirteen Bankers which is -- if you

haven't read it, I urge you to read. And he is a prolific

commentator on Europe's economic problems. So we're the

two Brits. We have a bona fide European, my old friend

Beppe Severgnini, who is a former colleague of mine from

The Economist, in Italy a superstar, you must understand,

David Brooks and then some in Italy.

(Laughter)

MR. CROOK: He's written quite a few books in

English -- which have been translated into English, which

I recommend to you, including one on U.S. politics and

U.S. culture which is a delight. So get on to Amazon

later and check that out. And as I say somewhat a genuine

European, someone who can get us an Italian insight. My

only problem with Beppe will be restraining him from

talking about what he thinks is the most important subject

right now, and that's not the future of the European

Union, it is the future of Italy v. Germany in today's

soccer match.

MR. SEVERGNINI: Same thing. It's the same

thing.

(Laughter)

MR. CROOK: Finally -- same thing, that's right.

Finally we have Richard Haass, head of the Council on

Foreign Relations, formally director of policy planning

for the State Department, one of America's most

distinguished foreign policy scholars, a prolific author

of wonderful books on his terrain, which stretches very

wide. And actually I'm not too familiar with what Richard

thinks about the interstices of this question on Europe,

and I'm very much looking forward to finding out.

Well, to set the ball rolling I wanted to ask

each of the panelists to respond to the initial question.

We'll get a little bit into the weeds of what the European

Union is doing or what it thinks it's doing, or what it

might be doing shortly. But I wanted to start by asking

each member of the panel to say what's their best guess,

two years from now about what the state of the European

Union will be, and specifically will it be stronger or

weaker? Will the eurozone system still have the same

membership as it does now? Will Greece still be in the

euro system, will Germany still be in the euro system? In

other words, are you a pessimist or an optimist on that

kind of timescale about Europe's prospects?

So Beppe, let's start with you, pessimist or

optimist?

MR. SEVERGNINI: Optimist, I think the answer is

it will -- it will and it probably will. And you don't

know the questions of course. The question is will the --

(Laughter)

MR. CROOK: All right, now we begin to see the

problem.

MR. SEVERGNINI: We have a question here, will

the European Union survive? Yes, it will. Will the euro

survive in its present form? Yes, it will.

MR. CROOK: Really, okay.

MR. SEVERGNINI: Will Italy win against Germany

at 12:45?

(Laughter)

MR. SEVERGNINI: I know the answer -- I think I

do know the answer, but I won't tell you.

(Laughter)

MR. SEVERGNINI: Thank you, but don't laugh. I

know -- I'm in this prophetic phase, Germany is going

through that.

MR. CROOK: Some never leave.

MR. SEVERGNINI: I was telling Clive -- some

never leave -- I was telling Clive that I took a train

from Portland, Maine to Portland Oregon in June. So I've

been on the American train Amtrak for 3 weeks, and I asked

at least a 1,000 people about what is going to happen in

November in this country. So I know that answer too.

MR. CROOK: You know that too.

MR. SEVERGNINI: But I won't tell you.

(Laughter)

MR. SEVERGNINI: Okay, that's it from me now.

MR. CROOK: He told me before we sat down it's

strictly off the record. Okay I'm going to come back to

you in a minute and ask you why you're an optimist.

But Simon, you next, you're not such an

optimist, are you?

MR. JOHNSON: Well, I'm not as optimistic about -

- as Beppe, particularly about Italy's chances this

afternoon. But let me start off by trying -- by saying

some very pro-European things.

MR. CROOK: Okay.

MR. JOHNSON: I think there will be a European

Union. I think the Europeans will hang together on many

issues. And I think they will help each other through

what are going to be some very difficult years. Having

said that, I think the way they've managed the eurozone is

an absolute catastrophe in terms of economic policy.

Your point about 25 summits is telling. They

said at every one of these summits they were going to fix

it, they were going to get ahead of it. They haven't,

they've failed, they won't do it in this meeting, they

won't do it at any of the coming meetings. I think within

2 years -- if the timing is very hard in these sorts of

problems, but 2 years maybe when this crisis becomes most

severe --

MR. CROOK: Yeah.

MR. JOHNSON: -- actually, it continues to

deepen, continues to generate problems around the world.

I think the euro -- something like a euro will

come out of this -- a more Germanic eurozone. The big

question will be whether or not Italy is in it, or which

part of Italy is in it. Northern Italy could absolutely

join, Southern Italy not so much. Those are going to be

huge questions. But can the euro survive in its current

form, no, I do not think so.

MR. CROOK: Richard, what's your take on that?

MR. HAASS: Well the European Union will

absolutely survive. This is one of the principle pieces

of post-World War II international architecture, this

tremendous not just economic, but political and

psychological momentum and rationale for it. And by the

way, building on what Clive said at the beginning, it's

important that it does survive.

Europe in the 20th century was the most

interesting part of the world, and that was really bad

news for the world. We do not want Europe to ever become

interesting again.

(Laughter)

MR. HAASS: We want Europe to remain as boring

as it is. In order for that to take place the European

Union has to survive. And you need a tight fabric of

relations linking Germany to France and the rest of the

core countries of the Continent, so that's a good thing.

Will the eurozone survive in its present form?

I have my doubts. I think Greece is a real question. The

bigger issue, I would say, is not whether it survives or

not, but whether it does well. And I would think it's

just useful -- one more minute here, to distinguish

between the financial crisis and the financial condition

of Europe. The financial crisis is the Perils of Pauline;

today is the 20-something summit. The only thing we know

about this summit is that it will not solve the problem,

and it will not be the last summit. That is the only

thing we can say with absolute certainty.

And I would go so far as to say I don't think

any of these problems can be solved, they are conditions.

So we can talk about -- we will, I expect, what the

Europeans may or may not do dealing with banking and

liquidity, and all these issues. But the larger question

is whether Europe will be economically successful. And I

would suggest not.

All this conversation about dealing with

liquidity or dealing with banks or dealing with austerity

misses the larger point. Europe is not growing. This is

one-quarter of the world's economy that is drifting. And

Europe has become the next Japan. And there's nothing in

the political blood of Europe right now which suggests

that Europe has the willingness or the ability to start

making the reforms that would stimulate serious economic

growth in Europe. That's the real problem, is that Europe

will continue to exist, but it won't thrive.

MR. CROOK: I think that's an extremely valuable

distinction, but it's -- the challenge is to manage the

condition rather than come up with a big fix, a big

solution. Well, let's hear a little bit more about your --

MR. SEVERGNINI: Why am I --

MR. CROOK: Your optimism.

MR. SEVERGNINI: Well, I think it's -- first of

all, I agree that Europe is a masterpiece -- in a way is a

political masterpiece as something that everybody -- well,

because America was of course instrumental, and was

crucial in forming eurozone as it is now, but the idea

that people killing each other for thousands of years, all

of a sudden stay together and live in peace and harmony

and work together, it's fantastic. I mean, people forget

that only sort of a few decades ago people were -- you

know, my father is 96, and he was -- you know, has been a

navy officer, he was --

MR. CROOK: Right.

MR. SEVERGNINI: -- fighting a war and now his

children are, blah, blah, so we know all that. My feeling

is that Europe needs to be scared. If you look at the

history of the European Union, from the very beginning,

only big scares bring Europe to do anything. I'll just

mention very quickly four passages -- very quickly. The

war, of course, the reason why Europe was formed was --

initially to bring together the production of coal and

steel, and then it became something more. But I guess

most of you know all of this, but the reason is why you

bring together coal -- because you don't want, especially

France and Germany to fight another war. So let's bring

everything together so it makes -- a war is not only

impossible, it is inconceivable.

MR. CROOK: Right.

MR. SEVERGNINI: So -- and but it was a scare.

What happed in the Second World War, we don't want that to

happen again, a huge scare, a huge project, great people.

You know D'Gaspri (phonetic) and Monet -- you know, all

those people. Okay, that's done. Then you had other

scares. And for instance, you had in the '60s and '70s

the economy of the world were not going well. And Europe,

especially the commission, started to work in the '70s and

late-'70s on the single market because things were

crumbling.

So they -- okay, let's put our head together,

think what we can do. The single market was a success.

But again we had to go through the -- the '70s was a tough

time, here too, but in Europe it was tough economically.

Then communist crumbles. Oh my God, what are we going to

do with all these countries all of a sudden? You know,

will they bring them in, leave them out, you know? And

oh, we cannot manage all this, this is too much. And

people were dramatic because we are a little melodramatic

in Europe. Of course, Italians we have -- we bring our --

you know, our -- we're very good at that.

(Laughter)

MR. CROOK: Isn't the word operatic?

MR. SEVERGNINI: Operatic is a good word, I

think it explains -- but not stupid.

MR. CROOK: Oh, not by any means.

MR. SEVERGNINI: We were operatic, but we

decided late last year -- sometime last year, then in a

crisis we wouldn't -- well, let's put it this way, you

know why we're operatic, the way we cheer the tenor until

the very moment we boo him off the stage.

(Laughter)

MR. SEVERGNINI: Look what happened with

Berlusconi, that's typical, typical. And we're not

stupid. Because again, we didn't go on with the old

tenor, we rushed to Dr. Mario Monti's emergency room

straight on. And we accepted that. Okay, just two points.

Third point, so what happens, we bring together -

- and Poland, especially Poland, Czech Republic, maybe

less so, Romania and Hungry. But still we managed to

bring them in, with problem, doubts, but nonetheless that

was another scare and another big solution, when we have

no choice. Europe needs to have its back against the

wall; otherwise we do nothing, we talk. And this is of

course the biggest scare, 25 summit meetings is

extraordinary. They -- the crisis was probably not

originated in Europe, but we know -- and I know who's

sitting here with me so I won't go into too many financial

details, but you know the basics.

I'll just say one thing and then I'll stop

because I really want to hear what they say. I think the

problem is Italian may be operatic, but you know who is

the -- who are really emotional now? The Germans. We

have a problem, we Italians, we brought in Mario Monti, we

accepted that the time was difficult, we fired Berlusconi,

thanks God. And we behaving like Germans. The Germans

are behaving just like Italians, they are emotional.

(Laughter)

MR. SEVERGNINI: They get really worked up. The

moment they -- they are, they are. One of the persons of

the top -- you know, when they have picture of the

European Union Summit, he is always in there, I cannot

tell you who he is because it was off the record. A few

months ago there was a -- he asked to see a few European

columnists, and he told me, look Merkel -- Angela Merkel

knows perfectly well that they have to step in, and don't

call them Eurobonds, call them the way you want, but

that's the only way to do it. She knows. She's just too

worried. And she cannot sell these to her emotional

voters. The point is, and there were a lot of good

pieces, yesterday one in the New York Times, but I think

this has been brought up many times. The moment the

Germans stop being emotional, and remember that they are

Germans, so they are supposed be --

(Laughter)

MR. SEVERGNINI: -- and they just put their head

to the numbers and think -- just two numbers. Germany has

already lent EUR900 billion to different European states.

If the whole castle crumbles, how much of that money will

come back? Second -- so talk about interest, not about

goodwill.

SPEAKER: Sure.

MR. SEVERGNINI: Second, I remember a time on

Newsweek, I'm afraid I do not remember cover, back in

2001, the title was, "The Sick man of Europe." The

subject was Germany.

SPEAKER: Germany.

MR. SEVERGNINI: The euro kicks in January 1,

2003. And Germany has the most stunning 10 years of their

economic history. I think you don't need to be them to

know that maybe there is a relation between the two. Of

course, because we Italians and the Spanish, everybody

else could not work with strategic devaluations -- so

everything was level field, things that we know, so the

Germans must know, and they do know that if there was --

they will be the worst hit. And the moment they look --

whatever it costs it will cost less than letting the whole

thing fail.

MR. CROOK: Okay.

MR. SEVERGNINI: And that will stop here.

MR. CROOK: Simon, you wanted to respond. He's

made many very interesting points. But first of all, and

I suspect this is where you want to come in, this is

standard operating procedure, right? This is the way

Europe makes progress. Crisis --

MR. SEVERGNINI: No, this one was a disaster,

because yeah, crisis one thing, but the way we did it was

too much and it was embarrassing. Nonetheless I can put

it in that category.

MR. CROOK: Okay. Simon.

MR. JOHNSON: I think both Beppe and Richard are

right to put it in the broad historical context. But what

I would suggest is that the Iron Curtain, communism had a

lasting effect in the sense that European integration

would have been much better served if it had gone west to

east. If it had gone to Poland, Czechoslovakia, Hungary,

look at their economies, look at the cultures, look at how

the organization of business before World War I or World

War II. They were much more similar to this Germanic

core, and to Northern Italy.

MR. CROOK: It's a good point.

MR. JOHNSON: But they couldn't go west to east,

they went north to south. That served them well up to a

point, but they have a bad currency arrangement. I'm

actually somewhat more positive -- Richard makes good

points about the longer-term issues in Europe, but I'm

somewhat more positive about the possibility for longerterm

growth, because if you can get away from a bad

exchange rate arrangement -- we've seen this in many other

countries, the exchange rate becomes a problem, becomes an

anchor around growth. And I think some economies are

going to struggle irrespective, but if you could move away

from the euro and move away from that structure it will go

much better for most of the economies there.

On the issue of the check and the German check --

I'm certainly not here to represent the German government

and I've certainly been very critical of them in many

dimensions on this issue. But the problem is what is the

amount. What are you asking the Germans to do? Is the

100 billion, is it a trillion, is it EUR3 trillion?

The problem is there is no number. It's an openended

blank check that involves not just fiscal policy and

transfers, but also monetary policy. You're asking the

Germans to jeopardize what they perceive, maybe

emotionally, but they perceive to be one of their most

important achievements, which is a framework of price

stability. You're asking them to say, we will underwrite

whatever deficit you, Greek, Spanish, or Italians have in

the future. We will underwrite that both with transfers

and with credit directly and indirectly from the European

Central Bank, to an unlimited degree.

That's an unreasonable ask. That is not going

to work politically in Germany. If that's the plan for

solving the European crisis you need another plan.

MR. HAASS: Well, again, one of the words I

actually urge us not to use a lot is solve, because this

won't be solved. There's probably three futures for the

eurozone right now. One is some version of collapse,

where Greece or someone leaves, and then the problem is

not simply managing the exit, but managing the precedent

of the exit. And that's really a frightening future.

Greece is 2 percent of the GDP of Europe, in and of itself

is not that important, banks are indebted there, but the

biggest problem is the precedent.

And when markets then would sniff one day the

weakness of another country they go after it. So that's

the argument for avoiding a collapse. That's still one

scenario we came very close the other day with the vote in

Greece, and now as if you will almost Europe's Lehman

moment. And the biggest problem with what's going on

there, I would suggest, is Europe is cutting it very

close. The Germans and others are making some very fine

calculations, and one day they just may get it wrong,

people bet wrong some times.

But anyway that's one scenario. The second

scenario is the other end of the spectrum is this somehow

gets solved, and Europe once and for all deals with the

structural flaws of Europe. And essentially you'll end up

with fiscal authorities to match monetary authorities. It

is not going to happen, is not going to happen. And the

reason is that nationalism is too strong. And people

could talk all they want about Europe, but at the end of

the day Europe is still made up of sovereign countries.

And these sovereign governments are not going to give up

certain sovereign rights or responsibilities, among other

things setting their budgets, taxing, spending, and so

forth.

So there's not going to be a solution which gets

us where we are which is managing. We are kicking the can

down the road, and the question is -- I think what Angela

Merkel is doing is not just managing her domestic

politics, people in Germany, even if they benefit

economically, you're right. Psychologically and

politically it's an impossible sell to go to the Germans,

you should transfer money to the Greeks so they can retire

10 years earlier than you can.

Can't make it no matter what the economic

argument, you can't sell that politically. So Merkel

understands that, and what she's doing every step of the

way, and it's frustrating, the commentary of it, but it is

not so dumb. She is basically saying before we deliver

the next tranche support I want to see what kind of reform

we're going to get from you. And that's what's happened

for months now, and I would suggest is going to happen for

many months more.

MR. JOHNSON: Let me come back on, if I may,

just on this point which I think is very important. I

agree for what it's worth -- for what that's worth, that,

you know, they're in this muddle-through scenario. And I

think there are signs that they will find a way, a kind of

rationale for a limited amount of risk sharing on that

going forward, and they'll patch it, and there'll be a

sort of structure of commitments that lets Merkel say,

we've taken the necessary steps towards some kind of

common policy framework, we've moved a little bit closer

to political union, she will say.

Now, I agree with your analysis in an underlying

sense that I think that that will be false. And the

reason it's false is the underlying nationalism, right?

It will be like the stability and growth pact all over

again. Promises will be made that nobody actually expects

to be kept, and it will just be a sort of political

accommodation that lets the thing be managed a while

longer.

Now isn't that scenario actually capable of

leading you to suppose -- the reason I'm challenging you,

Richard, on this is that you said at the beginning, of

course the EU will survive. I think this scenario, if you

keep pushing in the direction of a political union that

the people of Europe patently do not want, then you could

actually force a breakup in some future trauma. I mean, I

wanted to come back -- given that that's your analysis,

why are you so confident that the EU isn't going away?

MR. HAASS: Because, again, the EU as a

political construct can survive even if total economic

integration doesn't come about, which it won't. I think

one has to see Europe at multiple levels or multiple

planes, and things will happen politically, will continue,

even certain things economically. But there will be

limits in part for the reason you suggest, the entire

European experiment has been largely elitist. It does not

have deeper broad popular roots.

MR. JOHNSON: Right.

MR. HAASS: It's the reason, even if the

political leadership could ever agree on a far-reaching

set of framework to "solve" the problem, I bet several of

them could not sell it to their respective publics.

MR. JOHNSON: Absolutely.

MR. HAASS: I mean you've got a real problem

with what goes on at 36,000 feet and what goes down at sea

level in Europe politically and it's the reason, several

years ago, you saw all the resistance to the various --

MR. JOHNSON: Yeah.

MR. HAASS: -- referendum about (inaudible).

But I don't see why management, or kicking the can down

the road, or muddling through, choose your metaphor, is

not a viable strategy. You would have some form of

deposit insurance, some version of Eurobonds, and

something -- some way to basically share the pain, a

degree of greater obligations about certain standards.

And by the way, some of these standards were in effect

beforehand, maybe this time countries will actually be

expected to live up to them.

MR. JOHNSON: Right.

MR. HAASS: So I don't -- again there's very

little in history. If I just say, history tends not to

solve things. By and large history is about either

successful or failing management of problems that arise,

of adaptation. So to make the criteria for success in

Europe's solution, seems to me to paint the bar -- to set

the bar way too high. Set it lower, and I actually think

that will happen, again because Germany and France and

others have invested so much. This is -- it's hard I

think for Americans to understand, but this is the great

historical experiment in post-World War II Europe. I

really don't think this is going to come to an end.

MR. CROOK: Okay. Simon, and now I'll bring in -

MR. JOHNSON: I think the -- I agree that

there's an attempt to muddle through, but I think

financial markets are very different now than what they

were 20 or 40 or 60 years ago. And I don't think the

Germans get that, and I'm not sure other Europeans get

that either.

Just to give you some numbers, the total

notional value of interest rate swaps, denominated in

euros, is EUR180 trillion. It's huge. Germany operates

some of the least well-capitalized, least-well-run banks

in the world. Yes, there is plenty of impressive German

engineering in the world, none of it is in banks, okay.

(Laughter)

MR. JOHNSON: They are sitting on a powder keg.

Now, if you can stay on the path that Richard laid out I

agree that things can go somewhat better. And maybe if

Germany slips towards recession, they have some monetary

easing, and that's what they want -- the euro -- the

German unemployment numbers came in slightly higher than

expected today, and the euro weakened as a result.

But if we move, and I think we will, towards

concern about potential dissolution of the euro, and

people worry not just about interest rate risk and credit

risk, but dissolution risk. Ask yourself this, if you are

owed in euros by a German bank some amount, and you

believe that bank is backed by the German sovereign, you

believe the German sovereign is always going to be there,

but the euro is not always going to be there, what are you

going to get? What do you receive, where you receive it?

It doesn't matter if you had that contract in Frankfurt,

or in London, or in New York. You better believe it

matters a lot. And nobody knows exactly how that plays

out.

Now as the financial markets take hold of this

and work it through, the pressures keep coming back and

back. And the path that Richard laid out becomes narrower

and narrower. Citigroup has a note out today saying they

think Spain and Italy will get rescue packages. That debt

-- the official debt in that package will be senior to all

the existing sovereign debt these countries have

outstanding. Therefore interest rates should go up. This

is Citigroup, one of the biggest players, also a too-bigto-

fail bank, also with a huge exposure to derivatives.

The derivatives is a dagger pointing not just at heart of

Europe and the heart of this attempt to stabilize this

situation, it is pointing directly at our financial system

in the United States and our economy.

MR. CROOK: Beppe.

MR. SEVERGNINI: A small point to Simon. I

mean, you are the expert, but the way we see, or at least

me and quite a few colleagues that are writing about this

is that this country has a huge deficit, but it has got a

federal reserve which obviously is there to step in no

matter what. We don't have such authority. The European

Central Bank has been -- is prevented from doing that. So

somewhere somehow I'm sure the perfect solution probably

are not available in the near future. But explaining to

the market that, look we're going to defend these areas,

that hasn't been done, not even tried.

I mean, the Germans have prevented the European

Central Bank, of course they are worried about inflation.

Something that -- I don't know -- not many people in

Europe know this, I wonder how many people in this room

know this, the reason why the Germans are terrified of

inflations is normally people bring up Weimar. Of course

that's a big historical memory, inflation and what it

brought, by mainly it's that in Italy 85 percent of

Italians own their homes, their houses. In Germany it's

below 50 percent. So a lot of German savings are into

stocks and shares and all that, and bonds, and bund and so

on. That's why they are so worried, and it's a taboo

word. But I'm sure something can be done there.

MR. CROOK: So basically Germany needs a subprime

mortgage explosion to -- so that they're in the same

boat as everybody else, that's the answer I guess.

MR. JOHNSON: Yeah, level the playing field.

MR. CROOK: One of the things -- you know,

Beppe, when you were describing this sequence of, you

know, difficulty or crisis, if you want to say, nudging

Europe in the direction of closer union, one -- the

thought that occurred to me was that at no point in that

sequence did Europe actually need the single currency,

right? That was a -- you know, the need to accommodate

Eastern Europe, the need to bring in the relics of the

Soviet empire required a big treaty change. And the

single currency was folded into that episode, and a deal

was done. But as it were, it wasn't -- it was an unforced

error it seemed to me. It was a step beyond what Europe

needed to do, and could do, and that's why we're in this

mess now.

One of my reasons for being a little questioning

Richard's analysis, in just this one particular respect is

that now I think the response to this crisis is going to

be another step too far. I think we'll get some limited

risk-sharing on the debt. And the price for that will be

gestures towards political union. The deal that seems to

be taking shape involves creating some kind of European

fiscal commission, or some European fiscal authority that

will actually have a kind of veto power over national

governments.

Now, if they agree to that, I think that is

setting up the next crisis, even if it's a salve for the

present problem, at some point there's going to be a real

explosion when Europe tries to tell one of its members

that they can't do their own fiscal policy. So here's my

question, I mean, how far is union -- closer union,

beginning with the currency, beginning with -- and now

we're talking about more political union, that is not the

solution to these problems, is it? I mean, in other words

this sequence of ever closer union induced by crisis, that

leads in the end to misery, right, not to managing the

condition, as Richard would put it. It leads to a

colossal breakdown. That would be my thesis.

MR. SEVERGNINI: Look, it's happening already.

I mean, many European countries, for years now, could not

do what they wanted. And believe me, the reason why in

Italy we were all pro-Europeans is simply that it was much

better to be run on a fiscal policies and others matters,

for all the good things that happen in Italy is because we

are forced to do it. Can you imagine, I bring him on a

game, but I think Berlusconi was the quintessential

populist leader, you know, populist 2.0, the new version.

And he would never do any of these, he would just spend

his way and buy consensus.

The reason why Italy and other countries have

been doing a few good things, Mario Monti tonight, I'm not

a spokesman of my government, I think Berlusconi was more

fun, but this one is better.

(Laughter)

MR. SEVERGNINI: And Mario Monti actually

managed to bring in a labor market reform, and a pension

reform, serious ones, that for 10 years Berlusconi could

not bring -- didn't care. But something even Berlusconi

brought in, and other countries including Greece -- I do

agree that the Germans again who are running the show,

will ask, have already asked, and they were right to ask

what -- using Latin in American, you call quid pro quo, I

love that. You know that quid pro quo in Latin means a

misunderstanding.

(Laughter)

MR. SEVERGNINI: Did you know that? In Latin

quid pro quo it means literally a misunderstanding, I know

what it means here. So let's go back to the American.

She's quite right to ask for quid pro quo. The German --

the Greeks already did something compared -- Greece today,

compared to what it was -- they did something, the Spanish

they -- and more has to be done, but I think the two have

to go together, behaving and with fiscal wisdom and -- and

protecting -- and giving some kind of guarantee to our

collective exposure.

I know it's hard, and to -- and I think you are

right that the euro was un-enforced error, but you see the

European Union, that's the way we've always proceeded. We

launched the ball very far, it's like -- and then

everybody runs.

SPEAKER: Yes.

MR. SEVERGNINI: The kicker and everybody runs

to catch the ball. Even the Germans did that. The

Germans, when they decided after the collapse of communist

for a united Germany, it was a huge bet.

MR. CROOK: Sure.

MR. SEVERGNINI: But being Germans, having the

discipline and the money, they managed. But they -- look

at the history of Europe, it's always the same. Kick the

ball far away and then everybody is running after the ball.

MR. HAASS: Well, one of these days the ball is

going to go over a cliff, that's my point.

(Laughter)

MR. CROOK: Right.

MR. SEVERGNINI: No, that's not baseball, I'm

talking -- mine was a football metaphor. Discipline with

your metaphor.

MR. HAASS: Okay, I'll try.

MR. SEVERGNINI: I'll stop here.

(Laughter)

MR. JOHNSON: I think there are two issues that

we should try to separate, a shorter run issue and a longrun

issue about growth. Now, on the short run issue Beppe

has identified exactly the institutional flaw in the

design of the eurozone. And I'm sure he pointed it out

before the eurozone was founded, and along the way as

well, which is the lack of a central bank to back a

unified fiscal authority.

And if you can imagine moving either in a jump

or in a gradual form to that structure, better things will

happen with regard to the bond market. But be very clear

that this structure means that the central bank backs the

federal authority, it does not back the states. If

California debt were supported by the Federal Reserve to

the extent that the federal government debts support it,

would California run a more or less responsible fiscal

policy? And what would happen to the other 49 states, and

what would that do to both fiscal outcomes and monetary

outcomes in the United States?

So this is a long way from where we are today,

but maybe we can get there. In addition however there is

the issue of growth. The bet within the eurozone was that

there would be convergence, that Greece would become more

like Germany --

MR. CROOK: Yeah.

MR. JOHNSON: -- or the Greeks and Spanish

workers and so on would move to the high productivity

places such as Germany. Now this hasn't happened.

Germany, as Beppe said, has benefited greatly from the

eurozone, and from many other structural reforms they put

in place as a result partly of unification, and the

political impulse from that. And the unification within

Germany --

MR. CROOK: Right. Right.

MR. JOHNSON: -- as well as the euro pressures,

they have transformed their economy, they've become more

productive. Their competitiveness has increased while the

Spanish, and the Greeks and the others have either stayed

where they are or worsened.

So that divergence puts enormous pressure now.

Northern Italy is struggling under this exchange

arrangement. Northern Italy was in the past, and should

be again an export dynamo. It has lost that dynamism.

Augustin Carstens -- so you can do this in many ways, you

can -- or least two ways, you can change the exchange rate

or you can change wages and prices domestically. Augustin

Carstens who's the -- currently the governor of the

Central Bank of Mexico likes to say with regards to

whether or not you should -- whether or not it's easier to

change the exchange rate or change internal prices and

wages, he says there's two ways to paint a house, either

the house stays where it is and the painter moves around,

or you keep the painter where it is and you rotate the

house.

(Laughter)

MR. JOHNSON: Both are theoretically possible,

but the second is much, much harder.

MR. HAASS: That's a great metaphor. Let me

just make a couple of -- normally, when countries are at

different levels the way, say, Germany is with Greece,

with Spain you have exchange rate adjustment and that

makes certain countries more competitive. You would

devalue the lira, you devalue the drachma, and that would

make them more competitive with a high value mark.

One of the many problems of the eurozone is you

can't do that. Essentially everyone is tethered, and it

only makes sense if you have roughly similar economies.

And one of the many -- one of the many structural flaws of

Europe is you've linked together, in a common currency, a

bunch of dissimilar economies and you've denied yourself

the tool that Simon and his -- and all that would say,

here's what you do. So it can't happen.

Now, you can't, in principle, adjust wages and --

and so forth domestically, but that's called austerity on

steroids. And that's what we're seeing -- I mean, take

Spain. Spain is 25 percent unemployment, 50 percent -- 50

percent youth unemployment. This is the makings of social

unrest on a large scale.

The fact that you're now seeing the right and

left fairly extreme in the end-zones coming up throughout

Europe is no accident, it's no coincidence. Because you

can't devalue your way out of this problem for structural

reasons it's putting too much pressure on local economies

and on local political systems, which to me is a really

worrying thing about Europe.

The other thing that you would have to do in

order to be an optimist about Europe, about growth, would

think that Europeans would be willing to loosen up their

societies. What are the prerequisites of growth? Well,

it's things like labor mobility. That you have the

ability to fire people as well as hire them for life.

It's the available of certain types of capital, it's

limits on regulation, it's taxation options. The

Europeans aren't going to do this.

The European welfare state, the European

entitlement system is so elaborated, it's so much now a

part of the social and political culture of Europe. It's

not clear to me, if you'll pardon the expression, that

Europeans are prepared to become a little bit more

American in the kinds of economies and in the social

contract they carry out.

So it's hard for me to be optimistic about longterm

economics in Europe simply because I don't see the

politics allowing it. So again, for me the optimistic

scenario is muddling through. I just don't see how you

can do better than that, and I think we're lucky. For the

reasons -- I think you're lucky if we can continue to do a

muddling through as opposed to go over the cliff. This is

not a time to become wildly ambitious in Europe, but even

modest goals will turn out to be fairly ambitious.

MR. CROOK: I want to give the audience a chance

to ask questions in a moment. But let -- before we move

to that, let's try and have a moment where we try to be a

little bit more constructive and a little bit more

specific -- I mean, there is a summit meeting today. If

you three were advising these guys on what needs to be

done in view of all the problems, all the risks, all the

difficulties we've been discussing, what would you say? I

mean, I think that's a fair question to ask. Simon.

MR. HAASS: I don't think you'd begin with guys

with Angela Merkel in the rope.

(Laughter)

MR. CROOK: Okay, just -- whatever, guys and

gals. Okay, Simon, what do you think?

MR. JOHNSON: Look, I think that the

conversation should be about an orderly unwinding of the

eurozone. And that's a very difficult conversation

precisely because of the point that all the contracts are

denominated in euros. In the past, countries would peg

themselves to gold. Remember, back before the 1930s,

you'd be on the gold standard, and sometimes you'd go off

gold, which was -- could be fairly traumatic depending on

the circumstances.

But that was relatively easy compared to where

the Europeans are because when you peg to gold you'd kept

your domestic currency, you kept the dollar. And the U.S.

went off gold in the 1930s, contracts were still in

dollars. What do you do with all these contracts that are

in euros, for example in Greece, or Spain, or Italy? Very

hard conversation.

But if you can do that in an orderly way, to do

that with mutual support, do that using the help of the

IMF, I would not throw any U.S. money into this, into the

mix. I think the U.S. should --

MR. HAASS: Don't worry.

MR. SEVERGNINI: That's not going to happen.

(Laughter)

MR. CROOK: I know it's not going to happen.

MR. SEVERGNINI: Let me reassure you --

MR. CROOK: That's not going to happen. That's

not going to happen.

MR. JOHNSON: Even if you wanted $3 from the

U.S. Congress to save the world, you couldn't get it right

now. But what I would say is that the U.S. should stand

ready. That if you go into one of these nightmare

scenarios, off -- way off the path that Richard is hoping

for, then the U.S. --

MR. HAASS: Oh yeah, sure.

MR. JOHNSON: -- should find ways to try and be

helpful. In the meantime there is plenty the Europeans

can do for themselves, there's plenty that the IMF can

help them with. Managing an orderly transition away from

the euro is the right approach. And there will be in that

scenario substantial debt restructuring, including I

believe of European debt, that has major implications for

financial markets, both derivative and non-derivative

components, that will have a huge impact on U.S. banks.

We should be building up the capital, the equity

base of our banks. We should have an emergency suspension

of dividends and of stock buybacks by all the large banks

in the United States to prepare ourselves for the

financial storm, and the potential losses coming at us

from Europe.

MR. CROOK: I'd love to follow that trail, but

on your main recommendation -- an orderly dismantling of

the eurozone, I can't resist asking the follow-up which

is, does that begin with Greece leaving or with Germany

leaving?

MR. JOHNSON: Well, I think that's exactly the

right question for the conversation between the European

leaders.

MR. CROOK: What would your advice be?

MR. JOHNSON: I think it is very difficult for

Germany to play. For these historical reasons we're

talking about, Germany does not want to be the spoiler,

does not want to be the deal-breaker, they do not want to

take their marbles and walk away from the game. They

would do that only under extreme political duress.

So I think it is more logical to manage a

situation in which the periphery breaks away, and a core

Germanic -- more Germanic eurozone remains. Now, who is

in that? Germany, Netherlands, Austria, Finland, yes.

France, interesting conversation. Not clear to me so --

MR. CROOK: Right.

MR. JOHNSON: -- easily right now. That is not

convergence for the reasons Richard talked about between

the current French and German policies. Italy, now Italy

is -- the European integration was a lot about bringing

France and Germany together with Italy as a buffer, and as

a neutral party and as a third player. Can Italy stay in?

I hope so, I wish it were true. But the lack of dynamism,

the lack of growth in the Italian economy suggest it would

be very hard for Italy as a whole to stay in the eurozone.

So I think we're talking about managing the exit

of Italy from the eurozone. And I want that done -- I

urge that be done in an orderly, careful way. But I fear

it won't be. I fear that they will wait until too late,

until they're forced by markets to do things overnight,

down the road, in a way that is ultimately too traumatic.

MR. CROOK: Forgive me for drumming on this, but

I do think it's so important, I want to ask one more

question. I mean, if you dismantle the eurozone system by

letting the weak countries leave -- encouraging the weak

countries, forcing the weak countries to leave, then you

are in the scenario that Richard described right at the

beginning, that people will -- and this is a point you've

made Simon, the markets will instantly ask who is next.

I mean, the danger of this thing running out of

control at that point is enormous. If you start with

Germany leaving the mechanics of that exit are far easier

to manage, because the currency that's leaving is the one

you expect to appreciate rather than collapse. And it

doesn't push you along that road that Richard --

MR. JOHNSON: No --

MR. CROOK: No.

MR. JOHNSON: -- as a technical matter I

disagree, because the dissolution risk around euro

contracts is much bigger at the core of the financial

markets. So for German contracts that would be huge. We

can talk about it more bilaterally.

But in terms of managing the exit purview, of

course you're right, that as soon as one country leaves

everybody wants to re-price the risk to the other

countries. And our proposal for dealing with this, we

called it a "cordon sanitaire"; we thought if you gave it

a French name it might actually catch hold.

(Laughter)

MR. JOHNSON: The basic idea is you decide in

this meeting who is in and who is out. And you -- the

guys who are in -- guys and gals --

(Laughter)

MR. JOHNSON: -- who are in get the full support

of the central bank, from now to eternity, to an unlimited

degree.

MR. CROOK: All right.

MR. JOHNSON: That's the deal.

MR. CROOK: All right.

MR. JOHNSON: And as a result there's a fiscal --

much more than a fiscal compact, there's a fiscal union

within that core that makes this work. Everyone else is

out, but they're out with support. They're out in a way

that's managed. They're not just thrown into the markets,

go figure out what the new drachma is worth and come talk

to us in 3 months. That will give you very traumatic

outcomes, and a series of runs, including bank runs across

the European periphery. And it's much harder to contain

the damage of that. That's much more likely to have a

lasting, negative impact for everybody in those societies,

including --

MR. CROOK: Okay. Beppe, what would your

prescription be? What would you be advising these guys to

do?

MR. SEVERGNINI: Angela, please start telling

your voters the cost of the dissolution of the euro. She

hasn't done that. She -- I think, she -- seriously she

should -- okay, she ought to say things like this

publicly, clearly, look, it's going to be very hard, we

have to find a way we can ask Greece and Spain, and

whatever to do more. Okay, but you must note that the

breakup disorderly -- an orderly breakup is very

difficult, as he explained, but a chaotic one will be

disaster. And that's the way we are heading.

She should tell her voters, look the German

economy will shrink 10 percent, our export will be --

we'll stop selling BMW, and Mercedes, and whatever -- and

just using -- explaining the voters. I've been to Germany

so often in the last 10 years, and people have a very

simplistic -- not simple, but simplistic narrative about

this, oh, the other people they don't keep their financial

houses in order they should. We are good, they're not, so

finito.

MR. CROOK: Right.

MR. SEVERGNINI: No, that's partly true, but

it's not the end of the story.

MR. CROOK: Right.

MR. SEVERGNINI: And of course she should be

blunt enough to tell her people what the costs are.

Because -- I won't go into details, a), because that is so

much better than means, there are financial methods. But

it's a fact that Italy has been doing certain things, and

it's important for an American audience to know that, I'm

sure most of you have been to Europe recently that you go

into Europe, last year -- this year was Portland, Maine to

Portland, Oregon. Last year I took a train from Moscow to

Lisbon. Then I ran out of land, I love trains.

(Laughter)

MR. SEVERGNINI: And of course I've been to

London, and Germany, and France, and Brussels many times

for my -- as a journalist, not as a writer -- travel

writer. And you don't go through a disaster zone. Europe

is -- still is a wealthy place with something -- important

things to be fixed. I think leaving -- I think if we

cannot manage Greece leaving the euro, I think they should

have done that long ago. Greece has an economy that it's

the size of Piedmont, which is one of the -- Piedmont, not

Piedmont in the Bay Area, Piedmont in Italy, one of the

regions. So of course it would be difficult, but -- it

would be difficult, but we probably wasted time.

MR. CROOK: Okay.

MR. SEVERGNINI: But my recommendation is,

Angela, be frank to your own people because if you don't

there are enough people around Europe who are just waiting

for the perfect storm to launch a very dangerous,

populistic (phonetic) campaign. And Berlusconi is one of

them, but he is not alone. In Italy we have a comedian

Beppe Grillo, who's now over 20 percent of the intention

of the vote, probably 25, is the second biggest party. If

these people run countries I -- do you -- is it possible

to ask political asylum in the --

(Laughter)

MR. SEVERGNINI: I think they --

MR. HAASS: You could get it in Aspen, if you

like.

MR. CROOK: But if it all comes down to Angela,

maybe if Germany thrashes Italy this afternoon, the mood

of the country would stand this lecture that you think

Merkel needs to give, right? We should be rooting for

Germany in this match.

MR. SEVERGNINI: Look, we played 17 times, Italy

won 10 times, 4 were draws, and three we lost. We're

happy to lose if she --

MR. CROOK: If that's what it takes.

(Laughter)

MR. SEVERGNINI: If that's what it takes, okay,

we can give these -- the Germans even this.

MR. CROOK: I'm shocked, I'm shocked.

(Laughter)

MR. CROOK: Richard, what's your advice to the

assembled leaders?

MR. HAASS: Well, I think the argument that the

chancellor should explain the case to her people makes

sense. Leaders always should do that because it creates

space for them to politically do difficult things. And

she's been operating with a lack of political space, in

part because she hasn't worked hard to create it. So I

would agree with that. Germany has been a great

beneficiary of the arrangements of the last decade. My

problem with orderly dissolution is it may --

MR. SEVERGNINI: Richard, can I stop you just

one second. Helmut Kohl when -- I remember following the -

- I was following -- if you ask the Germans public, in

Western Germany, back in 1989-1990, do you want a united

Germany, a referendum, the answer would have been no way

because this is going to cost too much money. And Helmut

Kohl was a statesman who said, no matter what this is the

thing to do, I'll go and I'll do it. And now he's like

the father figure, but so leaders need to be blunt and say

unpopular things. Sorry for interrupting you.

MR. HAASS: Okay. I agree. Orderly

dissolution; two things, one, it's a radical idea. It's a

big idea, it's a radical idea. My problem is it may be an

oxymoron about whether it's -- in any case it's not going

to happen. The U.S. does not -- U.S. is not to predict,

but to prescribe. And it's -- so let me try to prescribe

more within the realm of what I think is politically

feasible, which I think are halfway measures.

MR. CROOK: Yeah.

MR. HAASS: It's things like what we have in

this country, deposit insurance. Why not have some form

of deposit insurance in -- greater liquidity injected into

various financial institutions. I don't think you have to

go politically as far (inaudible). But essentially

looking for measures to help you manage the crisis, that's

probably as good as I think you can get out of this.

What it would mean is, up to now, politics have

lagged behind the finance. It means catching them up a

little bit, and being a little bit broader about Europeanwide

approaches. And possibly planning -- I mean, if the

Greece situation is that bad, then I think plan B has to

be for an orderly Greek exit in a way that hopefully

minimizes the presidential effects so that Spain or Italy,

or ultimately France gets in their crosshairs.

So let me just make a prediction here. And it

might be true by this festival next summer that all this

management at best will kick the can down the road, and

you'll go from Greece, to Spain, to Italy. And ultimately

you're going to come up against it. And the defining

moment for Europe, when it's going to be France, because

you go back to European history and it's the Franco-German

relationship that was at the core of the coal and steel

community, it's at the core of European construction, it's

at the core of the European idea.

And the idea that you could have a Europe -- a

eurozone, or a European Union, and included Germany and

not France, or France and not Germany, I think is at the

moment, at least, beyond the imaginable. And as a result

the most interesting day in Europe is going to come not

today and tomorrow in Brussels, but down the road when

Monsieur Hollande is going to have to decide something

about what is his France going to be. And the gap between

him and the Germans right now is pretty sizable.

What Monsieur Hollande said as a candidate I

think is unsustainable in the form of governing. And the

question is can he walk it back, and can he and Germany

find something that they can both live with? I don't

know, but that will be the moment of truth for Europe.

And I think that day is inevitably coming.

MR. CROOK: That's interesting. And so I may

just follow-up for a -- in your world view, in your scheme

where you think of the present problem as, you know,

managing a chronic condition or half measures, just keep

going -- but you don't exclude the notion of a defining

moment. There is going to be a defining moment.

MR. HAASS: I think it's -- I think it probably

comes with France, because quite honestly, for Germany the

psychological and political idea of Europe is intimately

tied with Franco-German relations. That was the core --

MR. CROOK: Yes.

MR. HAASS: -- of two world wars. And the

political impetus of so much of Europe in the coal and

steel community was make the idea of a third modern

European war unimaginable, and impossible. And people in

Europe, particularly of the older generation in Germany

are scared about setting in motion a chain of events, in a

funny sort of way, that could put history in play again.

And that is why the stakes here are enormous.

MR. CROOK: Simon?

MR. JOHNSON: I agree with everything Richard

just said, but I would emphasize the vulnerability of

Italy. Italy has EUR2 trillion in debt outstanding, it

hasn't had growth for over a decade. The fiscal situation

is being addressed, but the pressure from the market is

enormous. If this blows up it will take down a lot of

banks. Some of these banks are big relative to the

governments that attempt to back them. And I think this

could absolutely be the defining moment.

Although it does ultimately, as Richard said,

come back politically to the relationship between France

and Germany. But economically and financially, Italy is

where it's all going to be about over the next 12 months.

MR. CROOK: See if there are any questions in

the audience.

So, you've put your hand up first. If you could

get to the mike. And if there are anyone else with

questions, you see we've got two microphones here. If you

could stand at the mikes then I'll see -- move from one to

other, and we can let a line form here. So maybe you

could just say who you are at first.

MR. ROGIN: Hi, I'm Josh Rogin. I'm with

Foreign Policy Magazine. Thanks so much for taking the

time to speak with us today. I wanted to prompt you to

sort of discuss the American role in solving the euro

crisis, if there is one. I mean, first of all, what's the

American interests here? We talked about that there's a

deep consequence for the American economy in what's going

on in Europe. But is there a particular outcome besides

just solving the crisis that's in our own economic benefit?

And secondly, what's the role of the Obama

administration? I mean, in public it seems like there is

no role, that they're avoiding it perhaps for political

reasons, perhaps because it's none of their business. But

there must be something going on in the Obama

administration. They must be advocating doing something.

What is that? Is that helping, is that not helping?

Thank you very much.

MR. CROOK: Let's allow the European to have a

first go at that. What do you think America's role, if

any, in this should be?

MR. SEVERGNINI: Well, I don't think there is

much they can do, to be honest, at this point. We're

talking American government and not the IMF based here.

So I don't think there is much they can do to be honest.

I don't think there is the money nor the will. It's

interesting, it is true that Amtrak train is not the Aspen

Institute, but it is true that traveling across America

Europe was not mentioned once as a subject. But I think

that they have really to push and pull and press -- in

fact I think your -- their president has been making a lot

of phone calls to push people and say, look -- because he

knows that America is a very uncomfortable position to

have in an electoral year because there is not much you

can do, but please tell me if I'm wrong, not much you can

do practically, but a lot of consequences will come.

Because if the euro crumbles, and there is a disorderly,

chaotic -- I mean, what happened in 2008 is going to be

like --

MR. CROOK: Okay.

MR. SEVERGNINI: -- nothing compared to what

could happen. And I think -- I don't think, I don't want

to believe -- I agree that I'm an optimist because I want

to be as well, but I do agree there is -- Europe is too

big to fail. Much more than a bank, or a company, or --

but if it does, the euro fails, and like in a disorderly

way, I think you could -- do you think you really want to

have an election in November. The outcome is so obvious.

I mean, we're going to decide your president, which I

don't think is fair.

MR. CROOK: Telling Simon that Europe is too big

to fail is an unreasonable provocation. So what do you

make of that notion?

MR. JOHNSON: Look, the euro is going to fail.

The question is when and under what circumstances

precisely. This is a third of the world's economy. You

better go back on that Amtrak train and explain that to

everyone you meet.

(Laughter)

MR. JOHNSON: A third of the world's economy is

going down, it's going down hard. There is nothing the

United States can do about it, except at the margins

through some International Monetary Fund support for

particular places.

But Italy is too big for the IMF to handle. In

any case the Europeans can, and should, and must deal with

this themselves. It's about the constitution of Europe

and the political deal within Europe. The most important

thing for this administration and officials in the United

States to do is prepare for an enormous storm coming by

fortifying the balance sheets of our largest banks. The

managements of those banks don't want to do it. They're

paid based on the return on equity unadjusted for risk,

that means they're like small slivers of equity, and a lot

of leverage, a lot of borrowing, this is incredibly

dangerous for the American economy. You should suspend

all dividends at these large banks, and suspend the

buyback of shares.

Build up capital as much as possible. We need

more equity in those banks. That is an absolute policy

need in this country that is not being pursued.

MR. CROOK: So your prescription for the U.S. is

basically duck and cover.

MR. JOHNSON: Well, I think --

MR. CROOK: There's nothing we can do to attack,

you know, attack the core of the problem to influence the

core of the problem?

MR. JOHNSON: I think as they used to say in the

English Civil War, 500 years ago, pray to God and keep

your powder dry.

MR. CROOK: All right. Richard, what do you

make of this, America's role? Does it have a role?

MR. HAASS: Before I get to the -- let's say one

thing about the stakes before I talk about the role. The

stakes are enormous, but they go beyond what we're talking

about. Look, if Europe goes down the United States goes

into recession, let's be honest. So the stakes -- the

political stakes are obvious if it happens before November.

But the long-term strategic stakes are also

enormous. It's not -- for two reasons, one is the

maintenance of stability in Europe. This has been one of

the hallmarks of modern history. Imagine how different

the world would be for the United States if suddenly

Europe came into play again as a strategic theater.

Just as important, Europe has been the principle

international partner of the United States for some time

now. What this essentially means is Europe's nonavailability.

It won't have the outlook, it won't have

the resources to do it. And so the era in which the

Atlantic partnership was just that, when the United States

and Europe often acted in concert around the world, I

think those days are largely numbered. And that's rough

because the United States needs partners if it's going to

deal with all sorts of regional and global problems.

I think our role is modest. Tim Geithner is the

point person, you can control, you can do things. It's at

the margin -- I think the best things we can do, besides

preparing ourselves for the worst, is put our own economic

house in order. This is going to be a big blow no matter

what happens. Even the optimistic scenarios I think are

fairly rough.

We ought to be strong, so we ought to not be

growing at 2 percent now. We ought to be doing things so

we're growing at 4 percent. And this means everything

from rethinking some of our tax policies so American

corporations start investing here. It means

infrastructure, it means education, it means having a

serious trade policy, and so forth.

The United States needs to, in some ways, look

to itself. We can't at the end of the day control what

happens in Europe. We can at the end of the day control

what happens here. We can make ourselves far more robust

than we presently are, and that would give us much more of

a cushion.

MR. JOHNSON: If you have a massive fiscal

shouting match at the end of this year, and for example,

the U.S. is downgraded by the rating agencies, interest

rates in the United States, based on what we've seen in

the past, would fall. Interest rates in Europe would go

up. That's what happened when Standard and Poor's

downgraded us last August. If you want to put pressure on

the Europeans, if you want to push that European ball way

over the cliff and have them all chase it, have a massive

showdown on the budget, and refuse to have any kind of

sensible conversation on the lines that Richard is talking

about. That will push the Europeans deeper into crisis.

MR. CROOK: That's an interesting optimistic

scenario.

(Laughter)

MR. CROOK: Let's have the next question.

MR. FAWBUSH: I'm Wayne Fawbush with the Ford

Foundation. And I came in this morning with a sense of

euphoria as a result of the Supreme Court decision. And

now that euphoria has been a little bit evaporated, but I

do appreciate the last cycle.

So let's bring this down to earth. I'm

traveling in Italy in September. Tell me -- I'd like the

advice on which currency to take, and what will be the

state of affairs at that time? Essentially what's the

timeline? We've talked a lot about what are the options.

I guess I'd kind of like to hear some speculation on

timeline, and the best currency to take. Thanks.

MR. CROOK: Well, let me just start with Beppe.

Have you moved all your savings into dollars, or are you

still in euros?

MR. JOHNSON: By the way, Beppe asked about

asylum. We have some very wonderful real estate available

in Arizona, Florida, and some other states. And I believe

if you make a big enough investment you can get residency

with that.

MR. HAASS: We will staple it to your visa.

MR. CROOK: That's right.

(Laughter)

MR. SEVERGNINI: Actually 2 years -- no, 3 years

ago I did a long journey across the Florida Panhandle,

Georgia, and Alabama. Not to buy, to write about. You're

going to Italy in September, right. Can I ask you where

are you going?

MR. FAWBUSH: Lake Maggiore.

MR. SEVERGNINI: Lake Maggiore, okay. Euro, you

can bring euro.

(Laughter)

MR. FAWBUSH: (Off mic).

MR. SEVERGNINI: No, you still bring euros.

Don't worry, relax, and go to Sardinia. It's a jewel, not

many Americans know it. Find the time, it's fantastic.

MR. JOHNSON: My father, who lives in Wales in

the United Kingdom, said to me recently that he was taking

a trip to Europe, but not to worry, he was only taking

French and German euros.

(Laughter)

MR. JOHNSON: And seriously -- seriously, you

can tell -- I'm not advising this, but I'm just informing

you, that you can tell from the number on the notes where

they were printed, and for which central bank they were

printed.

MR. SEVERGNINI: From a letter inside the

number. The number ends with a letter, and you can

actually --

MR. CROOK: This is how runs begin, you

understand.

MR. HAASS: The serious answer is to take

dollars. The euro will continue to weaken against the

dollar. Indeed, there are economists who think the only

serious chance for Europe to grow its way out of its

current predicament is for the euro, which is in what --

the $1.25 range these days, is to go down below a dollar,

to basically -- if you have a euro at $0.85 then you

suddenly open up some areas of competitiveness. And I

would not be shocked if that either by design or by

reality becomes the principle euro strategy of the future

is to collectively devalue itself out of the muddle.

MR. CROOK: No, I'm worried about destabilizing

the market. I think we have time for one more question,

as long as it's brief, and our answers will have to be

brief as well, so.

MR. STRAUB: I'm Richard Straub. I'm president

of the European Drucker -- Peter Drucker Society, and I

think I'm the second European here. So I thought I need

to say one word on the subject.

Listening to you, I think you rightly described

there's a huge problem, but it sounds to me almost too

catastrophic. One example, the youth unemployment is

always characterized with 50 percent, et cetera. But if

you look in detail this is not the right number, because

this is the wrong measurement. It was written in the

Financial Times by the way, there was an article a couple

of days ago describing it. I can't go into detail, but

it's the wrong measurement. It's not good, but it's much

less.

So let's not use the most catastrophic

scenarios. And Europe has a lot, I think that was said, a

lot of inefficiencies. France has a public sector share

of 56 percent, that's very high. And the same is true for

quite a number of other countries. So there's a huge

potential of sort of restructuring, of putting out

structural reforms under the pressure of the current

situation.

And I think not all is lost yet in this respect.

It will be difficult. But I think people start to

understand that we need a labor market reform, for

example. And this can make a change. That we need to

unlock innovation in Europe, Europe has enormous potential

for innovation, and it's currently not used. The

entrepreneurial potential in Europe is sub-optimal.

So I just wanted to make this point because I

think we are talking ourselves into a catastrophe which I

believe would be even much worse for the U.S. as what you

currently consider. And you can just protect yourself. I

think it may be worse for the whole world, and it's

completely an unacceptable scenario.

MR. CROOK: Okay.

MR. HAASS: I would say you're absolutely right.

The question is, looking at France in particular, where

does one see evidence, or where is one likely to see

evidence that the new leadership in France is going to

shrink the public sector, where the new leadership of

France is going to create an environment where French

entrepreneurs are going to return home, from Palo Alto, or

from Brooklyn, and go back to France.

I just don't see it. And I think the danger

right now is that society is under duress. Rather than

doing the kind of structural reforms that are needed, if

anything become more protective of people who are

suffering from it, and that's been the pattern up to now.

But you're exactly right in what -- you're right not to

give up, you're right in what you call for -- the question

is -- but it would take something of a cultural

transformation, and a political transformation in Europe.

I'd love to see it, but just, you know, call me skeptical.

MR. CROOK: I want to give Beppe the last word

here. And this goes to the point you raised at the

beginning, I wonder if -- in this respect, I mean if

Richard isn't being a little pessimistic, I mean, France

has just elected a socialist government. But as you were

saying, Italy has begun to grapple with some of these

problems. And the Monteuse (phonetic) movement in

countries like Spain, on the policy side, they've started

to grapple, you might argue, with some of these structural

difficulties. And other countries in Europe, including

Germany earlier on, have grasped the nettle, and tried

hard to do these structural reform.

So I just wanted to give you a chance to, you

know, reply to Richard, and say whether you think that's a

fair -- you know, with that kind of pessimism out the

supply side reforms that Europe might undertake, whether

that's quite justified.

MR. SEVERGNINI: Well, I started off, you know,

declaring that I'm an optimist. And I'm still an

optimist, and I tried to explain why. And I do agree that

in Europe and in Italy for sure, but also in France, and

Spain, and elsewhere there is room to maneuver and room to

reform.

In Italy red tape is still an industry. I won't

go into details, but I tell you that building a house, and

I've done that a few times in my life, or hiring someone,

it's still far too complicated. But it is true that

something have been done. The passage is really narrow.

Because of course you have political forces everywhere

that are getting ready, and they are betting on the worst

scenario, which will be great for them. It will be not

only an economic disaster, but also a tragic historical

development.

Because in Europe, and let me end with this

note, I mean, they're not here, but trust me, so many

years of Europe -- I decided to become a journalist

because I fell in love not only with a German colleague,

but going to do my thesis in Brussels, I -- I was 22, and

I loved the idea that, you know, German, and British, and

French all together, and my friends from all over Europe --

there is a generation, I am the oldest -- among the oldest

of their generation.

But now I have many readers in their 20s because

they -- I am the -- the best compliment ever paid to me in

a public is, one of these young person, a girl, she must

have been in her late-20s said, you know why we read what

you do, you know why we are all here, because you are the

oldest of us, and not the youngest of them. I loved that.

(Laughter)

MR. SEVERGNINI: I loved that. I mean, she

pointed out -- and there is a generation -- I'm 55,

between me and people in their 20's, so 35 years of

European. And they know they're Poles, and Italians, and

British, and Spanish, and Portuguese, but they do feel

Europeans. It is -- it's a kind of upper -- as people

went to university we had a very successful Erasmus

project, which involved some 2 million students, already

is a lot. These people are true Europeans. They don't

want to give up.

So if these people who are in a position of

power and some of them have now entered politics, and

business, these people are enough to convince their

leaders that these project has to be saved, it's too good.

And it would be such a shame.

MR. CROOK: You can't follow that. That's the

perfect note on which to end. And we're out of time.

Please join me in thanking them.

SPEAKER: Thank you Clive.

(Applause)

* * * * *

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