Introduction:

Thank you for inviting me to speak at this distinguished institution.

I will speak to you today about the transatlantic relationship. I believe that the transatlantic relationship is a major part of the solution to an increasingly “challenging” international environment. The reality that I have seen since becoming Ambassador to the European Union is that the US and Europe see eye-to-eye on most of the key strategic issues facing us around the world; we talk about those issues constantly; and we are working very hard to coordinate our policy responses.

That was very much the story of the U.S.-EU summit in Washington in April. In fact, it is worthwhile to read the Joint Declaration that came out of that summit. It gives a clear perspective on the breadth of the issues on which we cooperate and on the depth and intensity of our regular consultations.

Today, I would like to divide my remarks into two parts – the economic aspect and the political aspect of the transatlantic relationship.

Economic Relationship:

Let’s start with the economic side. First, I have good news for you. The recent Summit improved the way we conduct transatlantic economic relations. We established a framework for transatlantic economic integration. For this, Chancellor Merkel deserves credit for having the vision to launch such an important undertaking.

Transatlantic Economy Statistics:

You may ask - why are we so interested in developing transatlantic economic relations?

Today and in the years to come, the transatlantic economic relationship is the dominant link in the world economy, the mainstay of our foreign economic policy, and our “indispensable relationship.”

This relationship will play the leading role in shaping the global economy of the future. EU Commission President Barroso was on target when he said: “Where the transatlantic marketplace leads, the global economy will follow.”

Even with the rise of emerging economies such as China and India, the U.S.-EU relationship continues to be the engine of the global economy. Our positive, cooperative relationship and our common philosophical commitment to free markets generates global growth and economic reform.

In terms of size, depth, and breadth, no other relationship comes close. The U.S. and Europe are each other’s most important trading and investment partners. Almost two-thirds of foreign direct investment in the EU comes from the U.S. FDI flows in both directions were over $900 billion on goods last year. The U.S. and the EU account for two-fifths of global trade.

The U.S. and EU together account for almost 60% of world GDP. Transatlantic investment accounts for about 14 million jobs on both sides of the Atlantic.

Regulatory Cooperation:

Next, let me outline for you why we have decided to focus our efforts on the issue of regulatory cooperation between the U.S. and the EU.

As investment has displaced conventional trade flows as the driving force in our economic relationships, regulatory issues have become the focal points of our policy discussions.

The task at hand is to deepen our regulatory relationship to ensure that the U.S. and EU continue on the path to open markets, trade, and investment.

I would argue that our increasing economic integration has put us at the early stages of managing what could be viewed as a form of “transatlantic domestic politics.” – The potential for adverse spillovers from regulatory decisions – whether REACH in Brussels or Sarbanes-Oxley in Washington – means that we each have a stake in what would once have been considered strictly domestic affairs.

Fortunately, EU and U.S. regulators recognize the growing importance of cooperation and have greatly increased their dialogues in recent years.

At the April Summit, we established a mechanism to better manage transatlantic issues with Cabinet-level support. This should ensure among other things that the transatlantic effects of proposed regulations are given appropriate weight in regulatory impact assessments.

Energy/Climate Change:

Another important area for cooperation is energy. Presidents Bush and Barroso share similar views on promoting energy security.

The Summit ratified the growing convergence between the U.S. on the connected issues of energy security and climate changes.

There are common approaches to these issues on both sides of the Atlantic, and we will continue to promote the practical cooperation that we all recognize is necessary to promote energy security and reduce greenhouse gas emissions.

Political Relationship:

Now – to the political side. The U.S. and the EU work together on foreign policy throughout the world. This is demonstrated by the sheer number of high-level U.S. officials who visit Brussels to discuss our common strategic objectives in managing crises around the world. In fact, in any given week, we are handling visits of half a dozen senior Washington officials, and countless more at the working level.

Why such a high level of interaction? Because on almost any important issue facing the international community today – Kosovo, Afghanistan, our relationship with Russia, the situation in the Middle East, Darfur and Somalia, North Korea – and the list could go on – the reality is that the US and the EU member states invariably share strategic objectives. Of course, we may disagree on tactics, or have different levels of priority for a given issue – but that’s why we talk. And we find a lot of common ground – which is why Robert Cooper has called the political relationship today “the best it has ever been.”

That said, we should not forget that cooperation is not an end in itself. It is a means to an end. It does us little good if – in the name of maintaining our unity, we shy away from making the tough decisions when needed. That is a danger that any alliance faces – and it is particularly a worry for an entity such as the European Union, which bases its foreign policy decisions on consensus.

Sometimes, the right decisions simply can’t muster unanimous agreement. Let me mention two very important security issues facing us right now, where we may in fact be faced with such tough choices in the near future: Kosovo and Iran.

Kosovo: “TINA”:

First Kosovo. We are working extraordinarily closely with Europe through the Contact Group process and now we are coming to the end game. It is not going to be easy, though, and these next months are going to strain both transatlantic and internal EU unity. The International Crisis Group issued a report May 14 with a title that sums up for me the situation the international community faces regarding Kosovo. It was: “Kosovo: No Good Alternatives to the Ahtisaari Plan.” We have worked diligently with our European partners, including those EU countries in the Security Council -- Belgium, Italy, France, Slovakia, and the UK – to secure Russian agreement, or at least acquiescence to, a resolution supporting the Ahtisaari plan. Why? Because we agree with the ICG’s analysis – there are NO good alternatives. President Ahtisaari’s plan offers the best hope for a viable Kosovo where all ethnic groups can live, work, and contribute to Kosovo’s society. So far, the U.S. and Europe have worked together superbly in pushing for a result that will offer both supervised independence for Kosovo and a strengthening of Euroatlantic ties with Serbia.

At some point, however, we may be faced with accepting the inevitable: independence for Kosovo without the agreement of either Russia or Serbia. Why? Because the current situation is untenable. The UN has maintained a mandate over Kosovo for all practical purposes since 1999, leaving everyone in the region in legal limbo. Until it is resolved, neither Kosovo nor Serbia can move forward into the 21st century. But this will be a tough decision. It will probably not win unanimous support from all of the EU 27, at least not immediately. And that is where consensus will not be enough – we will have to be ready to do what is right.

Iran: And then there is Iran. I want to address the Iranian problem in more depth because it presents multiple challenges to peace and security in the region - through its support for terrorism, through its role in fomenting instability in Iraq and Afghanistan, and most importantly, through its quest for nuclear weapons.

EU - U.S. cooperation on Iran is solid. This is an excellent example of how when the U.S. and EU speak with one voice and act together, diplomacy works to its full force and effect. Thanks to this unity, the international community is in a better position than we were before -- we have brought along Russia and China and have shown that the international community is united. The IAEA is on board, Gulf states and developing countries are on board.

Nevertheless, we need to start asking the tough question "so what?" So what if the U.S. and EU have achieved great cooperation but we have thus far failed to get Iran to back down? We have to confront this problem and look at our position vis a vis Iran.

• Two UN Security Council resolutions against Iran are taking hold.

• The Iranian economy is going downhill. Existing sanctions have already had a significant impact on Iran’s ability to attract the expertise and investment needed to address weaknesses in its energy sector.

• Iran is still not complying - as confirmed by IAEA chief El Baradei.

Nobody - not the EU, and not the U.S. - wants to use military force in Iran. We agree with our European friends that we should do our utmost to resolve this problem by using diplomatic means, including the tools of so-called "soft power." Iran is a perfect opportunity to demonstrate the efficacy of soft power. If we don't use soft power to its full extent here, where will we use it? The question is: will using these levers work? I would argue yes, if we use it forcefully and effectively.

As with the use of military force, which requires a significant sacrifice in blood and treasure, the use of soft power, too, requires sacrifice. It will not be painless or cost-free. However, I would argue simply that (1) We must prepare further options; and (2) Our options may be better than they appear at first glance. The key is that we continue to work closely together to realistically tackle the challenge that Iran poses.

We are currently consulting with international partners as to what next steps should be taken to persuade Iran to pursue a diplomatic solution. Full and effective implementation of existing sanctions - including travel bans, arms bans, and assets freezes - should be at the top of everyone's "to-do" list. The EU has made excellent progress in this regard, but there is more to be done.

It is also worth considering the impact that stringent measures in the energy sector could have. Many Western pundits seem to assume that Iran is holding all of the best cards in this area. The thinking seems to be that, with oil prices high and unstable, any application of oil and gasoline sanctions to Iran would hurt the rest of the world more than it would harm Iran itself.

But is that really the case? I don't think so. Iran has significant weaknesses which would make it very vulnerable to world pressure.

First, Iran has only begun to tap its huge gas reserves and is actually a net gas importer.

Second, Iranian oil production, though substantial in absolutely terms, has steadily declined since the Iranian Revolution, and is now less than two thirds of what it was in 1979. In fact, Iranian management of its own oil has been so poor that it now is unable to meet its own domestic demand for refined gasoline and must import it.

So, the facts suggest that Iran may need the rest of the world more -- and be more vulnerable to our so-called "soft" leverage -- than most people realize. Iran needs external investment and technology to expand its oil and gas production. Iran needs foreign investment to develop new fields and transport links. Iran needs this development to support its dramatically growing population.

To be sure, a cutoff of oil from Iran could in the short term cause prices to spike in the global market. But we have tools to contain that -- in the medium term, by releasing reserves, by conservation, by expanding gasoline supplies through the use of fuel additives and so on.

Again, this would not be a painless action for any of us. But I think that an oil and gasoline sanction could work very quickly because Iran would be forced to blink first –and fast – in light of its vulnerabilities described above.

You may think that because the U.S. does not currently trade with Iran, Europe will bear the brunt of economic sanctions. But actually I think the US would be hurt more than Europe by a spike in oil prices, because its relatively lightly-taxed gasoline is much more vulnerable to price hikes than Europe’s. Also, think of the opportunity costs the U.S. faces - we used to have a great relationship with Iran and we would like to have the same again. In the long run, a responsible and globally-integrated Iran would provide the international community with enormous economic opportunities. We should keep this in mind as we consider the short-term pain we may have to endure as result of tougher sanctions now.

Let me make clear that we are committed to working for a diplomatic settlement – one that is in the best interests of all, especially the people of Iran. But let me also make clear that I think it is absolutely vital that we be bold and forceful in our use of soft power - it is our collective responsibility to make sure we use this tool to the best of our ability.

Conclusion:

Thank you again for inviting me to join you today. Let me now open the discussion up for questions.