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On June 23, voters in the United Kingdom will go to the polls for a referendum on the country’s membership in the European Union. As one of the EU’s largest and wealthiest member states, Britain’s exit, or “Brexit”, would not only alter the U.K.’s institutional, political, and economic relationships, but would also send shock waves across the entire continent and beyond, with a possible Brexit fundamentally reshaping transatlantic relations.

On May 6, the Center on the United States and Europe (CUSE) at Brookings, in cooperation with the Heinrich Böll Stiftung North America, the UK in a Changing Europe Initiative based at King's College London, and Wilton Park USA, will host a discussion to assess the range of implications that could result from the United Kingdom’s referendum. 

After each panel, the participants will take questions from the audience.

Join the conversation on Twitter using #UKReferendum

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• Brexit—in or out? Implications of the United Kingdom’s referendum on EU membership

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• Uncorrected Transcript (.pdf)

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• 20160506_uk_eu_brexit_transcript

Fiona Hill, director of the Center on the United States and Europe at Brookings and a senior fellow in Foreign Policy, discusses the decision of a majority of voters in Britain to leave the E.U. and the consequences of Brexit for the country’s economy, politics, position as a world power, and implications for its citizens.

Show Notes

Mr. Putin (New and Expanded)

The "greatest catastrophe" of the 21st century?

Brexit and the dissolution of the U.K. Brexit—in or out? Implications of the United Kingdom’s referendum on EU membership

EU: how to decide (Anand Menon)

Thanks to audio engineer and producer Zack Kulzer, with editing help from Mark Hoelscher, plus thanks to Carisa Nietsche, Bill Finan, Jessica Pavone, Eric Abalahin, Rebecca Viser, and our intern Sara Abdel-Rahim.

Subscribe to the Brookings Cafeteria on iTunes, listen in all the usual places, and send feedback email to BCP@Brookings.edu 

After 10 hectic days, Cypriots will return to economic life. The price, however, is an inevitable and costly adjustment plan. But contrary to many predictions, the eurozone and the Cypriot government have been able to find a solution in less than 10 days. Moreover, the eurozone has avoided yet another financial hurdle that, despite its small size, was described as having the potential to start another acute phase of the euro crisis.

The management of the eurozone crisis over the last three years has proven to be extremely tortuous. It remains so, and this episode will certainly not be the last. However, observers might also point to how the management by congressional leaders of the U.S. fiscal and deficit problems reveals similar political complexities. Could both be the inevitable result of a democratic, diverse, continental political constituency?

What people need to understand about the eurozone is its continuous willingness to ensure the future of the euro, and its (until now) proven capacity to find compromises despite diverging national interests.

Cyprus has been recognized for months as a ticking bomb within the eurozone, mixing a hypertrophied banking system (that produced jobs and wealth for Cypriots) with huge Russian deposits and suspected money laundering.

Cyprus has been recognized for months as a ticking bomb within the eurozone, mixing a hypertrophied banking system (that produced jobs and wealth for Cypriots) with huge Russian deposits and suspected money laundering. It seems that this had become Cyprus’s most important comparative advantage. The fight against money laundering is supposed to be a great cause of the OECD countries, and it is surprising to note that this aspect did not receive appropriate weight when commenting on the unconventional tools used by the troika to design its plan. The Cypriot banking system is not like the average banking system of Southern Europe. It is a case in itself and deserves a solution of its own.

The “success story” of Cyprus was destroyed by the haircut on Greek bonds; Cypriot banks hold massive amounts of Greek bonds on behalf of their foreign clients. Incidentally, this says a lot about the prowess of this supposed “international financial center” and the awareness of its clients. For many reasons, mostly the country’s democratic process, the active search for a solution to problems in Cyprus had been postponed for months until Saturday, March 16, when an agreement was reached between the newly-elected president of Cyprus, the eurozone governments, and the troika. On that date, every old prejudice about the mismanagement of the eurozone crisis, that had been shelved for the last year, suddenly resurfaced with a new torrent: of criticisms (an ill-conceived plan); of denunciations (a crisis of stupidity); of rejection (Europe is for people, not for Germany); of financial horrors (inevitable propagation of the Cypriot bank run); and finally of doomed forecasts (be alert, the breakup is coming).

Yet one week later, it is interesting to visit the control room and watch the radar screens:

• The agreement? Better designed and operational as of Monday, March 25; 
•  Bank runs propagation? No sign (even in the London branches of the two Cypriot banks);
• European periphery bond market? A definitely strong first quarter;
• Stock markets? Stable;
• Exchange markets? Stable.

However, we should not consider this summary to mean that this new episode in the eurozone saga has been more efficiently managed than the previous ones. Definitely not!

Two examples among many explain why this is not the case. First, the idea to tax every bank account whatever its amount was not a product of “German stupidity” but reflects a demand from the Cypriot president, who was willing to preserve the image of the island as a financial center; as if the confidence of dirty money could be a sustainable comparative advantage for Cyprus! The stupefying thing is that the other euro governments accepted this clause even though it was financially dangerous and certain to be rejected by the populace and its representatives. In following the relief produced by the substance of the new agreement, the Dutch finance minister and chairman of the Eurogroup announced that the Cypriot treatment was great news because it showed that bank depositors may be expected to contribute to future bailout packages. However this is explosive and potentially as damaging as the PSI initiative adopted at Deauville. There was immediate backtracking but this reminds us that the whole process remains fragile. All this being properly considered, we should examine the ongoing euro crisis along a different narrative.

And after having described the situation in Cyprus as potential chaos in the waiting, experts now explain the absence of collateral effects by referring to the July 2012 famous commitment of Mario Draghi.

What the above mentioned facts demonstrate is that markets and people outside of Cyprus adopted (at least until the Dutch minister’s proclamation) a much calmer view than specialized commentators. And after having described the situation in Cyprus as potential chaos in the waiting, experts now explain the absence of collateral effects by referring to the July 2012 famous commitment of Mario Draghi. This is at best an excuse for not exploring other explanations and at worst a superstition for placing too much power in his mouth. Rather, two broader facts should be emphasized:

• First, looking outside the eurozone, the euro has remained as attractive an international currency as before all the vicissitudes of the sovereign debt crisis despite all the aggressiveness on part of the international financial press. The exchange rate with the dollar constantly remained close to 1.3— a rate which reveals an over-valuation of the euro; such stability is surprising given all the daily announcements of its forthcoming collapse. This fact, which has never received proper attention, at the very least proves that the euro has always remained as attractive as the dollar. After all the drama we have gone through, there was little chance that the Cypriot episode will change this global perception of the euro.
  
  
• Second, within the eurozone, there is an underestimated willingness to stick to the euro as the currency of the European continent. Austerity measures are never popular and governments that adopt them have been punished in Greece, Spain, France and Italy. Nevertheless, this is the natural product of democracy, and when it comes to the explicit question— “do you prefer to stay in the eurozone, with its mechanisms and constraints, or move on your own?”— the popular answer everywhere has been “we stay”. This is what popular votes have proven in Ireland, Greece and Spain, as well as in Germany where local elections have regularly promoted euro-friendly candidates.

So what can we conclude from the recent crisis in Cyprus? The first conclusion is that Cyprus will pay a high price for exiting a dramatic situation and securing access to eurozone support; no other feasible deal was better than that one at that particular moment. Second, we have witnessed once again the willingness of the eurozone to stay the course, and its ability to design imperfect but feasible compromises, which is not so bad when compared to what’s going on in Washington. In brief, this is another Euro-solution. However, Cyprus is certainly not the last challenge confronting the governments and people of the eurozone. In that sense, the most problematic lesson from this chaotic week is not financial but political. The future of Europe more and more lies in the hands of Germany and there is no place here for accusing the Germans of egoism. Financially speaking, they have moved forward at every step during the last three years and they are the ones that repeatedly take the biggest risks. There is no question that Germany has a prominent voice and that it defends its financial security before entering into an agreement. This is what should have been expected and this is what we have seen with what happened in Cyprus. Looking forward, the bigger problem facing the eurozone is the urgent need to design a macroeconomic policy that will spur a return to growth for the region. On this issue, there is still no visible Euro-solution and that could prove to be the biggest risk facing Europe.

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By the end of May, citizens of Europe will have left the polling booths and a new European Parliament will have been directly elected for the eighth time in the institution’s history. Since the last elections were held in 2009 on the heels of the global financial crisis, the eurozone has developed stronger economic stability mechanisms, kept its membership intact, and even added additional members. Yet Europe also faces a resurgence of extreme nationalism, political fragmentation within nation-states, and frustration and protest driven by high rates of unemployment. There are very different visions for the future of Europe.

On June 3, the Global Economy and Development program at Brookings hosted a discussion on Europe’s future and what Europe’s election results mean for critical choices like the formation of the new European Commission, fiscal policies, U.S.-EU relations, TTIP negotiations and the future of the EU-United Kingdom relationship. Some of the issues that were addressed are also analyzed in Europe’s Crisis, Europe’s Future, a recently published book (Brookings Press, April 2014) co-edited by Kemal Derviș and Jacques Mistral.

Join the conversation on Twitter using #EuroFuture

Video

• European Monetary Union Has Political Consequences
• The European Elections and the Future of Europe
• People Are Feeling Apathetic about Europe
• European Elections Proof of Frustrations
• Jobs and Growth at Heart of Europe's Problem
• Britain Wants Eurozone to Succeed
• The European Elections and the Future of Europe

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• The European Elections and the Future of Europe

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• Uncorrected Transcript (.pdf)

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• 20140603_european_elections_transcript

For Europe, it has been a rough year, or perhaps more accurately a rough decade. The terrorist attacks in London, Madrid, and elsewhere have taken a toll, as did the Iraq and Afghanistan wars. But things really got tough beginning with the Great Recession—and its prolonged duration for Europe, including grave economic crises in much of the southern part of the continent. That was followed by Vladimir Putin’s aggression against Ukraine, as well as the intensification of the Syrian, Libyan, and Yemeni conflicts with their tragic human consequences, including massive displacement of people and the greatest flow of refugees since World War II. The recent attacks in Paris and Brussels have added to the gloom and fear. This recent history, together with the advent of nationalistic and inward-looking policies in virtually all European Union member states, makes it easy to get despondent—and worry that the entire European project is failing.

To be sure, these are not the best of times. Europe is perceived by some, including Republican presidential candidate Donald Trump, as failing to invest enough in its own security, since NATO allies spend less than 1.4 percent of GDP on their armed forces while the United States spends twice that. However, we must not lose sight of the key structural advantages—and the important policy successes—that have brought Europe where it is today. For example, Europe’s recent progress in energy policy has been significant—good not only for economic and energy resilience, but also for NATO's collective handling of the revanchist Russia threat. 

[W]e must not lose sight of the key structural advantages—and the important policy successes—that have brought Europe where it is today.

For many years, analysts and policymakers have debated the question of Europe's dependence on natural gas from Russia. Today, this problem is largely solved. Russia provides only one-third of Europe’s gas. Importantly, Europe’s internal infrastructure for transporting natural gas in all desired directions has improved greatly. So have its available storage options, as well as its possibilities to import alternatives either by pipeline or in the form of liquefied natural gas. As a result, almost all member states are currently well-positioned to withstand even a worst-case scenario. 

Indeed, European Commission analyses show that even a multi-month long supply disruption could be addressed, albeit at real economic cost, by diversification and fuel switching. Progress in energy efficiency and renewable energy investments also help. There is more to do to enhance European energy security, but much has been done already. The Europeans have shown that, with ups and downs, they can address energy security themselves.

Already this energy success has contributed to a strategic success. Europe has been heavily criticized for not standing up more firmly to Russia in response to the annexation of Crimea and the conflict in eastern Ukraine. In fact, all EU member states have agreed to keep economic sanctions in place against Moscow. In addition, lifting the sanctions has been firmly attached to the implementation of the Minsk II agreement—and despite recent cracks in European solidarity, we hope that this stance will hold going forward. 

The notion that Europe is weak and dependent on Russian natural gas is a relic from the past.

The notion that Europe is weak and dependent on Russian natural gas is a relic from the past. Europe has a strong regulatory framework with which commercial entities, including Gazprom, have to abide. For those who doubt the impact of these regulations, just ask Google or Microsoft. With the end of so-called destination clauses, natural gas can be re-sold whenever required, as long as sufficient infrastructure is in place. Just last year, Germany re-exported over 30 billion cubic meters of gas, mostly Russian, in particular to Central and Eastern Europe (including Ukraine). That volume exceeds the annual consumption of every European state with the exceptions of Germany, Italy, France, and Britain.

In theory, Europe could even substantially wean itself off Russian gas if need be. To be sure, that would come at a major expense: over 200 billion euros of additional investments over a period of two years or more, and then an annual 35 billion euros, according to some calculations. That will almost surely not happen. But as a way of bounding the worst-case scenario, it is still informative. One might say that Europe has escalation dominance over Russia; the latter needs to export to Europe more than Europe need Russian hydrocarbons.

The internal energy market is not finished, but Europe’s energy security has significantly improved in recent years. Even though world markets are currently awash in resources, there is no time for complacence, and European leaders should finish the job, foremost by safeguarding the swift construction of the so-called Projects of Common Interest (key energy infrastructure projects that address the remaining bottlenecks in the EU market), so that the U.S. State Department can take new infrastructure projects like Nord Stream 2 off its priority list, and make energy policy another true European success story. It is already much of the way there, and Western security is the better for it.

I attended a fascinating dinner earlier this week with Greek Foreign Minister Nikos Kotzias as part of his whirlwind visit to Washington DC. I shared with the minister some reflections on challenges facing him and the new Greek government at home in Greece and in Europe. When I served in Prague, I often urged the Europeans to take a page from our U.S. approach in 2009-10 and to avoid excessive austerity. I reiterated that view to the minister, and in particular pointed out the need for Germany to do more to help (see, for example, my colleague Ben Bernanke's recent post on the German current account surplus in his Brookings blog.) Paul Krugman hit the nail on the head with his recent column as well. On a personal note, when my father found himself trapped in Poland in 1939 is the Nazis invaded, he made his way to Greece, which gave him shelter until he was able to escape to the United States in 1940. So I was able to thank the Foreign Minister for that as well (somewhat belatedly, but all the more heartfelt for that). I was impressed with the Minister's grasp of the Greek financial crisis and the many other important issues confronting Europe.

The European Union (EU) is confronting a series of potentially existential threats, including the refugee crisis, ISIS terror, Russian adventurism, and Brexit (the potential exit of the U.K. from the EU).  I hosted Czech Prime Minister Bohuslav Sobotka at Brookings to get his fundamentally (but carefully) optimistic take on how he and his fellow EU leaders can meet those challenges. Here are five reasons for optimism that emerged from our conversation: 

1. Take the Fight to Daesh.  The PM made clear Europe’s determination to take on the terror and refugee issues at their source in Iraq, Syria, and Libya.  Just this week, the Czech Republic upped its commitment to the international coalition, announcing that it will send a team to train Iraqis using U.S. made L-159 fighter jets (also sold to Iraq by Prague).  With transatlantic leadership, these efforts are starting to bear fruit in the decay of ISIS.
2. Never Let a Good Crisis Go to Waste. As part of addressing today’s refugee crisis, Europe is exploring multi-lateral efforts to construct a common European border service, integrate refugee populations, and promote internal security.  The process is painful, but filling these gaps will make the European Union stronger.
3. Stand Strong With Ukraine.  Some predicted that European unity against Putin’s expansionism would not hold.  Instead, the EU and the United States have maintained their resolve in enacting sanctions.  That has strengthened the EU, but as the PM pointed out, now Ukraine and its supporters must make sure that state moves towards good governance and functionality. 
4. Taking the Exit Out of Brexit.  The PM predicted that the U.K. would not exit the EU.  When I pressed him on why, he acknowledged that there were elements of wishing and hoping in that forecast, and that the vote comes at a tough moment.  But I share the PM’s hopes—the U.K. is not one to leave friends when times get tough.
5. Never Forget to Remember.  The PM and I spent a lot of time discussing the ups and downs of Central Europe’s experiment with democracy over the past century.  He and his Czech colleagues—of all mainstream political parties—are acutely aware of that history, and that too gives me hope that it will not be repeated.

Immense challenges can destabilize and divide—but they also present opportunities for new collaboration and cohesion. If addressed in partnership, Europe’s current trials can ultimately strengthen the ties that bind the EU together.  

Watch the full discussion here.

Andrew Kenealy contributed to this post. 

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A conversation with Prime Minister of the Czech Republic Bohuslav Sobotka

Today, the European Union faces critical risks to its stability. The possibility of a Brexit. The ongoing Ukraine/Russia conflict. The strain of mass migration. ISIL and other terrorism threats. The lingering financial crisis in Greece and beyond. These issues pose distinct challenges for the EU, its 28 member countries, and their 500 million citizens. How will these developing problems affect Europe?          

On March 31, Governance Studies at Brookings hosted Czech Prime Minister Bohuslav Sobotka to discuss the current status of the EU as seen through the lens of a Central European nation, close U.S. NATO ally and current Chair of the Visegrad Group. Prime Minister Sobotka offered insight into how the EU will address these issues, and where its future lies.

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• Challenges to the future of the EU: A Central European perspective

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• Challenges to the future of the EU: A Central European perspective (English)

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• Transcript (.pdf)

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• 20160331_czech_eu_transcript

The eurozone has three problems: national debt obligations that cannot be met, medium-term imbalances in trade competitiveness, and long-term structural flaws.

The short-run problem requires more of the monetary easing that Germany has, with appalling shortsightedness, been resisting, and less of the near-term fiscal restraint that Germany has, with equally appalling shortsightedness, been seeking. To insist that Greece meet all of its near-term current debt service obligations makes about as much sense as did French and British insistence that Germany honor its reparations obligations after World War I. The latter could not be and were not honored. The former cannot and will not be honored either.

The medium-term problem is that, given a single currency, labor costs are too high in Greece and too low in Germany and some other northern European countries. Because adjustments in currency values cannot correct these imbalances, differences in growth of wages must do the job—either wage deflation and continued depression in Greece and other peripheral countries, wage inflation in Germany, or both. The former is a recipe for intense and sustained misery. The latter, however politically improbable it may now seem, is the better alternative.

The long-term problem is that the eurozone lacks the fiscal transfer mechanisms necessary to soften the effects of competitiveness imbalances while other forms of adjustment take effect. This lack places extraordinary demands on the willingness of individual nations to undertake internal policies to reduce such imbalances. Until such fiscal transfer mechanisms are created, crises such as the current one are bound to recur.

Present circumstances call for a combination of short-term expansionary policies that have to be led or accepted by the surplus nations, notably Germany, who will also have to recognize and accept that not all Greek debts will be paid or that debt service payments will not be made on time and at originally negotiated interest rates. The price for those concessions will be a current and credible commitment eventually to restore and maintain fiscal balance by the peripheral countries, notably Greece.