that in the long run it will end up being 26. i feel very confident about that, and i would just say you know, if you think about why that is, poland is a member of the group that we mentioned in the beginning. so this is very much not a, you know, eu-15. it's a very, a group with everyone in, basically, and you know, once vasilav klaus is out in the czech republic, who knows what the czech republic will do and we're in a situation with 26 visas vis-a-vis one. unfortunately the politics i think of the uk is almost certain to keep it out of these deep sovereign issues. how that is going to be squared away with, vis-a-vis particularly the financial markets and the role of the city of london is a really good

question. i mean, i guess i have some faith in the fact that at the end of the day, as it was actually came out a couple of weeks ago in a euro skeptic think tank open europe, had a report on, you know, what should the uk do in this, and they actually came out and they said, and these are people who, you know, your skeptics saying at the end of the day, the uk had more to gain from being inside than outside, so i think they will remain a member of the eu, but whether or not it will be more sort of a special relationship than a full member, i think that's very much up to deba debate, but they will not be part of the core in the long run. >> the cameron government has been quite concerned about their ability to have influence over regulations on financial services, obviously because of the city of london. >> sure. >> do you think even though that's not a eurozone competency, it's a single market

of decisions made at the whole of the eu, rather than the eurozone level. but do you think they will be able to protect, if i can use that word, their interests, financial regulations? >> certainly if they do it for the narrow party political reasons that david cameron close to stay outside the fiscal compact, they will fail. i think it was a very stupid thing he did, because he basically chose to have a couple of good headlines in "the daily mail" and the other tabloids rather than think about decisions about financial services in the internal market is already taken by a qualified majority, which means that david cameron, in order to protect these things, actually needs allies in the european union already, and by staying out of the fiscal compact, that's not a way to gain -- get a lot of friends, so he made a strategic mistake for short term gains.

will they ultimately succeed? i think they will, because i think within -- there will be allies for the traditional open market model that the uk is associated with, free trade, et cetera, and also because the uk is not associated with light touch financial regulation anymore, so i think there's room. >> let me -- go ahead, comments from you both and then go back to the audience. >> let me ask a question of you, what is the principal dispute between london and brussels over the financial regulation? >> me? >> or anybody. >> financial transaction texts? >> no, no, no, no. >> sure. >> they don't like that. >> that was the council sort of -- >> they don't like that and we

shouldn't like that either. >> what do you think it is? >> i think i know what it is. >> okay. >> we had joseph ackerman address this. >> yes. >> so i feel, i'm quoting him, he's the expert, right. the issue probably you all think that the issue is that the brits want to have less regulation than brussels, and if you would think that, you would be wrong, what the brits want is higher capital standards for british banks which the europeans don't want because they want british banks to do more lending in europe. of course the british taxpayer has to pick up the tab, if something goes wrong, so there's a tug-of-war, a little subsidy going on here argument but it's very counter intuitive and nobody in america knows this because the press doesn't report it but i'm just going to repeat, europe -- england wants you could say tighter regulation. i'm not sure as a regulatory lawyer i would say higher capital standards mean tighter

regulation. higher capital standards meaning you don't have to do any other regulation but england wants higher capital standards like we have over here, the continent doesn't want to do that, and i'm going into some length on this because the regulatory details really matter and they are also really boring. >> ulrike? thank you for that. >> i want to drop a little bit of vinegar into the wine of your 27. i would rather argue if push comes to shove and we will need a moment of what i call an institutional game change, right, in which we refix the institutional nature of the system in a way that we can probably not go with unanimity there. >> right. >> somebody in america told me rhode island didn't do the hamily tonian moment and only did three years. we will never wait for a danish or irish yes or no or whatever, so that game change cannot come at british conditions. i think that's the point, right,

and we gave them a first clap in december where we said we will not always wait for you guys, right? that does not say nobody wants to have the uk on board. it's an important country, city of london and so son and so forth. when push comes to shove my argument would be the german government seems to be going more 17 at the detriment of the eu 27 with the hope those who want to join come but at the conditions of the eu 17, and the poles will do that and the uk can do that if it wants. >> thank you. i saw a question over here so can we get a mike? >> thank you, fran. i'm scott harris, member of the atlantic council but until recently i was running the european office of lockheed martin for the last ten years, including when ambassador gray was there and we had several

pretty interesting adventures together. i want to thank the panel for an interesting discussion, but i have a concern that i'd also like you to think about addressing and we have the institutional discussions about mutualization and building deeper and treaty changes and things like that. we assumed that the governments of europe can actually do what they say they'll do, and i'm concerned that especially the european governments are going to be forced to and will sign up to things that they actually can't implement. can the greeks really reform the state sector and collect taxes? can the italians reform the labor market as mentioned and can they get the regional governments to not run deficits? in other words there are political problems that are very deep and cannot be solved by a dictation from brussels. do you share that concern at all? >> i think in many european

discussions this has come down to are the germans pushing everyone to become germany, to be blunt about it, and whether some of the long-term constitutional factors in many of these other countries can change. ulrike, what do you think? is this something that -- how many room for diversity will there be in these, in this post fiscal compact in europe? >> i'm with you that the inertia on the ground is enormous and if you look closer at, say germany, for instance, we also are now having the lender waking up to all of these greek rescue umbrellas. for instance, lehman is indebted as high as the greek but van vertenberg is not. there are huge inertia here at work and same in spain, same in italy, not italy itself.

i give you another point which is my biggest problem how we make this work, transnational democracy, it's the language. if you want to take crucial decisions on how do you spend your money for and we want to take this together in a collective deliberation process, and you don't speak the language, it's not so easy, right, and this is why we're heating up the press, busy germans versus lazy greeks instead of discussing who pays for the crisis, you could see sort of different policy schemes here with the french socialists solidarizing with the greek workers rather than france versus greek or germany versus greek discussion. you understand my point, so i don't know. i think the reality is to be a little bit reality check here, that if you look at elections and you look at populism in europe, we have something like a

37% divide in most of the european countries and why i mean by 37, to divide, in terms of a populism or so, you can measure that you have an average populism, late term populism of something like 30% in the netherlands and france, left and right pull together, and that is obviously most often the regional pressure and goes against the sort of more europe argument in the electoral constraints, so that is one point. for the rest, that's more of an economic argument, how much diversity we can allow in an aggregated economy and i hope we can make this discussion because if we win this discussion, we have won the future. what i mean by here is not all germany is rich. germany is really poor. 40% to 50%, 60% unemployed regions, right, but still we have a solidarity concept here and we don't process that way

and don't compare trade to export figures between two states. if we could shift the system as understanding the euro land as one aggregated economy and do fiscal transfer from wealthier regions to less wealthier regions rather than doing it also in the negotiation scheme, german money to greek money fiscal transfer, then i think we would have won the intellectual game change. i'm not saying we're there but i think we're preparing the ground that it's wealthier to non-wealthier regions and at the moment i think we will be able to recognize that not everybody is equal in the eu, that we need to accept poor and richer regions, that the periphery cannot perform as germany, that you cannot build industries on the greek islands like you have in dusendorf, germany, but we are still once and united argument can fly. that's the work we will need to

achieve and it's a big work. it's a big work. >> boyden, did you want to -- >> just -- i don't know, my daughter first reporting through the european voice, used to say is if we didn't catch a greek bureaucrat or citizen before noon it was too late, you couldn't reach them in the afternoon. she never had trouble reaching anybody in germany -- i'm sorry, that's personal. just let me just read you just a couple of figures from jaffe's article. throughout the decade of the euro, the germany's unit labor costs not taking into account east germany was 7%, it rose only by 7%. in italy it was 30%, in spain it was 35%, and in greece it was 42% unit labor costs. that's almost where the problem begins and ends, and so?

>> jacob, how much diversity can we get under the fiscal compact and is this a transfer union we're talking about? >> i think eventually it will have to -- will you get there but i think there is a very important distinction that i would make, which is, and whatever the european fiscal union would look like will be very different from that of the united states because the euro area in almost any conceivable shape or form that i can conceive of, and i'm very optimistic, remember, that will not have a sizeable federal budget like in the united states and the reason is actually quite simple, it has to do with people's self-identities, because the fact that europeans continue to self-identify as french, germans, belgians -- maybe not belgians actually -- [ laughter ] but the point is that you will only accept to be taxed at the

level in which you self-identify, which means ironically and i always like to make this point that when europeans -- when you say that europeans are much more willing to pay taxes than the united states, than americans, that's true, but not at the continental level. the willingness of americans, and this follows of boyden's argument that actually the u.s. is the old country here, the willingness of americans to pay federal income tax is much higher than the willingness of europeans to pay taxes to brussels because that willingness is very close to zero. so what it means in the long run is particularly also keeping in mind that the public sectors in europe are larger than in the united states that the overwhelming amount of public spending is going to remain at the state level, much more so than here in the united states, where the predominant taxing power of course resides with the federal government, that then either spends it directly in the

form of benefits or gives it in grats grants to states. that system is very different, the money is raised and spent at the regional member state level, and then i will say that you will have some sort of, that's why there is this focus on fiscal rules, basically how you spend the money that you, yourself, raised at member state level, so i think there's quite a lot of room for diversity within this system, because it's necessary, because there's not the possibility of a large, you know, 10%, 15%, 20% of gdp federal budget does not in my opinion exist in europe. >> so i'm going to ask the questioners and the panelists now to be a little bit briefer because we're coming down to the end, and we have several questions still out there. so this gentleman right here in the front and the next is way in

the back there. >> thank you. i'm ben carliner from the economic strategy institute, and thanks very much for a very interesting discussion. i have a question, though, i think that there's a very compelling description of this game being a high stakes game of chicken over and over in the european. given the stakes of the sovereign issues involved with the banking union and fiscal union it's not hard to understand that, but given the time frame that people are talking about in terms of setting up a banking union, setting up a fiscal union, my question is, how credible is it that the ecb can keep the pressure on? because it seems like the ecb is the key institution that is keeping the pressure on sovereign governments here, by not stepping in and being a lender of last resort, not doing more quantitative easing, and if, for example, imagine a scenario where french sovereign bond yields start to rise because the markets get a little bit worried. it's hard to conceive that the

french would accept that, and they wouldn't go and say listen, you've got to do something at the ecb and how much of an esprit de corps is there among the members of the ecb and can they maintain the pressure? >> and also how long longer can analysts like ourselves continue be wondering if this is the week that the crisis will be solved. >> well, as i said earlier, i believe the actual fire power of the european central bank is quite a lot higher than what is generally perceived by the markets, and with respect to what they will do in the case of a spike in french bond yields, i think it would be very -- then we would go back to the issue of conditionality, because you wouldn't, i believe, have a situation where -- probably recall what happened in august last year, and when the issue was whether or not trichet and

draghi would buy spanish italian debt. they sent these not so secret letters to skutero and berlusconi, we'd like to buy your bonds but this is the list of stuff you would have to do. the same thing would happen in the case of france where essentially they would be met with some degree of explicit, implicit conditionality in terms of whether it's labor market reforms or whatever in return for those types of prchds, urcho it would be in my opinion a repetition of the games we've already seen. more importantly and this also goes to the market psychology, what you need to have is the market circumstances in which a convergence trade is once again feasible, and what that entails is, because when you have that, then markets are all of a sudden going to buy these bonds because they think they're going to

converge, they're going to fall, and so and that again, is contingent upon the need to have, convince the markets that the center will actually hold, because once that happens, then the markets will actually help you in the way that they "helped" the european integration much too much in the run-up, you know, in the early years of the european or the economic and monetary union where of course there was exc s excessive convergence because it basically led to complacently at the policy level, so the point again, is you got to reach this sort of threshold, and then the sort of divergence will actually in my opinion become converged and i think the ecb is perfectly capable of that. >> let me go way to the back of the room, and then we're going to lump together another question here. oh, yes, okay, i get the last

question on there. go ahead. sflim' randy henning at american university and the peterson institute. i wanted to thank the four of you for a really interesting session this morning and follow up up on ulrike's points about the transformation of european european politics as we move forward, in particular, i wanted to ask you a little bit about the development of european political movements because i think these are going to be an important compliment to the kind of institutional transformation that you have discussed and the fine point on it, i'd like to ask you because i think you look more closely at this than most of us have, i'd like to ask you about the cooperation between the french socialist party and the german spd. i had thought from my standpoint, the challenge for them has been to come to

agreement on what to ask as the quid pro quo for moving forward with the compact and the stability treaty. it doesn't seem to me that they've come to much of an agreement on this. i've been disappointed that the spd has gravitated towards the financial tax which doesn't move fiscal and banking union forward in my view. so i wanted to ask you about the basic fundamentals between the two parties and negotiations between them over the past few weeks. thank you. >> let me quickly get on my mike over here. final will be down in the front. >> i wanted to ask whether alice believed that they think the markets share the implicit concern i think and scott harris has a very good question, about the distance these countries can go in reform. even in some of the core

countries, germany and austria, the sector is very sticky. if that is the case and markets are asking themselves that same question, let's remember we had a close call on greece. doesn't that argue for something very big quickly along the line say of a redemption fund, which worked well to get us from to the articles of the confederation? >> final question. >> thank you. european union litigation to the united states. do you have a situation where the main valuable is the transfer. now, i wonder whether this should be better represent ed because the european union is based on the -- also, and this

is based on some misperception, for instance, the issue that smaller countries benefit more from e.u. than larger companies. i think this is the misperception. large companies benefit us as much the others. the point that germany pays and the others don't. the issue that unit labor costs, the last three years or three years have shown that they converted. don't you think that clearly the perception is related to the elections to the democratic pors, but in the end agreed that leaders realized of the nature of the gain and in the end, actually act and find the solutions that are proper. >> do you want to finish with

that and then we'll go to -- >> okay, very quickly on that. no, i would love to share that. i don't think there's any doubt that doing this game as an in state description, it's a plus something. when i talk about a noncooperative gain, that again is a gain theoretical idea that you have to have this game of chicken for it unfolds. so that's more of a process element. and i also agree with what you said that these diverging neighbor costs and unit labor costs, that was referred to earlier, well, they are rapidly converging and we should also be careful not to have too much of a unit labor cost fetish because they do not actually represent

actual export performance. >> do you want to comment on the socialist? >> which is a beautiful cathedral and was under construction for 600 years, but it's pretty beautiful and the european union is like this. in a way, it will never be finished and when it's finished, they will start at another angle to do construction. i think this is to be understood. the crisis is in a way over. it has left us with craters of construction work and this is now taking on. it's political construction work. economic construction work and therefore, things sort of discretion when will it be over is no longer the question. i think the commitment from the

german government is committed. to do a very point of the crisis, at each step of the crisis, the very necessary to pr vent the euro from collapsing and i think markets have understood that. and what that is in a given moment, we will see, and they will fix the details. if it's three weeks later, the it's the redemption fund, but then you get little condition and so that's how i see it. we already in a big architecture thing here. to be more precisely on the -- i think there's another misunderstanding here, which is that the german is more german than socialist. yep? i wrote a paper in which i called the long shadows of -- i tried to match economic thinking

of german parties with respect to mainstream international thinking. what you can see in the paper, even if you go to departed german democrats, they would not be on a french argument. they would think stability is it. that you don't do -- so, of course, it was in a way in recent weeks because i want wanted to show solidarity, so didn't want to go for a vote on the fiscal compact. it wanted to renegotiate. so she needed the vote of the -- and wanted to do along the favor and renegotiate at some point, which did not happen. but it makes you understand that the german is and that's also what i want to give you.

we have elections next year. i've been so many times, okay, what will change if election in germany. the answer is it will not change much. even with the coalition, which i don't think is likely, you won't see game changes in the german mind set of how this crisis is to be solved and we will be hearing the same messages of stability, structural reforms, no debt finance grows. and but here's the thing. the moment the espadilla has been talking very closely and discussions started again since two years and they did the the work not only in economic politics, they had working groups. this is what europe was about tomorrow. more cooperation. this is the good side of the very close cooperation. >> one quick word. american history example again.

europeans shouldn't invoke the example of the redemption fund without understanding the quid pro quo was the market, chief justice marshall squashed interfering with his internal market and there is a quid pro quo, there was, and if europe wants to invoke the people who want germany to bailout, they should also ak ccept the intern market deal. >> i want to thank the panel. i think jacob started out by the euro zone crisis is a political animal. i think the range of topics we have talked about to the building of the political building of the united states, just demonstrates how accurate that was.