Flashpoints: The Emerging Crisis in Europe

January 30, 2015


JOANNE MYERS: Good morning. I'm Joanne Myers, and on behalf of the Carnegie Council, it's a pleasure to see so many of you here on this cold morning. But then again, the reason is self-evident, as our guest today is George Friedman, a prescient and insightful expert on global forecasting.

Today he will be discussing his latest book, entitled Flashpoints: The Emerging Crisis in Europe. This book is the long-awaited follow-up to George's earlier New York Times bestsellers, The Next 100 Years and The Next Decade. And if you are curious about the contents, you can read the transcripts by visiting our website at www.carnegiecouncil.org.

We are delighted to welcome him back to this podium. If you have been listening to the news, you will know that the European Union is experiencing a time of intense challenges. Whether we are talking about the unrest in Ukraine, the recent Greek elections, economic disparity among its members, or Islamic extremism and the resurgence of nationalism, Europe is being tested. While the European Union was designed to alleviate historical tensions, due to asymmetries of power, influence, and resources, the peace and prosperity on which the European Union was founded is failing. These emerging crises and how they will affect the future will be the focus of our discussion this morning.

In Flashpoints, George talks about unique political hotspots where tensions have appeared throughout history, hotspots which are still smoldering beneath the surface and are on course to erupt again. He writes that the question about whether Europe has transcended years of conflict and war or whether this period since the end of World War II has merely been an interlude of relative calm is central to any consideration of the future.

When most Americans think of crisis zones, Europe is probably the last place to come to mind. But it shouldn't be so. The trans-Atlantic partnership is one that shares many common values and concerns, and has grown increasingly interdependent in terms of our security and prosperity. As history has shown, political and economic crisis in Europe affects us all. What happens in Europe doesn't just stay in Europe. Europe is part of the international system.

So what does the future hold? George doesn't have a crystal ball, but what he does have is an analysis that will not only stand out, but will stand up to the test of time.

Please join me in giving a warm welcome to our guest today, George Friedman. It's so nice to have you back with us.


GEORGE FRIEDMAN: It has become a tradition for me that when I publish a book, I come here. It is not officially published until on a snowy January morning—I always publish on the 27th of January, for some reason—I get out of the car, I step in the snow, my feet get wet; now I know I've published a book.

There were two reasons I had for writing this book. The first was that in the next 100 years one of my forecasts was the fragmentation and failure of the European Union. At the time when I wrote it—it was published in 2008, but written in 2006 and 2007—it appeared to be a preposterous statement. The only pleasure an author gets is the term "I told you so." There's very little else.

But I also thought that it was necessary, having given the high-level gloss, to really drill in to what is happening in Europe, because Europe is an extraordinarily important place, both historically and personally.

I was born in Hungary in 1949. My life and my family's life was bound up with the geopolitics of Europe in a way that many people's wasn't. My parents were born just before World War I. Their brothers and fathers fought, not in the French trenches, but with the Turks and the Russians in a very bloody war. They came back ruined.

My parents met and fell in love in Budapest and started a business in the end-of-war period. Then the Germans came, and my father was taken and joined the Hungarian army and special Jewish labor battalions, and was present at Voronezh, just north of Stalingrad, when the Soviets counterattacked. Naturally, they counterattacked where the Hungarians were, as the Hungarians had minimal commitment to the idea of the Greater Reich. But that didn't mean they didn't get slaughtered. He walked back in the winter of 1942-43 to Budapest.

Then he went to Mauthausen; my mother also. Then they started a life again, and the Communists came in, the Soviets. My father, who had been a Social Democrat before the war, was on a list. It was very bad to be on a list. His brother, who was a Communist and an officer in the ÁVH, the secret police—my father and he hated each other and didn't speak for years, over subtle interpretations of early Marxist texts and something to do with an inheritance and who insulted whom at what wedding. This was a full-bore Jewish Hungarian family, with malice of all sorts.

But he warned my father that he was on a list. This was a matter of life or death. If he stayed, he would die. This was stolid.

So we contrived to leave. On a night in August 1949, my mother, my father, my 11-year-old sister, and I, at six months, got into a rubber raft and paddled across the Danube to Czechoslovakia. Why to Czechoslovakia? First, the Hungarian-Austrian border was completely closed, minefields laid, everything. You could not get across. But secondly, we had a geopolitical opportunity. Israel was being courted by the Russians, the Soviets. Anything that could hurt the British, the Russians would be happy to do. They didn't see the Arabs as an option. Therefore, they were supplying weapons to the Israelis. Israel needed two things: weapons and Jews. Stalin had both. He delivered them through Czechoslovakia.

Therefore, the geopolitics dictated that, at the age of six months, put to sleep with sleeping powder so I wouldn't cry out, we crossed a river, with searchlights sweeping the river and towers with machine guns in them guarding that river. We got to the other side, and we lived. That was the miracle of my father's life.

I remember there was a song by Pete Seeger about little houses made of ticky-tacky. My father asked me the question, "What is this about?" I said to him that people who live in mass-produced houses have mass-produced minds. They lose their identity. And my father said, "This is what Americans worry about?"

The Israelis were taking everyone to Israel. My father was a committed Zionist. He was absolutely committed to it, but they didn't want to go to Israel or have anything to do with it. He had spent his last years with people trying to kill him. He wanted to go to a country where no one was going to try to kill him, and he preferred a country that was much stronger than any of its neighbors. He was tired of being from Hungary, and Israel looked too much like Hungary. So as much as he was committed to the idea of the Jewish state, he was far more committed to staying alive, and that he would do in America.

We made it to Vienna. The Israeli convoy was stopped at the border. We don't know how my father did this. We got arrested by the Czech border guards, taken off. They went on to Israel and we went on to Vienna.

My father knew war was coming. It wasn't coming, but my father always knew war was coming. And in 1949, he wasn't crazy. He made some sort of deal that we don't understand, where we were brought to the United States on an American destroyer, my mother, my sister, and I, given the captain's cabin—which did seem extraordinary, but now that I know the Navy, was, "wow"—and brought here and given papers.

My father stayed behind. This was a time when something called Operation Rollback was underway, the attempt to penetrate the Eastern Bloc with expatriates and try to bring down the regime. The operation was completely penetrated by the Soviets. Everybody was killed. My father wasn't killed; hence, he wasn't doing anything important.

Then he arrived and came to the Bronx. We grew up and life went on in America. He bought a little house, and he was happy. My father had lost all interest in politics. As he put it, geopolitics is what's going to happen to you; politics is why you can't do anything about it. [Laughter]

My life and the geopolitics of the 20th century are bound up, not uniquely, but if you are a European and if you lived, you all had extraordinary stories. No one but the extraordinarily lucky and the extraordinarily cunning managed.

For me, therefore, Europe is a place which is both incredibly seductive—I studied at Freiburg University in Germany, so obviously it didn't trouble me that much—and it was a place of nightmares, the nightmares my parents had each night, the nightmares of Nietzsche coming to life in a shallow way—an endless series of nightmares.

In writing this book, I revisited my past, which at some point you should, but more than my past, the past of my family, because your family's past is your past. I dedicated the book to my sister, who is 11 years older than me and, at the age of five, withstood the Siege of Budapest by the Red Army alone—my family was taken away; she was left alone to survive, and did—and at the age of 11, was awake that night when we crossed the Danube.

This is a European life. There is nothing extraordinary about it. What is extraordinary is that it ended. So the fundamental question is, has it ended? Have they reached the point where, they like to say, "We have learned not to do this"? Can you learn not to do this? That's the question on the table for me.

There is an enormous paradox of Europe. It created humanity. By that I mean before the European conquest of the world, the Mongols had never heard of the Congolese, the Congolese had no idea of the Aztecs, the Aztecs didn't know of the Japanese. The world was a series of sequestered universes. What the British and the French and the Spanish did was to rip apart the veil, the very comforting veil, of a small world and, for the first time, identified humanity as a whole and forced humanity to be aware of itself. It wasn't their intent. Their intent was gold and land. The outcome, however, was to create the first global human civilization, such as it was.

They also conquered nature. You could see that as you walked in the streets of Paris or London in 1913. The transformation of the night to me is always the most important thing. The night ended all things for most people. Now it was simply another time of the day. You turned on the lights, you turned on the heat, and you moved on. As I like to say, then you could go to a concert and listen to Mozart. Any civilization that produces Mozart can be forgiven many sins. And they had many sins indeed to speak of. But what they did was magnificent.

They thought they had reached a point where they had solved everything, but there was a paradox of Europe. Having conquered the world, they never conquered themselves. Europe never united. Attempt after attempt to either forge an understanding or to conquer all of Europe failed. The Spanish failed. The French failed. The Germans failed. The British didn't even try.

But here was the paradox. This area of the world, the second-smallest continent in the world, if you will, conquered India, overwhelmed China in many ways, transformed Africa, even though there was a revolution, still shaped Latin America and North America—reshaped the world and yet could never bring peace in Europe. The conquest of the world coincided with a civil war in Europe that never ended.

When you look at Europe's geography, you understand it. There are peninsulas and peninsulas coming off of peninsulas and islands and mountain ranges that can't be passed and vast steppes. No one could militarily conquer it. No one could bring it together. No one could eliminate the tiny peoples, the Hungarians, and replace them with the generally European.

To this day, Europe is the second-smallest continent—or the smallest, if you are willing to dismiss Australia as a continent, which I am, but my wife isn't. She's from Australia. It's the second-smallest continent and it has 52 sovereign nations. You can drive through the northwestern part of Europe and, in three hours, pass through four languages and endless malice. The French have not forgotten what the Germans did. The Germans remember what they did, but think that happened to someone else. The Flemish hate the Walloons in Belgium. The Dutch think they float above all of this.

Yet no one floats above Europe in any way, and if you travel through this place and you drink late at night in a kind of working-class bar, you see Europe. As my father used to say, "Never forget, never forgive," which I think should be the slogan of the European masses, if not of the financial elite, who are happy to forget anything.

This inability to unite culminates in 31 years of horror. From 1914 to 1945, in the most extraordinarily collapse of a civilization that you could imagine, the Europeans killed for political reasons 100 million people, give or take—this in a continent that never had more than 500 million people. The slaughter was extraordinary. Genghis Khan couldn't pull this off. What they did to themselves between 1914 and 1945, at the Battle of the Somme, in the starvation of Ukrainian peasants, in the Holocaust, in Hiroshima—to go out of Europe for the moment—what was done was extraordinary by Euro-American civilization.

The most extraordinary thing was that it was a magnificent civilization. It was a civilization of culture and of science. It was a sophisticated place, which teaches us something about the distinction between sophistication and decency. It was a place that you would not imagine was possible. In fact, Norman Angell, who won the Nobel Prize, wrote a book called The Great Illusion in which he demonstrated convincingly that, given the interdependence of Europe, given the financial consequences of a war, it was impossible that a war should take place. He wrote that in 1910. He was a very smart man.

There was a belief in Europe, which is very important to remember when we talk about the EU, that if you have economic stability, no one is crazy enough to upset that, that reasonable people—and we all knew that Europeans were reasonable people, the quintessence of reasonableness—all understood fully and completely that there could be no war. Of course there was. It was a war that was unimagined by any of the people beforehand, and it ended in the fact that Europe, which had created the world, came out in 1945 as occupied territory. It had lost its sovereignty. One part was occupied by the Soviets; one part was occupied by the United States. Each treated the occupation differently, but it was a fundamental truth.

The essence of sovereignty is war and peace, to be able to decide it. The decision on war and peace after 1945 was not made in Berlin, London, Paris. It was made in Washington and in Moscow. In that sense, the question of whether or not there was going to be a war in Europe was in the hands of others.

I should point out—and I think this is an important thing to remember—how incredibly responsible the Americans and the Soviets were. The management, the care which they took not to allow the war to happen, in retrospect—living through it was a different matter—was extraordinary. Imagine the diplomats in 1914 in Europe or in 1939 having nuclear weapons. Would they have been so cautious?

I say this only because whenever I travel to Europe, I'm accused of being a cowboy. I don't like cows, I don't like horses, loud noises scare me, so I don't know why. They have this image of the Americans as being cowboys. A continent that killed 100 million people in 31 years regards the Americans as violent.

But here's the thing about the Europeans. They understood that this could never happen again. All of their efforts ultimately came to making sure it never happened again.

The Europeans really didn't recover their sovereignty until 1992. When the Soviet Union collapsed, the United States lost interest in Europe. At that point, the total power devolved back to Europe. That was also the year, coincidentally, that the Maastricht Treaty was signed. The Maastricht Treaty created the modern institutions of the European Union, from the euro to the Brussels bureaucracy and everything else. The intent of the European Union was two things—it was written into your basic documents—peace and prosperity. Not pursuit of happiness—that is, not the pursuit of these things—but the presence of these things. The assumption was, again, Norman Angell's assumption: a prosperous continent cannot go to war. If you secure prosperity, there will be peace.

There was a sense of European exceptionalism, that "we Europeans, having done these horrible things, have learned, and we have learned that it's not good to do these horrible things." If life were that simple, then it would be over. But having learned things in my own life has not kept me from repeating them. We are who we are.

The great test of Europe, therefore, was, could this Maastricht Treaty, could this European Union—and please remember that the European Union, the idea of European integration, was not a European idea. It was an American idea, embedded in the Marshall Plan, resisted by the Europeans. The French did not want to be integrated with the Germans, the English didn't want to be integrated with anybody, and nobody wanted to be integrated with the Italians. Europe resisted. The Americans forced the first tentative steps.

But then the Europeans embraced it as their own. They had this sense of exceptionalism, that we have understood what no one else understands: War is terrible. Well, yes, war is terrible. They understood the key to it, which was prosperity. But they never asked the question: What happens if you can't deliver prosperity? What happens if the business cycle hits you?

In seven weeks in 2008, history transformed itself. On August 8, 2008, the Russians invaded Georgia. This had two dimensions. First, it announced that history doesn't end so certainly; we're back. And they announced it with authority.

The invasion of Georgia had little to do with Georgia. If you remember, there was the Orange Revolution in Ukraine, creating a pro-Western government and a feeling in Ukraine that they were now part of the West. This was a message that the Russians were delivering: Georgia was an ally of the West. This is what American guarantees are worth. It's a lesson that took hold in Ukraine for quite a while. It certainly has to be understood if we understand what's going on in Ukraine today, that lesson.

The second thing that happened, seven weeks later, was Lehman Brothers.

The post-Cold War geopolitics collapsed in August and was redefined. The tremendous prosperity of the business cycle between what I would call the savings and loan fiasco and the Third World debt crisis, on one side, and the other side, the subprime crisis—the financial structure collapsed.

Peace and prosperity are the official foundations of the European Union. Peace had not been shattered, but had been strained, and prosperity was certainly tested.

This was the fourth financial crisis for the United States since World War II: the municipal bond crisis, the Third World debt crisis, the savings and loan crisis. This was settled as all the others. The Federal Reserve chairman, the secretary of the treasury, gathered a group of bankers together in a room on a Sunday afternoon, broke every imaginable law of American banking and finance, and came up with a solution that worked. There was an understanding that we've got to get out of this. There was also an understanding that the large institutions had to participate, and that there was no formal structure for really thinking about it, and no time to go to Congress. Congress knew what they were doing and said, "Okay, yes, we really want the banks to open on Monday."

We wound up in a situation where the Americans solved the problem and the Europeans never did.

They first had their own subprime crisis—and I always enjoy the Europeans blaming the United States for that. I point out, "Yes, we sold you crummy bonds, but you bought them." They don't seem to draw a connection here. But that turned into another debt crisis.

The essential problem of Europe is that Germany exports over 50 percent of its GDP. The fourth-largest economy exists with half of its economy dependent on exports. Of those exports, a little over half go to a European free trade zone. The Germans need that free trade zone, because if they were blocked from access to these countries, their economy would, if not collapse, be reeling at the very least.

So the Germans threaten to throw people out. Every one they throw out is a market they potentially lose. Hence, in six years, they have thrown no one out, but they have been very aggressive in lending to them at various times so they can buy their goods.

The German control of the euro, which was political, fixed its price at a level that benefited the Germans, but didn't give the Greeks, for example, the ability to devalue when devaluation would have solved many problems for them early on. The regulations of Brussels were such that it was almost impossible for entrepreneurial activity to take place, plus the tax code was so punitive to anyone successful that you would be crazy to try to be an entrepreneur. There was no Google threatening Siemens. The German corporations and the other European corporations of the 1950s style remain intact, where in the United States, Digital Equipment, Prime, Data General went reeling when Microsoft came up.

No such thing happened in Europe. So Europe remained very stable and very needy of itself.

The result was, since you couldn't be entrepreneurial legally, you were entrepreneurial illegally. The only way to start a business and have any chance of surviving is in the black, because if you follow the regulations, if you follow the tax code, you couldn't possibly survive—not that the Greeks really respected the tax code. But this is an old story in Europe, which is that the government creates regulations and then fully expects everybody to disobey them. The government knows that if you obey them, unemployment will surge in Romania, will surge in Poland, and so on and so forth.

So the European institutionalization of regulations, which, if followed, would crush you, forced huge amounts of the economy into the black market. That cut the tax base and created a sovereign debt crisis. The countries couldn't pay off their debt.

The next thing that happened was a debate. Two narratives emerged. In one narrative the shiftless, lazy, self-indulgent Greeks fooled the naïve and simple Deutsche Bank examiners into making them loans. In the other narrative, which now is being heard, the Germans rigged the EU to make certain that their need for exports—and it was a real need; they couldn't back off—was protected. In one story it was the irresponsibility of everybody in Europe. In the other story it was the Germans being Germans again.

If you go to Europe now, the animosity against Germans is extraordinary. The first thing that the new prime minister of Greece did was visit a shrine for the dead from World War II.

This feeling is back, not in what I call the Financial Times elite. You can't feel it in the Financial Times. For them, capital has no country. But if you go to the bars, if you talk to people who are not involved in international trade, the European Union has turned into a catastrophe. The unemployment rate in Greece is 26 percent. The unemployment rate in Spain is 23 percent. If you draw a map of Southern Europe, the unemployment rate is somewhere between 20 and 22 percent. This unemployment rate is the same level as in the United States during the Great Depression. Southern Europe is in depression. Germany's unemployment rate is 5 percent.

There is no longer a common European fate. There is no longer this idea that all of us Europeans share this fate. It was as if Texas had decided during the bailouts and everything that it would not give any money to Illinois. It probably would have done that if it could. But it's sort of hilarious. Yet that is what happened in Europe.

In fact, in this latest quantitative easing, as they call printing money, it is not being administered by the European Central Bank. It's being administered by the national banks, with two rules. One, you may only buy assets in your own nation, and secondly, no other nation is going to be responsible if this fails.

On the one side, the Germans do not want to be responsible for other countries. On the other side, other countries do not want Germany dictating and have no trust of the European bureaucrats.

This is the break point for the European Union, at the point when the core issue is not the euro; it's the Central Bank. When the Central Bank had to devolve authority on the national banks—which, by the way, don't have the staff to do this. They have been out of business, effectively, for a long time. It's not clear how they do it. And I do look forward to the day that this Cyrpus National Bank gets €2 billion. That will be a holiday in Cyprus.

So each of these banks is now doing it itself, each of these countries. It has not collapsed. It just simply doesn't work the way it was intended to work.

We have gone to nationalism again. The nation-states are back, and the borderlands have come alive.

Ukraine—the fundamental borderland of Europe, between the Russian mainland and the European peninsula, is active. We forget the fact that during the 1990s there were 100,000 people killed in Yugoslavia. The Europeans say, "Well, that's not really Europe." It's Brooklyn, I don't know. But this is a European affair.

But it's not only the external things. The fault line between North Africa, Muslim, and Southern Europe, Christian, the Mediterranean fault line, alive not exactly as a state-to-state issue, but an Islam-to-Europe issue—I won't say Christian because Europe is more complex—that's alive, all in small ways.

Inside of Europe, it is inconceivable that 45 percent of Scots would vote to end the United Kingdom. That's a stunning event, that they even possibly could come that close.

In Belgium, the fragmentation between the Flemish and the Walloons is enormous. In Spain, Catalonia wants to and likely will, in some way, withdraw from the Spanish Union. In Romania, the Hungarians want to leave the Romanians. In Italy, the Northern League wants to re-divide Italy.

All of these seem preposterous. But the mainstream European parties are collapsing because they have no credibility. They have no credibility because seven years after 2008, they still have not been able to solve the problem. If you read the Financial Times—I don't want to pick on them—you would think that the problem was over a long time ago because the banks are stable. I do not know how the banks are stable. There's a tale there, itself. But let's assume the banks are stable. Southern Europe is still in depression. The financial elite seems oblivious.

I don't regard Greece as an outlier. I regard Greece as a forerunner. Everything that has happened to Greece happened to the rest of Southern Europe.

So you are now in a situation where the borderlands, the divisions of Europe, have come back to life, on not only a national basis, but a class basis, with the financial class unable to grasp what is happening to the middle class.

Remember, when you cut government workers in Europe, you have cut doctors, you have cut lawyers. This is not the Department of Motor Vehicles cutting that nasty lady. This is cutting into the heart of the professional class. When the professional class, who had such hopes for their future and their children, find themselves in penury—and they do—when they find themselves in an impossible position in which to live, what comes out of that is far more bitter than what comes out of the working class. What comes out of that is an anger at everyone. That anger is there. This time it's Muslims, not Jews. But there is a wide umbrella to include in there.

It's from the right, a malice against the financial classes who brought about this crisis, who didn't care about it. When you are living a life of the middle class or the upper middle class and you lose it, for a while you retain hope, but we're out of time, as I put it. A European commissioner became very angry at me for this talk. He said, "We of course can solve this." I said, "Good idea. Do it."

The problem here is not that no one has thought of a proper formula or a think tank hasn't produced a paper yet. The problem is that the interests of Germany are so different than the interests of the rest of Europe that we are back to the problem of 1871, when Germany was first unified. There are no tanks rolling, but, as one Romanian said, the new tank commander comes from Deutsche Bank, and when he shows up, he takes no prisoners.

We are back to the fundamental question of Europe. The 31 years is over. I don't expect it to resume. But Europe has always been a place of conflict and malice and anger and hatred, between classes and between nations. You can't go to Europe and talk to people and not hear it. The question now is, can it be contained? I doubt it very much. The period from 1992 to 2008 was an interregnum, and an unnatural one. Europe is returning to itself, and when Europe gets sick, the world gets sick with it. This is a very dangerous situation. You could see it first of all in Ukraine.

Let me stop there.


JOANNE MYERS: On that upbeat note—I guess the past is prologue.

Would you spend just a few minutes talking about the Ukraine, before we open it up, and say what you foresee in the future?

GEORGE FRIEDMAN: There are two stories about the Ukraine. The American story is that the United States supported people who demanded respect for their human rights. They gave money to it and so on. The Russian story is that a democratically elected government—it was democratic—was overthrown by a mob, the constitution changed on a Sunday morning, and the entire attempt was underwritten by the United States. The view of the Americans is, we gave the Ukrainian people the right to choose. The view of the Russians is, they chose, you didn't like the choice, you did this.

Leaving apart the rhetoric—I was in Russia and had an opportunity to talk to people, and it was interesting—leaving apart the rhetoric, here is the fact. If you draw a line from St. Petersburg to Rostov, you draw the line that is the base of the European peninsula. To the west of this line are the Baltics, Belarus, Ukraine, part of the European peninsula. To the east of this line is Russia. Russia must move to the west if it is to have any access to the sea and if it is to have any buffers. Fair or not, it regards this first line of countries as essential to its survival. It can live with a neutral Ukraine. It cannot live with a pro-Western Ukraine.

The United States has its own primordial fear. The one thing that frightens the United States is a hegemon that can marshal all the resources of Europe. For a century—the First World War, the Second World War, the Cold War—U.S. foreign policy pivoted around preventing that happening. If the Russians have Ukraine and the Europeans are as weak and as fragmented as they are, where do the Russians stop?

So you have two nations with reasonable fears of each other. That's where conflict comes from.

General Hodges, who commands U.S. Army forces in Europe, visited Kiev last week, announced that U.S trainers were going to be arriving, and also pinned medals on Ukrainian soldiers for heroism. The symbolism of that was enormous. He also announced that the United States would now be prepositioning armor, artillery, and other equipment in the Baltics, in Poland, and Romania.

That is the cordon sanitaire of this containment. The United States is signaling the Russians that even if you regain Ukraine, we will stop you. This is done outside of NATO, without any expectation of help from the Europeans. Once again, the Europeans become irrelevant to this.

The Russians now have a very important choice. They were badly beaten in Ukraine. They first had a pro-Russian government. They held on to Crimea. They never invaded Crimea. They were there by treaty. They failed miserably in an uprising in the East. The Ukrainian section of the FSB [Federal Security Service of the Russian Federation] was fired, and Putin announced two weeks ago a complete restructuring of the FSB. The FSB is the foundation of the Russian state, and it was shown to be incompetent. This is a huge crisis in Russia.

Without going into all the details, the question that has always been at stake is, where is the western border of the Russian empire? The Americans want there to be no buffer between the peninsula and Russia. They justify this by the right to national self-determination. The Russians insist that there at least be neutrality. They justify this by the right to national self-determinations for the Russians in the east. Everybody is using national self-determination to justify their geopolitical needs.

So we are in a situation where the Russians, who, when they become economically pressed, become militarily dangerous—that's when they are the most likely to do something—come April, have to make a decision. I say April because that is when the ground will become firm again and the mud will go away. The Russians are increasing their presence, but still not significantly, in the pocket. We await the next move.

The American move was made. We drew the line when General Hodges visited. Now the question is, what do the Russians do?

QUESTION: I'm Don Simmons. I enjoyed your talk very much, Dr. Friedman.

There is no Chapter 11 process for countries. If the Greek government insists on a debt haircut and restructuring and the Germans and other European powers refuse, how will that be resolved, in your opinion?

GEORGE FRIEDMAN: There's a prior precedent of the Hungarians. The Hungarians had mortgages made to their people, denominated in euros, Swiss francs, yens. When the forint collapsed, Viktor Orbán essentially said to the Western bankers, "We will repay you in forint and we will give you about 60 cents on a dollar." It was a more complicated formula. "You have a choice. You can have this or you can have nothing."

In other words, you reach a point in a bankruptcy, a genuine bankruptcy, where it is easier to go bankrupt than to pay for it. The Greeks are clearly in that position.

There is no Chapter 11, but there is much precedent. One of the most troubling precedents will be Argentina, which defaulted and which found itself not frozen out of the markets. We had established as a Euro-American system that American Airlines could use bankruptcy as a tool for managing assets. It is very difficult—the moral risk is way past. We're past that point.

What the Greeks will simply do is what the Hungarians did. They have two options for doing this. One option is simply announcing, "This is what we're going to pay. Take it or leave it." The other is to print the drachma and announce, "We're going to pay it in the drachma."

The problem the Germans have is they are terrified, not by default, but by protectionism. What is terrifying to them is, as these countries pull away, they already want to control their borders and not let people, workers, come in. They are already essentially controlling the movement of capital in different ways. The Germans must have the free trade zone.

Merkel, who will scare anybody, is bluffing her hand. She is acting as if none of this matters; Germany can go on alone. But a country that exports 50 percent of its GDP can't go on alone. It's more hostage to its—put it this way. It depends more on its customers than Greece depends on its creditors. The asymmetry is that Greece can manage a lot better defaulting than Germany can manage through protectionism.

How does it end? For the Greeks, they are not going to pay that back. It's just not going to happen. No government in Greece can survive.

But it's not just Greece. You have Podemos coming up in Spain, which is exactly the same position. The Hungarians have already essentially defaulted on privately held debt.

This debt is not going to be repaid, for the most part. The decision on whether it's going to be a hard or a soft landing is Germany's, and Germany has its own political problems.

QUESTION: Richard Valcourt, International Journal of Intelligence. Good morning, George.

My wife is Hungarian. She came here in 1989. She was born and brought up under the Communist regime. Her family is still there, a little more than an hour from the Ukrainian border. So there is a great deal of concern right now over what's happening in Ukraine and the possibility of Hungary also falling under a possible Russian control.

Right now Orbán is playing games with the Russians. Is he being a little bit irresponsible or is he being foresighted in what he's doing?

GEORGE FRIEDMAN: He made a bet and lost. The bet he made was on two things. The first was that if the Russians want to play in the Ukraine, the FSB holds all the cards. The second thing he bet wrong on was that the United States was not going to do anything. I always say United States, because the Europeans are not playing this hand.

Orbán is now trying very hard to back off. It's hard politically because he has built his coalition—it's not much of a coalition; he really is strong—he built it around this idea of Hungarian nationalism, hostility to Europe, also hostility to the United States. I am fairly confident, for various reasons, that he realizes that this was a mistake. The problem is, how does he walk back the cat? The United States has any number of tools to use against him.

There is this view in Eastern Europe that the Russian intelligence was so capable that it would not permit anything to happen that they didn't want. There is this belief in Russian intelligence. The pathetic performance of the FSB in Kiev and later in the East has, I think, stunned many, some who are trying to figure out, what conspiracy can we come up with that makes sense? But the Poles flipped, the Romanians flipped—the Poles didn't flip; they were always there. The Romanians did flip. The Hungarians are trying to cope. 

So there is a reevaluation going on in Eastern Europe, and Hungary, which has managed to be on the wrong side of virtually every major conflict in Europe ever, is there again.

QUESTION: Thank you, George. James Starkman.

If you had been sipping your coffee at our table as opposed to this table, you would have heard the breaking news this morning that the Germans had forgiven all Greek debt and the Parthenon was being disassembled and reassembled in Berlin.

GEORGE FRIEDMAN: I really wish it was.

QUESTIONER: I was watching Charlie Rose last night. Larry Summers was on discussing the EU, which he said when it was being formed, he felt it was a bad idea because there was no political union and no banking union. But he now felt that, having been formed, it would be a total disaster were it not defended and held together. What is your opinion?

GEORGE FRIEDMAN: Yes, it will be a total disaster. The question is, what holds it together?

First of all, it's amazing to me, having taken much abuse by saying that the EU would fail, to find all these people who knew it all along. That's life. And I'm sure Larry Summers did.

Secondly, policymakers tend to believe that they can make policy—or, more precisely, there is foreign policy and there is reality, and they are not connected. The mere observation that the collapse of the European Union would be a disaster in no way means that the disaster won't happen if the analysis is correct. How do you square a free trade zone in which the center of the free trade zone is overwhelmingly dependent on exports?

Imagine if in NAFTA [North American Free Trade Agreement] the United States exported 50 percent of its GDP, and half of that went to Canada and Mexico. What would be the condition of Canada and Mexico under these circumstances, especially when the United States got to set the rules, had a disproportionate influence on the rules?

The Germans have to step back from this. They have to move away from an export-driven economy, just as the Chinese are stepping away. But the Germans can't afford the transition. They went through the integration of Eastern Germany after 1989 and spent 10 years struggling to bring it to this point. They are so sensitive to the political and social costs of this transition, they can't make the transition. And the others can't live with it.

I don't think this is a euro problem. Everybody is talking about the euro zone. If you solved the euro problem, you still would not solve the core issue of free trade, of whether you can have free trade with this reality.

Would it be a disaster if this happened? Yes. I'm talking about wars, so, yes, it would be a disaster. The problem is that most human tragedies don't happen because, gosh, we didn't get it; they happen when everybody is helpless. The problem of Europe is a massive lack of choice—helplessness.

So, yes, I think he's right; it will be a disaster. I'm simply saying that there is no way back. That's a tragedy.

QUESTION: Rita Hauser.

You have depicted a new fault line in Europe—agreed. What is American foreign policy, then, today? We've got endless amounts of involvement in North Africa, in the Middle East. We're dealing with terrorism. We're stuck in another sort of rewind of a war in Iraq. You haven't even mentioned at all Asia in your analysis, what has happened to our pivot to Asia. Are we going to be drawn back into the centrality of the Russian-American conflict or do we have some kind of a global view?

GEORGE FRIEDMAN: First of all, we are also 20 years into "the American imperium," if you will. It has only been 20 years since the United States was the world's only global power. In 1992, the last European global power fell, the Soviet Union. There is no European global power. There is no other global power. We neither wanted this condition—we are institutionally not ready for it, and we, frankly, don't know what we're doing. We are groping to an understanding.

We are roughly in the situation that Britain was about 1800. They had lost the North American colonies. They had huge financial problems. They weren't quite sure whether their primary interest was in fighting France or conquering India. They were all over the place.

It takes a while to mature, and 20 years is not "a while" in history.

The United States, however, has had a very, very, very consistent foreign policy for a century. It has been simply this: The amalgamation of Germany and Russia, or the Soviet Union, was inconceivable. The only thing that would threaten the United States in a fundamental way was the combination of German capital, German technology, Russian resources, Russian manpower.

Three weeks after the czar abdicated and it appeared that German troops were going to rush to the West and overwhelm the French and the English, that's when we declared war in the First World War and rushed a million men there.

In the Second World War, we allied with a homicidal maniac against another homicidal maniac, Stalin against Hitler, in order to make certain that the Russians and the Germans remained split. This was the foundation of Roosevelt's war plan. At the last moment, although we were working in the periphery, we invaded Northern Europe, on June 6, 1944, and contained them. We immediately moved toward a containment policy. The Cold War was entirely about German-Russian relations.

The United States, on one level, is in constant chaos in its foreign policy. On another, deep level, it has pursued the same policy for a century, and it is embedded in our DNA. It is not simply Russia and Germany, things of that sort, but Europe is the largest economic zone in the world. What happens there has massive significance. This is where we go first when this happens.

The problem we have is that we have a bunch of peripheral commitments—that is to say, the future of Iraq or what have you. We overreacted—which is very easy to say today—to 9/11 by becoming strategically engaged in an entire region. If our goal is to protect ourselves from terrorism, creating democracy in Afghanistan does not have a correlation between the two.

We have adopted a reactive foreign policy, because that's what weak powers do and we were a weak power for most of the century. We reacted to threats, and we are still reacting to threats. The Romans didn't work that way. The British didn't work that way. They also didn't work by sending their own troops to every circumstance they needed to. They worked by indirection, by a balance of power, by maintaining relations with other powers. Transiting from the kind of foreign policy we had during the Cold War to a new foreign policy is very, very difficult.

My argument would be that, first, our reaction to Russia is proportional, given our historic commitment to certain American interests. Second, our involvement in the Islamic world is not wrong; it's just not going to work. You are not going to get from here to there. It would be very nice, but between Iraq and Syria, you are talking about a country of 40 million. An army of 100,000 is not going to pacify it. It can defeat the army, but it can't pacify the country. Sending 2 million troops to pacify this region is not in our interest.

So my argument is that we are an immature country. I like to compare us to a 15-year-old manic-depressive—in the morning, totally confident; in the afternoon, "France said something bad about me, and I'm really going to sulk." Give us time. We're not ready for this. Our institutions aren't ready for this. We don't have a professional, self-aware, coherent foreign policy core. I know that Brookings and everything has these guys. But we don't have the institutions to manage our power yet. It will take several generations to get that.

In the meantime, others have handled this position worse.

JOANNE MYERS: George, thank you so much for setting our minds on fire again. His book is available. Thank you.

blog comments powered by Disqus

Read MoreRead Less