really do very much in the region except reassure poland. for influencing ukraine what's needed is action on trade, action on energy, action on foreign assistance, action on immigration, action on education and other assistance. those kind of policies are going to have to come primarily from europe. it is europe that dominates economic relations, social relations, political relations and cultural relations in that part of the world. europe is the entity that matters. so what we see is that in the end, it is the civilian power of europe more often than not, and the return to europe that emerges when we look beneath the surface of issues in world

politics like the ukraine. now, europe may not do as well as we hope as a result of the recent crisis, but it still possesses large power resources to influence the ukraine situation, and that is what we should look for in the future. >> thanks. i'm always tempted to say we should stop there and go for champagne now. i suppose we should plow on. charlie. >> thank you. like andy, i'm delighted to be here and to share the panel with the distinguished colleagues, and also because this is a conference that is being held in memory of clara. i didn't know her extremely well. i had memory interesting conversations with her about her passion, which is european defense and european integration. she is one of the most decent

people i knew in washington. i speak for people here and in london wouho worked with her th she is sorely missed. i don't take fundamental issue with andy in that i share his view that europe punches above its weight in a civilian respect. the best testament to that over the last six to eight months is what happened in ukraine where you had a popular revolution take place because when ukrainians were offered a choice between a future that was with russia or a future that was with the european union, they took to the streets and said resoundingly, we want europe. and that suggests its attractive power despite its internal difficulties is extremely strong. that having been said, i'm a little bit more worried about the political trials europe

faces as a consequence of the euro zone crisis and recent parliamentary elections. let me begin by saying a few things about those elections and the surge in the right. a couple of quick comments on ukraine then i'll end with a thought on the implications for the united states and the transatlantic relationship. i don't think that the parliamentary elections that took place 1 1/2 weeks ago represent a political earthquake or a fundamental turning point in the trajectory of the european union for the following reasons. one is that most of the woks that will be sitting in what one could call the populous quadrant are not scary folks. there are scary folks, yobic, golden dawn, neo fascists,

nazis, anti-semites. most represent people who are anti-immigrant, who are skeptical about the european union, but they are within the confines of what you would call a respectable political spectrum. second point they represent a broad set of views. it will be difficult to see a party who come together and form groups in the european parliament, which they need to do if they are going to have the voice that they would like to have. and the third point is that the european union and its member states is a parliamentary system. if you step back from the vote that took place ten days ago and you say what's the broader picture here, it is that european center right and european center left parties,

both of which remain staunchly pro-eu have number one taxed to the center since the end of the cold war. and number two, been in power. the bad news is they have steadily lost market share with a couple exceptions. that means even though they tacked to the center and there isn't much difference between social democrats and christian democrats, they have seated the left flank and right flank to these growing populous parties. that doesn't mean those populous parties are in power. they are not. it means two things. one, they are having a greater and greater effect on those centrist parties because those centrist parties feel a need to cooperate them or appropriate some of their language and policies. and secondly and more worryingly, they could win a national election. in the uk, in france, in

denmark, populous parties actually got the largest share of the vote. that means in a french election you could have a candidate named lupen become the next president. i don't think it's going to happen. if it did happen, even though i agree with andy getting out of the euro or getting out of the european union is a very tall order, it would fundamentally change the equation. i'm less confident than andy that the uk is there to stay. i would say if cameron wins, there is a better than even chance that the uk will leave the union, but that's obviously a speculative venture and at least the polling numbers right now don't put cameron in very good position. bottom line is it's worrisome what happened. the european union has been shaken by this event.

it will make europe harder to move forward which is worrisome from the perspective of what happens if another major economic financial crisis emerges. the germans in particular aren't ready for full scale banking and fiscal union. i'm not convinced the eu is out of the woods when it comes to the financial crisis. this particular europe is not well prepared to deal with that crisis if it re-emerges. let me end with a quick comment on ukraine. i would say on ukraine transatlantic perspective, the glass is more half full than it is half empty. the united states and its european partners generally stayed on the same page, which is no small task in the europe of 28 members that reside in a very different geographic and geopolitical space. that having been said, a couple of things worry me. one is the debate in germany where i think you have a

government that is actually very close to the obama administration, and a public that is actually very far from the obama administration. it leaves an exposed political pochlgts i leave it to wolfgang to say a few things about this. having been in germany twice the last few weeks, there are weird things going on there about germans being closer to russians, about germany not wanting to move in a direction of taking on more responsibility. the debate on ukraine there is all over the place. in a way i don't think i've seen since the end of the cold war. secondly, i'm a little bit uncomfortable with how readily the g-7 partners opened up to putin over the last 48 hours. i would have been more comfortable had they met with putin one-on-one and give a stern talking to.

to have these one-on-ones with most of the european partners, i think sends the message that it's too soon. to kind of bring him back into the fold. what he has done in crimea, what he continues to do in eastern ukraine is over a red line. over a fundamental red line, and i don't think we should mince words when it comes to that question. finally, maimplications. what does all this mean? not much. why? number one, the ukraine crisis led to a recommitment of the united states to europe. we saw in the last 48 hours a $1 billion commitment from the president to beef up defenses in central europe. number two, i don't think there is much elasticity in this relationship. i think 20 plus years after the end of the cold war the

resilience of the transatlantic partnership is, to me, stunning. europeans and americans keep coming back to each other come hell or high water. that's in part because of common values and common interests, and it's in part because there isn't much in the rest of the world that offers anything close to the transatlantic partnership. whether it's indonesia, turkey, brazil, india, china, you name the emerging power, and you say are these countries stepping up and providing public goods? the answer is definitively no. they're not anywhere close to playing that kind of role in international affairs. it's because of that that i think even if europe weakens, even if they stay a civilian power and don't move in a more decisive direction on amassing military capability, which i think right now is probably not

going to happen, we are going to complain. we are going to talk about smart defense. we are going to talk about 2% spending gdp on defense, but the overall relationship is, in my mind, in very solid shape. >> thank you. andy, can i come back to you quickly on one thing. i got the impression you don't think the shifts in politics within europe are affecting its world role at all. it does strike me in one area, at least, they are. which is how we deal with the countries to our south in europe, where we adopted a very security-driven, anti-immigration driven stance which seems wholly holds to your view of europe. our main part with dealing with immigration was colonel gadhafi we paid to set up camps to keep him away from our shores. in that way you see it as a slightly less solitary shift in our europe is dealing with the

world. >> i think that's true. i do think europe has been more moved to, no doubt, europe has moved to a more closed immigration policy, particularly with respect to southern countries. that's true. whether it's moved to a more closed immigration policy all around or not is a separate issue. i think we need to look at all the political pressures and all the obligations europe has. there is no doubt what you say is true. >> julie. sorry. >> thank you for the invitation to be up here on this stage with so many friends and colleagues. i'm thrilled that i could be part of a tribute to clara. i met her a couple of years ago when i was working at the department of defense on european defense. her favorite subject. and she came in, i think it was

in late '09, to interview me about ten minutes in i was interviewing her, and the conversation flipped rather rapidly and i realized she should be sitting at my chair and working on european defense because she was incredibly knowledgeable. of course as we all remember, it wasn't just she had incredible depth of knowledge and expertise, but such an enjoyable person to be around. no ego, no hidden agenda. you could sit for hours, and i think it was supposed to be a half hour meeting and i think it went 90 minutes. again, i was peppering her with questions. after that i always made sure i had time for clara and would come hear her speak when she was here at brookings or around town. she is dearly missed and we are thrilled to pay tribute to her today. on the question of the eu, the election results we saw a couple of days ago and foreign policy,

i would echo what charlie said in terms of the election results probably not having a drastic impact on the foreign policy agenda inside circles across brussels. i think the emergence of slightly greater representation of some of these populous parties will muddy the debates and create complications in a couple of very obvious areas. obviously, russia would be at the top of that list. to the degree the eu will continue to have conversations about altering energy policy, t-tip trade policies, and certainly enlargement to the extent the eu is interested in continuing to have a debate about that. one can imagine how this cast of characters that are arriving on the scene would alter those debates. i think it's a mistake to make

drastic assumptions about how this will fundamentally force the eu to alter course on any of the issues i just mentioned or any of the other issues that it's juggling from ukraine to iran to russia or asia and a whole list of other foreign policy concerns. but i have been worried about eu foreign policy. i'm not as optimistic as some. i worry not just about the european union and europe's approach to foreign policy, i really have deep concerns right now about how america, the united states and europe are handling their common foreign policy agenda. i think what we are seeing is both sides of the atlantic find themselves in this post 9/11 world. they've been able to sketch out and have interesting

conversations over the last decade about what they have learned and how they worked well together, what they didn't like about the post 9/11 world, about the global war on terror, about the bush years, but they're having trouble defining kind of the new agenda, their new foreign policy framework, the new strategy for everything that's coming at them in the world. i'm going to be issuing a report next week. we dubbed this the era of compounding complexity. it doesn't roll off the tongue, but i think this is an environment that is so incredibly complex, that i think europe and the united states are just really struggling to cope with the number of challenges that are coming at them. just to cite a few, we have not just the emerging rising powers, but we have all of the arrival of the variety of nonstate actors, individuals, corporations that are now

playing a huge role in crafting national security agendas, how we use state craft, how we use the tools of national security, and playing roles in ways that we never imagined. i think trying to find a way to fold those-ups into the foreign policy debates and give them a seat at the table has been a huge challenge for us. i also think we are coping with this defusion of power. i'm not going to stand up here and get into deet klein debate is america in decline or not, is europe in decline or not? those binary debates are not particularly useful. i think we do have to have a conversation between europe and the united states to think about our share of world power has certainly diminished as all of these other actors have arrived on the global stage. i think we're, again, trying to wrap our heads around that. when you pair that with the proliferation of game-changing technologies with very mixed

public opinion right now on both sides of the atlantic about what we should be doing in the world, how we should be leading the world, what types of tools we need in our tool kit, and then you look at this alphabet soup of international institutions that collectively, europe and the united states, have spent 60, 70 years creating and building, but they feel rusty and creeky and unable to deal with a lot of the challenges that we are facing with cyber to maritime security to drones and it goes on and on and on. i think you find that it's been particularly hard for both sides of the atlantic to come together. you see in ukraine as charlie noted standing shoulder to shoulder, but broader strategic debates about what ukraine and russia's actions in ukraine mean for us as partners going

forward. what it ultimately means for the eu/u.s. relationship, what it means for the nato alliance, what it means about our assumptions about great power politics and i think we are missing the boat a little bit, if i could tie it specifically to ukraine, on the strategy side of things. while we succeeded coping with this crisis was where we failed before the crisis where the united states in many ways felt it could easily outsource ukraine to its friends in europe and suddenly we were rubbing our eyes in disbelief saying what just happened here? we failed to have a conversation early on to say, gee, this doesn't look like it might play out so well what would happen n yanokovich ran for the hills? even now in the middle as we figure out what to do with poroshenko and how to provide

support to kiev and the rest, i am not sure we are thinking strategically where to go in relation with the russians. we are thinking short term in what is our next move in the next week to two weeks? but this strategic gap troubles me and worries about together our ability as partners to deal with a lot of the global challenges coming at us. in closing, i think we have to think more creatively about in our transatlantic dialogues, folding other players into the dialogue, thinking about the tools of state craft, what do we have in our tool box today? what's missing, where do we have to make investments, and most importantly, how do we take an affirmative but affordable foreign policy agenda to our very skeptical publics right now and explain to them the importance of global engagement, how we plan to pursue it, how we can use limited resources and

apply them in a very strategic way. we've got a lot ahead of us but i worry in a long-term perspective about this relationship. >> i wonder if we are not being a little bit complacent about putin. the results of the election put enormous pressure on national governments. i would try to exercise at least a solid veto on t-tip because of the electoral play in fronts. in the european parliament, it is far from clear there is a majority that will vote for this. if you're the european union and you can't do trade, what else do you do? do you not feel there is more? i get the impression from all three of you, you are fairly relaxed about the prospects. >> personally, i'm not relaxed about t-tip. i was nervous about it before the parliamentaryian election.

we have causes to be concerned about how this might continue to overshadow the debate. i've been worried quite some time because i think neither the folks in washington nor our counterparts in brussels mapped out a plan how we are going to get to a win on this. what i fear is that we've lost considerable time right now to those that are mounting the campaign against t-tip. they are much more organized, working on outreach, pr. we turned the lights off here in washington because of the congressional piece. we want to wait to get past midterms. by doing that, i think we've given some of the anti-t-tip, the permission to move forward with their agenda. >> ambassador? >> thank you. it's a pleasure. real pleasure to be here. i remember that i walked into this building the first time when i was, i think i was a third secretary or something at

the german embassy at the end of '79. i wasn't sure anybody was going to actually see me here. it's wonderful to be back. let me start by saying i'm delighted andy started us off on a positive note. it is important to note that contrary to major, to predictions by major and credible personalities, certainly most of them on this side of the atlantic, the euro zone has not collapsed over the last decade. it's still there. problems, we heard that this morning are not resolved, but we are working our way through them. an one point, too, you know the

100,000 or so eu flags in ukraine some months ago were a powerful reminder for all those of us who have become skeptical of our ability to make of the european union what we think the european union should become, should be. and how do you explain this exuberant joy of young ukrainians looking at europe and the result of these elections a week ago? well, why can't we have a tea party? i mean, you are suffering through this, so why can't we have some of that ourselves? i think it's normal. it was practically abnormal in my own country, for example,

that there was not a single party in the bundestok that said no to this basic consensus we have had now over a number of decades. so actually, i don't want to minimize the challenges that this new configuration will create in the european parliament and in national elections and national parliaments, far from it, but i think it's actually a healthy development. it will make, it will force us, us i mean the mainstream governments, mainstream parties, to work harder on the arguments with which we need or they need to convince publics that have, as was said in the first panel, that have come to identify the eu, not only with

overregulation. i think that was a proper point made in the first debate this morning, but with this bad idea of immigration. this bad idea of immigration. how should we think about the european parliamentary elections? i would like to introduce one aspect which has not yet been highlighted enough, i think. i call this, i mean these right wing parties that are now entering the parliament, i call this, you have to give them a name. i call it the putin alliance. isn't it interesting that president putin is getting applause, not only as everybody would expect, from the far left

in germany, the post communist party. they travel to moscow as they have done all the time and say thank you for being seen in the kremlin. but lupin and others decided to look at vladimir putin as their hero because he is such a wonderful defender of nationalism. of the nation state. what we have here is an interesting challenge, by as i see it, by president putin and those who support him or who admire him in western europe to the very fundamental idea of europe. creating something new, something better after centuries of strive and conflict. i think this is important but not because we are going to lose

our ability to govern, but because there is a rather fundamental challenge here going on between putin and western europe. charlie is correct. he is a good observer of things going on in the public debate. the government has an 80% majority in the bunde stock. chancellor merkel has to take note of these debates, she can rely on a very strong pro-eu, pro nato coalition in the bundestag. i am afraid they are, americans

are have not joining us but are only listening in. it's the chancellor merkel cell phone thing, the snowden revelations, it's the total loss of trust in what used to be the american trust ared senior partner. i don't want to dwell too much on this the relationship between germany and the united states is different, of course, than the relationship between the uk and france and the united states. we've always had this kind of daughter/father or daughter/mother relationship between germany and the united states. we were growing up and we were being chaperoned and protected as a nation and as the eu by the united states.

it also affects this trust and affects the ability in germany and other european countries to come up with a positive response to the t-tip challenge. it is now popular in certain circles in europe to argue, oh, this is yet another ploy by large international companies, mostly based in the united states to gain additional advantages, et cetera, et cetera, and we the simple citizen, we are going to not be as well protected regarding, you know, modify ied corn and chlorinated chicken and these rather ridiculous items that

have been quoted as harmful to the health of europeans, et cetera, et cetera. this is not an easy thing to overcome. let me -- i don't want to speak for too long. let me make a couple of points on russia and on european foreign policy. i, for one, believe that we should, we europeans should have spoken out more clearly when the question was raised some months ago should we or should we not cancel the g-8 meeting? my own view is it was wrong to cancel the g-8 meeting. we should have had the g-8 meeting, but we should have told president putin there is only going to be one item on the agenda. that's crimea, and we will talk to you as long as you are prepared to listen to us about crimea. and why you did the wrong thing.

what we are now seeing because we do not have a g-8 meeting, a spreading out of these bilateral meetings. i think i agree it makes me uncomfortable, too. i don't know what president olong is saying to president putin bilaterally. i believe i know what chancellor merkel is saying to putin, but i think it would be better to have him sit across the table and be given one response or more or less the same response in one meeting as a professional diplomat i always thought, and i always defended the idea that entertaining a dialogue, whether it's multilateral, bilateral, is never in and of itself a sign of weakness. the result of the negotiation can be a sign of weakness if you're a bad negotiator and give

in too much. having the discussion in and of itself cannot be a mistake. even at the height of the cold war, american presidents, including president reagan, had numerous discussions with soviet leaders, and that was not seen as a sign of weakness either. i think i have a question here. how we deal with russia. i want to highlight with one sentence. i think we in the eu, and certainly my own government in berlin we believe our priority objective ought to be to do whatever it takes to stabilize ukraine. right? sometimes i get the impression that some people here in washington believe that the

priority number one ought to be to maximize punishment for russia. when i was in ukraine, i got the impression that in some ways my ukrainian friends were told by or thought they were getting the message from washington to be even more anti-russian than they themselves felt felt necessary. so i think this is also an issue about which our government seems to have a continued discussion. how anti-russian do we want ukraine to be? ukraine will always live next to a big neighbor called russia. at some point they'll have to figure out a way to live together again, even if it's hard given the annexation of crimea, et cetera. last point. european foreign policy. we are doing a terribly bad job.

here i'm really critical about our own performance, national and eu-wise. in our own country, we have not had a single important national security document for the last eight years. i think the last one was in 2006. the world has changed significantly since then. in other words, neither our public nor our soldiers nor the members of the bundestag know exactly for what purpose we have our forces and why you should or should not use military force in whatever circumstance, et cetera. even worse, the european union, which under the leadership of javier zolana, whom i'm glad to say has a relationship with

brookings, developed a first strategy document way back in 2003. more than ten years ago. the european union has not been able to come up with a new version of this. i understand the hesitation of some of my friends who are national security advisors, et cetera, in various european capitals. their argument is let's not do it because if we do it, we will only get the smallest common denominator and the smallest common denominator will look so terribly poor and weak that it's better not to have the document than a bad document. well, i think the exact opposite. i think even if we come up with an insufficiently impressive document, we can improve on that in the next round, but we've got to start at some point. and tell the citizens of these 28 countries representing 500

million what our objectives are. what is our strategy? are we going to conquer africa or are we going to play a role in the middle east? and how do we want to deal with russia, et cetera, et cetera. i think that's something that should happen and any support the european debate can get from this side of the atlantic will be much appreciated. final word on the conduct of european foreign policy. i've been involved in these discussions for many, many years. what i thought is probably invisible when you look at this from the united states from far away, is that from among the 28 member nations of the eu, only maybe a handful are capable of developing what i would call

operational foreign policy, namely you say, okay, we've got to teach china a lesson. do we issue a declaration? that is what 20 out of 28 nations will find as the only, you know, possible action, or are we going to do something about it? is there actually a policy? can we develop a policy? maybe together with the united states or other partners. in other words, there is a difference between a handful of countries capable of having an operational foreign policy and most of these eu member countries that are small, less than 10 million people each, they have only a capacity to have what i would call a declaratory foreign policy.

they only have direct relation with neighbors. think of luxemborg. their capacity to think beyond the confines of the border is limited. i'm not criticizing luxembourg, i'm stating the obvious. don't be too critical of an eu that finds it so hard to come up with clear strategic direction and decision making. think of how hard it would be if the governors of all the states of the united states would constitute your national security council. one would say open the border with mexico and the other one would say let's do exactly the opposite. it wouldn't be so easy. and that is why we need to work

our way through this. i for one, i believe we should end up with majority voting in foreign policy. we are not quite there yet, but that's what we need. we need to be able to say 15 countries have agreed that we will now wage war and then we will go, but that's a hard thing to do. it will take many years, many months, a huge effort to get from where we are to that point. maybe i shouldn't have chosen the example of war making. peace making is better. thank you. >> do you think even in any of the larger states have anything you could call a strategy toward china that goes beyond signing as many contracts as possible and turning a blind eye to everything else? my own view is we need to

have a china strategy. because speaking as a german, so many jobs in germany now depend on strategic stability in the far east. it's not just because we need to work with the united states, et cetera, and listen to your strategic concerns. if there was a conflict in the far east, let's say between china and japan, that would endanger the free transport, et cetera, et cetera, the lights would go out first and foremost at bmw and mercedes, et cetera, et cetera, plants, which is why we have a built-in interest. our own income well-being depends on strategic stability

in the far east. that is something that has not yet sufficiently been explained to the average german voter. he would probably say let's stay out of these things. why should we worry about chinese warships in the south china seas? but it matters. that's why i believe the eu should have a policy. and i believe the eu ambassador in china needs to be able to say my instructions are to tell you that you are right or tell the japanese that you are wrong. we have not reached that point yet, unfortunately. i think there is a need to have it. >> i'm going to say something a professor from princeton with a spector of george cannon looming over me should never say. do we really need a grand strategy? because we live in a different world than we did in a cold war. it's different for two reasons. we don't have the big overriding

threats that we had then that would mobilize 20 countries, 27 countries around the same goal. we have second order, third order security threats. a coalition of the willing tends to be a couple of countries that care about something, a few more willing to go along, a bunch of countries that don't really care and a few countries that have strange domestic reason for not wanting to be involved. then the thing that happens in this situation, these things arise unpredictably. you can be critical of people not foreseeing people would erupt in the streets of ukraine and a problem could arise. you could argue it's unforeseeable. unlike the bilateral balance in the cold war, this was something that just kind of came out of nowhere. and it's a relative otherwise, a relatively peaceful world. war is lower than it's been in centuries. trade is more open than it's been in centuries even in the face of the greatest depression,

since the great depression, and there are more democracies, et cetera, et cetera. so in that circumstance, it's very difficult and in some ways counterproductive to get people to argue about principle in foreign policy. >> you know, that is ridiculous. right now putin is waging civil war in ukraine. he wants to return to the cold war. why don't we oblige him? >> but that's -- the issue is not whether or not we should do something about putin. the issue is whether or not three years ago we should have had a global strategy designed to deal with all cases of that kind. >> what do you plan to do now with putin? >> i think ambassador ischinger answered that question. >> we now started the question session.

we have to finish to get lunch. the gentleman over there. >> there may be a way out of this european crisis on the ukraine and the crimea. mine name is henry hedker. you take one look at the word "crimea" and crime is in it. they've taken this territory by force. the mexican session is something that the united states was faced with. they took all that territory by force and then paid for it later. so why not tell them to pay for the crimea area, any area they seize? it's a nuclear power. trying to prevent them from doing something is very difficult. sanctions is a way of doing things, but i don't think it's terribly effective. why not tell them to pay for all this territory while things are

still available internationally to try to solve a crisis. any comment? >> what i'm not doing the first round is taking the questions over there. >> thanks. i'm from the transatlantic academy, at least until next week. i wanted to take up ambassador ischinger's point about the european elections being a healthy development what worries me from what i heard this morning, is we can have these elections and carry on as usual. i don't think we can because that is not how democracy works. if we do that then it will make a mockery of democracy. actually, this is the first time because the elections have created a swell populistic in

the eu, this is the first time to engage at the public level on issues that have suddenly caught the interest at a level that's never been done before. so i suppose my question to the panel is, how do you think we can engage in a constructive dialogue with the public on those issues that are raised? because the issues that are raised at the public level are concerns about democracy, accountability, et cetera, in the eu. well the answer to those questions are precisely what the populistic mentality doesn't want. is there a way of actually taking this as a moment and engaging in a dialogue where you start using the dreaded f-word in the european debate? >> not in britain.

>> we've got a couple of questions on ukraine and one on the elections. >> quickly on the elections. i believe the eu is plenty democratic. people in europe could put a stop to any policy they want by making it count in their national election. so say you didn't like the euro or the way the euro functions and you were italian, spanish or greek, and i pick those three countries because those are three countries that thought seriously about pulling out or threatening seriously to germany that they would pull out in order to increase their bargaining leverage, and were pushed back down by pressure. you could easily force a change in the system. the reason that change has not been pushed is because there is not a democratic majority in any of those countries to push that change at the current time. so democracy could be part of the solution, but the problem is there isn't a democratic

majority to change the status quo. it's perverse, but it's true. >> on ukraine, i think that the idea of telling putin he should pay for it would be to understate the gravity of what's happened in that no, the loss of crimea is not a first order security threat to us or to germany or to poland or to the uk, but it is the most significant geopolitical move that we have seen in europe since the fall of the berlin wall. and what it says about putin's intentions, potential intentions in the future is what i think we need to worry about. it's why i'm fully supportive of efforts to beef up nato, to send more forces to the baltics and to poland, and not just do it in a symbolic way. because we don't know. in my own mind, i'm much less

willing to cut putin slack now after ukraine than i was before. and moving forward, i think american policy and policy with western europe has to be predicated on the kind of worst case don't give him the benefit of the doubt because of what he has demonstrated he has done. trina's question, i fwrae with you it would be a mistake to say this is business as usual, let's sweep this under the carpet. that's because i think the genie is out of the bottle. the european union has prospered since 1949. single market, single currency by flying under the radar screen. people didn't win or lose votes because they were pro or anti. it wasn't a huge issue in national politics. it is.

you go for a walk in a major e.u. country, and people are talking about it. it's been politicized. therefore, i think the mainstream parties have to engage and they have to be more courageous because right now if you step back and you read the european press, listen to european tv, the populous dominate the political narrative. those people in power are running scared. they are not fighting back. they are not saying, okay, let's have a debate. let's say we stop immigration. let's kick them all out. what's that going to do to our gdp? what's that going to do to our demographic picture? instead of having those debates, they're really ducking, and unless you get more political courage, unless you get the hollandes of the world to fight back, the default political

position, in my view, is the continued erosion of the legitimacy of the e.u. in the eyes of e.u. electorates. y yes, restoring the economy will help, but will it work? i don't think so. >> i buy the argument before the euro crisis the things that the e.u. did weren't things that really bothered all that much so you can muddle along with a highly imperfect parliament to sort of legitimatize decisions. now you have had the euro zone crisis and that affects the heart of -- issues of fiscal policy, taxation that are being dealt with at the european level. do you think we might need to move to some new way of legitimizing those decisions, or can we just keep saying you have national elections if you need them. what's your thought? >> you need a way of legitimating them because it's

true for the first time there is an issue at the european level and they need macroeconomic policies that the voters care enough about so it has a significant affect on elections. then the question is whether some elections in europe at the national level or at the european level, have -- can have an impact on that policy. the answer then to that question is yes. the domestic elections can have an impact on that policy, and the odd thing in europe is that despite the fact that policy is not working well and despite the fact that you would think some people in some countries would want to reform it, you don't have a democratic authority even in the most effective. you can understand where the german electorate doesn't want to change the status quo because it suits them pretty well. it's hard to understand on net you don't have a majority in spain or majority in italy or a majority in greece to change the status quo, but that is the fact. right? if you want to change the status

quo, that's how you have to change it. if for no other reason than monetary policy is in all advanced democracies not a policy customarily handled by the parliament. it's handled by an independent central bank working in conjunction with political bodies. you can't turn it over to the european parliament and make monetary policy. that's not how it works. >> fiscal policy. >> well, then you have a revolution in europe if you tried to turn fiscal policy over to the european parliament. i mean, if you tried to say that 10%, 20%, 30% of european budgetary policy went through european parliament. you can easily have a situation that's democratic but creates so much conflict that it can't survive. we've learned that in the united states, and i don't think europe wants to repeat that experience. >> june. >> just cook back to andy's point about the strategy, i think we do -- you're right we have to be clear about our ability to predict crisises xshgs there's alleges an element of strategic surprise. i think secretary gates said the

only thing the intelligence community succeeded in doing is consistently failing to predict what the next big event would be coming down the pipe, so, i mean, let's not assume that by sketching out some master grand strategy we could have either foreseen what happened in ukraine or anywhere else for that matter, but i think to wolfgang's point, the process of going through the drafting of a national security strategy or a european security strategy or white paper coming out of berlin, i mean, i think it's uchl particularly in this climate that we find ourselves where so much is come at us. it's useful to set priorities, to think about how we manage risk to how we deal with strategic attention in the era of twitter. you know, how do you remain focused? having been in the white house and seeing -- you know, how you can go six hours in a situation room from yemen to iraq to egypt. you know, one crisis after the next. how difficult it is to have some sort of at least overarching general frame. i mean, it's not a perfect

process, but i think there is utility in putting yourself through this. now, all that said, with ukraine no perfect national security strategy or any process would have perhaps predicted or helped us cope with what came at us, but i -- my point on that was that the trans-atlantic partners had really checked out in many ways and weren't having the kinds of dialogue and exchange that they needed to to at least cope with potential scenarios, and i think what i see happening right now is a repeat of that. i think we were so focused on the may 25th election as partners, europe, the ukrainians, and the united states, let's get through that election, let's insure that it takes place, that it's free and fair to the degree that we can claim it to be, and then from there figure out what comes next. we're now past the election, and i think we're having a hard time figuring out and having a broader strategic dialogue about, well, what is the

long-term plan -- game plan with the russians? where would we be willing to engage him? we're seeing that play out at the g-7, as you both noted. now we have these bilateral meetings surfacing. we're not exactly sure why and what messaging is going on. to me it shows that we've kind of lost our way, again, in terms of charting a common purpose and course visa vi russia, and we've been focused very much on the minuta. maybe i'll -- tony is going to be here shortly, so hopefully tony blanken will be able to sketch out for us exactly what the strategy is moving forward. >> you want to comment on this? >> two quick points. first on what should be or what could be lessons learned from this e.u. election process, with these right-wing parties coming up here and there. >> well, i have one simple prescription to offer.

we need better leadership in the e.u. take these two candidates who are currently battling for the next phase of running the e.u. commission. none of them, i'm sorry to say, meets the criteria of being a new -- somebody that will actually be listened to by the entire e.u. electorate. i think the trick would be to find somebody who could really, you know, be not a nationalist leader like vladimir putin for these right-wing people, an e.u. leader who symbolizes the fundamental values of the european union and who can speak with the authority. i think that's what we need in order to hopefully get rid of this -- of this development. second point on russia and

putin. i mean, i agree that this is not only about crimea. that's as bad as it is. this is a challenge to the international order. certainly to the european order as created by the helsinki final act, et cetera, et cetera, et cetera. president putin has turned out to be unpredictable. that's bad in international relations. if you are dealing with somebody where you actually have a very hard time figuring out what he might do next. so what should be our strategy? i think in retrospect -- i don't claim that i knew that on may 1st or may 2nd. when chancellor merkel met in the white house with president obama and they came out and said

we shall measure president putin's behavior in terms of how he deals with the elections in ukraine. i think in retrospect i would say we let putin get off the hook a bit easily because he didn't have a very hard time behaving in a way that now more or less forces us to say, okay. he actually shook hands with poroshenko a few hours ago in france. i think what now should happen -- that's based on my own experience in ukraine over the last several weeks. what now should happen is that we should tell mr. putin we will measure your behavior by your ability and your willingness to make sure that not a single truck with armed men and ammunition, et cetera, et cetera, will come across the russian border.

the russians say we can't possibly control this border. it's a long border, and in the soviet union there were no fences between the constituent parts of the soviet union. therefore, don't ask of us things that we can't do. well, i believe a country like the russian federation, if they want to do it, i think they can make at least some controls and arrest some of these truck drivers and some of these separatists if they are not paid by the kremlin. they ought to be arrested. and, you know, that would probably limit the flow of supply, et cetera, across the border. i think that's what he now needs to do in order to show goodwill. i think we need a double strategy. we need to upgrade the sanctions

if necessary, but at the same time as always in international diplomacy, we need to at least have some door somewhere through which he could walk, and that would be the, you know, re-entry ticket into is not necessarily the g-8 tomorrow morning, but some kind of an ongoing dialogue, which is why i have been among those who have thought that maybe creating some kind of an international contact group on ukraine with the united states, russia, the e.u., possibly poland as a particularly interesting partner, might be one way of getting diplomacy kickstarted again on ukraine. i'll stop there. >> shall we take questions or -- lunch is now ready. it does mean that we're not going to take any more questions, so thank you very, very much, indeed, to our panel. [ applause ]

>> lunch is ready for you here just to the left. go get some food, bring it back here if you want. we'll be starting at 12:30 sharply with tony blinken. thank you.

>> we have been bringing you the day-long discussion at the brookings institute and the discussion of europe. they're going to hear from deputy national security

advisor, tony blinken. he is going to talk about the european and u.s. response to ukraine. they're scheduled to start that at 12:30 eastern. we'll be back live when they do get underway, but while we wait, we're going to show you some of the discussion from earlier today. they talked about the economic future of the e.u. this is from earlier today at brookings.

>> my name is tom wright. i'm a fellow here with the project at international order at brookings, and i'm particularly delighted to be able to chair the first panel. i would like to thank fiona and jeremy shapiro to do it, and particularly in honor of cara who i knew for the past two years here. it's really a wonderful colleague, and she's sorely missed, and i know several people here knew her and are on the panel and i think she would be very interested in the topic today. not just because of the events in ukraine, but also because he is such a strong passion for european union foreign policy and for europe's role in the world. we're very fortunate to have three excellent panelists for the topic of really what's going on inside europe. the second panel looks at europe's role in the world, and we're trying to look at not just

europe's economy, but really everything that goes on inside the box. is europe about to get out of the financial crisis and the phase has passed and about to return to robust growth and really take on a greater role in the world and complete the project of monetary integration by adding sort of fiscal federalism and all of the things that economists and others over the last decade said they need to do in order to be as stable and competitive, or are we in the beginning of a japan style loss decade where the worst of the crisis is over, but it's going to be very hard for europe to get the political support to do what is necessary to really fix the fundamental flaws of monetary integration, and after the parliamentary elections of last week, what does that mean for the future of european federalism? are we seeing a populous backlash whereby the politicians and young -- the famous phrase

"know what they need to do, but don't know how to get re-elected once they do it." maybe they won't be able to get the reforms through, and what are we looking at in terms of the commission as to some of the key positions? so what i would like to do we'll have a conversation and then open it up for a conversation with you all for about half hour. simon, if i could, if i could start with you, could you begin by talking about europe's sort of economic prospects? are we really out of the worst of the crisis? where do we go from here in terms of, you know, insuring that there isn't a new crisis and that we see some sort of growth and getting out of deflationary sort of spiral and that europe can, you know, begin to sort of punch its weight economically in the world again? >> sorry.

i should add as well -- i apologize for not introducing deputy director of the center for european reform, simon, who specializes in the euro zone and european fiscal policy. >> thanks. good morning, everyone. thank you very much to both brookings and to -- for inviting me to speak today. i think it's a lovely gesture to dedicate this conference. i'm very, very grateful to brookings, kings, and cambridge for the help you've given us in setting up the fellowship, which we were on for many years. turning to the subject, i used to argue about this point a lot. she didn't disagree with my analysis, but i think for chloe it was close almost to h heresy for a colleague to argue that it could become a threat to the e.u.

we would have lengthy discussions about this. i'm going to start off by outlining why i think the economy -- the euro zone economy in particular -- is still in such poor shape. why this situation poses a threat to the e.u. as a whole, and why the choice really does now come down to more or less. now, despite the talk of economic recovery that one hears a lot of in europe and despite claims by euro zone policymakers that the crisis is over, the euro zone and by extension the e.u. remains in a very serious mess. it's worth remembering that the euro zone economy is still three percentage points smaller than it was at the beginning of 2008. now, even the u.s., which is six percentage points bigger. if one breaks down the euro zone into its constituent parts, we see some truly, truly terrible numbers.

the spanish economy is still 7% smaller. the irish one 8%. the italian one over 9%. the greek one over 20% smaller than it was six years ago. now, euro zone unemployment has come down a touch. largely because of people withdrawing from the labor market and emigrating, but it's still 12%. much, much higher than that in places like spain. youth unemployment -- i think this is the number that really shocks people on this side of the atlantic -- is at about a quarter. over 40% in italy, over 50% in spain. we're seeing some truly shocking numbers still. now, unfortunately, the myth persists in europe that these problems are the result of countries mismanaging their finances. this was the case in greece. aside from greece, it wasn't the case. the central problem we saw in europe with huge capital flows from the core in places like

germany, to places like spain in what are termed the periphery of the euro zone. now, this was inter-bank lending. that combined with the absence of so-called adjustment mechanisms within the euro zone is the -- not mismanagement of public finances. basically interest rates and the run-up were far too low for the likes of spain, ireland, other countries, and too high for germany. inflows of all of this money into spain led to booms in the economy and pushed up their wages and their costs. when the financial crisis hit, the capital inflows stopped overnight resulting in bank crisis in those countries. basically the capital stopped, the economies bombed, that hit public finances, the weakness of public finances hit the banks because the banks were sitting on all the government bonds. then that depressed the economic conditions again, and rebounding

on the banc. it's the sovereign bank doom loop that everyone talks about in europe. the failure to predict this is unforgivable. no one spotted this link between government and banks and what it could do. the weakness of adjustment mechanisms within the euro zone was predicted. this is a very large and very diverse currency union. it comprises some very, very different economies, so a shock -- an economic shock will hit some of them very differently to others. at the moment they cannot devalue their currencies as everyone knows, and had he don't have what economists call a lender of last resort. they essentially borrow in foreign currency. there's no bank that will step in and buy their debt in the way you see here in the u.s. so without a currency and without a fully phased central bank, something else has to be

flexible. now, this means that markets for goods and services and capital, labor, has to be highly integrated. resources move to where they can be used most productively. now, within the euro zone, there is an integrated market for goods. for cars and white goods, clothing, anything. there isn't much integration when it comes to services, which comprise most of the economic activity. capital is very slow to be allocated or to be used in the most productive fashion, so it's very slow. productive capital is very slow to move from one part of the euro zone to another. crucially, labor mobility is very low. we have seen a lot of people emigrating from spain and ireland, portugal in recent years, but a lot of those people, the majority of those people, have gone to countries outside of the euro zone, so the it's been to britain, here,

australia, canada, and north america and brits to america. very few have gone to other members of the euro zone. the second factor is that the european central bank has hampered adjustment by allowing inflation to collapse in the euro zone. it's 0.5%, which makes it very, very hard for countries, such as spain and italy, to engineer declines in their real exchange rates. the european central bank has also acted in a nakedly political manner. for example, by backing fiscal austerity in a slump, which ignores economic theory and history, and the economy's faults. the euro zone lacks any mechanism between constituent

members. with no federal budget to smooth asymmetric shocks, fiscal austerity has addressed the crisis. the problem is that fiscal austerity is so-called pro-cyclical. what it does is it exacerbates recession. it makes everything worse. now, adjustment based on austerity and internal devaluation, which is what europeans now call deflation, is dangerous. first, low inflation, let alone deflation, makes it very hard to reduce real wages. take spain. they need to reduce their real wages, but if inflation is very low, that's very hard to do because no, ma'am natural wages do not fall. it's almost impossible to cut no, ma'am natural wages. in cutting real wages, you need a bit of inflation. two, deflation decreases the real value of debt, both public and -- raises with interest rates, and this -- and then can lead consumers and businesses to

delay purposes if they expect prices to fall further. third, fiscal mrul apologize, which means the impact of cuts in public spending, are very large when interest rates are close to zero. spending reductions by governments tend to have a very big negative impact on demand. now, what is needed against that kind of back drop. well, in the short-term loose financial policy and accommodative fiscal policy. so it's basically quantity takive easing and higher inflation target. at least temporarily. >> what would you put that at, the inflation target? >> temporarily 4%. now, this would help prevent countries sliding into insole vensy and facilitate the needed exchange rate, real exchange rate. adjustment. while investment -- government investment by countries that have the fiscal scope to do so

would also help demand. that's the short-term. in the longer term, it's hard to see how this can work without a proper banking unit. it's a proper one that includes a large fiscal backstop. removing the responsibility from banks to the federal level. putting the backstop at the federal level. another thing would be for banks to hold. some kind of euro zone bond. this would help break the doom loop between the banks and the government by making it easier for governments to restructure sovereign debt. they can't do that at the moment because the banks are sitting on so much of that debt and by restructuring sovereign debt, they threaten their banks. they need the safe euro zone asset. it's what is implied in a

fully -- euro zone unemployment insurance system could form fiscal unit. and, finally and more democratically accountable central bank with a broader mandate. something akin to the mandate of the u.s. fed. so responsibility for price diversion for growth and employment. the problem with everything i've just said is that that requires more, not less, europe. as time goes on, it's becoming harder to make the case for more europe. anyone following the political scene can appreciate that. europe increasingly is now defined by the constraints that it places on governments rather than the opportunities it provides them with to improve the lives of their electorates. and the longer this continues, the fwraert the likelihood that we see a serious anti-european backlash. not just against the euro, but against the e.u. more broadly.

i think there are two solutions. volumes adjust forward to a more federal critical europe within the euro zone with politics resuming at the federal level or i would turn to a european union without a single currency and let individual countries manage their economies as they see fit. defaulting countries measures to deal with the financial crisis and an agreement about how to deal with legacy debt and contracts. hugely complex stuff. it will be a very big crisis. if a more federal europe is impossible, it will be better to get on with this before the politics turns seriously nasty. thank you. >> thank you. it's fascinating.

you said you outlined what i think is a good sort of solution for europe's problems in a number of areas. everything from monetary policy to fiscal policy to some of the politics, and you said that one of the reasons that that can't happen is because there's not enough support for more europe, but another reason maybe it can't happen is because germany in particular, but also the ecb and many of the leading thinkers in europe want more europe. they actually disagree with those steps, you know, so they disagree about a euro bond and they disagree about quantitative easing, and there's been this pretty significant philosophical gap in economic policy that's opened up between germany on the one hand and united states and some other countries on the other hand. it's a tough question to think through because even if there is support for european integration and even if there are people in key positions who want to be

forward-leaning, there is this deep philosophical, you know, disagreement about whether or not you can do these things. so i would like to turn to randy henning, who is a professor of international economic governance at american university and really try to put this question to you that if we -- we are where we are in economic terms. there are these solutions out there that many people believe would have sort of a big bang effect of really being game changers and kickstarting growth, but they're exceptionally unlikely because of german op sdmrigs and because of rising populism and treaty change. what does that mean for the next sort of decade in european economics? if we can't do what simon sort of outlined and there's unlikely to be a collapse of the currency union for all of the reasons that, you know, people are afraid of what the alternative

will be, what is the middle sort of muddling through option? how bad is it? is it not as bad -- quite as bad as we think? what can they do within the constraints that they have? >> well, thank you, tom. i'm pleased to be in part of this panel and happy to celebrate the life and work of clara o'donnell in this way with you. let me approach the questions you've posed to me with three -- three bulletin points. let me preface this by saying that on this 70th anniversary of the allied landing in normandy, the wraits is still tied to the fate of europe. albeit, fainkfully in a different way, and this country has an abiding interest in the success of european integration.

i want to see it succeed. i say this at the outset because we're going to talk about the problems that come with europe and the barriers to success. we do this in a spirit that's in our mutual interest. i have three main points. the first is as the jumping off point, jeremy shapiro, in talking ahead of this conference, suggested that i make this comparison to japan and the decade of stagnation. i'll begin with that. europe is not japan, but its stagnation displays some worrying similarities. the second point i'll make is that the european central bank shows a path that differs from the federal reserve and monetary policy ultimately owing to its constitutional contacts by political fragmentation.

the third point will be that europe will need to do more than it has yet agreed, if it is to stabilize the euro area permanently. in the long run it will need to find a way back to the no bailout clause. i'll use the american example to explain how and why that should be. with respect to the comparison to japan, there are important differences between europe and japan to be sure, but the parallels are ominous, and europe wants to avoid them. in japan we saw the bursting of an asset price bubble, impose losses on the banking system. regulators exercise forebearance. monetary policy was behind the curve. deflation was allowed to settle in, which created further losses for the bank in perpetuating a downward spiral. italy has already suffered a lost decade in terms of growth.

low inflation makes its debt deeply problematic, and italy has at best only one and a half of the famous three arrows that prime minister -- japanese prime minister abe has used. fiscal policy, monetary policy. it's essential the structural reform in italy to yield the growth over a long-term. also it shows a path that was different from the federal reserve in yesterday's announcement in frankfurt doesn't fundamentally change that picture. the constitutional context is

the reason for that different choice, and i want to -- that's the subject of the second point. the interaction between monetary and fiscal authorities which famously modelled sergeant wallace is a context between fiscal dominance and monetary dominance, right. >> could create a financial facility and bail out the deter, or the ecb could buy sovereign bonds. the two actions were close substitutes at least over the short to medium term, and each side was better off if the other made its concession first so, each had an incentive to wait.

when we see this pattern repeat itself, repeatedly over the -- between the spring of 2010 and the summer of 2012, the op shot is that the ecb delayed taking aggressive measures much longer than the fed and the bank of england. >> it's strategic interaction with government and the euro area. to the point about fiscal policy the euro area has chosen to -- i

think this path is fundamentally unworkable. euro needs to find discipline in a decentralized way, to be politically sustainable in the long run. so to think about this, consider how different u.s. rules are from the fiscal rules of the euro area. the fiscal compact in europe has been introduced into national law, but the process was initiated by the community institutions, and in some cases under durress. they have rules limiting debt accumulation and are adopted autonomously by the states, and this has implications for domestic political ownership. had he play a leading role, whereas the u.s. federal deposit has no such role. congress cannot legislate fiscal

rules for the states, so the u.s. model of fiscal rectitude based on multiple layers of rules at the state level, combine and this is really important, with a no bailout form in the united states. by contrast, member states have been bailed out. the next generation for dealing with fiscally dysfunctional states is likely to embrace more intrusion into domestic politics and policies. the rescue fund, like the size of the rescue fund, in intrucive fiscal rules can go hand in hand. >> do you mean going into a country and basically trying to structure their tax policy and form. it's pretty serious interference. it's not sort of the technical sort of stand back, you know, you immediate to sort of fill out this performance sheet at

the end. it's really people in capital cities, you know, writing the budgets of these countries. >> so, yes, absolutely. it's not just the size of the fiscal deficit that's coming under scrutiny from brussels, the commission in particular, but it's also the elements of the budget that achieve those deficit targets, as well as, of course, the debt targets as well. a good example of this is -- of this next generation of proposals that i see on the horizon, was jean claude's proposal which is now a couple of yearsing on old. >> it is, of course, a brookings sandwich lunch, so there's limits, i guess, to the vast enjoyment, but nonetheless, we hope you've had a good lunch, and we are extremely pleased to have tony blinken here to finish up, wrap up our annual

conference for us today. he has to leave on the dot at 1:15, and we want to get -- we are extremely privileged to have him here given the things that are happening on the agenda and obviously the president and everyone is troubling in europe, and he has some things to do manning the office and holding down the forces, as everyone likes to say. we're delighted that tony has agreed to give our keynote because he has been a long participant in and supporter of many brookings activities. he is a former think tanker back in the day, and he was also along with phil garden and jim steinberg in some sense present at the the creation of this center. in fact, phil gordon, our former director, has now gone off to work for tony. i think there's a direct correlation there. clearly kind of having worked

together on european fronts, that's been very good preparation for working out other issues. phil gordon was assistant secretary at and now a senior director for the middle east. tony is probably keeping him pretty busy. tony, as many of you know, came to wash wash at the beginning of the clinton administration. he worked in the state department, on the national security council staff. he has been a chief foreign policy speechwriter for president clinton. then he worked for senator biden directly at the senate foreign relations committee. he became the deputy assistant national security advisor to vice president biden when he moved to the white house, and now he has moved to basically be the principle deputy national security advisor for president obama. tony has a very long record of advising people, so i think we should all pay particular attention to some things that he has to say today, and now we're asking tony to go back to his deep trans-atlantic roots and tell us about the affect of the ukraine crisis on trans-atlantic

relations and obviously there's no one else as qualified to do so. thank you very much, tony. >> thank you all very much. fiona, thank you very much. it's always great to be at brookings. so many good friends and colleagues here. so many people we have stolen from here, including phil and others. and also, an institution and individuals. the administration and previous administrations and future administrations rely on a daily basis for ideas, for intellectual capital, which we don't have apparently a monopoly on. with kings college and the center for -- i appreciate you all hosting me very, very much. i thought i would try and trace where we are with ukraine by going back and sort of tracing how we got to where we are. then offer some thoughts on the

way forward. of course, this is a very active issue and, in fact, as we gather here today, there's much going on in europe with the president, with his european counterparts, with president-elect, with president putin, and this will be very much as always in the headlines. i want to start by going back. if we go back to the protests that began at the end of last year, it's fair to say that while the catalyst for the protests and the catalyst for change were president yanokovic basically reversing himself on the european union, something that europe expected, the united states expected. there was profound dissatisfaction and the sense of

disenfranchisement among so many ukrainians from all walks of life. with corruption with economic stagnation, with a lack of opportunity, and these all came together and then we had this catalyst of the 180 on the association agreement and then a vicious, vicious crackdown that followed. then we had russia and the actions that it took. they were almost, i think, as you said, from another era. russia used its greater size and its wealth to try to bully and intimidate a smaller neighbor to use its influence through force. the support for illegal referendum.

the tripling of the price of gas to ukraine. they enjoyed far greater than ukraine and most of the soviet space than do russia's own citizens under president putin, and second, the extreme form of federalism that russia seeks to impose on ukraine is exactly the opposite of the increasingly centralized control that president putin exeither in russia. the stakes for the united states and for the international community writ large were three-fold. if you go back to the very first major foreign policy speech of the obama administration, which was actually delivered by vice president biden at the munich security conference in february 2009, that's the speech that laid out in some detail the idea

of the reset. that principle was challenged by russia's actions in ukraine. so was the principle that redrawing borders by force undermining the sovereignty and territorial integrity of a democracy was unacceptable and the precedent that would set not just in europe, but beyond was also something that needed a swift and stern reaction. finally, lfs something particular about the situation in ukraine that was critically important, and that goes back to the 1994 budapest agreement. as i think most of you in this room know very well, when the soviet union fell apart, it left many successor states with many

nuclear weapons, and ukraine, belarus and kazakhstan decided give up -- in the case of ukraine, it wasn't prepared to do that until it had a firm commitment by russia, by the united states, by the united kingdom that its sovereignty and territorial integrity would be guaranteed, and so the four countries signed the budapest agreement and purported to guarantee just that. the idea that this piece of paper could be in effect torn up by this move by russia into ukraine profoundly called into question what message this would send to other countries around the world who might be considering giving up nuclear weapons. a terrible message to send, a terrible precedent to set. the united states response irks think, can be looked at in two points of time. first, before russia went into

crimea. that is from the moment the midon protests were met with a violate reaction, we work very hard to try to de-escalate the crisis to bring the parties together. the vice president was constantly on the phone with then president. the president was deeply engaged with his european partners as well as with president putin. the objective was to see if we could forge a diplomatic agreement for a way forward that resolved the crisis peacefully. once the russians went into crimea, our policy shifted. the president set three very clear directions that we followed to this day. first we would isolate russia for ukraine. second, we would support ukraine and build support for ukraine in the international community, and third we would reassure our allies and partners. the goals were simple and

straight forward with regard to russia. we needed to impose costs for the actions that russia had taken. we sought to defer -- deter russia from taking further irresponsible actions, and we hoped to shake the decision space when president putin sxin the government auto would operate in going forward. this involved in the first instance political isolation, and so you all know the littany of things that happened in the immediate weeks following the incursion into crimea. the de facto and then suspension from the g-8. the efforts in the united nations to isolate russia politically, and we saw that with a very significant vote at the security council. with china even abstaining and not siding with russia, and then an incredibly lopsided vote at the u.n. general assembly where russia found itself with another ten countries, none of whom i think would be partners of first choice for most people in this room. we rejected the referendum that took place in crimea, and then in the east.

we downgraded our bilateral relations, as did europe. even with something like the -- we persuaded many of our senior ceos not to go. now, this didn't just happen. it took incredibly hard, sustained, focused work starting with the president to move all of our partners in the same direction. i know people are tempted to say, oh, so they didn't get to go to a g-8 meeting or the g-7 issued a tough statement, or there was a vote at the u.n. general assembly, it doesn't mean anything. it does. it's significant. it matters because one way that president putin and russia define power is by the geopolitical standing and influence that russia is able to obtain in undermining russia politically in the international community, isolating it politically diminishes that power. then even more significant were the measures that we took to

isolate russia economically. we started and the president was determined to adhere to a basic principle that we should do it with our partners, with europe, and with other key countries for two reasons. first, the practical impact of being able to impose sanctions with others is much greater, but, second, the political impact is reinforced, and it reinforces the sense of isolation when it's not just the united states doing it. so i think, as you all know, we engaged in a process that resulted in visa bans, asset freezes, restrictions on doing business with key figures in russia, and in ukraine. we imposed targeted sanctions on 28 russian officials, six members of president putin's inner circle outside of government, 1 ukrainian separatists, a gas company in ukraine. we exported licenses for technology companies, and the european union, canada, australia, japan, likt enstein imposed similar, if not identical measures.

just as significant, we developed more severe measures, targeted but at the same time potentially very effective m financial energy and arms sectors. the very knowledge that these measures were out there has, we believe, a deterrent effect, and, indeed, the fact that countries are agreeing to move forward if necessary on them, not only deters, but it creates a climate of uncertainty that wul imposes costs without having to pull the trigger. so there's been discussion about the impact or lack of impact of these sanctions and these economic measures. to me the case is not even close. it's very, very clear. first, we heard in public from russia's finance minister, its deputy prime minister in charge of the economy, even president buttin himself acknowledging the impact of sanctions. very recently sparebank, the

largest bank and a proxy for the larger economy announced a steep decline in its first quarter profits. in doing so it said in particular recent events in ukraine significantly impacted the dynamics of the russian economy. now, across a whole host of measures we can see the dramatic impact that the economic isolation has already had on russia. we saw it initially in the financial markets, which are incredibly sensitive to isolation and to the pressure that was exerted, and we saw it at various points in the crisis as we exerted pressure go to extraordinary lows. they would bounce back if something that was perceived to be positive or relaxation occur, and, of course, in the short-term, because markets are volatile, they may not be the best measure, but we can clearly see the sensitivity of the markets. second, we saw the rubel, which also was having various points during this crisis to an all-time low. it, too, at various points, has bounced back sensitive to events, but what's very

significant is that during this period the central bank of russia had to spend $37 billion, 8% of its foreign exchange reserves, to defend the rupel, and the result in any of that were higher borrowing costses and a devees in the value of savings of russians. maybe more significant and even more compelling capital flight. $51 billion in the first quarter of the year alone, which was more than all of 2013, and going forward the imf, the world bank, private equity now estimate that for 2014 capital flight from russia is expected to be between $100 billion and $200 billion. foreign investors have been pulling back. they're staying on the fence. they look for stability. they look for countries that keep their commitments. they look for a country that's connected internationally. in all of those areas, russia's actions have sent a message to investors that's not the kind of environment they want to be investing in. russia's credit rating was dropped to just blov the junk level.

russian companies are not issuing bonds to raise capital. economic contraction is already clear. we've seen it in the first quarter and for 2014. most of the experts are predicting something close to zero growth. this week alone lords of london withdrew a multibillion dollar trade finance deal with rossteff. it is, of course, sanctioned. now, some of this was happening before the crisis and before the sanctions as a result of the downturn in the russian economy, but virtually every expert and every analyst that we have makes it very clear that everything we did in response to what russia did in ukraine accelerated and deepened this process. so those are the measures of what we have done to carry out the edict to isolate russia in ukraine, but i think what's even more important than that when you think forward is i am

absolutely convinced that russia's actions in ukraine are a strategic loser for russia going into the future. first, yes, you can say that russia "won crimea." but in so doing it is losing and has probably lost ukraine. ukraine is more united in its western orientation than it's ever been and its sense of national identity is stronger than it's ever been. then there's crimea itself. it's true that in the short-term the actions that russia took in crimea produced a political bounce for president putin, but i think that's going to change in a significant way. russia is spending about $7 billion this year just in the direct costs, budgetary and pension support, for crimea. over the next several years most of the experts estimate it will have to spend between $50 billion and $60 billion for critical infrastructure. rail and vehicle bridges, electricity and water connections to make up for what

crimea has lost as a result of russia's actions with ukraine. this puts an incredible downward pressure on defense and discretionary spending to improve the lives of the russian people, to modernize the economy. in short, the bloom will come off of the crimean rose as people begin to understand that this was not for free. there are real costs involved. second, strategically, what president putin has done in ukraine more than anything else has reenergized nato to a point i think we haven't seen in years. there's a renewed focus on nato's article five commitment. ironically, the very thing that putin has sought to prevent, which is nato moving closer in effect to russia, is exactly what is likely to happen as the allied military presence in eastern part of nato territory is likely, indeed, has already grown. to the extent we are successful in reversing the decline and defense spending among nato countries, this is probably going to prove to be the single most significant catalyst.

third, russia's actions in ukraine have done more than anything else could possibly have done to create the potential for real energy reform in europe. it's the biggest jolt to europeans to take real steps to decrease their dependence on russia, to diversify supply, upgrade infrastructure, develop new sources. this has the potential ironically to kill the goose that lays russia's one golden egg. and then, fourth, there are the unintended consequences. what message do russia's actions in ukraine in the alleged defense of ethnic rights send to nonethnic russians in chechnya? this could open a can of worms that will be profoundly against the interests of moscow. and then, finally, and maybe most interestingly, i mentioned a moment ago that when you think

about how to define power or how president putin sees power, it's probably a combination of two things, russia's geopolitical influence and its economic strength, and, indeed, there was a recent survey taken in russia where the russian people were asked what would be their two top priorities and it was very interesting. the results evenly split, international influence and create conditions for individual prosperity. by russia's actions in ukraine, both of those priorities are in profound jeopardy and, indeed, so is president putin's compact with his people to deliver that influence, to deliver that prosperity. there's a way out. integrate russia's economy with the world, diversify it away from fossil fuels, play by the rules, and that way out remains on offer, but ultimately it's up to president putin whether he wants to pursue it. i have to tell you that my concern is that left with few

choices in terms of sustaining his power, there will be a strong incentive on president putin to continue to play the nationalism card, and that means to continue to take the kinds of actions we've seen in order to produce a jolt of short-term support that then evaporates as people understand the costs, which requires another jolt. that's the danger. my hope and certainly the hope of the entire administration is that is not the course that russia chooses and i will come back to that briefly at the end. the second big line of effort we pursued over these months of support of ukraine and there was an equal effort to building that support led by the president. it began with economic support. we produced a package with our european partners of $27 billion over two years tied to reform, very critically, including cutting energy subsidies, improving macroeconomic manage am, strengthening the banking

sector, increasing energy efficiency and security. this was anchored by a $17 billion imf agreement which was achieved in record time, and then there were another $4 billion from the g-7 countries, from the world bank. a $1 billion u.s. loan guarantee to cushion the impact of reforms on low-income families. separate and apart from that we've been pursuing a program of transition assistance to ukraine. u.s. technical support for economic and political reform, capacity building in government ministries, anti-corruption programming, et cetera. most recently we have seen, of course, election support from the united states, from europe, of course in the os c and others. and it's worth commenting that this election was a remarkable achievement considering the duress under which it was conducted. it was the most free and fair election in ukraine's history as an independent country. we would often marvel at the irony of some people complaining in gdansk or in moscow about

being disenfranchised because they were the people creating the disen franchisement. there was a wonderful movie when i was growing up called "blazing saddles" by mel brooks. there's a great scene where the sheriff is surrounded in a house by the bad guys, and he comes out of the house holding himself hostage and saying, better let me go, otherwise i'll shoot myself. that was exactly what the -- those complaining about disinfranchisement were doing. and then it's interesting to note russia has complained about the aled fascists who dominate ukraine. well, if you look at the election results, the too far right parties each got less than 2%. so much for domination by the far right. besides the economic assistance, besides the assistance for the elections, we've also pursued security sector assistance.

$23 million over the past three months in nonlethal assistance to help the ukrainian security forces to deal with their immediate needs, to sustain themselves in the field, to defend themselves against the armed separatists, and to better monitor the border. we provided meals ready to eat. people laughed about that. well, you can laugh but then you can look at the photographs deployed ukrainian forces eating those meals ready to eat. communications equipment, vehicles. those were all short term measures to address what was most immediately needed in this crisis. but now with a new government and in cooperation with europe, we plan to engage on comprehensive security sector reform. now, some would have us sell or provide ukraine with all sorts of sophisticated weapons systems starting yesterday. that's exactly the wrong thing to do. it is vitally important that we

begin by assessing the shortcomings of the security sector, understand the necessary reforms, establish actual needs, establish priorities. until ukraine begins to dress with our help systemic shortcomings, insufficient resources, mismanagement, institutional incapacity, and gross corruption, assistance wile not be effective. but there's a real opportunity with a new government that's determined to remedy the shortcomings of the past and we're determined to seize it with them. finally, reassuring our allies and partners. the president was determined hearing from many of our allies and partners and listening to the deep concern that they had faced with russia's actions in ukraine to take immediate steps to reassure them. to bolster the article five commitment that lies at the heart of nato, and what he set out to do and what we have done is to produce a virtually

continuous air, land, and sea presence to the eastern reaches of nato. in the immediate we sent 12 additional f-16s to poland for training missions. we rotated ships into the black sea. the donald cook, the taylor. we deployed four company sized paratrooper divisions to poland and the baltic countries. this week the president announced a new commitment to reassurance and to european security with a $1 billion fund, a fund that would allow us to prepoe sation equipment in europe, to expand exercises and training, to increase the number of u.s. person nal rotating through central and eastern europe. it's obviously vital that the u.s. not be engaged in this enterprise alone. we've taken many of these steps to encourage our nato partners to do the same, to take part in the continuous deployments and rotations, and we expect over

the comings months that we'll be able to say that all 28 members of nato participated. and then by the nato summit in september we expect to see steps to reverse the decline in defense spending that, unfortunately, has characterized the alliance in recent years. ironically all of this again catalyzed by russia's actions. so where do we go from here? first, it's very important that we get a grip on and resolve the situation in eastern ukraine. what we've seen in recent weeks are two things, there has been on the surface at least a russian de-escalation, pulling back its troops from the border, ratcheting down the rhetoric, making even some positive statements about the ukrainian election. i believe these steps were designed principally to try to take some pressure off russia and possibly divide europe from the united states or europeans from each other to create some confusion because, unfortunately, this change in tactics i don't think it can yet

be said indicates a change in heart. russia still seeks to intimidate ukraine into giving russia undue influence by sowing chaos in the east by providing overt support for the illegal referenda, through increasing flows of militants and weapons across the border, and this is maybe the most striking development in recent weeks. i think you've all seen it. the numerous videos and media reports of armed militants admitting they came from russia, including many chechens. multiple attempts every day by convoys of vehicles to cross the border with armed men and weapons. recently there was the incident at the gdansk airport where separatists sought to take over the airport. the ukrainian military responded, and in that battle some 30 fighters were killed, and they were russian with russian passports. the separatists, unfortunately, have become increasingly

violent, increasingly heavily armed, and actively targeting and killing ukrainian security forces. so you can't have it both ways. you can't on the one hand purport to take steps to de-escalate the crisis but at the same time under the surface actually take steps to accelerate it. so it's vitally important we continue to keep the pressure on russia to change course and that's exactly what happened this week in europe at the g-7 and in the president's meeting with his european counterparts. president obama secured commitments from our partners to continue coordinated actions to raise the cost of russia's unacceptable interference from ukraine and most importantly, to affirm their readiness to implement sig yant additional measure to impose further costs on russia if it proves necessary. wee also been making clear what it is russia needs to do and what i