The Economics Ph.D. program at the Massachusetts Institute of Technology (MIT) is the factory of experts in Macroeconomics worldwide. Practically all the most influential bankers and central bankers of the last two decades have gone through that program. From there came the Frenchman Olivier Blanchard, who has been awarded the BBVA Foundation's Frontiers Prize.
Blanchard, who ideologically defines himself as "a person of the center-left," was the chief economist of the International Monetary Fund during the worst years of the euro crisis and the subprime mortgage catastrophe in the United States, is not only a serious contender for the Nobel Prize. He is also a continuator of the MIT's tradition of academic excellence, as he has been the thesis advisor for many of the economists in their 40s and 50s who are most talked about today worldwide, such as Justin Wolfers, Thomas Philippon, Michael Burda, or the Spaniard Jordi Galí.
A new day brings a new wave of tariff threats and trade and investment restrictions from the leader of the world's largest economic power, who seems determined to dismantle the economic system it had created and benefited from.
The most curious thing is that, with his policies, Trump is harming the United States itself. In the short term, no, of course not. When a budget with tax cuts is approved, like the one sanctioned by the House of Representatives on Tuesday, it boosts domestic demand, which in turn lifts the economy. Tariffs protect industries in the country, especially the less efficient ones, allowing for an increase in supply. Deregulation also enables increased production. So, immediately, everything seems fine. And that's what the market is reflecting. But in the long term, things change. Tax cuts further increase the deficit. The rise in domestic demand and protection of national companies against more competitive foreign competitors leads to more inflation at a time when prices are already rising. Finally, deregulation, especially in the financial sector, threatens to create new crises. In fact, if deregulation is not done carefully, there is a risk of facing a crisis like the one in 2008.
Indeed, with that crisis - or rather, with its impact on the EU - you said at the IMF summit in Tokyo in 2012, a phrase referring to Spain, which seemed to question the supposed rationality and efficiency of financial markets. "They are after you whether you implement economic reforms or not." Now, the US stock market seems to be following the same pattern, albeit in reverse, with Trump: everything he does seems fine, despite his completely interventionist policy.
With that phrase, I was not questioning the rationality of financial markets. The stock market, which, as you mentioned, is rising in the United States, tends to value solely the post-tax profit forecasts of companies. From that perspective, it is entirely logical for it to rise with Trump's policies.
But in recent days, the bond market seems to have shown some concern about a possible risk of recession in the United States.
Yes, and even Treasury Secretary Scott Bessent has mentioned the danger of a recession. But I believe that is not true. In my opinion, they are doing this to pressure Congress to approve tax cuts and claim that they saved the country from a recession left by Biden. I think the United States has two years of growth ahead, precisely until the midterm elections [of 2026]. After that, we'll see.
All of that, if Trump doesn't decide to surprise us even more.
Of course. Trump has been even more erratic than I expected. Only God knows if he will end up imposing tariffs of 10% or 60% on China, or how far his alliance with Vladimir Putin will go. All of this creates uncertainty. And uncertainty is bad for the economy because it greatly affects investment. If I were a company, where would I invest in building a new factory? In China or Mexico? This uncertainty could shorten the two years of growth that I initially expected.
Let's talk a bit about Europe, and especially about the report that your MIT colleague, Mario Draghi, published in September on the necessary reforms to improve the competitiveness of the EU and prevent it from definitively losing the economic forefront to the United States and China.
I have written a somewhat critical article about the report and have spoken with Mario about it. His study seems excellent to me, but I believe it has three points that could be improved.
Which ones?
The first is that it is not necessary to be number one in everything. Most countries in the world are not at the forefront of innovation, and nothing happens to them. In Economics, it is not necessary to always be a Jacques Anquetil [the first cyclist to win the Tour de France five times in a row], but it is enough to be a Raymond Poulidor [who never won, but was second three times]. The second criticism is that it is necessary to select in which sectors one wants to compete. It is not effective to set all technological frontiers as a goal. And finally, I believe that Mario focuses too much on the sexy policies, which are mainly related to technology. And he overlooks issues such as legal frameworks or educational systems that can be just as or even more important than the development of software programs. And in that regard, Europe is not doing so badly in many cases. Many young Americans are excellent computer programmers because they have been playing video games since they were children. But, for example, the educational systems in Spain or France are, globally speaking, better than those in the United States, although they still have problems, especially when it comes to attracting talent.
Do you think Trump's policy opens up an opportunity for Europe?
Definitely. In matters such as investing in decarbonizing the economy, Europe can reach strategic agreements, for example, with China, which can result in technological innovation and economic growth. And, although I am not an expert in defense, I believe that the development of a more unified European defense could introduce much efficiency in a sector that currently lacks it because it is fragmented among different countries. And thus be a great help to the European economy.
You were not only the chief economist of the IMF for 7 years, but you also supervised the doctoral thesis of the current chief economist, Olivier Gourinchas, and the head of the financial area of the organization, Tobias Adrian. Right now at the Fund — and in all international organizations — there is concern about Trump.
Some think that the United States will leave, but I don't see it that way. The International Monetary Fund has economic resources, and Trump wants to give money to the President of Argentina, Alejandro Milei. So the President of the United States is aware that this is an organization that is necessary for him and from which he can benefit politically. Another thing, of course, is what will happen to the institution. Kristalina Georgieva [the Managing Director of the IMF, who has just been confirmed in office for another five years] will probably have to leave. The United States will put someone horrible at the helm of the Fund. And the institution will be at risk of falling into irrelevance, similar to the World Trade Organization (WTO). If that happens, it will be a shame because the Fund is, at least, a forum in which, with the exception of Russia after the invasion of Ukraine, all economic powers speak and maintain a constant exchange of ideas.