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George Friedman at “Chicago Council on Global Affairs”, 2015:

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Nick Brand: My name is Nick Brand. I'm the director of corporate programs at the Chicago Council on Global Affairs. And thank you all for joining us this evening. I'd like to take this opportunity to welcome George Friedman to the Chicago Council. I believe it's his first time here. So, thank you so much for being with us.

I'd also like to thank our co-sponsor of this evening, the Chicago Club. And I know we have a number of members with us this evening. So, thank you as well for joining us. This evening's program is made possible by council's membership support. So, if you are not a member and you're interested in becoming a member, please see council staff at the registration table and they'd be more than happy to assist you.

We are on the record this evening, so while you're welcome to use social media, please do silence your phones. Our distinguished fellow Dick Longworth will be doing a write-up of this evening's event that will be available first thing tomorrow morning on our website. We're also live streaming this evening. So, the video will also be available almost immediately after the event, also on our website. After the program, George Friedman's recent book, “Flashpoints – The Emerging Crisis in Europe“ will be available for purchase and signing in the rear of the room.

And we have a number of exciting programs coming up. On February 10th, the former vice president of Costa Rica, Rebecca Greenspan, will be in conversation with the council's Phil Levy on Latin America, economic growth after the commodity boom. On February 12th, Indian economist Omkar Goswami will deliver the lecture on Asian economies, this year discussing India, a new deal for New Delhi. On February 24th ambassador Chris Hill, former Assistant Secretary of State for East Asian and Pacific Affairs, will be discussing the North Korean conundrum. I'll return to moderate the Q&A portion of this evening. But right now to introduce George Friedman, please join me in welcoming the chairman of Satter Investment Management, Muneer Satter.

Muneer Satter: Thank you, Nick, and good evening, ladies and gentlemen. I'm delighted to introduce George Friedman this evening. And his wife Meredith is right next to him. Welcome, Meredith.

Looking forward to his remarks on the changing political and security landscape in Europe. As tonight's audience indicates, this is an issue of great interest and concern to many people. It's also a very timely discussion.

If we look just in the past year, we can see a major shift in the security environment in Europe. There are armed conflicts in Europe's periphery, including Libya, Syria, Iraq, Ukraine. Russia's annexation of Crimea and the ongoing conflict in eastern Ukraine highlights Russia's renewed geopolitical assertiveness. In France the Charlie Hebdo attacks are a reminder of the struggle European nations facing confronting radicalised Islam and the danger posed by returning foreign fighters.

There's the additional risk that in response to Islamic terrorism, European societies will become less tolerant and more nationalistic. And then there's the eurozone, which remains mired in massive, unsustainable spending and debt, undercapitalized banks, anaemic growth, high unemployment, a declining euro, and now faces further turbulence in Greece.

So is Europe destined for conflict? And I look forward to, George, your response to that. It's now my pleasure to introduce George to you.

George Friedman is founder and chairman of the Private Intelligence and Geopolitical Forecasting Corporation, Stratfor. If you don't subscribe, you should. He's a regular contributor to discussions on international intelligence issues for major news and radio networks, including CNN, Fox and NPR. And he's the author of numerous books on warfare and intelligence.

Here's what some of our leading media outlets say about George's analytical expertise from Newsweek: “Expect the unexpected. He can see without the crystal ball.” Barron's consistently has found Stratfor's insights informative and largely on the money, as has the company's large client base, which ranges from corporations to media outlets to government agencies. And then simply put by The Wall Street Journal: “Predictions have made George Friedman a hot property these days.” In my opinion, George is one of the smartest and most sophisticated intelligence analysts anywhere in the world today.

Ladies and gentlemen, please join me in welcoming Dr. George Friedman.

George Friedman: In any sane city, I'd be speaking to an empty audience. Thank God I'm in Chicago.
Let me begin by trying to explain why I wrote this book. There are two reasons.
The first was that in a book I wrote and published early in 2008, I had said that the European Union was an unsustainable entity. On the one hand, it gives me great pleasure to say I told you so. But more importantly, if Europe becomes unstable, one of the central elements of the international system becomes unstable. Europe, after all, has a larger GDP than the United States. Taken together. There are consequences. Europe is clearly becoming unstable and therefore we must start contemplating the consequences.

But there was also a more personal reason. I was born in Hungary. And my life and that of my parents, my family was shaped by the geopolitics of Europe. My parents were born just before World War One. Their fathers and their elder brothers fought in that war against Turkey and against the Russians. During the interwar period where it seemed like all this was over, they met, they fell in love, they married, they built a business, and then were swept up in the next geopolitical wave. That couldn't happen. Germany once again. They were Jews.

They survived the concentration camps, extraordinarily a family where everyone lived, which at that time and place was remarkable for anyone. And then thinking it was all over, they started their business again. But of course, the Russians that occupied Hungary, the Soviets, the Americans were on the other side. To the west a few hundred miles.

And once again, geopolitics swept up my family. My father had been a social Democrat in his youth. By this time, he had no politics. His view was that geopolitics is what destroyed you and politics is what made it impossible to escape. But still, he was on a list. And being on a list in those days was a very bad thing to be. His brother was a communist and a member of the secret police. They had not spoken to each other in 30 years. Having disputes over the precise meaning of terms in the 1844 manuscripts. Plus, who insulted who with the last bar mitzvah... it was a typical family. That led my father to decide that he had to leave or die. He had spent his life making decisions like that.

And so in an August night in 1949, I was six months old, I was drugged and put on a raft, along with my 11 years old sister, who extraordinarily was not drugged, was awake. But then she had lived through everything. My mother got on board. My father got on board, and we paddled across the Danube to Czechoslovakia. For complex reasons, that was the way to escape. Searchlights, I'm told, were playing on the water. Machine guns in guard towers were trained. And it was a moment of life and death. We survived.

I came to America and then the Cold War shaped my life not as painfully but as intimately as it shaped my parent's life. For me, I'm not just an American, but now I'm a Texan. And you can't get more American than that. But I didn't speak English till I was seven. And I still speak of Hungary as home in the vernacular of my family.

So this book is also about a fundamental question that's personal: Is it really over in Europe? Is the slaughter that started in 1914 and ended in 1945 or began 2000 years ago with the Romans and never ended, is it over? And that question is crucial because that's what the EU promised. It promised peace and prosperity. That it would be over. I once asked my father why he never went back to Europe. After all, it had changed. He says, the Europeans never change. They just pretend it never happened.

So the question of this book, both intellectually and personally, is: has it changed? Will the EU survive? Will the promise of peace and prosperity endure? And if it doesn't, what comes next? This is, for me, the existential question of my life. But it is for all of us, a question that will reshape our lives regardless of what the answer is. Europe matters. Europe has always had this belief in its own exceptionalism. We talk about American exceptionalism, but the Europeans truly were exceptional.

There was a paradox built into Europe. Europe invented humanity. And what I mean by that is this: Before the European age of exploration, the Congolese had no idea the Mongolians were there. Mongolians had no idea the Aztecs were there, and the Aztecs had no idea the English were there. We lived in little planets separated and discrete. The Europeans brutally kicked down the walls. So that there was no longer, by the end of the European adventure, any culture that didn't know that it was not alone. Doing this Europe conquered the world in a way it had never been conquered before and invented humanity. It also conquered nature. It transformed nature, so on a cold winter night in Paris in 1913. You could banish the dark and banish the cold. And extraordinarily hear Mozart.

And for all the crimes of Europe, Mozart makes up for many of them. Any continent that creates that. It created a single humanity. But the paradox is, while it conquered the world, it never conquered itself.

Europe was unable to unite. The Spaniards attempted it. The French attempted it. The Germans attempted it. The British sort of attempted it. But no one could bring together all of Europe into one entity. Had it done that he would still rule the world. But it couldn't because Europe is a place divided by geography. Peninsulas on peninsulas, mountain ranges blocking your way, rivers that don't flow to the right place, seas between you and ultimately it is a place that is the second smallest continent in the world. Only one smaller is Australia, and that's only if you count it as a continent. My wife's Australian, so I like insulting her. It's a big island.

There are 52 sovereign states in Europe and you can drive in 3 hours and hear four or five languages spoken and encounter four or five countries that bitterly despise each other as much as my father and my uncle did. Over things that happened centuries ago, the depth of the malice of Europe can never be measured.

My mother, who was a very fine lady, could not say “Romanian” without spitting on the floor. This was absolutely required. When I visit Romania now they say Hungarian is a curse. And these are two members of the European Union, enlightened. One should never underestimate the degree of division in Europe.

Norman Angell, who was a very, very brilliant man who eventually won the Nobel Prize, wrote a book in 1910 called “The Great Illusion”. And “The Great Illusion” demonstrated beyond any doubt that a war in Europe was impossible. Because the level of financial exposure that a war would bring tumbling down, the level of interdependence and trade made war impossible. He was English, of course, and an English believed that no one would do anything that didn't bring a profit. But in 1914, something extraordinary happened. Extraordinary not because it was so novel. But because it was so unexpected. And what was remarkable was that it was unexpected.

In 1914, Europe plunged into war so deeply that in September of 1914, at a single Battle of the Somme, 600,000 died in one week. And the Europeans didn't blink.

The war went on. The war didn't go on for four years. It went on for 31 years. Between 1914 and 1945 100 million Europeans died from political causes. Wars, Holocausts, planned starvations, purges, the Spanish Civil War. Endless, endless conflict. In 31 years, Europe went from being the center of the world, the pivot of its culture, the creator of humanity, to occupy a territory. In 1945 not only was Europe ruined not just by World War Two, but by this endless range of horror. But it had lost its sovereignty. The eastern part of Europe was occupied by the Soviet Union. The western part by the Americans. Each treated their dominion differently. But make no mistake, it was dominion in the simplest sense. The decisions of war and peace, which are the fundamental questions of sovereignty, used to be made in Paris, London, Berlin, Rome. Now they were made in Washington. And Moscow. Heedless.

It would be done, I might add, and it's an interesting point that no two countries have ever handled a confrontation as responsibly as the Americans or the Soviets. The opportunities for war were endless. But the war never happened. And I like to say to Europeans who call Americans cowboys: Imagine if the learned gentleman of 1914 or 1939 had nuclear weapons. Would they have behaved with the meticulous caution that the Americans and the Russians behaved? Well, that's a question we don't have to answer, thank God. But it is doubtful for me.

The 31 years... I've researched history, there was never an empire of this size that ever destroyed itself in this way in 31 years. So, Europe is in fact exceptional in the way it did it.

The idea emerged of a United States of Europe, a union of Europe. It should remember that the idea emerged from the Americans. When the Marshall Plan was passed, it contained a clause asking that the Europeans form some sort of integrated entity to support each other. The Europeans resisted. The French did not want to work with the Germans. The British did not want to work with the French, and nobody wanted to work with the Italians.

It was very important – and this is part of the European amnesia – to remember that they resisted the idea of union. Until the United States essentially blackmailed them into it. And it didn't work very well and how hard the Americans worked just to get the coal and steel community going, is quite a story. It is not a story told by the Europeans. But still, the Europeans seize the idea, made it their own – there are worse things to do – and embraced the idea of a European Union, which in 1992, in the same year that the Soviet Union collapsed 500 years after the conquest of the world began.

The Europeans signed the Maastricht Treaty. And the Maastricht Treaty, as I said, promised two things: Peace and prosperity. The American Declaration of Independence promised life, liberty and the pursuit of happiness. There's a profound difference between the two documents. One spoke of a moral opportunity to become something. One promised something concrete. One allows you to pursue happiness. Didn't promise you happiness. The Europeans promised both. The issue, of course, always was: What happens if you can't be prosperous? What if prosperity, as it always does, takes a walk on you? What happens to peace?

From 1992 to 2008, the question didn't arise. We were in one of the most prosperous periods of history. All ships were rising. And the Europeans did not have to face the question. What am I if I'm poor? What does Europe mean to me then? All of this changed in seven weeks in 2008. 

On August 8th 2008, Russia invaded Georgia. This is extremely important. First, there had already been a terrible war in Europe in the nineties in Yugoslavia, 100,000 dead. But the Europeans explain the Yugoslavians really aren't Europeans. But here was Russia. Clearly chastened by its experience in the Cold War, the Second World War, the First World War, and one would think now committed to a liberal strategy. Invading Georgia. Suddenly it has returned to history. Suddenly, the idea that we'd all passed out of this phase, it came back at us.

Why did the Russians invade Georgia? They didn't really care about Georgia. It wasn't that Putin hated Saakashvili. Everybody hated Saakashvili. But that wasn't it. The United States had staged a series of coloured revolutions throughout the Russian periphery, one of which was in the Ukraine, the Orange Revolution. And the Russians saw in this Orange Revolution the intent of the Americans to destroy the Russian Federation.

Why else would the United States be underwriting groups to demonstrate, they said. United States at this time was bogged down in Iraq and Afghanistan, Mali and any other place you can think of. The purpose of the invasion of Georgia, an ally of the United States, was simply this to say: this is what an American guarantee is worth. To look at the Ukrainians and say: “You want to be an American ally? So did the Georgians – enjoy.” This is very important when we get to discussing Ukraine, because this is the origin of this ongoing struggle in the Ukraine. That won't end very soon.

It also returned Europe, or at least part of it to the recognition that the Russian question had not been settled. It had simply been posed in a new and different way. Seven weeks after this Lehman Brothers collapsed. And with the collapse of Lehman Brothers a period, a way in which the world worked changed. It ended.

For the United States this is really the fourth such crisis since World War Two. There was the municipal bond crisis of the 1970s. There was the third world debt crisis. There was the savings and loan crisis. That was my favorite if you have to pick one. And now this one. And it all ended the same way in the United States, there is a pattern.

First, there would be total irresponsibility, even from personal point of view in the financial community. This would be followed by a government bailout. One form or another, the Resolution Trust Corporation, the Brady Bond, whatever you want to call it. It was the way it was done. And this, in turn, would be followed by the financial community accepting the bailout and condemning the government for being irresponsible.

It's a lovely game. I've always enjoyed it and it's quintessentially American. Only the Americans would solve the problem by Bernanke, Paulson and seven or eight bankers stuffed in a room on a Sunday afternoon. Begging, fighting, screaming, breaking God knows how many laws to come up with a solution. It wasn't a good solution, but it was a solution.

And then we started to see the problem of the Europeans. There was no room in which they could all gather. It's not just that there were eight bankers. There were a couple of dozen prime ministers,t reasurers, what have you. And there was no coherence. There was also no experience, shall we say, at problem solving. The history of Europe had been solving problems through violent spasms. The Europeans had no peaceful if illegal procedures for solving the problem. And so, Europe, unlike the United States, began sliding down an abyss. 

The first abyss was the American, the subprime crisis. And I've been to Europe and had European bankers telling me how irresponsible the Americans were in selling these.

I pointed out: “Hey, jerk, you bought them.” That seems not to have entered the European mind, but it was and it is always a pleasant moment when you do this.

But in confronting the subprime crisis Europe discovered a basic flaw in its system. And that flaw was Germany. And the flaw in Germany was that it was not only the fourth largest economy in the world, but it exported the equivalent of 50% of its GDP half of which went to the European Free Trade Zone. Without that, the German economy, which had outgrown its domestic economy, would itself slide into recession or perhaps depression. That was inevitable.

They were doing what they had to do. They created this European Union as an opportunity for them. Now building a free trade zone around a massive exporter is like trying to build a solar system out of around the black hole. The United States is a net importer. But imagine if the United States exported 50% of its GDP to the world and half of that to Mexico and Canada. What the condition would be. Well, this is what Germany had to do.

There are two narratives of what happened, one is the German narrative, the other is the Greek narrative. The German narrative is that the German exports were the result of massive efficiencies and satisfy the needs of Europe, and that the crisis was caused by the irresponsibility of the Southern Europeans in borrowing vast amounts of money and not being able to pay them back, being undisciplined and so on.

The Greek answer is the crisis was caused by German addiction to exports and its manipulation of the European Union to maximise those exports. The euro was priced somewhere on the borderline between preventing inflation in Germany while facilitating German trade, while, of course, Southern Europe needed a much cheaper euro. And so they could export.

The rules of Brussels were crafted in such a way that entrepreneurialism, small businesses, were very difficult to fund. First in the countries the tax structure was such that the risk reward ratio here made little sense. On the other side of the equation, bankruptcy, as we note here, is not the same in Europe. When you hire an employee in Europe you don't so much hire him as you adopt him. He comes home with you. He looks in the refrigerator.

That is the reason there is no Google challenging Siemens. The large European corporations, modelled by the 1950s never re-engineered themselves. They never felt a Microsoft coming at them or Google coming at them. A digital equipment never collapsed into Hewlett-Packard, who in turn collapsed into or is not collapsing or who knows what into something else. The German welfare system ultimately depends on these corporations. Siemens is like General Motors was in the 1950s. It operates in a non-competitive universe. And is able to employ large numbers of people on very favourable terms rising upward. If Siemens had to compete with a rising tech company out of Macedonia, they couldn't afford those things.

So, where the Germans, in the Greek version say, “condemn the Greeks for their welfare system”, the Greeks say, “at least we paid for our welfare system to the extent we could. You are subsidizing your welfare system by writing corporations exporting massive amounts here.”

Who's right? It doesn't matter. They can't live with each other. The question became who should pay for the inevitable sovereign debt crisis. Why was it inevitable? Because any serious economic activity that took place in most of these countries was in the black market. Why? Because legally, the constraints on entrepreneurial behavior was so enormous that you couldn't take the risk.

We have a friend in Romania who created bolts. First thing the Germans did when they discovered there was a bolt market was they came in after the bolt market. The Germans don't just stay up here. They'll go anywhere for exports. I asked him, “How many men do you employ?” He said, “What do you mean, employ?” I said, “How many trucks do you own?” – “Oh, this is a very complex question.”

What he was doing was being entrepreneurial and the only way the EU allowed you to be entrepreneurial. On the black. Not that my friend would have paid taxes if he could have. But certainly, it was illegal and he didn't. But of course, the Romanian government encouraged him to do this because they understood that without this, unemployment would be stunning.

You created a kind of strange shell game. The question then was: how do we repay the sovereign debt that couldn't be paid because the tax base wasn't there? And there was a conversation and the Greeks said, well, why doesn't Germany pay it? And Germany said, I have a better idea. Why don't the Greeks pay it?

And because the Germans had a lot more influence, it was voted that the Greeks and everybody paid it. The outcome of that was not only in Greece is there 26% unemployment. There is 23% unemployment in Spain. Southern Italy is a 21% unemployment. The entire Mediterranean, the Northern Littoral, has been devastated.

It is not that it's Mediterranean Countries can't do this. The Turks grew at seven, eight, 9% a year for ten years. Why? They weren't in the EU. Their great good fortune was that they weren't admitted.

So, it is not that Southern Europeans are inherently shifty and lazy, lazy and dishonest because are you sure you have known many Greeks who are shifty, lazy and dishonest? Still they could grow their economy. The members of the European Union, on the other hand, couldn't. They couldn't because of the complex relationships that have been built up that tilted the system to the north. Germany has 5% unemployment. So France is now, I think, 12, I'm not sure, somewhere between ten and 12.

But Southern Europe is in depression. Its unemployment rate is the same as the US unemployment rate was during the Great Depression. It is not in recession. It is in depression. The difference of depression and recession is very simple. In a recession, you're in a cyclical process where marginal businesses are culled. In a depression very healthy businesses can't function.

As a result, if you do quantitative easing – I love that name for pretty money, it's so cool – if you're printing money to stimulate the economy, you will find that the businesses you need to take this money and turn it into jobs aren't there. This is why FDR never solved the American Depression through his policies. It took World War Two to do it. You can't stimulate an economy that's been structurally damaged. Southern Europe is now in a position that for a generation at least, it will not recover. This is not a marginal event within the business cycle. This is not a relatively intense business downturn. This is a social catastrophe.

Now we have to consider what kind of social catastrophe it is for moment. When the poor get poorer, they understand the grammar of poverty. It has not changed their lives. It has made it harder.

The people who have been devastated in Europe, Southern Europe by austerity are government workers. Now, when you say “government worker” in the United States, you think of that unpleasant woman in the motor vehicle bureau who definitely deserves not to have a job. But we are talking in Europe of doctors, electrical engineers, because the European system expands the state so massively that it just encompasses the professional classes to an enormous extent. It is said that the black market makes it. Not so bad. It's actually worse. We have a friend who is an architect in Greece who used to make $3000 month and that was cut to $800 a month.

So, the unemployment rate hides the impoverishment. When you're middle class, when you're a professional and you lose your home. When you lose the chance of the life you thought you had. Unemployment among 25 year olds or less is over 50%. You have now entered a world you never expected to be in. And for a while you think this is temporary, they'll figure it out. But after six or seven years, you realize, “No, this isn't temporary. I was 43 when I lost my job. I'm 50 now. It's not going to get better. This is my life.” And this is the dangerous point, because in Europe in the 1920s, when the professional class in Germany reached this point, they responded by looking for an explanation. And for someone to lead them out of there. And a little man with a mustache appeared. And he was persuasive.

One of the things I think Americans don't understand and that the European financial elite hasn't a clue about is the social catastrophe taking place in Europe. They are so obsessed with the health of the banks that they assume that if the banks are functional and bonds are being repaid, they're safe. But they are not. Because the biggest danger that any financial magnet has is a 75 cent bullet. And by that I mean in the history of Europe such problems are traditionally solved in a certain way. Either by coercing the financial classes, liquidating the financial classes as was done in Russia, coercing them, making deals with them, but certainly changing the way they operate.

In reading the Financial Times, which I do instead of the comics, it has been only a year since they've recognized that something bad is happening. They have not yet connected the dots to what it is. What it is is a massive, intelligent, educated and embittered class. Who sees no hope in the current system and who just elected a left-wing government. But what is also happening in Europe is the re-emergence of nationalism. The way in which the central bank organized quantitative easing was to take national banks, give them money so that no other country, particularly Germany, would be liable for anyone's defaults, but also did something very important. It made QE palatable, to the Hungarians and so on. It was something that at least was under the control of their national compatriots.

What we have seen is a rise throughout Europe of mostly right-wing parties, which differ from the left wing parties primarily that they are anti-Islamic. The left-wing parties are not. But they still want the same thing. They are going to refuse to pay. Like American Airlines. There's a moment in which it makes more sense to go bankrupt and stiff your creditors in a structured way. Did it pay? Southern Europe has passed that point by far. And what has emerged and what has happened is that the mainstream parties that crafted the agreements have collapsed. Papandreou, who is prime minister of Greece, his party got 5%.

You see a massive delegitimization of the mainstream parties and instead parties like Podemos in Spain, the National Front in France, UKIP in Britain. All of these are rising anti-European parties who make the case that we were much better off before the European Union was created.

But also emerging is the old hatred. Everybody hates Germany. Germany has contempt for everyone else. We've been here before. The Hungarians hate the Romanians. Inside of countries, the Scots voted by 45% to leave the Great Britain. Belgians, the Walloon hate the Flemish. The Catalonians want to leave Spain. Northern Italy wants to leave southern Italy or southern Italy the north, I don't know which, but they want to leave. Hungarians want to leave Romania. The map of Europe is being compelled because in the end Europe did not share a fate. To be a nation, you must share a fate.

So, in the financial crisis in 2008 came much as Texas would have liked to say, “Screw New York”. We are Americans, and that simply is the fate we have. In Europe, a myriad languages and histories and cultures and animosities are still there. They could never get rid of it, which is why they build the EU on top of these. And so did we. When we built these United States, as it was referred to, it was a collection of sovereign states. And at a certain point, for good reasons, bad and indifferent, the South wanted to leave the union. So, there was a conference held for three days at Gettysburg. And in this conference, it was decided that the Northern View in general would prevail. If not now, then in a couple of years.

Who will die for European Union. Who would give his life for an entity that existed to promise him prosperity and peace. It is a contradiction in terms. We hold these truths to be self-evident, that all men are created equal. There is a moral principle in the American Union, good, bad, indifferent, however you are going to take it. The European Union was purely prudential. It's good business. Join the European Union. Make money. Don't get drafted. Well.

The noise from the east is deafening. And the countries on that eastern frontier, Poland, Hungary, Romania have realised something very important. The rest of Europe doesn't care. The United States does. I mean, we're not going to miss a war just because it's far away. The United States cares. But what has hit the Romanians and the Hungarians, and I traveled there a lot: The Europeans basically say, "Yeah, we might do a sanction on this guy, but we're not going to do anything else, and we don't have an army anyway."

You cannot maintain a country in which the Eastern seaboard can't count on the Midwest to give them a hand. There is no country, there is no such thing as Europe. There's a marvelous wealth in Europe, individual countries that are spectacular opportunities, I'm sure. But the blanket statement “this is Europe” is merely a geographic statement about a continent. It is not a moral statement. It is not a statement of art. It is not a statement of truth. And we are now emerging from the dream of 1992 and 2008 into the reality that Europe has the smallest continent. Second smallest. 52 sovereign states. All with bad memories.

What happens in this Europe? Well, one is immediately tempted to say "nothing" because most people always think nothing will happen. But watch the artillery fire in the east. And those are the drumbeats of the future. Let me stop here and take questions.

Nick Brand: Well, we'll now go out for your question. So, if you can, please raise your hand and if you can, please make your question a question. So, yes, right here in the middle, please.

Audience: Mr. Friedman, thank you for your analysis. Very much appreciated. If you are in Ukraine right now and you're the Ukrainian government – or let's take a pass the government, but the people and technically the people should be the government, but that's a whole different issue at points in time – what do you do? Do you look to Europe who has been criticized by Putin himself as the scourge of the earth? Or do you look to yourself, where do you look? What's next for Ukraine?

George Friedman: Well, the first question you ask yourself, are you a Ukrainian speaker or a Russian speaker? Because Ukraine contains both. And while the idea of the Russian speakers genuinely wanting autonomy because they have been mistreated by the Ukrainian speakers is dismissed, it's also true. The Ukrainians do not want a federation. The Russian position is: “Look, Canada has a federation. Quebec speaks its own language, it's ok.” But the Ukrainians know that this is only the beginning. I mean, this will lead to devolution. What to do, if you're Ukrainian, is essentially reach out to the only country that will help you, which is the United States.

Last week, ten days ago, General Hodges, commander of US Army Europe, visited Ukraine. He announced that US trainers would now officially be coming, not just unofficially coming. He actually pinned medals on Ukrainian fighters, which by protocol of the military is not... the foreigners don't get to pin on medals. But he did, showing that this was his army. He then left and in the Baltics announced that the United States would be pre-positioning armor, artillery and other equipment in the Baltics, Poland, Romania and Bulgaria, which is a very interesting point. So, the United States, yesterday, announced it would be sending weapons. Tonight, of course, they denied it, but they are. The weapons will go.

In all of this, the United States has acted outside the context of NATO. Because NATO has to have a 100% vote, any one country can veto anything. And the Turks will veto it just for giggles. The point is that the United States is prepared to create a cordon sanitaire around Russia. Russia knows it. Russia believes that the United States intends to break the Russian Federation. I think that, as Peter Lowry put it – we don't want to kill you, we just want to hurt you a little bit – either way, we are back in the old game. And if you go ask a Pole or a Hungarian or a Romanian they live in a totally different universe from a German, and they live in a totally different universe from a Spaniard. So, there is no commonality in Europe. But if I were a Ukrainian, I would do exactly what they're doing, try to draw the Americans in.

Nick Brand: All right. Next question, please. Yes, right down in front here.

Audience: Thank you, Dr. Friedman. In the next hundred years, you sort of correctly predicted Russian belligerence and it was sort of demographics kind of drives destiny. You seemed, as I'm recalling, you seemed less impressed with Western Europe, but you thought Poland, Turkey and Japan might be countries to watch. You know, it's been roughly a decade since you published that book. Are you rethinking any of the predictions or assumptions you made in it?

George Friedman: Only that the time frame I expected to be longer is turning shorter. Like I said in the book, that the Ukrainian crisis would blow about 2015. I also said that I expected Russia to begin disintegrating around 2020. I may have given them too much time. The framework of Russia is that the central government collects the money and gives the oblasts and the towns money. Under the current circumstances, I'm not sure how much money they can give. We're back at Yeltsin's stance. Now, the thing to remember is in the long run, next three or four years, the Russians may be toast, but they become more dangerous the poorer they are and they fight better.

As a Russian told me, you wouldn't have predicted that we could beat the wehrmacht from the state of our economy. But we did. You Americans always think of yourself. We don't work that way. We can handle this. I don't think they can handle the full pain that's coming on them. Because I think that oil prices are perpetually going to... that is a new normal. But that's another story. However, in looking at the Russians, I don't think they can survive. So, Poland we've already seen take a much greater role in affairs of Europe, being much more decisive. Turkey has certainly held back its strength. It doesn't want to release it into Syria or Iraq, but it ultimately is going to be it. And Japan remains the major power of East Asia, not China. Japan's army is capable larger than the British army, there ist an excellent air force, and it doesn't have a billion people living in poverty on the level of Bolivia. So I don't see any need to change that. I'm a bit worried about the timing. That is to say, it may happen faster. The one thing that I'm proudest of is that I did say that the United States would be and remain the dominant power and recover the fastest from the meltdown that was clearly coming.

Nick Brand: All right. Next question, please. Yes, right down in the middle here, please.

Audience: Essentially Europe devolves defense to the United States for 50 years. So, what is, what are the implications for the future of European pacifism?

George Friedman: The question of European pacifism, I think is going to be determined within European countries. That is the stress within European countries like Belgium, like Italy and so on. I don't see major international war breaking out except along the fault line between Russia and the European peninsula. But what I'm struck by is how many secessionist movements have arisen in Europe at this point. And that nothing is more bitter, as Aristotle pointed out, than a civil war. And that's what I'm afraid of, which is that when I see the Catalonian, the Castilians, I remember what it looked like. No place is really pacific for very long. I mean, neither the United States. We have constant wars. Europe will, I suspect, not return to the 31 years, but it will return to humanity. They will have their wars, they will have their peace. They will live their lives. It will not be 100 million dead. But the idea of the European exceptionalism, I think, is the one suffering the first death. There will be conflict. There was conflict in Yugoslavia, and there is certainly conflict now in Ukraine. As to the relationship to the United States: we no longer have a relationship with Europe. We have a relationship with Romania. We have a relationship with France. There is no Europe to have a relationship with.

Nick Brand: Yes. The gentleman in the fourth row over here.

Audience: Excuse me. By the way, I'm a subscriber. Is Islamic extremism really the major threat to the United States? And will it die on its own or will it keep growing?

George Friedman: It is a problem to the United States that is not an existential threat. It has to be dealt with, but it has to be dealt with proportionately. We have other foreign policy interests. So, the primordial interest of the United States over which for a century we have fought wars – the first, second, Cold War – has been the relationship between Germany and Russia. Because united they're the only force that could threaten us. And to make sure that that doesn't happen.

I say this as a possible victim of Islamic terrorism. It will happen. Even if we devote all of our efforts to preventing it, we will fail. Therefore, if we do what we did in a decade after 9/11, which is utterly concentrate on that issue to the exclusion of all else so that our army can't fight unless it has sand under its feet, it's just not used to it, there are much larger dangers to the United States out there. It's very difficult to say to a country that has been hit by 9/11: Take it in stride. And no government can.

But the discipline of governance is that while at the same time reassuring people that you're doing everything you can, you make sure you're not. You're making as much as you reasonably should.

And our government... we have to remember the United States is like a 15-year-old. It's manic depressive. In the morning it is love, peace, love and happiness. At night it's suicidal because their best friend doesn't like them anymore. We are a very young empire. We don't even want to think about being an empire. We want to go home and have libertarian dreams. It won't happen. But it takes us a very long time to become mature. George Bush had no idea that his presidency was going to be about 9/11 and had no idea how to respond. And neither did his critics. Barack Obama decided he could wish it all away. If he was nice, they won't try to blow them up. We have to find a pattern of governance that combines an American republic with what it never wanted to be. But we're almost one quarter of the world's economy. We are going to piss people off a lot.

Nick Brand: All right, right down here on the front row, Phil Levy, our senior fellow on the global economy.

Phil Levy: Thank you for your remarks. Very interesting. While words were talking about how the US behaves, I was hoping you could address what US policy ought to be towards the financial crisis in Europe. A lot of this goes on behind closed doors, but as best one can see, it often seems to have been an encouragement towards stimulus. In your remarks, you express some skepticism about what stimulus would do. As we observe this, it's obviously of great import to the US. What should US policy be?

George Friedman: The US policy should be to stay as far away as possible and possibly pass a law order all American banks not to have European paper. We can't do that. But it would be a good idea.

Europe is too vast for the United States to do anything about, and the Europeans are too sophisticated to need advice. The problem of Europe is not that they are a third world country and they don't know how to do this. The problem is a deep contradiction between the interests of various parts of Europe that have led to a policy gridlock. It's inconceivable the United States would have enough money to solve the problem if they wanted it and insane for the United States even contemplated. As for policy advice to Europeans, don't take policy advice from the United States. I wouldn't take policy advice from the United States.

The problem here is not that people don't have policies. It is that it's an impossible situation that cannot be solved within the paradigm the Europeans are working. They will change the paradigm when it all falls apart. But they don't have the political will to face the irrationality of the situation. And deal with the fact that Germany can't export 50% of its GDP, at least not half of that into Europe, since that's not going to happen. And this is one of the reasons I'm not interested in policy personally. Foreign policy, we should like to see what happened. History was what does happen. And very rarely does foreign policy intersect the two. What I try to understand is what's going to happen. If I'd be pretty smart, I'd be rich, I certainly wouldn't give the advice to the Europeans how to be rich.

Nick Brand: Next question, please. Yes. All the way in the back there.

Audience: Given the weaknesses that you're describing, both in Europe but also in Southern Asia and likely in East Asia itself, is it appropriate or even practical for us to be continuing to push the boundaries of the American empire, if you will, to the edges beyond the areas of those kinds of internal problems?

George Friedman: The United States has a fundamental interest. It controls all the oceans of the world. No power has ever done that. Because of that, we get to invade people and they don't get to invade us. It's a very nice thing. Maintaining control of the sea and control of space is the foundation of our power. The best way to defeat an enemy fleet is to not let it be built. The way the British managed to make certain that no European power could build a fleet was to make sure the Europeans are at each other's throats. The policy that I would recommend is the one that Ronald Reagan adopted toward Iran and Iraq. He funded both sides so they would fight each other and not fight us. This was cynical. It was certainly not moral. It worked.

And this is the point: The United States cannot occupy Eurasia the moment the first boot sets the ground, the demographic differential is we are totally outnumbered. We can defeat an army. We cannot occupy Iraq. The idea that 130,000 men would occupy a country of 25 million. Well, the ratio in New York of cops to citizens was greater than we had deployed in Iraq. So we don't have the ability to go across, but we do have the ability to first support various contending powers, so they concentrated in themselves with political support, some economic support, military support, advisers and in extremis do what we did in Japan, in Vietnam, in Iraq and in Afghanistan: spoiling attacks. The spoiling attack is not intended to defeat the enemy. It's intended to throw him off balance, what we did in each of these wars, in Afghanistan, for example, we threw al Qaeda off balance.

The problem we have since we were young and stupid is that having thrown them off balance, instead of saying, okay, job well done, let's go home. We said “Well, that was easy. Why don't we build a democracy here?” This was a moment of dementia they came in. The answer, therefore, is the United States cannot constantly be intervening throughout Eurasia. It must be selectively intervening. And very rarely, that is the extreme moment. We cannot, as the first step, send American troops.

And when we send American troops, we have to clearly understand what the mission is, limited to that and not develop all sorts of psychotic fantasies. So hopefully we've learned that this time. It takes a while for kids to learn lessons. But I think you're absolutely right. We cannot as an empire do that. Britain didn't occupy India. It took various Indian states and turned them against each other and provided some British officers for an Indian army. The Romans did not send vast armies out there. It placed kings like, you know, various kings are created under the emperor. And those kings were responsible for maintaining the peace. Pontius Pilate was an example. So, empires that are directly governed by the empire, like the Nazi empire, failed. No one has that much power. You have to have a level of cleverness. However, our problem is not yet that, it is actually admitting that we have an empire. So, we haven't even gotten to that point where we don't think we can kind of go home and it'll be over and done. And so, we're not even ready for chapter three of the book.

Nick Brand: Next question, please. Yes, the gentleman right here in the fourth row.

Audience: So, I infer from your comments that the euro as a currency will not survive. What will that look like and how fast will it occur?

George Friedman: The model was set by the Hungarians. The Hungarians aren't in the euro, but they had mortgages denominated in yen, Swiss francs and everything else. When the forint went south, the Hungarian government stood for its homeowners and said, “We will repay you in footings. And you will get $0.60 on a dollar” – it's more complicated, but basically that – “or you'll get nothing. Give me a call in the morning. Let me know what you want.” The European bank shut up and took what they could get. This is what the Greeks will do. They'll make an offer they can't refuse. Remember that Germany is terrified of anybody leaving the free trade zone. That is a terror of Germany. There is no better bluffer than Merkel. She scares the hell out of me and everybody else. But the truth is that she's got the weak hand. Because she's the one dependent on exports. And the others are not sure they want to stay in that game. If she pushes a country out of the euro, what's to keep them from pushing her out of the trade zone? And she knows that, which is why she always goes right to the edge and then comes back. And the Greeks know that, which is why they're going to push her against the wall.

Her weakness is becoming apparent in all of the Europeans. So how does it happen? The Greeks will not print drachma whose net worth will be God knows what. And they will make an offer and the offer will be: you take this – this will be a structured debt relief – or we just won't pay you at all. Remember that the debtor owes a lot of money. What is the old saying: “If I owe $100, you got me. If I owe you $1,000,000,000, I got you.”

What are these banks going to do? And the problem in Europe is that if you push them out of the eurozone, you get even less than if they stay in. I suspect a euro will survive, but I also suspect that somewhere in Europe there's a building that houses the offices of the League of Nations, which was never quite abolished. I'm sure it still functions. In Europe institutions maintain themselves after no longer function. Germany will not have a mark. It'll have a euro. How many other countries will be there? I don't know. But the way out was pioneered by the Hungarians. And the next step is the drachma coming back. And the real question is, what will the banks do? What can they do? They can't talk about moral risk because they already blew that in Argentina. I mean, they already know all of Europe knows that going bankrupt, whether you're Argentina or American Airlines, doesn't mean the end of the world. And the Germans have done everything they can to make it more attractive to bail than not to bail. Now, whether they do it within the euro or some other currency is less interesting. Then they are going to fault. And the question is how manage it is.

Nick Brand: We have time for maybe one more question. We've taken a lot of questions from men this evening. Are there any women in the question that would like... Yes, the consul general from Croatia.

Audience: I think as a student of history, remember, we lived in personal union for 700 years or so, and people speak of Yugoslavia and they never speak of Croatia and Hungary spending seven centuries together. Sorry, this was a discretion. Is it in the US interest to dispense with Russia the European power?

George Friedman: Could I... I didn't hear you, I think.

Audience: Is it in US interest to dispense with Russia as a European power?

George Friedman: With Russia as a European power?

Audience: Yes. I'm just curious, how do you foresee the architecture once it implodes? What will happen? It's a frightening scenario. Can you tell us a bit more?

George Friedman: Remember the structure of Europe, from St Petersburg to Rostov you draw a line. To the west of it is the European Peninsula. To the east is Russia. No one has ever permanently occupied Russia, but Russia has always moved westward. Now it's just furthest point east. The line, incidentally, is roughly the border of the Baltics, Belarus and Ukraine. The question on the table for the Russians is will they retain a buffer zone that's at least neutral or will the West penetrate so far in Ukraine? That they're 70 miles away from Stalingrad and 300 miles away from Moscow. For Russia, the status of Ukraine is an existential threat. And the Russians cannot let go. For the United States, in the event that Russia holds onto the Ukraine, where will it stop?

Therefore, it's not an accident that General Hodges, who's been appointed to be blamed for all of this, is talking about pre-positioning troops in Romania, Bulgaria, Poland and the Baltics. This is the Intermarium, from the Black Sea to the Baltic that Pilsudski dreamt of. This is the solution for the United States. The issue to which we don't have the answer is what will Germany do? The real wild card in Europe is that as the United States built this cordon sanitaire, not in Ukraine, but to the West and the Russians try to figure out how to leverage the Ukrainians out, we don't know the German position. Germany is in a very peculiar position. Its former chancellor, Gerhard Schroeder, is on the board of Gazprom. They have a very complex relationship to the Russians.

The Germans themselves don't know what to do. They must export. The Russians can take up the export. On the other hand, if they lose the free trade zone, they need to build something different. For the United States, the primordial fear is Russian capital. Russian technology. I mean, German technology and German capital, Russian natural resources, Russian manpower. As the only combination that has for centuries scared the hell of the United States.

So how does this play out? Well, the US has already put its cards on the table. It is the line from the Baltics to the Black Sea. For the Russians, their cards have always been on the table. They must have at least a neutral Ukraine, not a pro-Western Ukraine. Belarus is another question. Now, whoever can tell me what the Germans are going to do is going to tell me about the next 20 years of history.

But unfortunately, the Germans haven't made up their mind. And this is the problem of Germany, always, enormously economically powerful, geopolitically very fragile. And never quite knowing how to reconcile the two. Ever since 1871, this has been the German question. The clear question of Europe.

So to answer my faithful colleague of 700 years of empire, where Hungary and Croatia was joined – I didn't think you enjoy that that much: Think about the German question because now it's coming up again. That's the next question that we have to address. And we don't know how to address it. We don't know what they're going to do.

Nick Brand: And unfortunately, that's all we have time for this evening. Thank you so much, George Friedman. He'll be signing copies of his book in the rear of the room. Thank you as well to the Chicago Club for co-sponsoring this evening. Good night.