Chapter 1: What were the economic impacts of the US-Israel war with Iran?
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Hello, I'm Stephen Carroll. I'm in Brussels, where many of Europe's biggest decisions get made.
And I'm Caroline Hepke in London. We're the hosts of the Bloomberg Daybreak Europe podcast.
We're up early every weekday, keeping an eye on what's happening across Europe and around the world.
We do it early so the news is fresh, not recycled, and so you know what actually matters as the day gets going.
From Brussels, I'm following the politics, policy and the people shaping the European Union right now.
And from London, I'm looking at what all that means for markets, money and the wider economy.
We've got reporters across Europe and around the globe feeding in as stories break.
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Chapter 2: How has the US power changed since the early 20th century?
I mean, everything's relative, I guess. Okay, well, on that note, why don't we bring in our perfect guest, older gentleman, older British gentleman with a British accent, per Joe's description. Martin Wolf, thank you so much for coming back on Odd Laws.
Well, I'm very glad to fill a niche I didn't know you had.
You truly are the perfect guest though, because again, a lot of people have described you as one of the most important economics commentators of all time. And so I think it's great that we get you back to opine on some of these very big events that we're seeing. Speaking of large events, you have described the Iran situation as a nightmare scenario.
Walk us through what you're thinking there, because when I look at some of the headlines around markets at the moment, the S&P 500 closed at a record on Friday. It doesn't seem like markets are aligned with that particular point of view. What's going on?
Well, I suppose there's so many different things, aspects of this. I've been thinking of this wonderful Shakespearean line, life being a tale told by an idiot, full of sound and fury, signifying nothing. So one feels that when markets are looking at this, they feel this is full of sound and fury, but it doesn't signify anything. And there are, I think, two possible reasons for that.
One is the famous taco line from my dear colleague, Robert Armstrong, that Trump always chickens out. So in the end, he's not going to blow up the world. He's going to find a way out of this, which will have done some damage. It will make, I think, the US look fairly ridiculous. But it can... it can be forgotten, declare victory and stop.
And I think that's still perfectly possible, a perfectly reasonable view, because he's already sort of stopped the fighting and it feels like he's looking desperately for an end game. The question is whether the other side will play ball. And that is still to be seen. And then there's the other possibility that in the end, If the oil were lost, as it were, forever, the world will adjust to that.
Yes, the output that goes through the straits is very large, but in the longer run, a lot of it can go through pipelines. They can build these. It will take quite a while, and the world can compress this demand in time. It might take a few years, the world growth will be lower, but what we're losing is about a fifth world output. Oil is much less important than it used to be 70 years ago.
Prices have risen, but actually, if you look at real terms of the long history of oil prices since the first oil shock, they're not sensationally high. And so, we will adjust to it, and we're very good at adjusting to it. The Gulf will end up as a different place because it will be exporting the same way, but it's not enough to derail the world economy.
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Chapter 3: What role does AI play in the current economic landscape?
I could go through what's driving it. I looked at this actually after the pandemic. I said, how often... Is it that we've had a genuine recession, a decline in GDP? Now, this isn't GDP per head. There will be more often times when GDP per head shrank, but basically the world economy is unbelievably robust, and that's because lots of people are providing stuff people want There are markets.
They produce for the markets. They invest to produce for the markets. Investment is very important as a driver of demand, as Cain said. And so it takes something really enormous to stop it. I went through the two oil shocks of the 70s. I was already a working economist. And they were big shocks. And we got terrible inflation and all the rest of it.
Volcker came along, and yes, he did cause a recession in the US, but it wasn't global. So I think we have to start off by saying the world economy is incredibly resilient. The second thing is that, and that's why I use the full of sound and fury, if you look at the actual policies that we've ended up with... They're sort of designed, I'm sure they're not intended, not really to hurt.
So the protection is very uneven. This was part of, I wrote about this before Trump got into office. And that creates the opportunity is designed in the system for trade diversion. If he just put up an average tariff of 40% or 35%, a lot of trade would disappear, but that's not what he did. He ended up with imposing very high tariffs on some origins.
China still has very high tariffs, but the trade diversion has been phenomenal. Trade goes through Vietnam, it goes through Mexico. And the IMF had a very nice chart on that in the latest World Economic Outlook, which basically showed that, yes, direct trade between the US and China has shrunk, direct trade between the US and Canada has shrunk, but other people are taking its place.
And in some sense, it was designed to be porous. Then there are all sorts of exceptions that he's negotiated in return for who knows what with sundry companies like Apple. Apple would have been very badly hit. So it's all very porous and it's all negotiable. So it's not as serious as all that. And then the shock in the Gulf is significant.
But oil isn't as important as it used to be, as we discussed. The energy system has changed across much of the world. And this will be accelerated, of course, but that's for the future. And prices have gone up. There will be a slowdown. I'm absolutely sure that we might get close, really bad, really bad. Maybe the world economy grows at 1%, 1.5%. But it's not a catastrophe.
And finally, profits are robust because let's face it, worldwide, labor is weak. So companies can manage their affairs in a way to ensure that they survive. I've looked at this. I'm sure lots of small and medium-sized businesses are very badly affected. But the colossi that are generating most of the profits, particularly the tech colossi, they're not affected by this.
This is at least exposed, perhaps not as surprising as one might have thought. There's a great deal of ruin in the world economy.
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Chapter 4: How are Europe and the US navigating their relationship amidst chaos?
I don't think there's one right way to be a leader.
Make decisions. A poor decision is always better than no decision.
Listen to new episodes every other Monday. Follow Leaders with Francine Lacroix wherever you get your podcasts. Setting aside interior decorating, and Joe knows that I could certainly talk about this for much longer. But you mentioned this idea of Trump as king, and you also mentioned this idea of trade adaptations.
And one of the things that's happened since the Iran situation is Trump has come out and said, well, if you can't get oil from the Gulf, and you're Europe, you can come to the US and get oil from the US. I'm very curious how statements like that play on the ground in Europe, given that on the one hand, this is a situation caused by the US.
I think it's fair to say that Europeans regard Trump as somewhat unpredictable. Somewhat. Somewhat. I'm doing an impersonation of British understatedness here. Then his message to Europe is basically, well, trust us for your energy security.
Yes. Well, I think the trust us has definitively gone. That's hardly news. I think that's true worldwide. I'm just trying to think, does anyone actually trust this guy? Because being untrustworthy seems to me the core of his modus operandi. I mean, he wants to surprise people and he does in both directions. So nobody in Europe believes
believes now that there's any promise that will come for this administration that is to be believed. And I think that's true pretty well for everybody. That's understandable because it's consistent with the evidence and the behavior and even what he says. However, Europe is in a very, very unfortunate position, which is that it grew so dependent on America for so long that pretty well all its...
structures, its defense system, very obviously, but also the things it didn't bother to produce itself. For instance, the whole tech array, the trade relations, the investment relations, and of course, the underlying ideology, the sort of liberal democracy they imported. This all came from America. I mean, we were wrong to say that it wasn't there.
A lot of this wasn't there before in different ways. But after the war, the first and second together, it was so shatteringly demoralized as a continent and so damaged, we can go through the damage done to all the different major countries, that the U.S. became the core of... Every aspect of security, belief, trust, they were very, very content with this.
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Chapter 5: What does Martin Wolf mean by a 'Faustian bargain' regarding AI?
I think that the administration is right, but I don't think they're honest in their critique, but that some governments, my own included, have gone too far in protecting people from what is called hate speech, and that there is a perfectly good argument that both in private institutions, universities, and so forth, and in public, you don't have a right not to be offended. That is clear.
However, my view also is that there are some forms of speech that European history, we'll see where it goes with American history, suggests are profoundly dangerous. And the one I used in my example of this is that if you're lecturing Germans on the import, which is started in the most notorious start of this was Vance's speech in Munich,
last year in 2025, well, the Germans feel that it really would have been a pretty good thing if they'd stopped Hitler saying some of the things he said. Indeed, if they'd removed him and put him in prison for a very long time and not instead of just letting him out when he was put in prison. So there are questions of what... how far you allow speech to be free.
It's a fine doctrine, but it seems actually the administration too believes there are lots of things we really don't want people to say. So there's an issue there. But I think there's a critique there. On the civilizational thing, I think, and I wrote this in my book, that One of the things that define a state, and certainly a democratic state, is the possession of borders.
A state and citizenship, which is associated with a state in a democratic context, is exclusive by definition. The values may be universal, but citizenship is not by definition. And we get that going all the way back to the beginning of these ideas in our ancient world, the Greeks and Roman view of what a republic or a democracy was. So I think that not controlling your borders
and making sure that the people who come to live in it, particularly the people who come to live in it permanently, are people you've chosen. It's been a political process in which you've chosen them, is essentially in violation of the citizenship compact. And I wrote that at length.
And I think it's perfectly understandable why many citizens would feel we don't want everybody in the world to come here. It would create some very, very big problems. And I think the view on the parts of the left, quote unquote progressive left, that borders should basically be abolished is not compatible with the survival of any form of democratic notion grounded in citizenship.
So I'm very clear that was a big mistake. What worries me more about... the concept of democracy that is emerging, which you see in the Trump camp, and you saw in some of the people he admired, like Viktor Orban, is the idea that if you are elected, anything you do by definition is democratic. And that is absolutely incompatible, inconsistent with
obviously, the core premises of the Constitution, particularly what we would think of as the Madisonian principles, that there is such a thing as the tyranny of the majority. So even if somebody has a majority, very rare that they do, that doesn't entitle them to do whatever they want. Constraining institutions are the core of the Republican idea.
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Chapter 6: In what ways is the global economy resilient despite turmoil?
The French really invented the universal conscription state. And this culminated in the two world wars, which completely shattered Europe. It shattered its idea of itself, its confidence in itself, and its values, because look what happened in the death camps. So Europe's triumph ended up in a catastrophe. And that's what Europeans are. I'm old enough to remember all this.
I was born in just after the war.
Not the colonies, surely. Not the colonies.
It was actually Europe itself that destroyed itself. In the end, by the way, that led to the direct liberation of all the empires because they didn't have the power anymore to do it. And America was very keen on it. Absolutely right, by the way. So anyway, Europe said, after that, we have to be something completely different. This is really important. We have to be something completely different.
But the most important, we need to unite, but we're still states. We have different histories, languages, cultures, and so forth. We can't get rid of that. So we must cooperate. We want someone to look after us. That was the U.S. We don't trust ourselves. We've lost trust in ourselves. Very important. The British leased this because they got through it.
So they decided that they would, they feel we can be outside it. We're an island. But the others, the enemies are just across the border, everywhere. Go back to that, the end of the world. So we left everything to Uncle Sam because he was a kind, generous uncle. We made a few obvious mistakes, but basically we trusted it. That's how we got to where we are. This is my 10 minute history of Europe.
Now, suddenly you're saying you want us to become a superpower. You want us to be a great power with an army and a will, and we don't trust any of that stuff. The last time we tried to do that, we blew up the world. This is not nothing. It's still there. The desire, the will to power, the famous, isn't really there. So that gets to the answer to your question. What do I think will happen?
And I think that's exactly the struggle now, because you could see, in a sense, there are two forces. in Europe today. One is a centrist, liberal, rather mild desire to create an effective Europe, which isn't really a state, but is more of one than now. That's the center. And the other side are the right-wing nationalists. But the right-wing nationalists are nationalists.
They're not European because when you start going back to who the nation is, you go back to France. Less Germany, but it's going to happen. Italy is a peculiar story. I won't go into that. But in France, the French right is nationalist, protectionist. It doesn't see itself as Europe. There aren't any...
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Chapter 7: What historical lessons can be learned from Europe's past?
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That was a fantastic sort of overview of the history and the core challenge. I'm curious, look, predicting the future is impossible. So maybe we'll just stick to the present and the past. The UK left Europe. So the UK left this sort of structure that was put in place to sort of denationalize the continent and so forth.
We did join late. Join late.
Not accidentally. But also like ā OK. So the UK in theory has more sovereignty now than it had when it was part of the EU. What's it doing with that sovereignty? Because it doesn't look like it's been able to put it ā it looks like more or less the struggles of continental Europe and UK are more or less ā shared.
What's holding the UK back? It's a perfect example of a small country that didn't realize it was a small country. They thought the people who sold this, sold this in part because they said this will stop all these immigrants. It turned out, actually, we could do a stupendous job of accepting immigrants from everywhere else in the world as soon as we stopped the Europeans.
So they were sold a bill of goods on that. It was pretty obvious. They were told we would be able to do all sorts of wonderful deals on our own. And we've done a few minor deals. One of the deals we were promised was a free trade deal with America. That certainly didn't happen. The point is Britain on its own is a minor power.
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Chapter 8: What future challenges does the US face as a superpower?
So he wants that. He has no ideology really beyond that, except it is very, very important to make clear in every bilateral relationship, he thinks bilaterally, that he's the boss. and the others aren't. And so he will throw his weight around, particularly against anybody who thinks he's essentially not showing him proper respect in various different ways. So Maduro, so the Mullers.
And as he put it, the only constraint is my own sense of morality. Well, you work out what that means. So that is what he wants, what he wants to be, and he will naturally respect people who are like him. The movement, I think, has multiple different objectives. Some of them would like the United States, which coincides with Trump, the United States to be a 19th century great power.
Britain in 1850, Palmerstonian Britain. We have no friends, no permanent enemies. We have permanent interests. That would be a more intellectual version of this. And obviously, lots of them think that. But some of them pretty well. Obviously, Hegsworth is a Christian crusader. That's a completely different set of ideological aims. Vance seems to be an isolationist.
So there's nothing coherent there. And so in the end, when I look at this, I think this is Trump's party. And with Trump, what you will get is action. not intellectually grounded, pretty ignorant. He will use a lot of power. If he doesn't work, he will withdraw. Thank heavens. That's what I see.
It doesn't seem to me that we're looking at the US under this regime and looking at the people around that has a coherent sense as a whole of what it wants to be and what it wants to do. That's terrifying. because it is the most important country in the world. It is the guarantor of the system, which I like to point out works sensationally well for the US.
So one of the most astonishing thing to me is that if you look at it from outside, the US, I mean, I think it makes incredible mess of its own policy and politics. It could do much better, but the US is a spectacular success. Why does everybody want to change everything? It seems very difficult to understand, you know,
And if you compare it with the Roman Empire, the United States is sort of in the second century. So what's the problem? But this US is what I see now. It could change, presumably, though I have no idea whether it could change durably. And my last point was very much a part of my new postscript for my book.
You won't restore confidence in the rest of the world that the US sort of knows what it's doing and what it's about, has a coherent sense of itself just by a defeat in one election. Because that's not it. That's not over. You have to think that this has become unthinkable. And it doesn't seem to me likely looking at it.
So the honest truth, and someone who lived in America for 10 years, a foreigner, but I lived there, followed it closely, the place has become completely bewildering. And a completely bewildering superpower is absolutely terrifying. Nobody likes China. Nobody, really. but they know what it's about. It's predictable. You know how the regime works. You know how the system works.
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