In an interview with the German newspaper Süddeutsche Zeitung published today, Clemens Fuest, director of the Munich-based Ifo economic research institute, warned that while the United States alone might not plunge the global economy into crisis, a rapid spread of protectionism in China and Europe could pose a significant threat.
“Unfortunately, this cannot be ruled out,” Fuest stated, advocating that “if everyone heads in the wrong direction, a major crisis could arise.”
The suspension of many tariffs by Trump for 90 days, he added, does not mean the danger has passed.
Fuest emphasized that the European Union must do everything possible to prevent the advance of protectionism and recommended dialogues with China, Mexico, Japan, and Canada.
“The Americans are damaging their reputation as reliable partners. This is very dangerous because the US remains the world’s leading economic power,” he stressed.
Unlike previous crises where investors viewed the dollar and US markets as relatively safe havens, interest rates are currently increasing in the US, and the dollar is depreciating.
“What’s happening now is a wake-up call for the Americans and the global financial architecture. Two-thirds of the world’s equity capital is in American markets, and the dollar is the world’s benchmark currency. If that collapses, the consequences could be incalculable,” he cautioned.
Fuest suggested that a decline in demand for US debt securities might have prompted Trump to make a truce in the trade war, highlighting that political power is not limitless but is subject to market constraints.
“When governments act erratically and destructively, it erodes money and confidence. Financial markets operate swiftly. When confidence collapses, every investor knows they must try to be the first to exit. This can trigger dangerous dynamics with unpredictable outcomes,” he explained.
Nonetheless, Fuest believes that before a collapse occurs, the US Federal Reserve (Fed) might begin purchasing sovereign debt, which would introduce other problems, such as a significant dollar decline.
In the context of the open trade war between the US and China, Europe’s situation holds certain advantages, according to Fuest. “In the midst of the conflict, Europe can exert some pressure on the US by leaning more towards China,” he explained.
On the other hand, he noted, the European market is large and attractive, “and this is something Trump is also aware of.” Therefore, he added, Europe has options, which can strengthen the EU.
Fuest deemed it correct that the EU postponed retaliatory measures and cautioned that Europe, unlike China, is highly dependent on the US not only for defense but also in important sectors like the digital economy.
Asked whether he could understand, as an economist, the reasons behind Trump’s initiation of the trade war, Fuest responded negatively.
However, he added, the explanation does not lie in an economic idea but in how Trump opts for “a classic populist scheme” of attributing internal problems to external factors.
“The scapegoats are immigrants, international trade, international financial markets. Subsequently, simplistic solutions are proposed that worsen the situation,” he explained.
Fuest also highlighted another theory suggesting that Trump aims to benefit those who profit from instability, though he admitted lacking data to support this hypothesis.
