Jeffrey Sachs on global economic fragmentation and Europe's decline
Glenn Diesen interviews economist Jeffrey Sachs on the breakdown of the global trading order and Europe's worsening position.
Summary
Professor Jeffrey Sachs joins Glenn Diesen to argue that the accelerating fragmentation of the global economy is producing clear winners and losers. He contends that the US-China trade relationship and the Europe-Russia economic linkage are both damaged beyond near-term repair, and that Europe is the principal loser in this breakdown — having severed ties with its main energy and resource supplier while clinging to a United States that no longer has genuine interest in European prosperity. He contends that the US has subordinated economics to geopolitical strategy, using trade and technology as instruments of hegemony rather than mutual benefit, and that this represents a fundamental departure from the principles of open trade that drove global development. Sachs places the probability of a resumed US war with Iran at above 50%, warning that such an outcome would cause catastrophic short-term economic damage to the entire global system. He concludes that Asia will be the long-term winner of current realignments, while both Europe and the United States are in a shared decline that their political classes have so far failed to comprehend.
Key Takeaways
FULL TRANSCRIPT
The state of the global economy
Glenn Diesen: We are joined again by Professor Jeffrey Sachs to discuss what's happening to the global economy. Thank you very much for coming back on.
Jeffrey Sachs: As always, great to be with you.
Glenn Diesen: We see that the wars against Iran and Russia, the economic war against China, and the US seeking to dominate its own backyard are pushing the global economy towards the edge. We see that a lot of the economic interdependence set up over the past decades — in terms of reliable access to maritime transportation corridors, natural resources, technology, currency, and banks — is either being severed or weaponised. How do you see the current state of the global economy? Is this a temporary disruption, or do you think there's a risk of a complete breakdown?
Jeffrey Sachs: There have clearly been some important breakdowns. The US-China trade and investment relationship is never going to be what it was ten years ago — that dynamic of confidence and mutual investment in both directions is over. Clearly the Europe-Russia linkages are damaged, perhaps to the point of no return in our generation, and that is very significant. Europe is the big loser in that breakup.
There is also regionalisation taking place because there are simply more risks associated with long-distance trade and logistics. Trade and investment relations within Asia are strengthening. Trade and investment relations within Africa are likely to strengthen. Europe is rather bereft, because it broke relations with its main natural resource supplier, which was Russia, and all it looks to now is a completely unstable, nasty, and disdainful United States. So Europe is completely adrift economically.
These are deeper trends that are not going to be changed by any of the events in the next weeks or months. But I think it's very important to say at the outset that the world economy still hangs in the balance, even in days and weeks. It sounds melodramatic, but I think it's true. If the United States resumes the war with Iran — which I think we have to put at 50% or higher — the results would be devastating under any circumstance. We are at that precipice. We have a completely deinstitutionalised United States government. We have an absolutely out-of-control Israeli military state. It has become nothing more than a war state, and it wants continued war. If the war that is on simmer right now turns back to a boil, then everything will be dramatically accelerated, magnified, and made horrendously worse in its short-term economic impact.
The point is that because of essentially US efforts to somehow maintain a kind of preeminence that the US no longer has — but the attempt to maintain it through regime change and war operations — the breakup of what was an integrated world economy is real and unlikely to return anytime soon.
I should add that the very nature of the digital economy, the interpenetration of data in the digital economy, means that the United States from a military and security point of view is determined to create a US-centred part of the world that is separate from China's. That also means that by the nature of the technologies, the US is going to break the trading system in one way or another for many years to come. And that's not just Trump's petulance — that will be a national security perspective in the United States that is widely shared in Washington.
So we're in a fragmented world. But I think the fragmentation leaves Europe really outside of everything. It leaves the United States probably aiming mainly to control what will be an increasingly unruly Americas, which will not accept the increased US dominance that the US is trying to impose right now. And I think Asia will become increasingly integrated, and the winner of all of this will be Asia.
Europe's strategic self-harm
Glenn Diesen: I agree. It seems that Europe will be the big loser here. My concern always, after the Cold War, was that with NATO expansion we redivided the continent, which makes Europe weaker in terms of security, economics, and politics. Now we see this manifest itself as mass hysteria and very irrational war enthusiasm. Europe cut itself off from Russia. We see the Middle East being reorganised. Europe is now putting all its eggs in the US basket because this was the source of stability over the past 80 years. But even the US is now very openly losing its interest in a less relevant Europe. How do you see the possible pathways for Europe? Is there a way to restore its prosperity or relevance, or do you think it has already played all the cards it could?
Jeffrey Sachs: The Europeans should have reflected on the fact that it was the United States that worked very hard to keep Europe and Russia apart. For decades it was the United States that was warning against Nord Stream and against closer relations between Germany and Russia — meaning that those links were good for Europe, especially good for Germany as the main economic motor of Europe. The United States viewed that as a risk to America's own preeminence and its own political sway in Europe.
So Europe should have noticed that they had the leverage. But Europe played along completely with the US. It became enamoured of the idea of expanding into central and eastern Europe — I like that idea — but I did not like the idea of building a new wall to exclude Russia. This is an absolutely absurd idea from Europe's point of view. Europe should reverse this. This is geography. Somebody will eventually look at a map again and ask how they brought this about on themselves. This is really complete self-harm.
But if you look at the current leadership — of course it's not going to happen with people like von der Leyen, or Kallas, or Merz, or Starmer — the European political leadership has bought into a completely failed economic and geopolitical strategy. It is now a failed political class, and until that changes — one way or another, with new political entrepreneurship in Europe — Europe is just going to be in decline economically. We see it: industry is shuttering up, and there is no bright spot in the European economy right now at all.
Economics as an instrument of hegemony
Glenn Diesen: I recently read a speech by Elbridge Colby, the Under Secretary of Defense for Policy, and what I thought was remarkable was that it didn't really suggest the war in Ukraine should come to an end. The speech more suggested that the Europeans should arm themselves and take over — outsourcing the war rather than ending it. And we've seen the Europeans now approve $90 billion to Ukraine. They call it a loan, but I think that's more to deceive their own public, because this money is not coming back. At the same time, there seems to be growing preparedness to get more directly engaged in this war with Russia. But we also see opposition growing in Europe, because as you said, the political elites and the public are not necessarily on the same page. Do you see any shifts — people waking up among the public — or do you think the current political elites are too entrenched?
Jeffrey Sachs: Let me say something about Colby and something about the funny thing that happened on the way to our current disaster.
I've been teaching international trade now for 46 years. When I studied as a student, we studied international trade and why it was good, why it was mutually beneficial, and we spent about 15 minutes in the semester on what was called the national security exception. I remember my professor — a learned professor of international trade — saying, "Well, you know, all the good things we're talking about with trade, we should remember that there might be exceptions if national security is at stake." It was about a 15-minute aside.
This is the way that good economists view the world, and good economics in this regard goes back to Adam Smith. We celebrate the 250th anniversary of The Wealth of Nations this year. Adam Smith's idea was that an expanding world market is mutually beneficial for all of the participants. He was a great humanist, and he said everybody will benefit — even today's bereft and colonised peoples will gain strength through international trade and the flow of ideas, and there will be a rebalancing of the world so that all parts of the world benefit from open trade. Smith advised the British monarchy and parliament in 1776: give up the American colonies. You don't need military control. Just trade with America. You don't need an imperial policy. Eventually the American Revolutionary War broke out, and by 1781 the British colonies were independent of Britain.
The point is that economics as a discipline has recognised that open trade is mutually beneficial. Of course, trade under colonial or imperial imposition is not — but open trade among sovereign nations is mutually beneficial.
What happened in the United States is that as the US lost its nerve with the rise of China in particular, but more generally with the catching up of many countries — so that the US share of the world economy was going down — economics was taken over by the international relations people, who view the world not as win-win but as win-lose. Suddenly the idea that economics should be ordered to preserve American hegemony became an increasingly prominent discussion in the American scene. I found it never very interesting. I found it absolutely ignorant of basic economics and also wrongheaded, because fundamentally for me the rise of China was not a threat. It was a benefit — first to the 1.4 billion people of China, and ultimately a gain for the whole world through trade and through China's innovations.
But from the American conceptual point of view, people like Elbridge Colby or people like Jake Sullivan in the Biden administration came to see economics as the instrument for continued American hegemony. The last 20 years has been spent honing the instruments of economic warfare — the idea that we should think about trade and the flow of technology mainly from a military and geopolitical point of view, not from an economic point of view. The main idea became: we have to remake the economy to suit American dominance, to protect and extend American dominance.
Jake Sullivan, who was the national security adviser for Biden and now teaches at Harvard University, has written a piece in Foreign Affairs recently, basically about how economics should be run for the sake of American power. To my mind, all of this is mind-boggling in its economic ignorance and its economic destructiveness. But this kind of discussion dominates right now. Economics is no longer about economic prosperity and well-being — even in the US university context. It's about power, and it's about how we can head off China's rise and how the information technology world should be organised so that China is not a beneficiary, and how Nvidia chips are kept out of China's hands.
All of this has reoriented our thinking in an extraordinarily destructive way, because we are taking down the basic scaffolding which made the world economy achieve economic growth and development — for the developing countries to a large extent. People in the US say globalisation failed. Globalisation did not fail. Globalisation provided the basis for worldwide economic progress that happened to be especially rapid in the developing and emerging economies. That's success. That's not failure. But what economic growth did was diminish in particular the share of the United States in overall world output, and that is what is unnerving to these so-called strategists. They want to keep American dominance, not American well-being.
So the American people are suffering from this absurd war that we're in. The Iran war is tragic, but also completely absurd. It never should have happened. Any sane president would have known not to do this. Trump brags, in fact, that since 1979 all the presidents of the United States refused this war, but he did it — which is a testimony to his complete lack of understanding and insight, not a tribute to his bravery. It's a tribute to his impulsivity, his recklessness, his absence of process, his ignorance — not to any prize that he has. But it's part of this idea that we're playing with the world economy for the sake of American power, not even for the economic well-being of the American people.
As you said, everywhere in Europe the public is disgusted, and they're going to be more disgusted in the coming months because their living standards are going to go down further. In the United States, Trump's approval ratings are plumbing new depths each month — now down to 34% approval and 62% disapproval. This is happening all over the so-called Western world, which has turned economics into a weapon aimed at Russia and at China, rather than as an instrument for well-being that might actually help Russia and China as well as helping ourselves.
That's basically what's happened, and that's why it doesn't surprise me that Mr. Colby and the Pentagon would view an ongoing war as a good thing — because from their point of view, they're not looking at what's good for the American people. They're looking at what is good for this conceptual idea of American dominance.
Naval blockades and the weaponisation of maritime corridors
Glenn Diesen: When we look at this weaponisation of economic connectivity — blocking Chinese access to technologies, or seizing the sovereign funds of Russia — that's one thing. But one area of economic warfare that has historically been a source of war has been naval blockades. This restriction of access to maritime transportation corridors didn't seem like a key challenge over the past few decades, but now we see it becoming central. You probably saw the recent speech by Trump where he essentially brags that the US is now acting as pirates — seizing ships and taking their cargo. And it's not just talk. We've seen the blockade on Venezuela, Cuba, Iran, the hijacking of tankers over the years, going after Russia's commercial fleet. The UK plus nine other countries are setting up a naval alliance to, as they call it, contain — which means confront — Russia. We also see the threat of the United States possibly intercepting Iranian vessels all the way to the Strait of Malacca, which would essentially mean war on China. Where do you see this going? Is this a return to the historical reality that if you want to trade, you need a powerful navy to ensure commercial vessels are supported by guns?
Jeffrey Sachs: This is all shocking, because some of the most basic principles of international statecraft have been freedom of navigation on the high seas. For the United States to be championing piracy — well, at least Donald Trump says out loud what others try not to say out loud.
I think this piracy of the United States will prevail in the western hemisphere. It won't be challenged from outside, certainly, and it will be challenged from inside the western hemisphere. In the end, Latin America — though it is under the sway and military dominance of the United States — will not accept what is happening right now. But it will take some years, because the United States is not only putting on blockades and directly overthrowing governments — and it will do so with Cuba most likely very soon — but it is also intervening in the political systems and elections of almost every country. So it is in the short term turning the Americas into a bastion of US dominance. This will probably succeed in the short term, because I don't think Russia or China or anyone else from the outside will challenge this.
But the farther away you go from the United States, this becomes unworkable. The United States will not succeed in the end in blockading Iran. The US doesn't even have the naval capacity to do so. It doesn't have the staying power. It can't even keep a comprehensive blockade from a strictly military point of view, let alone from a geopolitical point of view with China and Russia and others opposing it.
If Europe is stupid enough to take on Russia and Russian shipping directly, there will be war between Europe and Russia, and Europe will be devastated. The European current class of political leaders — with a few exceptions, a few people who are honestly thinking about this — but thinking of the main characters, Merz and Macron and company, they will in their short period remaining in government possibly lead Europe to destruction, not just to economic decline, which they've been doing for a number of years.
The further one goes towards Asia, the ability of the United States to have sway diminishes fast. I think one of the lessons of the Ukraine war and the Iran war is that US military dominance is not impressive anymore. This is a matter of changing technology. It's a matter of the rise of military power of Russia, of China, of North Korea, of Iran. It's the nature of technology itself — the big, expensive US weapon systems are not especially suited to the kind of warfare that we have now.
So the closer one gets to Asia, the less relevant the United States becomes. That's why I said at the outset that I think Asia as a whole will become more economically integrated. The US will not have chokepoints that it can hold. China has a formidable navy already, and it has a very sophisticated, AI-empowered military that it's building very rapidly. It is not naive about US intentions, to say the least.
I don't see the US being able to prevail in its overall aim of hegemony, nor do I think it can project power in Asia. And if things really get tough and China acts in its own neighbourhood the way that the United States is acting in its neighbourhood — say China decides, for whatever reason, and I hope it never comes to this and it doesn't have to, but China blockades Taiwan — the implications for the United States are extraordinarily devastating. Yes, we're building semiconductor fabs in the United States, but nowhere at a speed or depth that can begin to replace the supply chains that come from Taiwan, Japan, and Korea. If China asserts its regional power the way the US is doing, the US does not have a military response. Every war game in recent years has shown that, and that change is accelerating.
We're seeing the limits of US technology because these systems are expensive and poorly tuned to the changing world, which is why the Pentagon is scrambling to come up with some kind of new technology model — but that's years and years ahead.
All of this is to say I don't believe that the United States can impose its will even in the Iran war. I think it may well try to do so in the coming days or weeks, and then let's talk again — because the whole world situation in the short term is going to be dramatically worsened. Everything we're saying will not fit the reality even in four, five, or six weeks of a renewed outright war in which the physical infrastructure of the Gulf region is heavily damaged, which is the likely outcome.
So the US is on the wrong track — irrational, very poorly led, rather desperate to keep control over what it no longer controls. And therefore, as I say often, the United States is by far the most dangerous country in the world, because it is trying to do what it can't achieve. When you have that gap between aspiration — which is global dominance — and reality, and you try to pursue your delusion, you end up creating great harm. And all of this is spurred by its junior partner, Israel, which has even greater delusions — biblical-scale delusions that are absolutely bizarre — and that prod the American delusions. It's quite a dangerous situation, but there's no good outcome for the United States. And until the European political class changes and understands the basic realities of geography and of changing power and technology, Europe is just going to be completely out of this whole scene.
The resilience question and shared Western decline
Glenn Diesen: I agree — the Europeans should realise that geography is destiny. But with the US, it's certainly a resilient country, though I wonder how much stress it can absorb. This whole idea that it can replace energy supplies to Europe and East Asia assumes that the other great powers will just sit by and not respond, and that its vessels will simply remain obedient.
Jeffrey Sachs: The US isn't so resilient. The US has a shiny and very bright dominant technology sector — Silicon Valley, hats off to a lot of accomplishments, no doubt. But if you travel in the mainstream of America, there's a lot that's broken down and people are very unhappy for understandable reasons. The infrastructure is decades out of date. The difficulties of working people are very significant, and none of this is being attended to by this political class in Washington, which is out of date by at least 30 years in its understanding of America and of the world. It's a completely money-driven, corrupted political class to begin with, and the things that are said in the United States have very little resemblance to the reality of the world right now.
So I don't think the US is so resilient in any way, and the unhappiness is very great. People could look at the question asked by Gallup of the American people: is the country on the right track? This hovers around one out of five Americans saying yes, with the vast majority saying no. That reality has been with us for a while, and nothing that's happening — not one element of Trump's delusional world — is putting America on the right track.
So Europe and the US share basically this decline. They were the privileged part of the world. They're not anymore. They're both flailing around, trying to understand that, and they're both failing to understand it — Europe by clinging to the United States, which has no genuine political interest in Europe, and the United States by clinging to the delusion of a dominance that it proclaimed 34 years ago at the end of the Soviet Union, which wasn't even true then and is completely delusional today.
Glenn Diesen: I agree. I think that's a perfect description of where we are now.