[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE EUROPEAN UNION'S FUTURE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON EUROPE, EURASIA, AND EMERGING THREATS
OF THE
COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
JULY 14, 2015
__________
Serial No. 114-61
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COMMITTEE ON FOREIGN AFFAIRS
EDWARD R. ROYCE, California, Chairman
CHRISTOPHER H. SMITH, New Jersey ELIOT L. ENGEL, New York
ILEANA ROS-LEHTINEN, Florida BRAD SHERMAN, California
DANA ROHRABACHER, California GREGORY W. MEEKS, New York
STEVE CHABOT, Ohio ALBIO SIRES, New Jersey
JOE WILSON, South Carolina GERALD E. CONNOLLY, Virginia
MICHAEL T. McCAUL, Texas THEODORE E. DEUTCH, Florida
TED POE, Texas BRIAN HIGGINS, New York
MATT SALMON, Arizona KAREN BASS, California
DARRELL E. ISSA, California WILLIAM KEATING, Massachusetts
TOM MARINO, Pennsylvania DAVID CICILLINE, Rhode Island
JEFF DUNCAN, South Carolina ALAN GRAYSON, Florida
MO BROOKS, Alabama AMI BERA, California
PAUL COOK, California ALAN S. LOWENTHAL, California
RANDY K. WEBER SR., Texas GRACE MENG, New York
SCOTT PERRY, Pennsylvania LOIS FRANKEL, Florida
RON DeSANTIS, Florida TULSI GABBARD, Hawaii
MARK MEADOWS, North Carolina JOAQUIN CASTRO, Texas
TED S. YOHO, Florida ROBIN L. KELLY, Illinois
CURT CLAWSON, Florida BRENDAN F. BOYLE, Pennsylvania
SCOTT DesJARLAIS, Tennessee
REID J. RIBBLE, Wisconsin
DAVID A. TROTT, Michigan
LEE M. ZELDIN, New York
TOM EMMER, MinnesotaUntil 5/18/
15 deg.
DANIEL DONOVAN, New YorkAs
of 5/19/15 deg.
Amy Porter, Chief of Staff Thomas Sheehy, Staff Director
Jason Steinbaum, Democratic Staff Director
------
Subcommittee on Europe, Eurasia, and Emerging Threats
DANA ROHRABACHER, California, Chairman
TED POE, Texas GREGORY W. MEEKS, New York
TOM MARINO, Pennsylvania ALBIO SIRES, New Jersey
MO BROOKS, Alabama THEODORE E. DEUTCH, Florida
PAUL COOK, California WILLIAM KEATING, Massachusetts
RANDY K. WEBER SR., Texas LOIS FRANKEL, Florida
REID J. RIBBLE, Wisconsin TULSI GABBARD, Hawaii
DAVID A. TROTT, Michigan
C O N T E N T S
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Page
WITNESSES
John McCormick, Ph.D., Jean-Monnet Professor of European Union
Politics, Indiana University-Purdue University Indianapolis.... 4
Stephen Walt, Ph.D., Robert and Renee Belfer Professor of
International Affairs, Belfer Center for Science and
International Affairs, John F. Kennedy School of Government,
Harvard University............................................. 12
Jacob Funk Kirkegaard, Ph.D., senior fellow, Peterson Institute
for International Economics.................................... 20
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
John McCormick, Ph.D.: Prepared statement........................ 7
Stephen Walt, Ph.D.: Prepared statement.......................... 14
Jacob Funk Kirkegaard, Ph.D.: Prepared statement................. 23
APPENDIX
Hearing notice................................................... 46
Hearing minutes.................................................. 47
THE EUROPEAN UNION'S FUTURE
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TUESDAY, JULY 14, 2015
House of Representatives,
Subcommittee on Europe, Eurasia, and Emerging Threats,
Committee on Foreign Affairs,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:01 p.m., in
room 2200, Rayburn House Office Building, Hon. Dana Rohrabacher
(chairman of the subcommittee) presiding.
Mr. Rohrabacher. I call to order the Europe, Eurasia, and
Emerging Threats Subcommittee for this afternoon's hearing on
the future of the European Union.
From a relatively modest idea in the early 1950s for six
countries to form a common market for steel and coal
production, the supranational organization that we now know as
the European Union was created. Five and a half decades on, the
European Union has expanded to include 28 national governments
and represents over 500 million people. Taken together, the GDP
of the EU is over $18 trillion, one of the largest global
economies.
The historical forces which promoted the European
integration after World War II helped to make that continent
more peaceful and more prosperous. The European Union and the
liberal values it embodies helped numerous post-Communist
Eastern European countries make the transition from their
Socialist Communist economies to a market economy. The fact
that new countries continue to seek membership shows that the
fundamental values of the EU are the right ones and continue to
be attractive.
Despite this, however, the future of the European Union and
the entire project of European integration has arguably never
seemed so much in doubt. The EU has expanded to include
economies of all sizes, countries, and different cultures, and
sometimes conflicting national interests. This has led many to
rightfully ask: Has the EU become too large to manage? Must
more authority continue to be ceded to Brussels in order to
prevent dysfunction?
While the negotiable agreement reached by the Greek
Government yesterday appears to keep Greece in the eurozone for
the time being, the crisis there is far from over. Greece's
economy has shrunk by a quarter, and youth unemployment is 50
percent. And I hope the implementation of this latest
agreement, which we saw yesterday, will set Greece on a better
path. But, given the experiences of the past 5 years, I am
certainly less than optimistic.
So let me just note, in 1953, Germany received a massive
debt relief from its creditors. I can't help but wonder, if
Greece received the same treatment 2 or 3 or 4 years ago, would
we still be in this crisis moment that we see in Greece today?
If questions about the integrity of the eurozone weren't
enough, the authority and the legitimacy of the EU is also
being challenged from within.
The popularity of basically Eurosceptic political parties
has increased, and they are pushing back against the
centralized power in Brussels. In last year's European
Parliamentary election, over a quarter of the seats were
claimed by Eurosceptics and Eurosceptic parties. In 2016, 2017,
Great Britain, one of the largest EU countries, will hold an
in-or-out referendum over the question of remaining in the
European Union.
In the face of a major fiscal question and increasing
doubts among the citizens of Europe, what then is the future of
the EU? Have the influences, which historically drove
integration, now are they driving people apart rather than
bringing them together? Or is the answer to these difficulties
to double down and to deepen the union to an even greater
degree?
Before we go on, let me just note, I think the Greek crisis
has an important lesson for our own country: A government can
live beyond its means and live well on deficit spending, but
not forever. And I hope lawmakers here in Washington, not just
in the European capitals, have taken note of that fact.
So, with that said, I am looking forward to our witnesses.
And I will turn now to the ranking member, Mr. Meeks, and then
I will introduce the witnesses.
Mr. Meeks, you may proceed.
Mr. Meeks. Thank you, Chairman Rohrabacher, and thank you
for working with and putting this hearing together to provide
us with an opportunity to openly examine current events in
Europe and how they will shape the European Union's future.
The future, it seems, is becoming the present quickly. For
many of us who work on Europe and related issues in this House,
events within the EU have come into sharp focus. The issues
being sorted out are not new, however. The United Kingdom has
always had a special relationship with the continental Europe.
The Greek economy did not begin to show troubling signs
yesterday and the rise of extremist parties is not something
new to Europe.
The question, therefore, is this: Are we seeing a
restructuring of the European political system, or is this
simply a necessary crack along the path to a more peaceful and
united Europe? A prime example is the situation in Greece. This
process is a reminder that the union is indeed a process and a
club that demands cooperation, solidarity, and compromise. It
is moments like what we have witnessed over this past weekend
and into the early morning of yesterday that tests the mettle
of the Union.
And I am encouraged by the fact that the parties came to an
agreement for now and wish to see that the Greek Parliament
make the necessary decisions in the upcoming days. Hopefully,
in the future, such crises can be stemmed earlier in the game
and not lead to brinkmanship involving such high stakes.
You know, I just returned from a trip to Riga, Latvia,
where I discussed these issues with Latvian political leaders,
their foreign ministers, citizens, and as well as with members
of the European Parliament. They clearly see the benefits of a
successful European Union and an American presence on the
continent. During the cold war, they lived on the other side
under a regime that did not allow them the freedoms and
prosperity they have today.
In Latvia, I also shared a meal with young American
soldiers--some who happened to come from my State of New York--
that represent our friendship and common values with Europe. On
the ground, in people's lives, the future of Europe depends
upon us working in partnership, America and our friends across
the Atlantic. A united Europe represents American ideals along
with European ideals and commerce and liberty and security that
can lift standards all over the world.
Though difficult, times like these, I think that it is time
that I believe that by working together we can ensure success.
From the U.S. Congress' perspective, we understand the
difficulties in creating a more perfect union, and we are still
trying to move in that direction. But let us take a step back
to define our important relationship with Europe and the
European Union. The European project is a peace project firmly
aligned with American interests and designed to promote liberal
democratic ideals while working for the global common good.
Such a project may seem lofty, but in practice, it sets a
framework to facilitate the free movement of people, commercial
goods, finance, and ideas. This unprecedented and evolving
union on the other side of the Atlantic consists of allies, our
allies. And, of course, there is no roadmap for constructing
the EU. Whether or not these mistakes could have been avoided
is irrelevant at this time as we work together to iron out the
remaining wrinkles in the European Union, working with them.
In our country, we are still perfecting our system of
government and cooperation between the State and Federal
levels, yet I believe that despite the difficulties of such an
ambitious European Union, the will to do that is there. Despite
the pain of reforms, the overwhelming majority of Greek
citizens want to remain in the European Union. And we will find
out what citizens of the United Kingdom think of their
membership soon also. The internal affairs of the EU must be
resolved so the integrity of the Union can continue to sustain
its purposes.
So, with that, Mr. Chairman, I look forward to hearing the
testimony of our witnesses as we talk more because we have all
kinds of scenarios. When we talk about ISIS, China, we have got
to work together with our allies across the Atlantic. I think
that is tremendously important, and as so, there is plenty to
do. And I would love to hear the testimony of our witnesses.
Mr. Rohrabacher. Thank you very much, Mr. Meeks.
And, Mr. Sires, do you have a opening statement?
Mr. Sires. I just want to say thank you for holding this
hearing, and I want to hear what the witnesses have to say.
Thank you.
Mr. Rohrabacher. How about you, Colonel Cook?
Mr. Cook. I just have a brief statement since there was so
much talk about Greece, and depending upon votes, some of my
questions may orient toward that.
My big concerns right now are Russia. And Russia, which has
been using oil and gas to control Europe, this is something
that is not new. And, of course, if you look at the history and
the cultural and historical ties, the Byzantine Empire, if you
will, going back many, many years, long before I was born, I
might add, that relationship kind of scares me, particularly
the offer to help out the Greek economy. And that could drive a
wedge between Greece, of course, and everything that is going
on, and they might reorient themselves to Russia.
And so my questions, when we do get there, will be oriented
toward that. As I said, I am very, very concerned about that,
and not just the EU, but it is going to dwell into, of course,
NATO.
So thank you very much for being here today. I am glad you
had this hearing.
Mr. Rohrabacher. Thank you very much, Colonel.
And we have three witnesses with us today. I would ask each
of them to try to sort of put all of it down in about 5
minutes, if you could, and the rest you can submit for the
record. But try to pick out the points that you really think
are the most important for us to discuss. And then we will
have, as I say, a dialogue afterwards.
Our friend from Alabama, Mr. Brooks, do you have an opening
statement at all that you would like to make?
Mr. Brooks. No, sir.
Mr. Rohrabacher. All right. So, with that said, let me
introduce our witnesses.
Dr. John McCormick is the Jean Monnet Professor of European
Union Politics at Indianapolis campus of Indiana University.
And he has authored over a dozen books, numerous journal
articles. He was educated in Rhodes University in South Africa
and University College London. All right.
And we have with us Steven Walt, the Robert and Renee
Belfer Professor of International Affairs at Harvard's John F.
Kennedy School of Government. And he is a contributing editor
to Foreign Policy magazine and has authored four books on
international affairs, including a New York Times bestseller.
And, finally, we have with us Dr. Jacob Kirkegaard, and he
is a senior fellow at the Peterson Institute for International
Economics. Previously, he worked with the Danish Ministry of
Defense and the United Nations in Iraq. He studied at Columbia
University, received a Ph.D. From Johns Hopkins University.
So we have three very prominent witnesses and people who
are not only respected in the education but in foreign affairs
as well, so we would be very appreciative of hearing what you
have to say.
Dr. McCormick, you may begin.
STATEMENT OF JOHN MCCORMICK, PH.D., JEAN-MONNET PROFESSOR OF
EUROPEAN UNION POLITICS, INDIANA UNIVERSITY-PURDUE UNIVERSITY
INDIANAPOLIS
Mr. McCormick. Well, good afternoon, and thank you very
much for inviting me to this very topical hearing. My name is
John McCormick. I am the professor of political science at the
Indianapolis campus of Indiana University, and I have been
studying, teaching, and writing about the European Union and
its precursors for about 25 years.
In that time, the last decade, without question, has been
the most challenging and the most troubled, beginning with the
rejection of the constitutional treaty in 2005, moving to the
global financial crisis that began in 2007, the eurozone crisis
that began in 2009, which both evolved against a background of
a growing popular reaction against European integration, a deep
cynicism about the achievements of the European Union and
doubts about its capacity to play a meaningful role in the
world.
Regardless of all this, I remain the eternal optimist. I
continue to believe very much in the many longer term
achievements of the European Union: For example, the European
single market and its many benefits; the role of integration in
helping keep Europe at peace; the slow building of a Pan-
European identity; the promotion of democracy and free markets,
both at home and abroad; and everything from a cleaner
environment to greater mobility for college students to cross-
border police cooperation, common policies on trade and
competition.
So we are here today to talk about the future of the
European Union, but doing so is particularly difficult because
of the nature of the raw material that we have to work with.
And there are two particular problems that present themselves.
First of all, we cannot agree on the political identity and
personality of the European Union. It is very difficult to have
a meaningful conversation and discussion about its successes
and failures or about its future prospects when we don't know
what ``it'' is.
Unfortunately, nobody has yet offered a definition of the
European Union that can help us sort through these
complexities. And when I am asked to answer the question,
``What is the European Union?'' My answer is, it is a
confederal system with Federal qualities. And, unfortunately,
that definition always demands subsidiary conversation about
what exactly I mean, and it is not one with which many of my
peers would anyway agree.
Second, much of the debate about the European Union and the
effects of European integration is diverted by
misunderstandings about the power and the reach of the European
Union. Critics routinely overstate the powers of the European
Union institutions. They routinely overstate the extent to
which the laws of the member states are driven by the
requirements of European Union law. They routinely blame the
domestic problems of the member states on perfidious Brussels.
And they often choose to focus more on the problems of the
European Union, which make for dramatic headlines, than
focusing on the successes, which don't.
So I was asked to comment specifically on three matters,
and while I have done so in more detail in my written
statement, I will just provide a very brief summary here. First
of all, there is the question of the sovereign debt crisis in
Greece. Many bright and creative minds have wrestled with the
design and implementation of the euro and then with how best to
respond to the debt crisis, and yet we still find ourselves in
dire straits.
So predicting the future presents an enormous challenge. I
do believe, though, that the crisis will be resolved; that all
parties will adapt to the outcome; and we will learn and move
on. Why? Very briefly, because the euro project is too big to
fail, both politically and economically.
Secondly, there is the question of the U.K. Referendum on
membership of the EU, and here I am on firmer ground. I predict
firmly that the British people will vote to remain part of the
European Union. Why? Because the majority in favor of staying
has been growing; because the referendum debate itself has been
a learning experience that has drawn more attention to the
benefits of staying and the costs of leaving; and because the
Cameron Government has pledged to negotiate with forms of the
European Union that may result in a further reduction in
support for leaving. Now, we should also remember that the
referendum is ultimately an effort to resolve a disagreement
within the governing Conservative Party. And we should assess
it as such.
Finally, there is the question of the electoral success of
Eurosceptic political parties. It is true that they are
attracting more support, but this is as much because of
criticism of the political establishment in Europe and also as
much about concerns about immigration as it is because of
criticism of the European Union. And it is also important to
appreciate that Euroscepticism comes in many different shades
and that while some of its adherents wish to see their home
states leave the European Union, many seek only reform of the
European Union.
So, in conclusion, I would argue that the successes of the
EU far outweigh its failures, that the governments of the
member states will continue to work hard in the interest of
European integration, and that the EU will weather the current
storms and emerge bruised but wiser.
Thank you very much, again, for the opportunity to speak to
you.
[The prepared statement of Mr. McCormick follows:]
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Mr. Rohrabacher. Thank you, Dr. McCormick.
Dr. Walt.
STATEMENT OF STEPHEN WALT, PH.D., ROBERT AND RENEE BELFER
PROFESSOR OF INTERNATIONAL AFFAIRS, BELFER CENTER FOR SCIENCE
AND INTERNATIONAL AFFAIRS, JOHN F. KENNEDY SCHOOL OF
GOVERNMENT, HARVARD UNIVERSITY
Mr. Walt. Mr. Chairman, Ranking Member Meeks, and members
of the committee, it is an honor to speak with you today at
this uncertain moment in European history. And given Europe's
importance to the United States, trying to anticipate its
future path is a critical task.
It is hard to be optimistic, however, about the EU's
prospects. It has been a positive force in world politics for
many years, but it suffers from growing tensions and self-
inflicted wounds. It is likely to experience repeated crises
and growing divisions, and we cannot rule out a gradual
decline. Because a prosperous and tranquil Europe is in our
interest, this is not good news for the United States.
As we have just heard, the European Union is in many ways a
remarkable political achievement. Yet despite its past
accomplishments, it faces five fundamental challenges, none
easy to overcome. First, it is a victim of its past success.
What began as a limited arrangement among six countries has
become an elaborate supranational organization of 28 members.
Those members are increasingly heterogeneous. Germany's GDP is
300 times larger than Malta's. Luxembourg's per-capita income
is eight times higher than Latvia's, five times higher than
Greece.
The size, population, and economic resources of these
states varies enormously, as do their cultures and national
histories. The expansion has made the EU more cumbersome and
less popular. Two years ago, more than 70 percent of EU's
citizens believed ``their voices do not count in EU
decisionmaking.'' Nearly two-thirds believed ``the EU does not
understand the needs of its citizens.''
Second, although the disappearance of the Soviet Union was
a welcome development, it removed one of the main motivations
for European unity. Since then, EU members have repeatedly
pledged to develop a common, foreign, and security policy, but
they have never done so. Today, the incoherent European
response to events in Ukraine highlights the lack of consensus
on basic security issues.
The third problem facing the EU today, of course, is the
euro crisis. Seven years has passed since the crisis hit, and
the EU still lacks the political institutions needed to sustain
a genuine currency union. If Greece eventually exits, its
departure will demonstrate the euro is not irreversible and so
new doubts about its future. If Greece stays in, another crisis
is probably inevitable.
Even worse, the crisis has sewn deep divisions within the
continent, with debtors and creditors exhibiting a level of
resentment and hostility not seen for many years. Needless to
say, this is not what the euro's creators had in mind when they
took that fateful step.
Fourth, the EU is now buffeted by serious regional turmoil.
State failures in Africa and the Middle East have produced a
flood of refugees seeking entry. Extremist movements, like Al
Qaeda, have had worrisome repercussions among some of the
Europe's Muslim population. The conflict in Ukraine raises new
concerns about the eastern frontier. The EU has been unable to
agree on new measures to address any of these challenges,
further underscoring its dysfunctional decisionmaking.
The final challenge is the persistence of nationalism. The
elites who built the EU hoped it would transcend existing
loyalties. This has not occurred. Indeed, the United Kingdom
may vote to leave the EU next year. Scotland may exit the
United Kingdom. And national settlements continue to simmer in
Catalonia and elsewhere.
Now, economic hardship and rising concerns about
immigration are reinforcing the emergence of Eurosceptic
parties that reject the basic ideas on which the EU was built.
And you add to that mix Europe's unfavorable demography--its
population is declining, and the median age is rising rapidly--
and you have a recipe for continued economic stagnation, which
will, of course, encourage the prospects of some of these
nationalist parties.
Looking ahead, you can imagine at least three possible
futures for the EU. First, in theory, bold leadership could
build the institutions needed to support the euro, assimilate
new immigrants, adopt reforms to produce stronger economic
growth. But that is unlikely. No European leaders today have
the vision and stature of an Adenauer, de Gaulle, or Thatcher.
Serious reforms would take years to implement given the EU's
elaborate machinery.
Instead of an ever greater Union, therefore, the EU is more
likely to simply muddle through. It will try to contain the
fallout from the euro crisis, hope new trade deals with the
United States and with China will provide an economic boost. In
this scenario, the EU survives, but its global influence
declines.
But there is a third possibility: The entire experiment
could begin to unravel. A Greek exit would set a dangerous
precedent. Nationalist sentiments could deepen. New
authoritarian leaders could come to power. Greece or Hungary
might even draw closer to Moscow. And once that process begins,
the only question would be, how far and how fast will it go?
Lastly, both muddling through or a gradual unravelling
would be bad news for the United States. Slow growth in Europe
means slow growth here in the United States. A weaker Europe
will be less useful as the United States tries to deal with a
rising China or a turbulent Middle East.
To sum it up: Since the end of World War II, stability and
prosperity in Europe have been a great benefit to the United
States. And the EU has been a key ingredient in a world order
that was very favorable for the United States.
But if the EU's best days are behind it, Americans will
have to prepare for a world that is less stable, less secure,
less prosperous than the one to which we have become
accustomed. I hope that is not the case, but that is the most
likely outcome, given where we are today.
Thank you very much.
[The prepared statement of Mr. Walt follows:]
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Mr. Rohrabacher. Well, we have heard from the optimist and
the pessimist.
And now do you have a fusion position for us, Doctor?
STATEMENT OF JACOB FUNK KIRKEGAARD, PH.D., SENIOR FELLOW,
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS
Mr. Kirkegaard. Mr. Chairman, Ranking Member Meeks, members
of the committee, it is a pleasure to testify before you today.
In my oral testimony, I will address three impacts on the
European Union's future: First, from the Greek sovereign debt
crisis; then from the upcoming United Kingdom referendum on EU
membership; and, finally, on the growing electoral success on
Eurosceptic parties.
The Greek sovereign debt crisis is first and foremost a
crisis for the euro area. Relative to existing Pan-EU
institution, recent developments have essentially cemented the
existence of a multispeed Europe where countries in the euro
area have undertaken dramatic new integration while other
member states remaining outside the common currency are only
affected to a limited degree.
Recalling, however, that this multispeed situation has been
de facto present in the EU for many decades, there is no
obvious reason to fear that the existing new institutions
cannot continue to cope with this situation also going forward.
Recent events over the weekend saw a dramatic escalation in
the confrontation between the Greek Government and the rest of
the euro area. Negotiations took place with a major taboo in
the euro area of politics, the possible exit of a member state
from the common currency broken, and Alexis Tsipras for the
first time faced this political calamity for Greece. He
subsequently, in my opinion, quite understandably, folded his
position.
The decision, however, by the euro area to make the
possibility of exit from the common currency an explicit and
obviously very effective negotiating tool will have changed the
nature of the euro currency itself. Given the willingness of
top euro area political leaders to use this exit threat, the
irreversibility of the common currency in all member states is
today less certain and subject to a higher degree of political
uncertainty.
This will significantly have increased the political and
financial onus on the euro area to agree to more and deeper
institutional integration of the euro area in the short to
medium term. Recent events in Greece therefore can be expected
to lead to a further accelerated integration of the euro area,
though, as mentioned, not have direct implications for the EU
as a whole.
The upcoming U.K. Referendum on EU membership is highly
unlikely, in my opinion, to lead to material and lasting
changes to EU institutions for the simple reason that the
referendum is overwhelmingly likely to be fought with the U.K.
Government, the Prime Minister, and all the main bridge
opposition parties all campaigning successfully for the U.K. To
remain in the EU.
David Cameron and the U.K. Government will campaign, in my
opinion, for a yes to avoid severing the ties between the
Conservative Party and its traditional funding base in the
British business, as well as to avoid the results in economic
uncertainty and damage to the U.K. Economy from a no vote.
Similarly, the referendum will take place in a favorably
economic context of a projected growth between 2 and 2.5
percent between now and 2016, which is the most likely year for
the referendum.
Most importantly, however, the politically necessary
changes to EU law will be possible for David Cameron to
achieve. In principle, EU law is valid throughout the 28 member
states, yet in a number of cases, individual member states have
secured so-called legal opt-out for specific elements of the EU
treaty, exempting them from having to implement some policies
at home.
In short, the EU legal framework is a highly flexible
animal when EU leaders require such flexibility and legal
finessing to overcome a particular political problem. Given how
Germany and many other EU members have already expressed their
clear political interests in seeing the U.K. Remain a member of
the EU, there can, in my mind, be no doubt that the full
arsenal of legal EU flexibility around the EU treaty will be
made available to David Cameron.
There will, consequently, in my opinion, be ample
opportunities for the Prime Minister to secure politically
important as well as legally binding changes to the EU laws
governing the economy at the United Kingdom as part of the now
ongoing negotiation, all of which points to a yes vote in the
referendum and therefore largely maintaining the institutional
status quo within the EU.
In recent years, many EU countries have witnessed the
growth of new parties that can be classified as broadly anti-
establishment and Eurosceptic in their political outlook. At
the same time, however, it is important to recognize that
European parliamentary systems have historically often operated
very successfully with very large anti-establishment
representation at national and European levels.
Prior to 1989, this was often seen with an often sizable
Communist Party representation in national legislatures. There
is, therefore, a priori no reason to believe that current
levels of representation of these types of parties in EU
Parliament represent a historically unprecedented and
impossible situation.
There is further no immediate reason to believe to
Eurosceptic parties are going to continue to grow beyond their
historical political range of up to about 25 percent of public
support and into effective governing majorities across Europe.
This is due to the narrowness of the core shared both left- and
right-wing populist message of many of these parties, which can
best be described as a welfare chauvinistic political platform
that at once advocates a strong and activist role for the
government in protecting the social welfare but only so for the
native population.
This policy mix has generally and successfully targeted the
lower skill segments of European electorates yet has to date
failed to extend much beyond these groups and into a genuine
majoritarian platform. Yet, even without the prospects of
gaining governing power, the stronger political voices of these
parties very significantly raise the political hurdles for
further revisions of the EU treaty.
This means that the EU for the foreseeable future will have
to continue to function within the broad legal framework laid
down in the 2009 Lisbon Treaty. In sum, therefore, the recent
reemergence of these Eurosceptic and anti-establishment parties
across Europe will not materially affect the overall direction
of EU policies but will greatly slow down the adaptability of
the EU's existing institutional design to future challenges.
In summary, therefore, the overall state of the EU is
challenged but nonetheless remain more stable than is often
believed. Thank you very much.
[The prepared statement of Mr. Kirkegaard follows:]
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----------
Mr. Rohrabacher. Thank all of you for your testimony today.
I will start with a few questions, and then we will proceed to
our other members as well.
So you are saying that the British are going to vote to
stay in the EU.
You are more pessimistic about that, correct?
Mr. Walt. Actually, no, if I had to bet, I would bet that
the U.K. Would remain in as well, but as was just said----
Mr. Rohrabacher. Okay. So all three of you are thinking the
U.K. Will stay in there, all right.
I was interested in this talk about EU being flexible. And
I think one of the things that I believe is being criticized is
that Brussels actually is trying to manage things from a
central location, and that is creating a lot of resentment
among people. Just as here in the United States, some people
are a little bit concerned about the fact that Washington, DC,
is coopting various political decisions that used to belong to
the States.
But none of you are convinced that this in and of itself is
a resentment about the centralization of power that will lead
to the demise of the EU or at least some crisis for the EU.
However, what about what you just touched on, the immigration,
the effect of immigration into these countries? And, quite
frankly, there is a lot of people in our country that don't
believe that people who have come here illegally should be
receiving government benefits and the benefits of our society,
even jobs.
Is the immigration that is going on in the EU now changing
the fundamental nature of those countries to the point that the
EU--these were different countries then that joined the EU 30,
40 years ago. So is immigration going to change that? Maybe a
little bit--30 seconds for each one of you on that.
Mr. McCormick. Yes, it is. I mean, there is a lot of
similarities between the kind of problems we face here and the
kind of problems that the Europeans are facing as well. The
immigration issue is more complicated for them because there is
a religious factor, and there is a racial factor involved. So
part of the concern about immigration is motivated by religious
and racial extremism. But the number of immigrants in Europe,
as a percent of the population, is less than the number of
immigrants in this country.
Mr. Rohrabacher. Of course, we are a nation of immigrants,
so, I mean, we represent every race, religion, and ethnic
group. We are very proud of that. So it wouldn't have that much
of an impact as opposed to a homogenous society.
Dr. Walt, what do you think?
Mr. Walt. One is, Europe historically has done a poorer job
of assimilating immigrants than the United States has. That has
been one of our great successes throughout our history. And,
second, this has to be understood in the context of a continent
really that has experienced very slow economic growth ever
since the financial crisis.
So in addition to having significant problems of
immigration, some degree of violence stemming from that, you
have the concerns of unemployment, the concerns that immigrants
from Eastern Europe are taking jobs away. Whether that is
correct or not, the perception, I think, is widespread in parts
of Europe. And that in turn reinforces the popularity of some
of these right-wing nationalists or Eurosceptic parties.
So, in a sense, the inability to deal with the immigration
problem may make the Euroskeptisim problem worse as well.
Mr. Kirkegaard. I would say that I think the main political
impact of immigration in the EU right now is actually both the
scale but also to relative novelty of this because the scale is
actually very large. If you look at the number of permanent
legal immigrants coming into the EU since in the 21st century,
it is actually about twice the level of green card holders
coming into the United States.
But, secondly, this is happening to countries that
historically does not have the tradition that the United States
has. These are countries that were traditionally very
homogenous, have sort of light culture, nationally dominant
cultures, and therefore, as was mentioned, these countries have
historically done poorer in terms of integrating these
immigrant communities.
So if, indeed, the EU policy is a more, let's say, liberal
policy of accepting this immigration into these countries, that
would work to undercut--the nationalists within those countries
would then be a more opposed to the EU. Is that correct? You
understand? In other words, if the EU is pushing for a higher
level of acceptance of immigration, and the people of those
countries, because they are more homogenous, do not want them,
that would actually be weakening the EU. Is that correct?
Mr. Kirkegaard. I think it would depend very much on where
you are in the EU. If you are in Italy right now, where the
number of illegal immigrants crossing the Mediterranean is
very, very large, you would actually campaign and be very much
in favor of the EU taking charge of this migration and trying
to spread it out throughout the entire Union, thereby loosening
the burden of Italy specifically.
Whereas, of course, if you are in Finland, you would
probably have the opposite opinion about sort of sending this
up to be a policy area dictated or governed by EU.
Mr. Rohrabacher. Okay.
Very quickly, the agreement with the Greek Government is
thumbs up or thumbs down for the EU? Is it positive or negative
long term?
Mr. McCormick. Thumbs up.
Mr. Rohrabacher. Dr. Walt.
Mr. Walt. I think it is largely irrelevant. I think it is a
short-term Band-Aid, but I don't see in this agreement yet the
solution to Greek's ultimate economic problems.
Mr. Rohrabacher. But is it going to be a thumbs down then?
Mr. Walt. Then I believe we will see a replay of what we
have just witnessed at some point in the future and how many
times Europe can go through this series of brinkmanship before
you finally do get a Greek exit remains to be seen. But I
wouldn't be confident that patience is infinite.
Mr. Kirkegaard. Thumbs up. I think the political
significance of a country that, having lost a third or perhaps
up to a third of its GDP, now still would, I believe, in the
coming days will find a significant political majority to
implement this deal--and therefore stay in the euro area--I
don't think should be easily dismissed.
Mr. Rohrabacher. All right.
Mr. Meeks, you may proceed.
Mr. Meeks. Thank you.
Let me make sure that--and I think I got it right. But I
think that, Dr. McCormick, is it important for the EU to stay
together?
Mr. McCormick. Yes.
Mr. Meeks. Dr. Walt.
Mr. Walt. It would be better for us if it did and better
for Europe if it did.
Mr. Meeks. So it is better for us and Europe?
Mr. Walt. Yes.
Mr. Meeks. So it is better for everyone?
Mr. Kirkegaard. Absolutely better for everyone.
Mr. Meeks. So, now let's just talk about dealing with this
Greek problem for a second because some say to deal with the
problem, if you listen to the Greek Prime Minister, he came in
on a mandate of no austerity. And yet, in this agreement, there
is austerity. Do you see any debt relief in this agreement?
Because some will say--and I will go to--I guess, you are the
economist here--that if Greece is ever going to get back on its
feet, it is not just austerity. It is austerity with debt
relief so that it can begin to grow again. Can you talk a
little bit about that?
Mr. Kirkegaard. Yeah. I mean, there is no doubt that you
need a combination of the two. You need some degree of fiscal
rectitude because Greece is a country that historically has run
very large and persistent government deficits. But given where
the debt is now, you clearly also need debt relief.
And I actually do believe that there is very credible
prospects for debt relief included in this agreement because
what it does is that it basically tells the Greeks that if you
agree to a new bailout program, following the first successful
review of that program, we can have a discussion of debt
relief, meaning that the debt relief comes only as a reward, so
to speak, for good behavior.
And then the other issue is that we need to be clear about
what debt relief entails. I don't believe you will see an
actual haircut on the debt, but I certainly do believe that you
will see the Greek Government debt being restructured in a way
so that they may not have to pay any interest or amortization
for 30 years. The maturity of the debt may well be extended to
60 years or beyond that. So the actual cost of the debt--which
incidentally is already below the levels of interest paid by
the U.S. Federal Government, despite much higher gross debt
levels--becomes more or less a non-issue, in my opinion, for
the ability of the Greek economy to grow.
And then, finally, I should note that--and this is where
the U.S. influence will be very important--part of the reason
that the European Union will be compelled--or sorry the euro
area will be compelled to do this probably by the first quarter
of next year is that they are seeking IMF cofinancing, about
one-third financing for this program starting March next year.
That can only happen, in my opinion, that should only happen if
they by that time have done a restructuring of the Greek debt.
Mr. Meeks. Anybody want to add anything or take away
anything from that?
Mr. Walt. I will just say, I am not as optimistic for
several reasons. First of all, Greece's debt is now in excess
of $300 billion or so. This new relief package is about $80
billion, I believe, somewhere along there. But most of that
money is simply going to get recycled back to European
financial institutions of one kind or another. It is not a
stimulus program for Greece; it just allows them to keep
servicing their loan. So it does nothing by itself to actually
get the Greek economy to be more productive at all.
There is no debt relief in this package yet. It is promised
out there. And what the Europeans are now asking Greece to do
is suffer a little bit more, in fact, suffer a lot more with
the prospect that then things will improve at some point down
the road.
What I am, I guess, still baffled by is if the Greek reform
was so easy, why hasn't it happened already? It has been, you
know, 5 or 6 years where they have had multiple opportunities.
It is clearly politically extremely difficult for the Greeks to
do this. And to expect them to do it having inflicted even more
pain on them, I think we are as likely to see essentially
sharper political divisions within Greece, as opposed to
suddenly all linking arms and beginning a serious reform
program.
So, again, I hope this package works, but I am not
confident that it will.
Mr. McCormick. One line of thought that is not often
explored and discussed in the Greek debt crisis is the
responsibility that Greece itself holds for getting itself into
this current mess. Greece should never have been allowed into
the U.N. in the first place. That was a mistake because it
didn't meet the terms of membership.
It had mismanaged its economy before it was allowed into
the euro. Being allowed into the euro just made matters worse
because it was allowed to borrow money at a lower interest rate
than there have been before. It then went off on a debt-laden
spending spree which made all of its bad previous habits even
worse.
So my optimism about Greece is based on the fact that I
think the Greek people and the Greek Government are going to
get to the point where they realize they have to clean house;
they have to manage their economy effectively, as effectively
as some of their other European neighbors have. And whatever
the terms of the bailout or the debt relief or the terms of
some of these deals that are done, I think what we are seeing
here is a very hard learning experience for the Greek people
about how to manage a modern economy.
And I am a bit nervous about saying this because I am not
sure it is a very popular idea, but I think the European Union
and the eurozone--and the Germans--attract more criticism than
I think they deserve. And I think we have to look at what the
Greeks have done to bring this upon themselves.
Mr. Meeks. I am out of time.
Mr. Rohrabacher. All right.
Colonel Cook.
Mr. Cook. Thank you, Mr. Chairman.
I talked in my opening statement that I was going to ask
you about the Russian situation and the fact that, not just in
terms of the EU but NATO having that economic olive branch out
there: Hey, we got the money. We can help you out.
Can you comment on that possibility of--somebody
mentioned--I think the doctor talked about that in Hungary--and
you can include that in other countries, that--because their
economic situation might be interested in that handout.
Mr. Walt. I think, given the conflict we have with Russia
now over Ukraine, Russia has quite cleverly and understandably
used its various assets, including offers of money to try and
diminish European unity and to some degree NATO unity to
prevent extensions of economic sanctions to try and weaken
Western resolve. And as I indicated in my initial statement,
one of the problems here is that there isn't really a consensus
in Europe today on just how serious the Russian threat really
is.
I think everyone acknowledges that it is a problem. There
is no real support for Russia's behavior in Ukraine. But
whether it is a new cold war or whether it is the return of the
battle of Soviet Union, there is certainly no agreement there.
And I think most Europeans actually don't see it as nearly as
serious a problem. Perhaps the Baltic states do but hardly
anybody else in Europe.
So I think you will see Russia attempt to dangle various
blandishments in front of some European countries, including
Greece, and that is a way they can exploit it. I don't think it
is going to, you know, cause the EU to dissolve tomorrow, but
it is an additional source of centrifugal force within the
union as a whole.
Mr. Kirkegaard. I guess I would be slightly less optimistic
or pessimistic, depending on--but I don't basically think that
Russia has much to offer Greece in the real world. The reality
is that Greece needs so much money, that Vladimir Putin doesn't
have that.
Just to give you an example, if there had been no agreement
over this weekend, the European Central Bank would have pulled
out 89 billion euros from the Greek banking system, and it
would probably, in fact, need considerably more than that to
keep these banks afloat. And Vladimir Putin, in my opinion,
doesn't have that much money in liquid reserves. And even if he
did, I am highly skeptical that he would be willing to put that
much cash into Greece.
So Vladimir Putin, therefore, in terms of, shall we say,
offering a material difference to the acute economic crisis
that Greeks face right now, really doesn't have much to offer.
And I think you can see that, in fact, that at the end of the
day when the negotiations in the European Union about extending
the current sanctions on Russia was up for debate where
unanimity is required, the Greek Government basically posed no
particular objection.
Mr. Cook. Thank you.
Dr. McCormick.
Mr. McCormick. You know, in my opening statement, I said
one of the great benefits or achievements of the European Union
was the expansion of free markets and democracy, both within
Europe and outside Europe. Greece is one of those cases where
it joined the European Union after having spent some time under
military government with its democratic credentials in
question.
I think the benefits that Greece has seen over the last 30,
40 years, have been part of the European economic community,
European Union. It would be very difficult to imagine anything
that Russia or specifically Putin could offer that would be
better than what Greece has now, even in spite of the fact the
Greeks are going through terrible times at the moment. The
political and economic benefits that have been part of this
enormous partnership are so much greater than having any kind
of association with something like Putin's Russia.
Mr. Cook. Thank you.
I am going to a conference, a NATO conference this week,
and we will see whether they have the same optimism.
I want to talk about the borders and terrorism. And if X
amount of terrorists get in one country, particularly one that
is easier to get into, that they all share that the same logo
of being able to enter another country, is the EU going to
strengthen that, or are they going to continue that policy as a
whole, particularly in light of increased terrorism? And I am
looking at ISIS and some of the other elements.
Mr. Walt. As I mentioned, one of the concerns I have is the
degree to which external events, events around the European
continent are beginning to impinge upon Europe in new ways, and
you have just referred to them.
The so-called Schengen principles, which allow internal
migration without real restriction, without border controls in
much of the European Union, is a major achievement and has been
an economic benefit but, I also think, has contributed to a
general sense of being a European community. And there have
been calls in recent months for tightening those various
restrictions, to reimposing some of these border controls to
deal precisely with this problem.
I personally think that would be a mistake because I don't
believe the problem that Europe faces or the threat Europe
faces from various forms of extremism is so great as to warrant
that decision. But politics is not always rational, and I can
easily see that if there were one or two more incidents in
Europe, even if they were of a rather small scale, you might
see more momentum up to start reimposing some of the border
controls. And that would be a step back from one of the
achievements that the community had made in recent years.
Mr. Cook. Thank you.
I yield back.
Mr. Rohrabacher. Mr. Sires.
Mr. Sires. Thank you, Mr. Chairman.
You know, the more I read and the more I try to learn about
Greece, it is just mind boggling. And then you have all these
rumors out there that I don't know what is true or what is not
true, about the percentage of tax collection that they have,
about supposedly it is cheaper to take a cab across Greece than
to take a train because the trains, the way they are run, the
transit system, I mean, it is just--and then you talk to other
people, and they tell you that the underground economy in
Greece is thriving.
Now, is that accurate, the underground economy?
Mr. Kirkegaard. Yes, that would generally be, in my
opinion, correct. It is both very large and has historically
been very large, and it has certainly grown a lot bigger in the
last 5 years.
Mr. Sires. And this is just a reason to avoid paying taxes?
Mr. Kirkegaard. Yeah, this is to avoid paying taxes but
also to avoid being subject to a whole other host, a range of
social and labor market regulations.
Mr. Sires. Would you agree with that?
Mr. McCormick. The most recent figure I saw for 2009, the
OECD said that approximately 25 percent of the GDP of Greece
was based on the gray market. By nature, the gray market and
the black market are very difficult to measure, but the OECD,
25 percent.
Mr. Sires. So but this is something that has been going on
in Greece for a very long time. So this is like the old
expression, you know: You have an old dog; how can you teach
him new tricks? You know, how are you going to do that?
Mr. McCormick. In brief, I think the costs of reorganizing
their economy in a sensible, modern fashion--sorry--the
benefits are much greater than the costs of continuing to do
what they are doing now. They can see the costs now. The
terrible things that the Greeks are having to go through, the
costs they are having to pay for years of this kind of activity
are abundantly clear to most Greek people.
Mr. Sires. Do you agree with that?
Mr. Kirkegaard. Yes, I would absolutely agree with that.
And I think the way to look at Greece is actually not through
the lenses of thinking of it as just in an economic crisis. I
think a closer comparison is actually sort of 1989, the
collapse of communism because what has happened in Greece in
the last number of years is essentially that the existing
economic and political system, I would argue, that was put in
place after the end of the military regime in the 1970s has,
for all respective purposes, collapsed.
So what you need is actually an extensive amount of
fundamental capacity building and nation building in order for
this country to reemerge, quite frankly, as a modern,
functioning market economy.
Mr. Walt. I would just add that when I hear the word
``nation building,'' it always makes me nervous because I think
we now know that that is a very difficult, time-consuming, and
unpredictable enterprise. And if you consider the scale of
reform that has to take place in Greece for this to work--we
have to have a complete reform of their tax system; complete
deregulation of many of their industries, revision of the
pension system; and this all has to happen in a period where
there is no slack, right, where the economy has essentially
been in free fall for quite some time now--you need both
political will to pull that off; you need lots of competent
people to pull that off. And we are expecting Greece to do that
in very rapid order, right.
This is a very large demand that essentially the rest of
the European Union is making. It may be necessary. It may be
the right prescription, but you can't be confident that they
will pull it off, even if they try hard.
Mr. Sires. You know, as I listen to you, to me, why would I
throw money in there? Why would I even insist in trying to----
Mr. Walt. Well, I think as----
Mr. Sires. I know what you said, that it is important and
all that, but they don't seem capable of doing it. I mean,
Portugal and Ireland, they got some money, and they seem to be
getting their act straightened out pretty much. But I don't see
anything going on in Greece where that gives me the confidence,
if I were a European country, to go in there and say: Well, you
know, let's throw in another $95 billion in the hope that in
the next 50 years, that it will get better.
Mr. McCormick. It does seem like throwing good money after
bad. But I guess my question would be: What is the alternative?
Mr. Sires. Let them go on their own.
I mean, why----
Mr. McCormick. Then you are going to have more disruption
right on the border of the European Union. You are going to
have another unstable country causing difficulties for
everybody right on the border. Surely, it is best to invest and
work with the Greek Government because, remember, you know, the
Greek Government is meeting with its 27 peers all the time at
meetings. They are talking about common issues. So to be
brought into this family of negotiation, this new style of
negotiation, surely better to bring them into the room and talk
to them than to throw them out and say, Good luck.
Mr. Kirkegaard. There is a significant degree of political
self-preservation in this as well because if you do not give
Greece a new third bailout, then the Greek Government will
default on all the existing loans that the eurozone has made to
them, which is 240 billion euros or something like that, which
means that the Germans and others would have to admit to their
own voters that this was actually not a loan that at some point
in the future might be repaid but a gift.
Mr. Sires. I mean, Greece existed before the eurozone,
right?
Mr. Kirkegaard. Correct.
Mr. Walt. And as I think one thing we would all agree on
this panel is it was a mistake to let Greece into the eurozone
in the first place. It may even have been a mistake to create
the euro given it lacked the political institutions to actually
make a common currency work.
The disagreement you are hearing a little bit on the panel
is, of course, replicated inside Europe itself, from those who
think it would actually be bettor for rest of the EU to allow
Greece to Grexit, to leave the common currency, despite all of
the consequences that have just been referred to and those who
think that those consequences could be so severe that it has to
be avoided. That has essentially been the disagreement between
France and Germany over the past few months.
Mr. Sires. Thank you very much.
Thank you, Mr. Chairman, for the courtesy.
Mr. Rohrabacher. Sort of like those people who think it
might have been a good idea to let Puerto Rico be independent.
Mr. Brooks.
Mr. Brooks. Thank you, Mr. Chairman.
I have been pondering American history with Europe while we
have been listening to your testimony and Q&A back and forth.
It seems, after World War II, for 47 years when there was not a
European community, our relationship with Europe was good. Then
we had the EU created, 7 years' worth of phase-in, and the euro
currency comes into play, roughly 1999, and now we have had 16
years thereafter, and our relationship has been good. So it
seems to me, either way, America's relationship with Europe has
done well with and without the euro.
So, to me, the European Union issue is more of a focal
point for the European nations, and they should be the deciders
of their fate. And I am curious about a comment that was made
that the ``European Union is better for the USA.''
And my question is, why? What can you share with us that
would help convince me that it is in America's best interest to
have a European Union as opposed to not having one in as much
as our relationship with Europe was good in both contexts?
Mr. Walt. I think I said that so I will take a swing at it.
First of all, the EU, whatever its current problems may be, is
a major economic block in the world and a major trading partner
for the United States.
Mr. Brooks. Was that good for us or bad for us if they
collectively have more strength as they negotiate trade
agreements with the United States?
Mr. Walt. But a prosperous European economy and a European
economy that is growing is one that American businesses can
send and sell more products to and American investors can send
their money and make money investing in Europe.
Mr. Brooks. Do you have any data that shows that Europe was
growing slower before the EU as opposed to after the EU?
Mr. Walt. It has grown at different--in the 1990s, it
actually grew quite well, as did we. It has had problems since
2008 as we have. We have recovered more quickly than Europe
has.
Mr. Brooks. I know this is little bit outside the framework
of this hearing, but do you have any data that backs that up--
--
Mr. Walt. I don't have----
Mr. Brooks. The history of that--well, we are talking since
1945, so that would be somewhere in the neighborhood of 70
years.
Mr. Walt. The lowering of trade barriers throughout Europe,
which was part of the original European project, clearly helped
stimulate economic recovery throughout the 1950s, 1960s, so it
was very beneficial for Europe to essentially allow free trade
within Europe and allow their economies to grow.
Second thing is that, as has been said here, the European
Union has been a source of stability within Europe, and the
community was also very instrumental in helping the transition
from communism, and that is good for the United States because
it has been, until relatively recently, a part of the world
where we didn't have to worry as much post the breakup of the
Soviet Union.
There are other parts of the world that we have been much
more concerned with, and if Europe began to spiral back toward
real national rivalries, American policymakers would have to
spend more time worrying about that and less worrying about
other problems.
And then, third, I would say that, you know, Europe has
been a strategic partner of ours for a long time. And if Europe
is internally preoccupied and economically weaker and
increasingly divided, then when we try to deal with other
strategic problems in the world, we are going to find we are
going to get even less help from Europe than we do now.
Mr. Brooks. One of the important aspects of our
relationship with Europe is our military alliance, particularly
NATO, and it seems that under the European Union, defense
spending by the collective of European nations has declined, as
opposed to when they weren't a part of the European Union, thus
making them less able to help America in troubled spots around
the globe. I just mention that as a concern of mine.
I want to focus more in my remaining time on the Greek
bailout impact on America. We have had now our third bailout.
Our first one was in 2010, second one was in 2012, and now we
are 2015, and there is some hope that maybe this one will stick
when the two prior ones did not.
What is the monetary exposure to the United States of these
bailouts failing?
Mr. Kirkegaard. I guess I can take a stab at that. The
direct exposure to the United States to the Greek bailouts
comes through the IMF and the approximately 17 percent
ownership or shareholding that the U.S. Has.
Mr. Brooks. 17.69 percent.
Mr. Kirkegaard. And that--given currently that exposure is
about 25--I believe $25 billion, so 17 percent of 16 to 17
percent of that.
However, as was seen in the last--in the agreement this
weekend, actually, the Europeans made it very explicit that
they are going to pay--essentially give Greece the money so
that they can repay the IMF, which means that, in my opinion--
--
Mr. Brooks. Very quickly, in my remaining few seconds, is
the IMF involved in the third bailout?
Mr. Kirkegaard. I believe they will be, yes.
Mr. Brooks. That you will increase our exposure to the
extent the IMF is supplying funds for the third bailout?
Mr. Kirkegaard. It will not necessarily increase it because
existing loans will be repaid simultaneously so there----
Mr. Brooks. Do you know the net?
Mr. Kirkegaard. Sorry?
Mr. Brooks. Do you know the net, is it going to go up or
down because we have got the old bailout numbers and now we
have got the new bailout numbers and payoffs of some of the
old, but we have got all the new, is it going to be a net up or
down?
Mr. Kirkegaard. I don't know what the requests from the
Europeans will be. It also depends on the size of Greek
privatization proceeds, et cetera. But I would say that for the
next 3 to 4 years, probably it will be about even, after which
it will begin to decline quite rapidly.
Mr. Brooks. Mr. Chairman, my time is expired. Thank you for
the indulgence and the extra 45 seconds.
Mr. Rohrabacher. So we have the--so the United States will
be paying for the some of the bailout because we are part of
the International Monetary Fund. No? What is it?
Mr. Brooks. Yeah, we are; 17.69 percent is our quota
ownership of the International Monetary Fund. So whatever the
assets are in the IMF and their obligations to Greece, since we
are one of the owners, there is an impact on the United States.
Mr. Rohrabacher. So of this--so what is your guess, then,
of the--if you say that there is going to be a certain amount
of bailout, and how much of that is the United States going to
end up paying?
Mr. Kirkegaard. Well, the range that was mentioned in
this----
Mr. Rohrabacher. Through this, you know----
Mr. Kirkegaard. The range that was mentioned of the
agreement over the weekend was 60--or 82 to 86 billion euros,
which is about 90--a couple of--just over $90 billion.
Mr. Rohrabacher. Right. And so----
Mr. Kirkegaard. And then the--however, subtracted from that
will be whatever the proceeds--a certain number of Greek
Government privatization proceeds from privatizing state-owned
enterprises, et cetera. Now, how much that will be is unknown,
but the target is 50. I certainly don't believe they would
reach 50, but let's say it is 20. That takes you down to sort
of in the mid 70s or $70 billion. So one-third of that would be
for the IMF to cover.
Mr. Rohrabacher. And how much of that of us? So one-third
of that is--what--20 billion, $25 billion?
Mr. Kirkegaard. Yeah, give and take. It will be--let's say
it is 22, and then 16 percent of the 22.
Mr. Rohrabacher. 16 percent of it. Now, what does that
leave? That leaves us about $5 billion just about?
Mr. Kirkegaard. Yeah, something like that.
Mr. Rohrabacher. Okay.
Mr. Kirkegaard. Give or take.
Mr. Rohrabacher. So isn't that wonderful, we are getting to
bail out Greece and our friends over in Europe for $5 billion?
Isn't that wonderful? We can't find any way to use that money
anyway, just, you know----
Mr. Walt. It is important to recognize that if the bailout
deal were to work, then it is not a handout. It is a loan that
gets repaid. All right, so the question really is, do you think
that this is likely to turn Greece around, finally allow it to
begin to pay off its debts, lead to a restructuring of the
debt, and we all live happily ever after?
Mr. Rohrabacher. When you talk about this debt--excuse me,
and I am going to go to our last member of the panel here, but
what is--these banks. We are talking about we are bailing out
these--the European banks. These people are being bailed out,
said the banks are actually getting the money. Are these
privately held banks or are these banks that are owned by the
Government of France and England, and et cetera?
Mr. Kirkegaard. Well, in this instance, the current bailout
that is under discussion is actually not private banks that own
the debt. There was that issue back in 2010, where there were
clearly some European banks that benefitted from that. They
were mostly private banks in France and elsewhere.
But, clearly, the European government entered into this
process because they were afraid that otherwise they would have
to bail out these banks themselves and therefore make them, so
to speak, publically available.
Mr. Rohrabacher. So we are not bailing out any private--
this money for bailing out Greece does not include money that
is going to privately owned banks.
Mr. Kirkegaard. No. I mean, there are----
Mr. Rohrabacher. Is that right? The other gentleman, is
that true? Is that true?
Mr. Walt. I don't think that is entirely true. It depends
sort of what you mean by privately held banks. Some of this
money will help Greek banks that have no cash on hand at
present. It is why they----
Mr. Rohrabacher. It sort of have--makes it even worse,
doesn't it, as far as we are.
Ms. Gabbard.
Ms. Gabbard. Thank you. Thank you, Mr. Chairman.
Dr. Walt, just wanted to follow up on some of your previous
comments about being better for us in the U.S. If EU stays
together--EU stays together. If you could--if you could answer
the question in the opposite way of talking about how we can
measure what the impact on our economy would be if the EU
completely dissolves or if it ends up that the U.K. Ends up
exiting the EU, what kind of impact would that have for us?
Mr. Walt. In terms of purely in economic terms, I think
that that would be a blow to the eurozone and the EU in general
as an economic actor. I think it would lead to slower economic
growth within Europe, which is already relatively low, but
that, in turn, reduces economic opportunities for the United
States because if the euro--the EU is growing at \1/2\ percent
a year, then there are far fewer American firms for consulting.
There are far fewer Europeans who are going to be buying
American products.
So we would be better off if Europe had a rapidly
vigorously growing economy and a healthy demand for American
products.
Ms. Gabbard. Do we have any idea, with a little more
specificity, on what kind of impact that would be? Obviously,
you are saying there would be some loss here, but I am just
trying to look for a little bit more specifics.
Mr. Walt. Yeah, I can't give you a figure, sort of
macroeconomic estimate. I just don't have that, of what the
actual impact on the U.S. economy would be. But I know that
anything that hurts the European economy will also hurt the
United States, not perhaps as much, but it has a negative
effect on our economic prospects as well.
Ms. Gabbard. Okay.
Mr. McCormick. It is very difficult to put numbers on this,
but I mean, the United States now is dealing with one economic
block, so when the U.S. trades with the European Union,
negotiates with the European Union, trade negotiator, it is 1-
on-1. The European Union breaks up, it is 1-on-28. There are 28
separate sets of bilateral agreements the U.S. has to work out
with these countries.
Also, access to one big single market of 506 million
people, a U.S. corporation doing business in any one of those
28 countries has access to the entire market. If this breaks
down or splinters in some fashion, it adds that much more level
of complication in terms of dealing with these entities.
Ms. Gabbard. With regard to what Prime Minister Cameron has
before him, what do you assess he will be trying to renegotiate
with regard to Britain's commitment to the EU?
Mr. Kirkegaard. I mean, I can take it. I mean, what he
has--I mean, it is a little unclear precisely what he is asking
for at this moment from the EU authority, but what he has
mentioned is he would like to have Britain exempt from
something called the working time directive, which is
essentially a European regulation that says that you cannot
work more than 48 hours a week.
Excuse me. And then there are other specific types of EU
regulation or EU law that he would like the U.K. To be exempt
from. He may also, it is alleged, seek to have the EU exempt
from the sort of opening clause of the EU treaty, which talks
about an ever closer union, which of course, would be purely
symbolic politics. But, nonetheless, that of course is very
important in a referendum campaign.
Ms. Gabbard. Thank you.
Thank you, Mr. Chairman.
Mr. Rohrabacher. All right. We have a vote. So we are going
to have to go very quickly here. Again, I just want to confirm
this. So we are talking about, in this bailout, the Greek
bailout, that about $5 billion will be--Americans can be--about
$5 billion coming from our pockets.
I would like to again go back to who this money is going
to. It is going--the bailout--first of all, is it accurate to
say that the bankruptcy can be traced back to policies of the
Greek Government?
Mr. Kirkegaard. In my opinion, yes.
Mr. Walt. Yes.
Mr. Rohrabacher. Okay. So the Greek Government had policies
that put us in a spot where banks--now, the banks that will be
repaid now because they have been spending this money to keep
the Greeks afloat. These banks are--you are saying they are not
private banks; they are German banks, French banks and----
Mr. Kirkegaard. No, no. This is in 2010. Today, the people
that are going to be repaid are, in fact, among other things,
the IMF itself. It is also other official sector, the European
Union--sorry, the euro area, and then a relatively small amount
of total outstanding debt, about 20 percent of Greek debt is
still held by private investors.
Mr. Rohrabacher. Okay.
Mr. Kirkegaard. There is no direct, so to speak----
Mr. Rohrabacher. So the last bailout, we saw private banks
being--basically being given money bailed out, or excuse me.
The bailout with the Greeks, but they give it to the private
banks. Those private banks, are they profit-making
institutions, or are they government-related institutions?
Mr. Kirkegaard. They will be mainly profit-making
institutions.
Mr. Rohrabacher. So how much was the last bailout?
Mr. Kirkegaard. The--well, the original bail--I mean, the
total bailout so far is about 240 billion.
Mr. Rohrabacher. $240 billion. Of that $240 billion, how
much went do these private banks?
Mr. Kirkegaard. I think that that--I don't have a number
off the top of my head, but I would say, if you look at the
direct exposure that these banks had to the Greek debt that was
restructured, which should also be known that these banks
actually took, as all private debt holders did, a 50 percent
haircut on this debt in 2012.
Mr. Rohrabacher. Depends on if their haircut meant that
they are still making a profit or whether it means they are
going to eat into the resources. If a bank or if any other
private institution, at least in our society, it is supposed to
be, that if you take a risk, that is what you are--you are
making your money because you are taking a risk in giving your
money out. And if the Federal Government or if the European
Union just simply bails out anybody who is taking a risk and
makes up for it with public funds, I don't see why we are--why
are they they making a profit then on this stuff? You are
saying those banks didn't make a profit those years?
Mr. Kirkegaard. Well, I mean, I am saying that they are
profit-making private enterprises. Whether--I would say that
they definitely did not make a profit on the Greek debt
holdings because they were compelled to take a sizeable debt
restructuring, a 50-percent haircut back in 2012.
Mr. Rohrabacher. Well, I am wondering--I could see why a
lot of people would be very skeptical, regular working people,
people who own small businesses or whatever, would be very
skeptical in hearing about the transfer of all these billions
of dollars and a lot of it going and bailing out really very,
very wealthy people who control the banking system.
Mr. Meeks, you got one last----
Mr. Meeks. Well, just, you know--sorry. It seems as though,
from what I am hearing, that the risk to the United States, as
far as us, it is minimal, if anything. It is not substantial.
And the likelihood of us having to pay anything, especially
with the special fund that the Europeans have set up to make
sure the IMF is paid because the only exposure we would have is
through the IMF, and that seems to be backed up already by the
EU in this agreement saying that they are going to make sure
that the IMF is paid. So, therefore, that basically would leave
$0 that the United States is, you know, as far as being--is
that not correct?
Mr. Kirkegaard. Yes, I absolutely--it is very important for
me to emphasize that the IMF is the super senior creditor, and
I believe that there will always be a very firm political
commitment by the euro area to ensure that the IMF is paid
back, and therefore, the actual exposure to the U.S. is, as you
said, close to zero, effectively zero.
Mr. Rohrabacher. I remember when we bailed out Mexico, but
all the money----
Mr. Meeks. You had your time already.
Mr. Rohrabacher. But all the money went to American banks
that never actually left our shores at all.
Mr. Meeks. All I know is that what we had is a financial
crisis in the United States also in 2008, and what we had to do
was bail out our banks to keep our economy afloat. The banks
ultimately paid things back, so this is not something that is
unusual as far as, you know, dealing with the current economy.
It is something, you know, they are not doing any differently
than what we had to do.
We rebounded, and now we have got to get the reforms that
are necessary and is best for the cost. You know, when you look
at the EU as a whole for us, we are looking at what is in
America's best interest, we got to hope that, you know, we are
also doing what is in the Europeans' best interest, but I don't
think--I don't know if you--but if you are looking just for
what is America's best interest, it is for us to deal with
Europe as a whole.
For example, one of the next big issues that we have to
deal with in Congress is going to be another trade agreement
called TTIP, and it would be best for the United States if we
were negotiating that deal, that we are doing it with the EU as
a whole because that then gives a greater market for our
businesses to try to make sure that we are getting the best
deal to create jobs here, et cetera. Is that not correct?
Mr. Walt. That is correct.
Mr. Kirkegaard. Correct.
Mr. Meeks. Thank you.
Mr. Rohrabacher. We have skeptics over here. I am one of
them. All right. Thank you all very much.
Mr. Meeks, thank you. Thank you to our witnesses. We have a
vote on, so we are going to have to run. God bless you. Thank
you.
[Whereupon, at 3:20 p.m., the subcommittee was adjourned.]
A P P E N D I X
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