The Great Uncoupling & Fiscal Crisis: America, Europe & the Bond Market Reckoning

0:00On today's podcast, we're looking at the impact and the consequences of America's split from Europe. We're going to compare this to China's split from the Soviet Union in the 1960s. And we're going to talk about the added complication of global fiscal crises, higher bond markets, and make a prediction that this will be the one to watch for 2026. Yeah, and stick around to the end because we have a special bonus segment in partnership with IBEC where we discuss how Irish business will position itself for what's to come in 2026. That's all coming up in a couple of minutes.

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1:42David McWilliams: To understand the economy, you have to understand human nature. This podcast is powered by ACAST. How you doing there? It's time for the podcast. As you can hear, myself and my co-conspirator here having a little giggle. We're talking about, look, I know it is the fourth podcast since New Year, but it has been such a whirlwind with Venezuela, with Iran, with Trump, and all that sort of stuff that we haven't really had time to actually catch a breath. Now, John, this podcast is going to be about Europe and America and the obvious cleavage between Europe and America made most resplendent by the issue of Greenland and who owns this part of the world at the moment, right?

2:34We'll come back to the Greenland question another time, I think.

2:36David McWilliams: But I haven't had time to even talk to you. How are you doing? Tell me, are you detoxing? or you've got New Year's resolutions. Detox de-schmucks. But here's the thing, Mac. I've always felt that the real New Year for me is not New Year's Eve. I actually don't really like New Year's Eve. But the real New Year's is September because it was always a time of going back to school. And that for me was, oh my God, this is the start of the year, you know. And Christmas and New Year's is just the kind of the break in between. I think I know what you mean. I think I know what you mean. There's a certain amount of dread with which many, many people look at the first couple of days of September.

3:22Yeah. And it is a hang-up. It is the fear. Yeah, it is. It is the fear. It's like you have the Sunday dreads. This is like the annual dreads. Yeah, and the fear. I remember going back to school and you wouldn't know what teachers you had. Yeah, yeah. And you'd get some complete awful creature. You'd walk in first class Monday morning. Hope I don't get Mr. Cook for history. Well, you'd have some sort of sociopath. and you were like, oh man, really? Not again. And they want to lay down the law early on as well. Yeah, no, no, absolutely, absolutely. I remember giving up French in fifth year, having done really quite well because I was terrified of the priest.

3:58Right. Shows you, and that priest actually terrorised me so much before fifth year, after just to come up with the interstate, I was in his class and he was a complete psychopath and I dropped French, I never did it again. and bizarrely then I ended up doing a master's through French years later, right? Yeah, yeah, yeah. But I was terrified of him. He actually featured in a book called Skippy Dies by Paul Murray, in a really brilliant book, published about 10, 15 years ago. How does he feature exactly? As a sociopathic, terrorizing priest in a Irish school. Right. And it was this guy. And I actually suggested it to Paul And he said, you're not wrong.

4:44You're not a million miles away.

4:45David McWilliams: So he had obviously experienced this as well. But anyway, an odd way of looking at the world through the lens of a terrorized teenager in French class is to look at the world between those type of people, those autocratic people who seek to dominate, to terrorize, to exert power in their own arena and regard power as being absolutely essential to the way in which governments, politics and geo-economics works. And then other people who realise that actually what power is about restraint, power is about respect for others, power is about dialogue, it's about respect for the truth, it's also about faith in institutions that you've built.

5:30David McWilliams: So it's a totally different worldview. And I mean, if you look at... Softer, more cuddly, but more reasonable. More reasonable and maybe much more effective in the long run. Yes. So the liberal order that we built over the last 70 years is a fine balance between power and restraint. And maybe restraint is always the most powerful because sometimes what is most powerful is the threat of violence rather than the violence itself. It's the threat of power rather than the power of itself. So if you look at going back to my teenage terrified years, right? Yeah. You look at, you know, your Putins, your Trumps, your Xi's, right?

6:16David McWilliams: These are the people who believe that the world is brutal, right? It's Hobbesian. If you look at philosophy. Yeah. And Stephen Miller as well. Well, actually, you mentioned Stephen Miller. I'm just going to quote you what Stephen Miller said this week. If you don't know, Stephen Miller is Trump's... The gobshite. Well, he may well be, but he's a very, very influential dobshite. He is the probably key influencer on Trump. He's also the one man who's been within the Trump cabinet and not been fired. I think he's pure evil, I have to say. Well, he said this week, right? And this is, again, we're talking about what the podcast is going to be about, right?

6:54David McWilliams: He said, it's a brutal world out there. I do what I want. They govern, right? These sort of people govern by arousing these passions like hatred, anger, resentment. They have an urge to dominate, right? Miller said, we live in a world in which you can talk all you want about international niceties and everything else. But we live in a world, the real world, that is governed by strength, that is governed by force, that is governed by power. These are the iron laws of the world that have existed since the beginning of time. what he's also saying is that world of trust and civility, the liberal order yeah is for agents it's for sissies we're the hard guys, we're the rough guys we're going to terrorise, we're going to say if you haven't done your French homework, we're going to destroy you, we're going to mangle you you're going to terrorise you, right?

7:52you're getting alleged

7:52David McWilliams: you're getting more than that but anyway, the podcast is going to be about the rupture between Europe that still believes in discussion, in protecting the weak, in having a social infrastructure, that not everybody can be macho, that humans are a variety of different creatures. And the way in which we work is we set up rules, we set up institutions, we have faith in them. Niceties, you mean. Niceties. And the big power guys, yeah, exactly. The big bullies except that actual fact other people have rights and other people have a voice and other people's worldview is legitimate. That's the European view.

8:39David McWilliams: Vis-a-vis the Stephen Miller view, which is that we are going to encourage emotions like anger, like resentment, like hatred. And if we emerge on the top and we are the most powerful, then we have the right to dominate others. So first part is about the split between Europe and America over ideology and over perceptions of how to progress and perceptions of where we go from here. But the second part of the podcast is something that's been a creeping, creeping niggle in the back of my head for the last couple of months, which is that we've been witnessing two phenomena. One is the inability of our Western economies, the industrialized economies, to generate lots and lots of growth after the pandemic.

9:35And as a result of that, the large additions to and increases in government debts. Now, up until recently, interest rates were very low, long-term interest rates were very low, and there was a sense that that doesn't really matter. But I think this year could well be the year where you get a fiscal, I wouldn't say crisis, but a fiscal worry that interest rates will rise. Listeners will remember the UK had this about four years ago when Liz Truss unveiled her rather, let's see. Her lettuce. Her letters, her rather incredible package of tax cuts that were going to generate a huge amount of growth in the future, but they'd have to borrow to cover those.

10:21And the market said, you know what? Nah, what are the letters? This happened in the UK. People were quite shocked. I wouldn't be surprised if we see something like that maybe in France this year, maybe in the UK again, maybe in the UK again, because the UK is in a total fiscal mess. Europe as a whole? Well, I would just say France in particular. Maybe even at a stretch, typically in Europe, crises began in the periphery. And then the periphery began to infect the centre. So the crisis was in Greece or Ireland or Italy or Spain. Now what we're seeing is the weakness of Europe is actually in the centre.

11:03It's in Germany and France. And the peripheral countries are getting their act together. So what we might see is something like an inverted crisis in Europe, which starts in what used to be the most credible European country, France and Germany, particularly France, and may emanate out. But of course, the other big issue is the United States. The United States is due to borrow 6 % of GDP this year alone. It probably has another$9 trillion of debt, which is to be refinanced. Now, that is a significant amount of capital that has to be absorbed in by the United States government at a time when they're about to change the governor and the Fed, where people are worried about where the American policy mix is going.

11:49So all told, what you have is not a recipe for, but the ingredients of a fiscal crisis. Now, all the while, the Bond vigilantes, John, you like this image, I knew you liked it before. Yeah, yeah, yeah, I do. So imagine a vigilante, right? Imagine some lads up a lane, right? Wearing red berries. Red berries. Red berries. Wasn't that the New York... Guardian Angels. Guardian Angels. Guardian Angels, right? Now, imagine... Now, the Irish version would be fellas with kneecap balaclavas, right? Okay. But they're waiting up the lane for the poor old bond market to meander up. Now, the reason the bond vigilantes are theirs...

12:27So bond vigilantes are an expression for bond market players, bond market investors, who are going to try to discipline governments into not having too much debt by attacking them at what they call the long end of the bond market, which is the 30-year US Treasury bill. But the vigilante idea is that they're trying to discipline the governments by selling bonds, which pushes up interest rates. The problem with that is that actually can lead to a vicious cycle, which we'll talk about in a minute.

13:03David McWilliams: Okay. So, John, the two big issues we're going to talk about is one is this split between Europe and America, but it's based on a change, the autocratic worldview versus the liberal worldview. But we're going to look at it through the framework of something that happened in history, which is Khrushchev falling out with Mao. because, in effect, Europe and America have been on the same side, in the same way as China and the Soviet Union were on the same side for ages, and then they split. And what actually happened there? So the first thing we're going to talk about, a bit of history, a bit of economics.

13:39Love it, love it.

13:40David McWilliams: A bit of geostrategy, all that good stuff. Second thing we're going to talk about are bond vigilantes and whether those bullies might actually bully the bullies. Well, Mac, speaking of bullies, just before we get going, I want to play a little track from your favourite, I know, Bob Dylan, from 1983 off the album Infidels, a track that resonates as much now as it did back in 1983. Have a listen.

14:24What a great track that is.

14:25David McWilliams: It is a great track. It is a great track. All right, neighborhood bully. Here we go. Let's talk Europe, America and the bond market. So let me ask you, last podcast, we were talking about Ireland and what lies ahead in 2026. And we spoke about Donald Rumsfeld's known, knowns, known, unknowns and unknown, unknowns and all the rest. Yeah. So that kind of applies to this podcast and 2026 and a possible fiscal crisis and America backing out of Europe. So let's start there. Okay, so we're going to start, John. I was reading over the last couple of days of Nikita Khrushchev's trip to the United States in 1959.

15:13he, at the invitation of Eisenhower, left Soviet Union, flew to America, and spent 12 days touring America. The first time a Soviet leader ever did it. And it was also the beginning of the thawing of relations between the United States. What year are we talking about? 1959. 1959, okay. So what is fascinating about this is that one of the more interesting things is Khrushchev got really pissed off that he wasn't allowed to go to Disneyland. it's kind of funny yeah he was a massive fan of mickey mouse well it was the case of your name's not down you're not getting in no the americans couldn't cover the security they thought he was a security risk right so the cia mickey mouse yeah it's donald duck was going to attack him anyway

15:56David McWilliams: we got really upset about that like there was a big diplomatic incident that he wanted to go disneyland and he wasn't allowed but what is interesting is this was not so much the culmination of part of a process whereby the Soviet Union decided that it wanted what they called peaceful coexistence with the United States. So a massive change from Stalin. The reason we're going to talk about this is a way to look at the recent but very dramatic reversal of America's commitment to Europe is to look at it through the same lens as when Khrushchev cozied up to America and as a result of that split with China.

16:45So Stalin and Mao were creatures cut from the same sort of cloth, right? Very, very... Nasty, nasty. Really, I just kind of committed to ideology in a mental case. And the ideology, of course, is Marxist-Leninism. And when Khrushchev decided that the Russians and the Soviets could no longer, or should no longer, be in all-out war against the Americans, this caused a massive rift between Beijing and Moscow. So much so that relations were cut off in the early 60s between Beijing and Moscow, the two massive communist powers in the world. And they didn't normalize until 1989. Wow. So for almost 30 years, there was very little diplomatic relations between Soviet Union and the Communist Party of China, which people forget.

17:41It's kind of mad. But I didn't know. So that's the first thing. And the way to look at the split between Europe and America now, between the MAGA movement, and you mentioned Donald Rumsfeld, who was a neocon, who was very, very much into America projecting its power all over the world, is that Europe as the junior partner in this coalition is a little bit like China that was the junior partner in the communist coalition of the 1960s. So what basically happened is the Russians, I'm saying the Russians in parentheses for the Soviets, but the Russians realized, one, that they couldn't outproduce the Americans.

18:27That's the first thing. Even though the 1950s, there was a perception that the Russian economy could overtake the Americans. Right. And technologically, they were, well, they claimed to be more advanced. They were winning the space race and all that kind of stuff way ahead of the Americans. And that's really freaked out the Americans. So the Americans doubled down on this. Now, I think what happened was two things. Khrushchev understood that they couldn't beat the Americans because the American economy was so much more vibrant than the Russian economy, number one. Number two, he also understood that with nuclear weapons, they had this mutually assured destruction that neither side could win.

19:11So his view is, well, what's the point in fighting there? Exactly. And of course, the third one was that he understood that the Russians needed to divert resources away from the military-industrial complex, which was a term coined by Eisenhower, not by Khrushchev, and into basic consumer goods, basically to try and shift the Russian economy from a war economy that had been on full alert in the Second World War and all the way through the 1950s into something that felt a little bit more like a consumer economy. So they got basic ladders, they had basic holidays, all this sort of stuff. So that's the reason that the Russians flipped.

19:55Now, of course, Mao in China felt completely betrayed by this because he felt that he was the inheritor of a legacy of Marxist-Leninism like Stalin. And that Khrushchev, by going against the idea of total war with the Americans, was actually chipping away at the manifest foundations of communism, which was to be always and ever opposed to capitalism. So this idea of peaceful coexistence was an anathema to Mao. And of course, the Chinese had a complete freak. And for 30 years, the Russians and the Chinese didn't speak, which is kind of exceptional. And look at what's happening in Europe. Europeans, particularly Germans, as the most powerful country, have always assumed that America will have their back.

20:48They've always assumed that the America that risked everything for the Berlin Airlift in 1948, the America that opposed communism, the America that bankrolled the Federal Republic of Germany, the America that put nuclear weapons on German soil, so much so that it actually prompted an anti-nuclear movement in Germany in the 1970s. Sure, yeah, yeah, absolutely. The America that supported them 100 % when the war came down, the America that in effect seeded a revolution against the Soviet Union in the 1980s, and then in the 1990s, the America that created and substantiated the IMF, the World Bank, all these institutions, the America that in the main, of course, expanded NATO.

21:39That America, the Germans always assumed to be there. It is now not there, right? We know that. So the split is as significant as the Sino-Soviet split in the 1960s. And of course, the junior partner in any breakup always feels more slighted, always feels more betrayed, always feels more humiliated, and is always more hurt. Yeah. Like, this is just natural human relations. Yeah. Well, we're all, you know, sitting here scratching heads, go, why? Yeah, yeah, yeah. What are you doing this?

22:14David McWilliams: It's not me, it's you. All that sort of stuff, right? So, in a way, if you look at, there was fascinating, about two weeks ago, what's his name, Mertz, isn't it? Mertz. What's his first name? Oh, Chancellor Mertz. About two weeks ago. How are you, Chancellor? Chas, we call him. Chas, for sure. He's one of the lads. About two weeks ago, Chancellor Mertz, and of course he's from the CDU, the CDU, the Christian Democratic Union, is the political party that was most pro-American in Germany. And he... Merkel's party as well. Merkel's party, yeah, but Helmut Kohl's party. Yes. But more importantly, Conrad Adenauer's party.

22:56Now, Conrad Adenauer was the first German chancellor after the Second World War. So these have been absolutely 100 % committed to the idea that America is Germany's best friend and vice versa. And Mertz said that, and that's amazing, he said, Pax Americana no longer exists and will never come back. Now, that's coming from the CDU, right? That's coming from the people who feel most betrayed. And again, you know, what you have is a Europe now that is kind of unhinged, untethered. It's got nowhere to go. Yeah, we're a bit discombobulated. We've got to reinvent everything ourselves. And the amazing thing is that it feels like, It must feel like if you're a senior civil servant, a diplomat, a military person in either Italy, France, in Germany, but particularly in Poland and all those places close to Russia, that you're clinging on to NATO.

24:07But you kind of know that even Article 5 might not protect you. because the idea would be, because what all Europe is trying to do now is trying to make sure that Trump doesn't give everything to Putin. But the peaceful coexistence, which was Khrushchev's term for living with the Americans, is exactly what Trump is doing with Putin now. He's saying, how do we live with the Russians? What do we have to give the Russians for us all to live in peace together? And that's the basis of the negotiations with Ukraine. Well, here's the thing, though. You know, number one, when Mertz says that that Pax Americana is dead and will not come back.

24:47Are we sure it's not going to come back? Like if there is a change of power and Trump is gone and blah, blah, blah, you know, the water is now muddied. But if a Democrat or even just a more sensible Republican gets in next time, I'm talking, you know, in the next couple of administrations, will it not come back in some sort of fashion? It could happen, but what is as likely is that the next president of the United States and the next administrations will be affected by MAGA in the sense that MAGA will have pulled the Democrats closer to them because they have to actually address those issues. They address those issues.

25:34They have to pick off a constituency as well in order to get elected. So what the Germans are saying is that this is not just one man. This is an America that's changed its worldview. Yeah. Now, of course, the implication for that for Europe is a military implication that we know. It is a geostrategic implication. It's an energy implication. And, of course, it is also maybe a wake-up call to the European Union, which is, okay, America is no longer protecting you. Russia will no longer give you energy. China is no longer a place you can sell your goods, but in actual fact is a place that Europeans are losing market share rapidly.

26:17And Europeans have to figure out what to do. Is there a Europe? Or does it split into constituent parts? Now, the most likely thing now is that part and parcel of all this discussion is the fact that in Europe, as we go into the election cycle, all the right-wing nationalist parties are on the ascendancy. And all of them are committed to less European Union, not more. And this is the effect... And more nationalism. Yeah, and this is the effect of, well, apparently the effect of Steve Bannon, who him and his buddies have been touring Europe for the last, you know, five years, whipping up this right-wing, apparently, anyway.

26:58Well, I think it's got to do with the fact also that the European economies, take France for example, because we're going to talk about France in a minute, have not delivered the growth rate or the quality of life, standard of living to people. there is a big big issue with immigration which i'm not too sure is stirred up by ban on it's not helped by online social media but it's there and it's real and europeans feel affected by it there is the what they call the ticking time bomb which is the fact that europeans replacement rate has fallen below two which means that for every couple we are as europeans not even reproducing ourselves very very quickly that has dynamics in population which means the population remains you're basically a very top heavy you've lots of old people and not enough young people paying the tax and as you say democracy is destiny yeah it is destiny it is destiny and those young people are the people who are getting locked out of the housing market they're the people who are not in the same sort of contracts as their parents they're the people who are being affected by globalization we we don't know yet what ai is going to do but rest assured that a significant amount of european middle class people work in what's called the service industry and the service industry is ripe for disruption by ai so a whole office jobs and all those sort of things so you put all those things together and what you have is a very disgruntled european population who are are reflecting this disgruntlement or this agitation or this fed-upness in voting for parties that said, I hear you, I understand you.

28:57And those parties are not now parties of the left, where they used to be. The left used to say, I'm your man, let's go to the union, I hear your pain. They're parties of the right. And those parties of the right have got an antagonistic view towards Brussels, and what I would call the post-Second World War settlement, which is the European Union. And the European Union is now seen as the enemy within, which used to be the saviour of Europe. Yes. And it's now seen as the problem. And of course, the enemy without is Russia and China, and ironically, ultimately, America too. America now, yeah. So, Camille, you mentioned France there.

29:40So why were you focusing on France? Is France the sick man of Europe at this stage? Well, the problem is, John, is that France has had five prime ministers in two years. Yeah. That's not a good sign. That's not a good sign. And it is possibly the weakest of all European countries right now. and added to this discombobulation with geopolitics is the fact that fiscal deficits are rising dramatically, both within Europe and outside of Europe. And if interest rates were to rise and long-term interest rates were to rise and the bond vigilantes were to come back in, you might see a fiscal crisis in France and that then percolates out from Paris to the other capitals of Europe.

30:27It affects everybody else. It affects everybody else. Okay, well, let's talk about France the possible fiscal crisis and the bond vigilantes after a bit of this great stuff

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32:36Okay, Mark. So before the break, we were talking about the split between America and Europe and comparing it to the split between Russia and China back in the 60s. But that brings us up now to the fiscal or possible fiscal crisis and the trouble that not only France is in, but global debt levels are off the charts since the COVID crisis. Yeah. So talk to me about that. How is that going to manifest itself and how is that going to dictate global politics? Okay, because I think this is one that people are not really focusing on as much as we probably should do. So the first thing is that industrialized countries, that's all the Western countries, now have on average debt GDP ratios of 110 % of GDP.

33:28Yeah. So what that means in terms of debt dynamics is if your debt GDP ratio is 100%, that means if the rate of interest is 5 % and the growth rate of the economy is 2%, you have a problem. The reason is, let's say, just think all the debts as 100 euros, right? So if a country's got a debt of 100 euros and it's got an income of 100 euros, what happens is that if its rate of interest is 5%, it's paying 5 euros to somebody else every year, the interest rate and the debt. But if its growth rate is only 2%, right, it means that it's generating on the revenue side, John, 2 euros, but it actually has to give out 5 euros, right?

34:19So it means that every year the debt position gets worse just by standing still. Yeah. So now imagine that all of Europe or all of industrial world has a debt GDP ratio on average of 110 % of GDP. So if interest rates start to rise, it's long-term interest rates, and they start to rise greater than the growth rate, you have a fiscal financing problem. So that's exactly what's happened in the industrialized world. Our growth rates have slowed down, but our debt to GDP ratio has risen. And because of that, the long-term interest rate, which is the one that really assesses the risk in debts and assets, etc., has risen quite dramatically.

35:11So long-term interest rates were zero during the pandemic when the central banks took this sort of unprecedented action to reduce interest rates and to print money and all that stuff, right? Now long-term interest rates are moving towards four, maybe even towards five, certain countries. And that has profound impacts for what's called the debt dynamic. So that, I think, is something that we really have to worry about. The reason I talked about France was that France doesn't seem to have the political nous to actually fix this. But to just take those debt ratios and park them for a minute. Yeah.

35:54And then see what's been happening as long-term interest rates rise, which is called, you know, bond yields rise. There is this, what they call negative feedback loops. So basically what happens is higher interest rates mean increased borrowing costs. But increased borrowing costs means larger deficits because you have to borrow to stay still, right? But larger deficits mean you've got to issue yet more debt. And more debt means there's a massive imbalance between supply and demand for debt. Like who's buying the stuff? And of course, the supply and demand imbalance leads to yet more higher yields.

36:32so you get this negative feedback loop. So as interest rates rise, borrowing costs rise. As borrowing costs rise, deficits themselves rise. As deficits themselves rise, the governments have to issue more debt to cover these deficits. And as more debt is issued, at a certain stage the market goes, the vigilantes go, fuck this, I'm not going to keep supporting this, too much risk there. If the vigilantes sell the debt of a country's yields rise even further and you're back to square one, but you're in a negative feedback loop. Well, hang on a second. I mean, the way you just described that there seems completely understandable.

37:10So what didn't they understand in the first place to start this? Come on, like. But it's because when you have a massive amount of capital in the world looking for a home, there's what they call a lot of savings. So there's lots of older people in Western countries. Yeah. Older people tend to save more. Younger people tend to spend more. For a long time, there has been a huge amount of cash basically spilling out from pension funds, looking for assets. Yeah. Debts were seen to be very low risk. Government debt, even lower risk. So as a result of that, lots and lots of pension fund managers and fund managers got into this idea.

37:56It's like, this is a no-brainer sort of idea. So is this some of the problem with globalization is that you had this free movement of capital around the world. If you didn't have that free movement of capital, where would you be? Where would we be now? Interest rates would be higher. So like one of the biggest reasons, one of the most significant reasons for low interest rates around the world has been China. So China is this country that has now a massive, what we know, current account surplus. So it basically has lots of money that it doesn't know what to do with. So what it's been doing with a lot of this money is buying treasuries of the United States, which has been artificially reducing the rate of interest in the United States.

38:35That happened for the last four or five years. The Japanese used to do it previously to that. And the Europeans have large amounts of surplus savings, right? Because we've an old, rich population. So there was lots of money around. And when there's lots of money around, John, to answer your question, people don't care about these things. Now, what is happening now is a number of things are happening, right? First thing is people are becoming aware of just the numbers and the difficulties. But the second issue is the rate of inflation in America has remained very stubbornly high. I remember I was in America just before Christmas.

39:13It's really expensive. America is much more expensive than here. And you really notice that. And of course, because the rate of inflation is high, that means that there's a perception that the Fed hasn't got inflation under control. So there's a certain amount of nervousness about the future. And then you throw in on top of that, the fact that Jay Powell is going in April of this year. And of course, Donald Trump wants to put in one of his own patsies in there. And there's a perception that whoever Trump wants in the job, now there's three or four other lesser roles in the Fed, but still very significant roles.

39:49coming up for grabs. The idea is that Trump wants all these guys or girls, whoever he would like to be in these positions, to reduce interest rates, to boost the American economy before his election, to manipulate the cycle. Now, of course, that will only make nervousness about long-term interest rates even more apocalyptic, because long-term interest rates are nothing but short-term interest rates with a risk premium. The risk premium is the fact that American policy, people can't understand exactly what's going on. Then you have this demographic time bomb, which we know in the industrial countries, there's going to be less taxpayers and more old people.

40:28So that's going to cause a almost structural increase in government deficits if you want to keep the same level of standard of living as we have now. Then there's these other things. So for example, there's the weaponization of the American bond market. Before Donald Trump, China, Japan, And these sort of countries were happy to take American debt because they regarded America as a partner. Right. But that's not the case anymore. So the Japanese and the Chinese have been selling American treasuries in order to hurt America. Right? Selling them to who? Selling them back to the Yanks. Right. Selling them back to the, in effect, back to the Fed.

41:09Right. But also selling them to the Arab countries and countries with more capital. Yeah. But the point is that... American treasuries have now become a global weapon in a trade war, in a tariff war. So this is having a different, this is having another impact. Is this part of the law of unintended consequences? No, I think for the Chinese, it's the intended consequences. Oh yeah, no, but initially America is selling so much debt in the first place. They didn't expect it to come back and bite them on the ass. Well, it's not that it has come back and bite them. So what Americans have realized is that there's a huge demand for American assets out there, right?

41:49And that has allowed the Americans to issue more and more debt. It has allowed them over the last 20 years to live way beyond their means. This idea that their prosperity is kind of rented, not earned. All I'm saying is maybe we're coming to an inflection point now that that's actually changing. Right. And if that's actually changing, then you would have this idea of de-dollarization. The dollar is no longer the main currency at a time when people are worried about the policy mix in the United States, at a time where China and Japan, China in particular, are using American debt as a weapon against America.

42:27All this comes at a time when the United States, because the Republicans still believe in this bizarre idea that you can cut taxes and generate revenue, which they can't. And they now have about 6 % of GDP whole in their finances. And Donald Trump is very happy to just keep borrowing, borrowing, borrowing. So what you have is a bizarre mix of known unknowns to come back to our friend Donald Rumsfeld. And Europe, particularly France, France also displays the same sort of problems. We saw in Britain under Liz Truss, as I mentioned earlier on, that things can go really bad very, very quickly. So you put all that into the mix, and I'm not sure yet that people have understood that we might be going into a difficult area where geopolitics is throwing up new requirements, new demands on countries, where national politics is throwing up new individuals, new policies, new ideologies, which are not supranational, but are hyper-nationalist.

43:43And all the while the assumption that the industrialized countries can continue to borrow in order to plug gaps in our fiscal and monetary mix now might come under much more scrutiny. And the thing we know about crises in financial markets is that they are, like our friend Hemingway said about going bust, it happens initially very slowly and then very quickly. So if you look at what's happening to long-term interest rates, and we leave it here now, John, they've been just ticking up slowly tick tick tick tick tick tick and nobody's really noticed them but they're up 4 % in 4 years when you have massive amounts of debt over 110 % of GDP that's a big big problem when you have politicians who are not prepared to raise taxes that's an even bigger problem and when you have a requirement in Europe to spend far more on defence because the Americans are not here anymore then you have that sort of perfect storm of a fiscal crisis.

44:52Nobody's talking about it yet, but it may well be one of the imponderables of 2026.

45:02David McWilliams: This next section is in partnership with IBEC, Ireland's leading voice for business. Now, as we move into 2026, Irish business is approaching a moment of real consequence. Ireland will hold the EU presidency at a time when competitiveness, trade and economic resilience are all under pressure across Europe and when decisions made in Brussels will have a direct consequence for employers here at home. In this segment, we're looking forward, not back. The question is how will Irish business position itself for what comes next? From the future of the single market to digital transformation in AI to the practical impact of new regulation like pay transparency and auto-enrollment, the policy choices ahead will shape how business grow, hire and invest.

45:49David McWilliams: To unpack all that, I am joined by Fergal O 'Brien, IBEX Director of Lobbying and Influence, to talk through IBEX priorities for 2026 and how Ireland can use the EU presidency to put competitiveness and enterprise back at the centre of the European agenda. Fergal, how are you? Good to see you. Good, David. How are you? Brilliant, brilliant. Now tell me, from where you're sitting at IBEC, what are the big, big challenges in the year ahead? Probably, I think, David, the three biggest things we're hearing from IBEC members in business at the moment are, firstly, how can we really use this opportunity in 2026 of Ireland's presidency of the European Union, particularly in the context of, you know, the seismic kind of geopolitical shifts we've had over the past 12 months or so.

46:38So that's really, really big for business. Secondly, can we get infrastructure done? Almost every business is talking to us about that. And then I think the third one, which might be maybe a little left of field for some is, can we make sure that we stay open for business, that we're seen as inclusive, that we're seen as welcoming, and we're seen as a country where talent feels welcome? Because I think there's been some things in the last number of months in particular where that's actually been questioned internationally. If we look at the European presidency. Yeah, let's focus on that one first.

47:09The context of the world has changed the last four months has just been incredible. And while we think we've had a trade war, the reality for Irish business is actually it's more like an investment war because the trade has continued to boom. But I think the other really big issue is what it means for the future of security and defense on this side of the Atlantic. The Americans have pretty much told Europe that they're going to be on their own. and Irish business really needs to come to the table now in a mature way to talk about security defense in this kind of resilience context in a way that we haven't done before.

47:43So us coming to our presidency and leading that conversation about the resilience of Europe, I think is going to be really important coming from what was historically seen and continues to be a neutral country. The trade opportunities, both internal Europe, we've got to make Europe work. We've got to make that single market effective. and from an external European third country trade opportunity. I think that's really, really important. We've got to make sure that industrial Europe, as we call it, kind of the enterprise base in Europe is competitive because for too long it hasn't been and we haven't implemented these great draggy and letter recommendations.

48:20So the diagnosis is there. Let's go and fix Europe, right? And I think Ireland can really kind of lead some of that conversation. AI and digital is so important. philosophies on both sides of the Atlantic. We've got to find something that's going to work for Ireland, going to work for Europe. I think that's got to be an important part of our presidency. The last one I'd mention to you is just our social model. You know, this is kind of interesting. We use terms like social model, but we're really talking about our labor market, how we do things in Ireland. This is the first European presidency without the UK.

48:51And, you know, Europe without the UK is actually a really different Europe. We need to make sure it's working for us. So I think it's a big year in the presidency, David. and we really got to shape that. And do you think, I mean, Fergo,

49:03David McWilliams: when you're talking to business, when you're talking to your members, because I've got, you know, it's a big umbrella group, you've small members, you've big, big companies. Do you think that Irish business is hopeful that we can kind of dance around all these issues in a way? Because some of these issues you want to avoid and some of these issues you want to accelerate. Is your sense our chief executives hopeful about the year we're going into? I think our greatest strength from a kind of an economic model perspective has always been the agility. You know, we're really good at kind of responding to opportunity, you know, getting around some of those big challenges.

49:39You know, just look at how we manage Brexit, for example. It could have been, you know, catastrophic for the Irish economy. It wasn't. So we've been through this trade war. You know, we're coming through that pretty well. You know, I worry a little bit about the investment kind of legacy of that. But the really big issue that people are now thinking about is, you know, this is a new world order. It is not just a trade issue. It's a new world order. And we've got to be part of a European conversation in a way that we probably haven't been strongly enough over the past number of years. And that's what CEOs are saying to us.

50:11David McWilliams: When you talk, you mentioned the security issue there. Now, this is something that's, it's increasingly a live issue. It started in the back burner. It was very, very much a minority sport. even this last 12 months. But in the last couple of months, there has been quite a dramatic sort of shift in terms of the perception of us and our perceptions of ourselves. How do you think that plays out? Does it play out now or is this a much more long-term game? I think CEOs are already being asked questions around the resilience of investments that have been made in Ireland. How secure are supply chains?

50:49how confident can we be that we have the resources to protect our essential utilities our data infrastructure our energy and i suppose particularly when you look at what a critical kind of junction box we are for transatlantic and global data we have serious stakes here you know to and we've got to make sure that our resilience has really been prioritized

51:15David McWilliams: and you focus there the last two issues one is the perennial issue of infrastructure okay because no economy can exist growing at the pace we are growing with the demographics that we have with the types of industries we have without basic let's say just transporting infrastructure I'm not talking about utilities, that's transport. Why do you think we are so behind when it comes to transport infrastructure? I think one of our challenges, look, Welch is still relatively new to us. We did great things in the notice when we said about a motorway network. Then we were interrupted. And then we went through a phase where we started to have money again.

52:05but the complexity of the entire delivery system just weighed us down. So now we've realized that the system has been broken, right? For the last half a decade, our system has been broken. I'm seeing a real commitment from government now to fix those barriers, to really get about this. And the other thing, David, which I think is going to be crucially important is we need to be seen internationally as an investable location. Very often people think, a lot of observers think, it's a state that delivers all our infrastructure. Well, the private sector has a massive role to play too. The private sector invests billions in our renewables, in our communications, in our transport.

52:44So we've got to be seen as a really good location for that mobile investment. And I think in a world where it's going to be more difficult to get that traditional mobile capital, you know, the kind of multinational firm, we really need to set our sights on the mobile investment for Irish infrastructure, for that transport to make our lives better, that enabling infrastructure for households and for businesses. It'll help productivity and it'll give us quality of life. But you've got to be seen as open for business. And in the last half decade, we haven't looked like that. So that's a real gear change that we need.

53:19David McWilliams: And your final point there at the top was this demographic talent idea that unless Ireland is open for more talented employees, entrepreneurs workers half of the offering here the attractiveness disappears because of course firms are coming here for taxation and for location and for various other types of maybe the fact that we're a common law country all those things but we need more talented people to come in than are here at the moment how do you think that's going to pan out in the next 12 months on our run rate in the last couple of years about half of all the jobs we've been creating have been from workers coming outside europe to take up wonderful opportunities in the irish economy we've always kind of seen ourselves as kind of open and welcoming but i think in in the last year or so there's definitely challenges to that perception both from diversity inclusion but but particularly in terms of how welcoming we're seeing to immigrants now.

54:26And I think we need to be really careful around the national conversation on things like immigration control or population control. Ireland has thrived by being an open and diverse economy. We've thrived in terms of being that hub for talent. And I think if we lose that, then that could be more damaging to our economic prospects and future prosperity than any changes to global tax or US tariffs. It's got to start with the talent and we need to make sure that we're genuinely open and welcoming.

55:00David McWilliams: Fergal O 'Brien, the Director of Policy and Loving at IBEC, thank you very much for that comprehensive, in a nutshell, overview of the challenges that Irish business faces in the course of the next 12 months. Thanks, David. That conversation was part of a segment brought to you by IBEC, focused on what lies ahead for Irish business as we move into 2026 and Ireland's EU presidency. What's clear is that this next phase is about implementation as much as ambition, turning big European priorities, competitiveness, resilience, digitisation, into outcomes that actually work for employers on the ground, and domestically ensuring major reforms like pay transparency and auto-enrolment are delivered in a way that's balanced, practical and sustainable for businesses of all size.

55:51David McWilliams: IBEX's role here is central, not just responding to change but shaping it, representing Irish business interests at home and at the heart of Europe. If you want a deeper look at IBEX's impact, priorities and policy work, you can visit ibec.ie forward slash impact to explore how they support business and influence decision making across Ireland and the EU.

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