 Thank you very much. It is an enormous privilege to be here, to have a chance to address this distinguished audience, to be introduced so generously, to be introduced without an economist joke. It was not so long ago that I was introduced by the guy who said, I already know what it takes to succeed as an economist. And I said no, and he said an economist is someone who's pretty good with figures, but doesn't quite have the personality to be a chartered accountant. That was in Moscow, and no one got a picture. Anyone who doubts the importance of what we economists try to understand and try to address need only come to Ireland. Your story for the last 20 years has been a story of the economics going well, economics going too well, economics going unsustainably well, that which is unsustainable, not being sustained, and severe consequences following from that, and then the economic challenge being over here. The thing I am always most convinced and concerned to teach my students is that economics is not a game. These are diagrams and abstractions, but they are about things that are very, very real, and that the lives of hundreds of thousands of people are affected for good or will or ill when national finances and national financial arrangements are made wisely or made unwisely. So the topic of financial arrangements is a concern to much more than financiers. The debate over macroeconomic policies is a concern to much more than macroeconomic policies. And few debates over macroeconomic policy have been as consequential, or will I believe be as consequential in the next few years as discussions of the Europe and of European monetary arrangements. So I want to reflect on that topic from the perspective of a concerned American who has worked closely with European colleagues and friends on global financial issues for more than two decades. I must report to you at the outset that if you had told me and my ministerial colleagues in Europe during the late 1990s that a dozen years from now Brazil would be borrowing money at a quarter of the risk premium that Spain would be borrowing money at. That Mexico would be borrowing money at a quarter of the spread at which Italy would be borrowing money. That there would be intervals in which Colombia would be borrowing money with a lower risk spread than France. And that the IMF would have launched the three largest programs in its history for members of the European Monetary Union. We would have found that to be an inconceivable set of events. And so I think it is important before looking forward to reflect broadly backwards on the European project, on European Monetary Union, how we came to this point and how this crisis is being. I would start with this observation. The success of the European Union over the last 60-some years is one of mankind's greatest trials. My Harvard colleague Stephen Pinkham has written a book, a very powerful book I believe, entitled The Better Angels of Our Nature, that argues that the long sweep of human history is towards reductions in violence and brutality. It makes observations like the observation that the incidence of murder in the most primitive societies is five times or ten times as great as the incidence of murder in the worst of contemporary inner cities. It looks at the extent of brutality on any number of measures. And it argues that if you take the long view, there has been a downwards trend in violence. That view would have appeared loose in 1945. What ended in Europe in 1945 was only the most violent and tragic of a millennium's worth of conflicts. No century had passed without major violence between the nations of Europe. In few half-centuries had passed. What happened during the First World War was the worst that had ever happened. What happened during the Second World War was much worse than that. It was far from obvious that that pattern would end. And yet today, for all of the problems, war between the nations that were protagonists during the Second World War today is inconceivable. That is a reflection of many things. It's a reflection of the horror of what had preceded. But the horror of what took place during the First World War was not sufficient to bring about that objective. It is a reflection of the efforts of the United States. It is, above all though, a reflection of a grand and broad project of bringing the nations of Europe together. First through a coal and steel community, then through a common market, through also a security alliance in which the United States played a key role, directed and prevailing in the struggle against communism. Ultimately, through the end of the Cold War and the reunification of all of Europe, one can only admire, support, praise and approve that broad European integration project. There was, to be sure, an enormous political logic to the idea that became fashionable in the late 1980s. That one could complement a common market with a common currency. There was great symbolic appeal to the idea that a union that was increasingly going to be without boundaries would increasingly use a common money. There were legitimate and real arguments that the common currency would reduce fractions and further the objective of international integration. It was reasonable to suppose that the process of convergence between the richer and poorer nations, and especially the convergence upwards of the poorer nations, would be accelerated by a common currency and greater integration. For all of these, it was reasonable to suppose that currency volatility would be inimical to free trade and substantial economic integration. And to suppose also that fixed yet potentially changeable exchange rates would be the object of intermittent speculative attacks with serious consequences for governments and hardly attractive benefits for speculators. And so the urge to merge, if you like, represented by the common currency project was a compelling. To be sure, economists, especially economists on my side of the Atlantic, were very skeptical. They very much were aware of all the benefits that I had just described and were very much aware of the political benefits of European unification. But they had two broad concerns. First is the concern that comes out of what might be what is called in the economics literature, the idea of the optimal currency. The notion broadly is that choosing a currency area requires, on the one hand, balancing the fact that a common currency is good because it promotes trade, reduces frictions. With the idea that when you have a common currency, you can't have a differentiated monetary policy, and sometimes you need to have a differentiated monetary policy. Historically there have been two broad ways in which systems have worked. One is the way that in my country, New York and Mississippi work. New York and Mississippi are very different places, but they share common currency. When there are good times in New York and bad times in Mississippi, the federal government collects substantially more taxes from New York and substantially less taxes from Mississippi, and in effect there are substantial transfers from New York to Mississippi. When there are good times in New York and bad times in Mississippi, mobile populations adjust their movements so that more people stay in New York and fewer people move to Mississippi. And so the shock is buffered both by federal transfers and by substantial mobility of labor. Another way in which difference can be handled is the way in which it is handled between Detroit and Toronto. There are no substantial fiscal transfers between Americans and Canadians. There is very little mobility on net between America and Canada. But when the price of oil goes, price of oil and commodities goes up, and so good things are happening in Canada, the Canadian currency rises. Canadian producers become less competitive, American producers become more competitive, production relocates to America, and greater competitiveness is achieved. There was the real concern that a European Monetary Union would combine the monetary arrangements of the United States with the inflexibilities and lack of fiscal transfers of the United States in Canada and therefore give rise to substantial problems when there were relative shocks. There was also the concern of what might be called common pool problems. Imagine that all of us went to dinner together tonight and the rules were that we would each pay one eighty-fifth of the check. Very likely none of us would be ordering chicken, more of us would be ordering beef, and the fine wines would be selected from the restaurant menu. Now imagine that we were each, as part of our one eighty-fifth, permitted to invite guests, perhaps paying guests, to join us for dinner. Pretty soon the whole population of Dublin would be joining us for dinner because after all somebody would be happy to pay ten dollars to be on my tab, but if I was only going to have to pay one eighty-fifth of their tab, it would be very much worth it for me. With a common currency, with government debt on which it was nearly unimaginable that there would be default, with at least a substantial element of common concern about banking systems, there was a concern that all would draw on the reservoir of common credibility. And then that reservoir would come to me to plead. What happened? I think it is fair to say that political figures show a different degree, a different and greater degree of deference to engineers than they do to economists. They recognize that when, that if a bridge across a river is politically imperative, but engineers say that it will collapse, you can't really build the bridge. But there was the conviction that because the will was strong enough, the economic problems would somehow be managed if they arose and would not prove too serious. And so as a politically driven decision, Monetary Union moved ahead. What happened? This was as classic a case as any I have ever seen of my late teacher Rudy Dornbush's objective, that in finance, things take longer to happen than you think they will, and then they happen faster than you thought they could. For the first decade, the euro worked much better than most economists expected. There was, I think it's fair to say, substantial, I told you so, if not crowing on the part of many European statesmen who noted that huge flows of capital had moved successfully at low costs, driving apparent rapid rates of economic growth to the European periphery. That speculative attacks had been avoided, that the performance of the European economies had been strong, that the distress predicted by so many economists had not materialized. That was the story for the first decade. But it has not been the story of the second decade. Experience has revealed that significant parts of the capital flow to the poorer countries of Europe were unsustainable, with terrific rates of debt repayment being achieved primarily through further borrowing rather than through the development capacity to repay. It was observed that over time, substantial competitive imbalances were took place, that were masked by substantial capital flows that went into real estate and other forms of domestic production. It was observed that financial institutions were, once the tide of increased capital flows stopped, in much less healthy shape than had previously been imagined. And it was observed here in Ireland, among other places, that in ways that had previously been not just unappreciated but not imagined, the financial health of governments was far more dependent on the financial health of banking systems than anyone could previously have supposed. And so triumph gave way to crisis. A judgment was reached initially that followed the classic pattern in response to financial crisis. Elizabeth Kubler-Rossa wrote famously of the reactions that people have when they learn they have terminal diseases. First, there is denial, then there is rage, then there are attempts to bargain, and finally there is acceptance of the reality. Something parallel operates in finance. Denial takes the form of saying that it is a confidence problem, that if we simply assert that everything is okay, it will be okay. Rage takes the form of blaming the speculators and seeking to man short-sell it. Bargaining takes the place of announcing that if we will have programs, we will have plans to have plans, but not actually implementing measures. And acceptance takes the form of concrete programs to drive things forward. Where has Europe been and where has Europe gone? That is for Europeans, not Americans to decide. I was asked constantly in 1999 as Treasury Secretary what the American view about European Monetary Union was. The answer I always gave was that we support the Europeans. Our interests are aligned. If European Monetary Union works for Europe and creates a more prosperous, more successful Europe, it will work for America. And those words were carefully chosen to be very supportive, but not committable of my conviction that the experiment would prove entirely successful. What happened? Scribe. Whatever the merits, whatever the merits of the initial decision to move to Monetary Union, whether the set of measures to promote fiscal discipline, to urge integration, to drive structural reform, to support transfers and labor mogul. Whatever the wisdom of that constellation of decisions seems to me that a thoughtful observer has to include, has to conclude that a formation of Monetary Union like the adoption of a child is irrevocable and is not an act that can prematurely or morally be reversed and cannot be reversed without catastrophic consequences. I do not believe that there is a great enough prospect that Monetary Divorce could be managed without tremendous ill effect to suppose that that is a realistic strategic choice to be entertained as a choice. I believe that is the judgment that Europe has come to, and I believe that it is very much an appropriate judgment. The question remains though, what is the strategy forward? It must be recorded that an observer like myself who wishes the project well but is able to maintain some degree of detachment sees in some of what has taken place in a pattern all too reminiscent of U.S. decision making during the Vietnam War. Daniel Ellsberg, the regenerator of the Pentagon Papers, wrote a famous essay about the Vietnam War entitled The Stelmay Myth and the Quagmire Machine, which he described how at every crucial juncture during the Vietnam War, every crucial juncture, policymakers were told that if they did nothing the system would collapse, there would be surrender, there would be national humiliation for the United States and defeat for South Vietnam. That in order to have a realistic prospect, no guarantee, but in order to have a realistic prospect of achieving our war objectives, we would need to take steps A, B, and so forth, and then there would be a prospect that we would be succeeding, but those steps would be very painful in terms of both the domestic politics and the international. And then they were, and then policymakers did not like either of those alternatives. And so they would ask, what is the minimum that I must do to avoid catastrophe in the next six months? And they would then be told that it was to do some of A and a bit of B, you could probably skip C, things would last for six months. And that was the choice they always took until it all collapsed around and the helicopters left. If one watches what has taken place in Europe since May of 2010, one can discern a cycle playing out at an accelerating rate. First there is tension, then there is anxiety, then there is potential financial crisis in the periphery, then there is a summit, then there is difficulty reaching an agreement at the summit, then there is a fever pitch of tension that is given release by an agreement, then there are measures taken, then there is relief, then there is a rally in markets, then there is self-satisfaction if not congratulation on the part of participants, then there is relaxation, complacency and relatively calm markets, then there is a little bit of warning that this was good but the problem has not fully been resolved, then there were rising spreads and credit markets, then there was growing anxiety, then there was another summit, there have been about four of those cycles since May of 2010. I do not believe that we can confidently suppose that we have seen the last of those cycles. It may be the case that measures are now in place which will avert severe financial collapse of major financial institutions or major solids. That is not assured but it is possible. What is almost certainly the case is measures are not in place that will drive adequate growth for social cohesion, for significant declines in debt ratios or for improvements in middle class standards of living. The painful truth is that virtually every financial crisis that has been resolved for fiscal consolidation in the last half century has taken place with a substantial decline in real exchange rates, a measure that is not possible within a monetary union without radical deflation, a measure that is much more difficult without growing markets in which to export. What does all of this suggest? It suggests that policy in the European Union needs in the months ahead to focus increasingly on growth rather than on austerity, something that has strong implications for structural and regulatory policy. It suggests that austerity is not a growth strategy. Yes, fiscal consolidation has at some times and some places been a significant contributor to growth. Those were times and places in which it was possible to bring down interest rates rapidly. Those were times and places in which credit could be made substantially available to businesses wishing to invest. Those were times and places in which a falling currency and buoyed global markets could support substantial exports. Then in the current time and place where none of those things are possible, it cannot be supposed that austerity constitutes a growth strategy. It may at some point be an economic necessity, but it is not and cannot be relied on as a growth strategy. Third, it suggests that central efforts to reduce the magnitude of adjustment that are necessary are essential for European growth. These take two forms. They take one form which one might call the federal dimension or the micro dimension of the form of financial arrangements within Europe for supporting governments and for supporting banking systems. No positive function is served as Keynes famously warned in economic consequences of the peace by charging interest rates at rates that require transfers of a kind that countries cannot make. That's why attention to levels of interest associated with public sector debt has been appropriate. That's why attention to the provision of support to banking systems through governments or directly from central European mechanisms is profoundly important. The other dimension goes to the question of European-wide policy. Is it appropriate that policy be oriented to maintain low inflation in the most rapidly growing countries? There is room for debate about whether an average inflation rate for the European Union of 2% is sufficient given the magnitude of the debt challenges that are faced. I do not believe there is room for debate as to the wisdom of a 2% inflation rate and only a 2% inflation rate in the countries that are structurally likely to enjoy the highest rate of inflation when there is a need for substantial relative price adjustment within the Union. Similarly, the only propositions of which economists can be absolutely certain are the basic budget identities. One of them is that the sum total of all imports has to equal the sum total of all exports. To suppose that the indebted countries can import substantially less and export substantially more without major adjustments in the surplus countries is simply to wish the problem away. Adjustments must be of essentially equal magnitude in surplus and deficit countries. And it is incumbent on those calling on deficit countries to adjust to provide a theory of how surplus countries are going to adjust as well. For Europe to suppose that all of that adjustment or the lion's share of that adjustment can take place outside of Europe at a time when the world economy is struggling, at a time when the United States remains in substantial trade deficit is, I think, to make an unreasonable supposition. And so European debates need to move beyond morality tales about austerity, a serious contemplation of the underlying economic growth of growth. None of this is easy. None of this will be politically entirely welcome. But much that is said about the European Union emphasizes various aspects of politics and I do not minimize the importance of politics. But I would suggest that part of the reason, and this is why I dwelt on the history, that we are at our difficult point is that decision-making privileged politics and desire over the ineluctible implications of economic arithmetic. And if we are going to find a way forward more successfully, I believe that the underlying economic arithmetic of the need for growth and the reality that adjustment of deficits cannot take place without adjustments with surpluses needs to be more central in our discussions going forward than it has been in the past. I began by remarking on the success of the European Union as one of the great chapters of the history of mankind by emphasizing how supportive the United States was of it. That was true after the Second World War. That was true after the Cold War. It is the rise in China as we were true today than it ever has been in the past. All right-thinking Americans, whatever their political party, whatever their precise judgment on a range of tactical issues, wish Europe well at this crucial juncture. Thank you very much.