Süddeutsche Zeitung meets with Niall Ferguson and Moritz Schularick in Berlin, where they are presenting their views on the global situation at the Chancellery and the Ministry of Defense. Economic historian Ferguson of Stanford University is regarded as a brilliant analyst of the times thanks to his numerous bestsellers; most recently, the 62-year-old has also faced criticism for his stance on Donald Trump. For 20 years, Ferguson has collaborated repeatedly with Moritz Schularick (50), who heads the Kiel Institute for the World Economy, one of Germany’s leading economic research institutes.
SZ: Corona-pandemic, Ukraine war, Donald Trump’s tariffs, Iran war: in the last years several geopolitical shocks hit the world economy. Why did this accumulation of shocks happen – and is there more to come?
Niall Ferguson: I think this is history as normal. After the first Cold War, in the 1990s and 2000s, we had relatively little conflict, and we got used to that. But if one takes a hundred-year perspective, the 2020s don't look that unusual. The shocks are not especially surprising. You would roughly expect a pandemic every hundred years. You would certainly expect a war in Ukraine, it's been one of the most dangerous places on earth for conflict. As for the Middle East, well, that's the third Gulf War we just had.
So economic shocks will be the new normal?
Ferguson: The surprising thing is that the impact of these economic shocks has been quite small, at least for the US. If you had told me in 2019, there's going to be a pandemic, several wars and Trump's going to put tariffs up to levels we haven't seen since the 1930s, I'd have said: it’ll be bad, sell your stocks!
Moritz Schularick: Time and again, people underestimate how resilient market economies are. In 2022 many Germans were convinced that without Russian gas the lights would go off. That didn't happen. Price signals did their job: people saved energy, firms switched to oil. But it’s also true that the governments have spent a lot of money to counter the shocks, so public debt has ballooned. In the next round of history we'll have less financial freedom in Europe to stabilize away the shocks.
The Iran war has shown that a regional power can easily block essential trade routes like the Strait of Hormuz. What does that mean for the future?
Ferguson: These are the realities of asymmetrical warfare that the Houthi rebels already showed when they attacked Western ships. The European public hasn’t accepted this new global problem. It’s still hard to persuade people in Berlin, Paris or London that Russian or Iranian Shahed drones could strike their cities or disrupt other strategic waterways. Having said that one needs to recognize that the United States and to a lesser extent China are acquiring new powers that will re-establish their superpower status: the weaponization of artificial intelligence, the increasing use of space for military purposes. It's a mistake to read the Iran war as a simple story of American failure.
Many people are afraid Trump will end democracy in the US, attacking democratic institutions as he’s doing.
Ferguson: I've been saying for 10 years now Trump is not Caesar. Trump is not Hitler. The American system was designed 250 years ago to prevent the emergence of a king and it works to contain Trump. The government has been involved in hundreds of legal cases and lost most of them. The Supreme Court ruled against Trump on the tariffs, despite the fact that he had appointed three of the justices. The Republicans are going to get beaten in the midterm elections. If the Democrats nominate a relatively centrist figure, that person likely wins the next presidency. No one knew Barack Obama in 2006, and two years later he was elected president. That’s how it’ll go…
…if you’re not too optimistic about Trump. Meanwhile you could maybe join the government and deliver some economic sense on topics like tariffs, you’ve already been asked twice to work for him.
Ferguson: It’s not all bad. Trump’s a risktaker who’s bolstered the economy by deregulating sectors and changing energy policy from the Green New Deal to all the available energy. The US economy has left Europe far behind in the last 10 years.
Schularick: The US is the world leader in digital technologies. The driving force behind that is the private sector, not the government. But unlike in Germany, the government has at least not stood in the way of success.
Ferguson: I criticize the tariffs, but if one talks to the people who made them, their argument is: you can't do free trade with China, because they break the rules systematically. So Trump uses the tariffs to either force China to change its behavior or simply make Chinese products less competitive in the US. I think there´ll be a time when Europeans say — and Germans first — we should have done this too instead of letting the Chinese destroy our automobile industry.
But it wasn’t fair that Trump slashed the tariffs on Europe which didn’t break the rules.
Ferguson: I don't think Trump was elected to be fair. Trump was elected to be unfair to all people who aren't Americans. That's his whole way of thinking, and the policy has been good for US interests, while the consequences have been borne by others.
Looking at China's expansion and the geopolitical shocks: Is the German business model dead, because it focuses a lot on industry and exports?
Ferguson: German business completely underestimated the China threat. I remember people telling me seriously that the Chinese would never be able to make ball bearings or windshields as good as German ones. They failed to see that China's strategy was to game the system, to subsidize companies, to steal intellectual property etcetera. Unless there's radical change, I predict: Europeans will be driving Chinese cars on a massive scale very soon. BYDs for example. And it's no longer just the automobile industry and machines. The entire pharmaceutical industry of Europe is about to be wiped out by the massive expansion of Chinese biotech and pharma.
Schularick: We need a resolute strategy towards China. We had an EU summit last week but we still do not have a European strategy.. Europe will have to use access to the big European market as a bargaining chip. We will allow China to sell BYDs here, but we'll insist they're produced in Europe to keep the jobs. We’ll do what the Chinese did to us.
And Volkswagen will go bankrupt?
Schularick: Volkswagen will likely be bought by a Chinese car maker like BYD.
Phew.
Schularick: Here's the good news for German industry: There's a potential vision of the world economy in 20 years where we have the three continental economies: Europe, US and China that will produce nearly everything essential for national security at home. And the German manufacturing base will underpin much of European security.
Ferguson: I’m more pessimistic. Europe will only establish itself as a third superpower if it achieves technological autonomy, with its own cloud and own AI that it doesn’t have now. And I don’t see Europe achieving this autonomy as it’s moving away from further European integration and in the direction of populist nationalism with a likely Rassemblement National successor to Macron and the AfD leading the German polls.
Schularick: I agree, Europe needs technological autonomy in key areas and there’s a big risk of that not happening. In that case Europe gets squeezed between the two gorillas China and the US. China and the US will eat up Europe piece by piece.
You’ve said Germany is Europe's best and last hope…
Ferguson: …because Germany has the fiscal space to do stuff which other countries clearly have not.
But since the government announced big spending on infrastructure, many people say that this raises debt levels too much.
Ferguson: Debt is only a problem if you're consuming the money. If you’re using the money to upgrade your infrastructure, you'll get the growth, and the debt-to-GDP will take care of itself. Many Germans haven't understood that, but it's crucial. The infrastructure so needs an upgrade. Germany feels old. The railroads suck. It's shocking. I invite your readers, go to Switzerland, it's time travel.
Schularick: This makes an industrial strategy for defence investment even more important. Europe can’t rely on the US anymore to defend it against an aggressive Russia.
Is there also an economic chance there?
Schularick: Absolutely. To live in peace and freedom in the next decades Europe needs space capabilities, AI, robotics. All the defense technologies of the future are high-tech areas with dual use character,where Europe has fallen behind, which is the central reason for it’s economic malaise. Defence spending is a huge opportunity to catch up technologically and grow economically at the same time.
Ferguson: As long as there's low growth, the populists gain and the democratic center can't hold. So go for the economic payoff of defence spending. Germany has the manufacturing capacity and skilled workforce, and the traditional model through automobile exports is dying.
How do you judge the progress?
Ferguson: We need an „Operation Warp Speed“ for German rearmament, because otherwise the voters won't see the economic benefits. At the moment, the impact of Trump's tariffs, Chinese competition and energy shocks are greater.
Schularick: We need European defence integration, because with fragmented national industries production remains small-scale and prices high. Militaries tend to prepare for the last war, not the next. We have to stop thinking only about tanks and planes and go for the high-tech defense areas that we have to do together as Europeans. There is no security for Europe without tech. But there won't be European tech without the defense budgets. We have to use this large pot of money for national security to develop a sovereign AI, advanced software, robotics, space capabilities and so forth. It’s so frustrating that we're spending hundreds of billions right now in this country without a clear direction.
What role will AI play for the rise and fall of leading nations?
Ferguson: The AI revolution is one of the biggest in economic history, more significant than the railroads, electrification or the internet. The US is the leading AI superpower, China follows and Europe is nowhere. In a world of only two AI superpowers, there's a dangerous arms race between the two, as there was at the beginning of the first Cold War in the nuclear domain.
In the 2000s you two coined the term Chimerica for China and the US in an economic symbiosis…
Ferguson: …that was unsustainable, because the benefits went disproportionately to China. We predicted divorce…
..and now both are competing for the dominance of the world. Who will win?
Ferguson: I think it could end quite soon, very badly. Because there's a window of risk where the US can't deter China from making a move against Taiwan because it lacks the military capability, especially after the Iran war. And China is incentivized to take control of Taiwan, because with the semiconductor producer TSMC, Taiwan is the key to US leadership in AI.
That’s alarming…
Ferguson: …but on a 10- or 20-year horizon, the US will prevail. The whole Chinese economy is being dragged down by failing consumption, household exposure to a real-estate sector that cannot revive, and a truly astonishing population contraction. The authoritarian regime without political competition and clear property rights based on rule of law is also a negative factor economically.
So is there hope economically for a Europe that stays staunchly democratic?
Schularick: On the current trajectory, China’s approaching 40 percent of global industrial value added by the end of the decade, but there's a limit to what its current strategy can achieve. Someone else must make stuff. So the outlook for an industrial economy in the heart of Europe like Germany might not be bad. We have to get our act together to become competitive and catch up technologically. If we succeed, I predict: The decline of German industry can be stopped.