Is America fit to be a superpower at the moment?
Not right now. The fiscal crisis is real enough for the defence budget to be getting chopped brutally. The administration has a strategy of imperial retreat – though it does not call it that– which magnifies the impact of these cuts. The Iraq operation has been wound up recklessly fast, and I expect Obama to be moving in the same direction in Afghanistan this year. When empires retreat fast, there will be a spike of violence as the local factions vie for dominance. So I’m pessimistic in the short term. Over the longer term, it’s something that can be turned around. The US still has the resources, the technological edge, and the soft power advantages that have no rival.
So what must the US do?
The US has inbuilt advantages. It has the dollar. It is a safe haven. And the worse things are in Europe, the more slack the US gets cut. But that’s not going to be true for ever. The US has got to make huge fiscal cuts or raise taxes by historically huge amounts. Politically this is incredibly difficult, especially if there is not a mood of crisis. Everyone says this is a problem for next year. Ultimately, the fiscal arithmetic is so nasty that credibility will go, sooner or later.
When is fiscal Armageddon?
Nobody knows. It could change the life of the next president, but we can’t rule out that this will play out for 10 years. Even if interest rates stay low, below 3 per cent, the share of interest payments relative to tax revenues inexorably rises until, by the 2040s, more than half of federal tax revenues go on interest payments. That’s just handing money to the Chinese. What we know from financial history is: you’re fine until you’re not fine. Unsustainable fiscal policies can be sustained until there is a change in sentiment. What changes sentiment is often a piece of news. In the Greek case it was the revelation that books had been cooked. After which there is the contagion effect. It’s very non-linear.
Who will inherit this can of worms?
Obama has under-delivered because he lacked the experience to be a successful president, not because he is a mediocre man. It’s extremely hard to do that job unless you have the Senate and the House by the short and curlies. He has never figured out how to do that. Europeans exaggerate the power of the presidency. But Americans understand that the strength of the president is contingent on his standing in Congress. There is also a managerial problem. It’s clearly a messy White House. The best argument I can make for Mitt Romney is this: the rhetoric may be dull but he will be good at the job. Over the next four years, America will require someone with a track record of competence like Romney’s to sit down at the centre of the great beast that is the federal government and figure out how to stabilise its finances, which are on course for destruction right now.
Can Romney win?
It will be hard, even though he has the qualifications.
Why can’t the US get its finances in order?
Congress has been playing Russian roulette with the deficit. We’ve had three bouts so far: the debt ceiling, the super-committee, and the rating downgrade. Each time, click, it wasn’t a bullet. If you keep playing this game, at some point, bang. The US is in a peculiar position: a very large proportion of its debt is held overseas and a very large proportion of that is held by its principal strategic rival, China. If you are an empire relying on foreign capital you suffer some strategic loss of autonomy. That’s the downside for the US. For the Chinese it’s a double-edged thing. They know they have some leverage as the biggest foreign holder of Treasury Bills. They also know it exposes them to a quasi-default and dollar depreciation. They don’t know whether to be pleased or worried.
Is China going to be the next imperial power?
The Chinese are becoming informal imperialists. They are forced into this by their need for natural resources and they are incentivised by their strategic predica-ment. Their incentive is clear: which is a better investment – a pile of paper claims on the US Treasury or a copper mine? Real assets are very attractive to the Chinese because of their fear of being on the wrong side of a currency war with the US. The Chinese have thus become reluctant play-ers in African politics. They are at that early stage of empire. They own some mines, they’ve got a colony of settlers there and they’ve become rather too close for comfort to the local rulers. In countries like Zambia, they have ended up with quite large communities, and they find themselves responsible for the security of their assets and their people.
China’s leadership is moving to a new generation this year. Who are you watching?
The man to watch is Bo Xilai, the most interesting figure in Chinese politics today. He is Party Secretary in Chongqing, which was supposed to be a demotion after he had served as Commerce Minister. He has made a political success of that post. He is practising a new kind of Chinese politics, a mix of the democratic – with overt appeals for public support – and the reactionary, in the sense that he uses Cultural Revolution songs and iconography to legitimise what he is doing, which is a big anti-corruption drive. For me, one of the surprises of last year was going to Chongqing and seeing people singing “Chairman Mao is the Sun that Never Sets” in the Shapingba Park. If he makes it to the Communist Party’s Politburo Standing committee, that could be an indicator of change. The other thing to watch out for is the acceleration of privatisation, which I expect. State-owned enterprises are still big and they retain their earnings. If they are privatised, then share holders would start to get dividends.
Is China going to crash and burn?
There will be plenty of political and economic problems. I don’t think it will blow up and I don’t see a China crash. But it’s very difficult to manage a smooth transition from a one-party state to a hybrid planned/market economy to something different.
How long do you give the euro?
It’s likely to survive just because the costs of dismantling it are forbiddingly high. It’s not clear who would gain from it disappearing, but it’s very clear who would lose, so there are strong incentives to keep it going. German industry benefits from the weak euro. Why is there nearly full employment in Germany? Because German companies are selling goods all over the world.
So what’s your advice to Chancellor Merkel?
I would tell her that you have to face the reality that this is German re-unification writ large. If you want to keep Europe alive and not betray the legacy of Helmut Kohl, you have to recognise this is going to be a transfer union. There will be eurobonds. The full faith and credit of Germany is going to be part of the package. You are either a federal system or you are not. If you are not, don’t expect it to be stable. I buy the moral hazard argument which the Germans make. But their brinkmanship is very dangerous. The German strategic mind tends to underestimate the cost of things going wrong. They think in years or decades, while the bond market thinks in hours and days. We are seeing a familiar German miscalculation where the best becomes the enemy of the good. The best solution is one where, thanks to tough measures, the Greeks start to behave like Germans. It’s just not plausible that deflation will convert Greeks into Germans.
How long do you give the technocratic governments in Italy and Greece?
They are living on borrowed time. I don’t think Mario Monti has much more than six months to sort Italy out before the parties reclaim their control over the spoils. What’s got to happen in Italy is going to be extremely painful and unpopular.
Should Britain, as you once wrote in a “counter-factual” essay, have stayed out of the First World War and let the inevitable happen, which is Germany dominating continental Europe?
That argument looks stronger today than ever before. Anyone who is in any doubt at all about German dominance of the European Union has stopped reading newspapers. The decision-making process is dominated by Germany. Remember Nicholas Ridley (the British Trade and Industry Secretary) who was fired in 1990 for saying that Economic and Monetary Union was a German racket to take over Europe? Someone should apologise.
Monetary union may have turned out that way, but it wasn’t really a German plot, was it?
It would be more historically accurate to say it was a French plot to circumscribe Germany which was bound to go wrong.
You once said Scotland should be “liquidated”, but recently you seem more pro-independence.
The reason I have said these apparently contradictory things is that the Scottish position is contradictory. The Scots are nationalists after a few drinks on Saturday night and North Britons on Monday morning when the hangover kicks in. In my lifetime Scotland has become politically more devolved and culturally more integrated. There is enormous ambivalence. This is why Cameron is right to call the nationalists’ bluff. I have been urging him to do so for three years. His intention is to have the referendum go against (Scottish First Minister Alex) Salmond. But Cameron can’t lose: either the Scottish nationalists are humiliated or they get independence.
That means the break-up of the UK.
Who cares? If it’s a reality, then so be it. The Scots cannot continue to be the Quebecois of the UK. This is the moment of truth. I think they’ll bottle it.
Which passport for you – British, Scottish or US?
I’m a British passport holder, and an applicant for a Green Card, and my future is in the US. I now have an American son [with second wife, Ayaan Hirsi Ali, the Somali-born feminist and former Dutch MP] and he will be a US citizen. That is where I and my wife are probably heading.
Will you take American citizenship?
Yes. I’m fulfilled by my job at Harvard, I love America, I’m excited by the challenges it faces. If you are going to live somewhere, why be a disenfranchised taxpayer?
Why do British intellectuals head across the Atlantic? Is it the money? Or are they fleeing the British press?
In my case, neither. As a financial historian I was quite isolated in Oxford – British historians are supposed to write about kings – so the quality of intellectual life in my field is much higher at Harvard. And the students work harder there. In general I have felt more at home in the US than I ever felt in England. It’s partly being Scottish. When I first came to Oxford I struggled to feel comfortable in an Anglican, public school-dominated institution. Proper Protestants – by which I mean not Anglicans – are more at home in New England than old England. My parents were religious sceptics, but the cultural milieu I grew up in was Calvinist. I’m over-industrious, so I don’t feel quite such a deviant in America as I did in England. The time I spent in England now begins to feel like a detour. I realised last year I was never going to come back here to live.
You have 21,862 Twitter followers but you don’t follow anybody. Do you know everything already?
In the 24 hours that we’re given every day, I’d probably be better employed working on my biography of Henry Kissinger than following people on Twitter. I’ve spent eight years on it already.
When is it coming out?
In about two years. I have a million pages of material on the database from 55 archives around the world. It’s daunting.