Henry Kissinger: ‘We are in a very, very grave period’

The grand consigliere of American diplomacy talks about Putin, the new world order — and the meaning of Trump

Edward Luce

It was not hard to entice Henry Kissinger to meet for lunch. Though he is 95, and moves very slowly, the grand consigliere of American diplomacy is keen to talk. He hops on and off planes to see the likes of Russia’s Vladimir Putin and China’s Xi Jinping with as much zeal as when he played the global chess game as Richard Nixon’s diplomatic maestro. He loves to be in the thick of things. Persuading him to say what he actually thinks is another matter. Kissinger is to geopolitical clarity what Alan Greenspan was to monetary communication — an oracle whose insight is matched only by his indecipherability. It is my mission to push him out of his comfort zone. I want to know what he really thinks of Donald Trump.

The timing is perfect. We are having lunch the day after Trump met Putin in Helsinki — a summit that America’s foreign-policy establishment believes will go down as a low point in US diplomacy. Trump had done the unthinkable by endorsing Putin’s protestations of innocence of electoral sabotage over the word of America’s intelligence agencies. Later today Trump will unconvincingly try to undo what he said in Helsinki by insisting he meant “wouldn’t” instead of “would”. But it is too late for that. The New York Daily News has the screaming headline: “Open Treason” next to a cartoon of Trump shooting Uncle Sam in the head while holding Putin’s hand. There could be no better moment to jolt Kissinger off his Delphic perch.

I arrive with a minute or two to spare. Kissinger is already seated. He cuts a gnomish figure at a corner table in a half-empty dining room. A large walking cane is propped against the side wall. (He tore a ligament a few years ago.) “Forgive me if I don’t get up,” says Kissinger in his gravelly German accent. We are at the Jubilee, a cosy French restaurant just around the corner from Kissinger’s Midtown Manhattan apartment. It is only a few blocks from Kissinger Associates, the geopolitical consultancy that charges clients princely sums to hear what I assume are his unvarnished thoughts. My only inducement is a nice lunch. When we order, Kissinger checks whether he is my guest.

“Ah yes,” he says, chortling after I insist he is. “Otherwise that would be corruption.” He eats here often. “I had dinner here just last night with my daughter,” he says. On two or three occasions, someone comes over to shake his hand.

“I am the Ukrainian ambassador to the UN,” says one.

“Who?” says Kissinger. “Ukraine,” the diplomat replies. “We think very highly of you.” Kissinger’s face lights up.

Ah Ukraine,” he says. “I am a strong supporter.”


Geopolitics weighs heavily on Kissinger. As the co-architect of the cold war rapprochement with China and détente with the Soviet Union, Kissinger now surveys a world in which China and Russia are both challenging the US world order, often in concert with each other.

But the doyen of cold war diplomacy is as interested in the future as he is in the past. This year Kissinger wrote a terrifying piece on artificial intelligence for The Atlantic Monthly, in which he compared humanity today to the Incas before the arrival of smallpox and the Spanish. He urged the creation of a presidential commission on AI. “If we do not start this effort soon, before long we shall discover that we started too late,” he concluded.

This summer Kissinger is working from home on a book about great statesmen and women (there is a chapter on Margaret Thatcher). He has just finished a section on Nixon, the president whom he served — uniquely — both as secretary of state and national security adviser. It is 25,000 words long and Kissinger is toying whether to publish it separately as a short book. He worries it will backfire. “It might bring all the contestants out of their foxholes again,” he says. Do you mean that it could provoke comparisons between Watergate and Trump’s Russia investigation, I ask. “That is my fear,” he replies. Before I have a chance to follow up, Kissinger switches to Thatcher. “She was a magnificent partner,” he says. “I am a believer in the special relationship because I think America needs a psychological balance and this is a natural one based on history — not just on contributions.”

Our starters arrive. Kissinger has a plate of chicken liver pâté, which he consumes with gusto. He has tucked his napkin bib-style into his upper shirt. I want to talk about Trump. Kissinger is keen to stay on Britain. I ask him about Lord Carrington, the former British foreign secretary, who resigned in 1982 to carry responsibility for failing to stop Argentina’s invasion of the Falkland Islands, and who died, aged 99, this month. On the day of Carrington’s death, Boris Johnson, the most recent British foreign secretary, quit with very different motives. You could say the first resigned with honour and the second with dishonour.

“I loved Lord Carrington,” says Kissinger with feeling. “I never went to England without seeing him.” In all their years of friendship, Carrington did not once complain about having to resign, says Kissinger. “He said to me: ‘What is the point of assuming responsibility if you then whisper to your friends that you are not really responsible?’ I don’t think we have that quality any more because for that you need a tradition that you take for granted and we no longer can.” Johnson certainly doesn’t embody it, I suggest. “I don’t think Carrington thought much of Johnson,” Kissinger replies.

What did Kissinger make of the Helsinki summit? His answer is halting.

“It was a meeting that had to take place. I have advocated it for several years. It has been submerged by American domestic issues. It is certainly a missed opportunity. But I think one has to come back to something. Look at Syria and Ukraine. It’s a unique characteristic of Russia that upheaval in almost any part of the world affects it, gives it an opportunity and is also perceived by it as a threat. Those upheavals will continue. I fear they will accelerate.”

Kissinger embarks on a disquisition about Russia’s “almost mystical” tolerance for suffering. His key point is that the west wrongly assumed in the years before Putin annexed Crimea that Russia would adopt the west’s rules-based order. Nato misread Russia’s deep-seated craving for respect. “The mistake Nato has made is to think that there is a sort of historic evolution that will march across Eurasia and not to understand that somewhere on that march it will encounter something very different to a Westphalian [western idea of a state] entity. And for Russia this is a challenge to its identity.” Do you mean that we provoked Putin, I ask.

“I do not think Putin is a character like Hitler,” Kissinger replies. “He comes out of Dostoyevsky.”


Our main courses arrive. Kissinger has ordered branzino on a bed of green vegetables. He barely touches the dish. “No, but it was very good,” he says later when the waitress offers to pack it into a box. By contrast, I eat most of my Dover sole and Brussels sprouts. We are both drinking Badoit sparkling water, which Kissinger has specifically requested. I sense I am losing my battle to get him on to Trump — or failing to detect his hidden message. Is he saying we are underestimating Trump — that, in fact, Trump may be doing us the unacknowledged service of calming the Russian bear? Again, there is a pause before Kissinger answers.“

I don’t want to talk too much about Trump because at some point I should do it in a more coherent way than this,” Kissinger replies. But you are being coherent, I protest. Please don’t stop. There is another pregnant silence. “I think Trump may be one of those figures in history who appears from time to time to mark the end of an era and to force it to give up its old pretences. It doesn’t necessarily mean that he knows this, or that he is considering any great alternative. It could just be an accident.”

By now Kissinger has abandoned his halfhearted stabs at the fish. I know he has briefed Trump. He has also met Putin on 17 occasions. He reports the contents of those meetings to Washington, he tells me. I try a different tack. To whom does Trump compare in history, I ask. This also fails to do the trick. Kissinger goes off on a tour d’horizon of the health of European diplomacy. He can find no leader who excites him, with the possible exception of France’s Emmanuel Macron. “I can’t yet say he’s effective because he’s just started but I like his style,” says Kissinger. “Among other European statesmen, Angela Merkel is very local. I like her personally and I respect her but she’s not a transcendent figure.”

Which diplomatic brain would he compare in today’s US establishment to himself, say, or the late Zbigniew Brzezinski — his former sparring partner, who also served as national security adviser? The mention of Brzezinski triggers something. “When Zbig died, which was a great surprise, I wrote to his wife that no death has moved me quite as much as his,” Kissinger says, again with evident feeling. “Zbig was almost unique in my generation. We both considered ideas about the world order to be the key problem of our time. How could we create it? We had somewhat different ideas. But for both of us, we were above all concerned to raise diplomacy to that level of influence.” Who is asking those questions today, I ask. “There is no debate today,” Kissinger replies. “It is something we need to have.”

I cannot shake the feeling that Kissinger is trying to tell me something but that I am too literal to interpret it. Like a blindfolded darts player, I try a number of different throws. What would Germany become if Trump pulled America out of Nato? Kissinger likes that question but declines to give odds as to its likelihood. “In the 1940s, the European leaders had a clear sense of direction,” he says. “Right now they mostly just want to avoid trouble.” They are not doing a very good job of it, I interrupt. “That’s true,” says Kissinger with a cryptic smile. “One eminent German recently told me that he always used to translate tension with America as a way to move away from America but now he finds himself more afraid of a world without America.” So could Trump be shocking the rest of the west to stand on its own feet, I ask. “It would be ironic if that emerged out of the Trump era,” Kissinger replies. “But it is not impossible.”

The alternative, Kissinger adds, is not appealing. A divided Atlantic would turn Europe into “an appendage of Eurasia”, which would be at the mercy of a China that wants to restore its historic role as the Middle Kingdom and be “the principal adviser to all humanity”. It sounds as though Kissinger believes China is on track to achieve its goal. America, meanwhile, would become a geopolitical island, flanked by two giant oceans and without a rules-based order to uphold. Such an America would have to imitate Victorian Britain but without the habit of mind to keep the rest of the world divided — as Britain did with the European continent.

Kissinger is more circumspect on AI — a subject, he concedes, with which he is still grappling. But he is troubled by the unknown consequences of autonomous warfare — a world in which machines are required to take ethical decisions. “All I can do in the few years left of me is to raise these issues,” he says. “I don’t pretend to have the answers.”

I have little idea how Kissinger will take my next question. Is power an aphrodisiac? “What was the word?” Kissinger asks. “Aphrodisiac,” I repeat. I am quoting the famous Kissinger line that he made in the heyday of his career when he was still a single man. In the late 1960s and early 1970s he was as much known for his racy dating calendar as for affairs of state. “I would certainly say that being able to make decisions has a dimension that you don’t have in ordinary life,” Kissinger replies with the hint of a smile. That was a subtle answer, I tell him. “I did say that,” he replies. “But when I say these things they’re more intended to establish your cleverness than your life’s purpose. And it’s true to some extent. It is based on observation.”


By now we are on to the coffee. Mine is a double espresso. Kissinger has mint tea. I decide to take a final stab at the bullseye. We have been talking for almost two hours. If there is one recurring criticism of Kissinger, I tell him, it is that he goes to great lengths to preserve access to people in power at the expense of not speaking plainly in public. Isn’t now — of all moments — the right one to burn a bridge or two? Kissinger looks crestfallen.

“I take that seriously and a lot of people, good friends of mine, have been urging this on me,” he says eventually. “It could happen at some point in time.” There is no time like the present, I say with a nervous laugh.“

It is clear the direction I am going in,” he replies. “Is it clear to you?” Sort of, I reply. You are worried about the future. However, you believe there is a non-trivial chance that Trump could accidentally scare us into reinventing the rules-based order that we used to take for granted. Is that a fair summary?

“I think we are in a very, very grave period for the world,” Kissinger replies. “I have conducted innumerable summit meetings, so they didn’t learn this one [Helsinki] from me.”

It is clear he will not elaborate further. I ask him which period he would liken to today. Kissinger talks about his experience as a freshly minted citizen in US uniform serving in the second world war. He also reminisces about what brought the young German refugee to these shores in the first place. After Germany marched into Austria in 1938, Jews in Kissinger’s home town were told to stay indoors. His parents left for America when they could. “There was a curfew and German soldiers everywhere,” he says. “It was a traumatic experience that has never left me.” His reminiscence is carefully chosen.

Something like a biblical storm has descended since we sat down. One umbrella literally flew past the window. I help Kissinger through the soaking whiplash to his car. The driver takes his other arm. He is unsteady. I realise that I have been ungraciously interrogating a man almost twice my age. “Dr Kissinger has been looking forward to this lunch for days,” says the server after I return to borrow an umbrella. That is nice, I think — though I fear my Trump questions may have depressed his appetite.

Edward Luce is the FT’s US national editor and author of ‘The Retreat of Western Liberalism’

Friendly Fire

Trump Takes Aim at Germany and NATO

Germany used to be one of Washington's closest allies. But Donald Trump has singled the country out as his favorite target for criticism. The U.S. president continued to pursue that obsession this week, and came close to destroying NATO in the process. By DER SPIEGEL Staff

On Wednesday afternoon at 3:15 p.m., Angela Merkel and Donald Trump sat down together as if nothing had happened. As if Trump hadn't started the day with a hate-filled tirade against Germany. As if he hadn't just lambasted the country as being a "captive of Russia" or said that "Germany is totally controlled by Russia." As if he hadn't spent days volleying salvoes at Germany on Twitter because the country still isn't doing what Trump, as the American president, wants it to be doing. As if he hasn't described the whole situation as being "not acceptable."

There was nary a mention of these things in the meeting. It turns out that the façade can still hold even in the midst of serious conflicts. They smiled, they shook hands, they greeted each other by first name. They have a "very, very good relationship," Trump said. By the time the two had sat down in their white armchairs, it was no longer about NATO or about the 2-percent defense spending target the White House has been insisting on by the alliance's "delinquent" members. Nope, now, it was about Ivanka.

Trump wanted to send greetings from his daughter to the German chancellor. Ivanka is very impressed with you, he said, likely intending it as a compliment.

For the moment, all that was left of the trans-Atlantic relationship were greetings from Ivanka.

A Showdown Against Germany

Trump turned this week's NATO summit into a showdown with Germany and its chancellor -- Trump against Merkel, Trump against Germany. At the peak of the crisis, Trump even threatened to withdraw the U.S. from the alliance. For two entire days, he allowed doubts to persist about NATO's very survival.

Since his election as the 45th U.S. president, Trump has shown that he has no use for either allies or partners. He's waging a trade war against China; he caused the collapse of the G7 summit in June; and he disparaged Canadian Prime Minister Justin Trudeau as "very dishonest" and "weak."

But Trump has attacked no other country to the degree he has Germany. Germany of all countries, for decades one of America's closest allies. The country that stood on the front lines of the Cold War, it seems, has now become Trump's Enemy No. 1.

Trump rages about the German cars being driven on American roads, he harbors illusions about some horrendous uptick in crime in Germany and is pleased about how allegedly dissatisfied the German people are with their government. The Germans, Trump recently blustered, are "turning against their leadership."

The U.S. president seems to view Germany with a mixture of jealousy, admiration and anger.

Trump is convinced that Germany's economic success is in large part attributable to what he perceives as the Germans' highly adept ability in the past at exploiting the Americans. Trump's line seems to be that his predecessors may have let the cunning German chancellor get away with pulling one over on them in the past, but those days are over now.

Trump mixes everything together -- trade with defense; the Nord Stream 2 natural gas pipeline with Iran. But it's German defense spending that is the focus of the current attacks. In Trump's mind, the Germans are freeloaders whose security is guaranteed by the Americans, who get very little back in return.

'We Are Not Prisoners'

Discontent has been stewing in Berlin for weeks over the U.S. president's shortcomings. Trump's tone along with the constant rebukes and insults are infuriating even the staunchest supporters of trans-Atlantic relations.

"We are not prisoners -- neither of Russia nor of the U.S.," says German Foreign Minister Heiko Maas. "We make decisions about our budget, our energy supply and our trade relations freely, sovereignly and on the basis of facts."

So why does Trump have it out for Germany, of all countries? Perhaps it's the mixture of economic strength, military restraint and moral hubris in Germany that makes Berlin the subject of Trump's loathing.

What is certain is that there is no other country he is attacking as persistently. Even back in spring 2017, the European Council on Foreign Relations think tank concluded: "Germany, not China, will be Trump's enemy No. 1."

"Germany may be a target for Trump because he sees it as a rich nation that profited from the Marshall Plan after World War II, that rose to economic power and now isn't paying its dues," says Jim Townsend of the Center for a New American Security.

British historian Timothy Garton Ash suggests we should be asking Sigmund Freud for answers to Trump. In an interview in this week's issue of DER SPIEGEL, he argues that rational explanations will do little to help on that front. The psychological explanations run the gamut from Trump's German roots to his aversion to strong women like Angela Merkel.

Looking at it from Trump's possible point of view, a number of factors come together that could inspire his apparent contempt for Merkel: her close relationship with Barack Obama, the predecessor Trump hates or, perhaps, her notoriously unshakeable calm, which has already raised the ire of numerous irascible men both at home and abroad.

'Attacking Her Is Almost a Natural Reaction'

The fact that the liberal American press that Trump so despises has championed Merkel as its heroine may also be contributing to his aversion to her. "Merkel defends certain liberal values like multiculturalism and open borders in Europe, making her in some ways the political antidote to Trump," says Stephen Walt, professor of international relations at Harvard. "Attacking her is almost a natural reaction."

Nicholas Burns, the former U.S. ambassador to NATO, won't even rule out the possibility that Trump may be seeking to topple the German leader. "I can come to no other conclusion but that he is trying to weaken her," says Burns. He says Trump judges Germany solely on the size of its trade surplus with the U.S. "He is so focused on that, so consumed by it, that he can't see all the benefits that we get from our alliance with Germany," Burns says. He describes Trump's attacks on Merkel as "embarrassing to our country."

To be sure, Merkel and Trump have already clashed several times in the past. But the conflict has never been as tense as it was this week.

The showdown between the chancellor and the president took place behind closed doors on the second day of the NATO summit in Brussels. The actual agenda for the summit itself didn't provide any real causes for dispute. It covered routine matters like the relationship with Georgia and the Western alliance's ties with Ukraine -- all points upon which the Germans and Americans should be able to readily agree.

But Trump doesn't want to play along. He seeks conflict rather than peace. First, he arrived late for the meeting, and then he unleashed his standard litany of complaints. How the Germans cheat the Americans in trade, the many BMWs driving on American roads, the gas from Russia and Berlin's refusal to spend more money on its armed forces, the Bundeswehr.

Trump Threatens to 'Go His Own Way'

It was the standard animosity which has become the norm and which Merkel has been forced to get used to. This time around, though, Trump didn't turn to Twitter as his weapon of choice.

Instead, he attacked the Germans in front of all the allies at a meeting of NATO's most important body, the North Atlantic Council. It was an unprecedented move.

Trump talked himself into a fury and then began issuing threats. He said every NATO country, including Germany, should reach the 2-percent target by next year. That, though, contradicts everything that the allies agreed to at the 2014 summit in Wales. Back then, the partners agreed to "aim" to spend 2 percent of gross domestic product on defense by 2024. Now it's supposed to happen by next year? Otherwise, Trump raged, he would "go his own way."

An American president placing a question mark over NATO's future? It's outrageous. NATO Secretary General Jens Stoltenberg then interrupted the meeting -- the representatives of Georgia and Ukraine had to leave the chamber because their countries are not part of NATO. It was clear to everyone at that point that it would not be possible to go back to the set agenda after Trump's tirade.

Don't Mention the 'W' Word

America's allies were appalled, and even Trump's own advisers appeared uneasy. Putting pressure on the Germans is one thing, but blowing up NATO altogether? No, that's not what Trump's people want. They advised their colleagues from the other member states not to discuss the summit declaration, which reaffirms the 2-percent pledge made in Wales.

Merkel had planned to appear before the press at around 10 a.m., but now she had to postpone the appointment. Instead, NATO leaders held a crisis meeting. All staff were asked to leave the room, with only the leaders and one other member of each government allowed to remain in the room. For Merkel, that person was Defense Minister Ursula von der Leyen. But as with his ice cream portions, Trump got extra scoops. Joining him were Secretary of State Mike Pompeo, National Security Advisor John Bolton and White House Spokeswoman Sarah Huckabee Sanders.

Merkel and Trump sat far apart at the oval table, with the seating order determined by the alphabet -- from "A" for Albania to "U" for United States. Stoltenberg began. We have to talk about burden-sharing, he said. The aim, he said, was to leave the summit with a clear commitment to NATO.

Then Trump began to speak. The others already had a clue of what would come now. More venom against Germany. "So, we're supposed to protect Germany, but they're getting their energy from Russia," he said. "Explain that. And it can't be explained." It's "unfair," he said.

The first to respond was Lithuanian President Dalia Grybauskait. She's a trained karate fighter, and in this fight, she positioned herself to protect the Germans. Grybauskait proposed agreeing on certain steps to increase spending. Like the others in the room, she also didn't want to utter the "W" word. "W" for Wales.

The reason is clear: The Wales agreement had been signed by Barack Obama and is thus a toxic document for Trump. When the president hears the word "Wales," it apparently makes him think of Obama and causes him to throw a tantrum. French President Emmanuel Macron also dodged the "W" word, instead referring to the efforts European members are making within the NATO alliance. He also noted that the U.S. defense industry benefits from the fact that Europeans are already now spending so much more money on defense.

'We Know We Have To Do More'

Then it was Merkel's turn. The Germans, she said, are already spending much more on defense than in the past. She can rattle off the list almost by memory these days. It includes the proposed new NATO logistics command center in Ulm, the Bundeswehr deployment in Afghanistan, the 17 years spent at the side of the United States there, the fact that Berlin is NATO's second-largest supplier of troops as well as the already approved decision to increase the military's budget to 1.5 percent of GDP by 2024. "Our hands are completely full just implementing that," she said.

But an increase in defense spending to reach 2 percent by next year? Totally impossible. "We know we have to do more," she would later tell the press. But she didn't add more. "We're going to have to talk about the extent to which we will increase spending on equipment," she said, "and by that I clearly mean equipment and not arms." She kept things vague and didn't make any promises.

After Merkel, the British spoke, followed by the Dutch. But Trump couldn't hold back. He attacked the Germans again. Only 1.2 percent for defense, he asked? That's impossible. He then addressed Merkel directly: "Angela." Once again, he complained about Germany's gas deals with Russia.

The chancellor countered that Germany gets less than 40 percent of its natural gas supplies from Russia. But Trump wouldn't let it go. In the U.S. it looks as though the country is getting ripped off here, he scolded.

By then, it was almost noon, and it was time for the smaller NATO countries to have their say. They sided with Merkel. During a break, Albanian Prime Minister Edi Rama went up to the German chancellor. His country had been the only one singled out for praise by Trump, but he didn't want to create the impression that Albania had somehow become Trump's model pupil.

Finally, Stoltenberg moved to end the meeting. The secretary general had been determined to rescue the summit. He suggested that NATO leaders leave the meeting with the message that, despite the differences, they had committed themselves to NATO and to higher defense spending. Next year, on the occasion of NATO's 70th birthday, it will be possible to measure the progress that has been made. It's a meaningless formulation -- everyone is aware of that -- but perhaps it somehow helps them.

After the meeting, Trump stated publicly that Germany had committed itself to a further increase in defense spending. But that's fake news, sources close to Merkel said. The chancellor's position, they noted, is precisely the one she shared with the press -- namely that the idea that the Germans are somehow unfairly exploiting the Americans is a fixation Trump has harbored for decades. In his now infamous 1990 interview with Playboy, Trump complained of how so-called "allies," a word he placed in quotation marks for emphasis, are "screwing us." Although he also spoke of other countries, those remarks were primarily directed at West Germany.

When asked what he would do first if he were president, Trump replied: "I'd throw a tax on every Mercedes-Benz rolling into this country and we'd have wonderful allies again."

'German Blood ... Great Stuff'

There has been repeated speculation over whether Trump's own heritage may influence his fury toward Germany. The fact that his ancestors emigrated from the town of Kallstadt in the state of Rhineland-Palatinate certainly doesn't seem to have fostered any kind of affinity in Trump for his ancestral home.

At best, Trump has an ambivalent relationship with his German roots. The family didn't show much pride about its origins. On the contrary: During the Nazi period, Trump's father Fred began claiming the family had emigrated from Sweden to the U.S.

Fred Trump had justifiable reasons for concealing his true origins. During the mid-20th century in the U.S., identifying yourself as German wasn't exactly something that would provide a boost to business, and this was particularly true in a city like New York, with its large Jewish population.

That's apparently why Trump repeated the claim in his book "The Art of the Deal," published in 1987, that the family came from Sweden. The New York Times has reported that Trump asked his father prior to publication why they still "had to do this Swedish thing?" It is unknown how his father answered.

By the 1990s, that concern seemed to have significantly diminished. When asked by Vanity Fair magazine in a 1990 interview whether he was not in fact of German origin, he answered: "Actually, it was very difficult. My father was not German; my father's parents were German ... Swedish, and really sort of all over Europe."

In 1999, Trump led New York's Steuben Parade, an event held by the German-American community, as its grand marshal. In a video message to the event, he said: "We passed Trump Tower, 69 stories. I looked up and I said, 'This is a long way from Kallstadt.' I'm a proud German-American."

In the 2015 documentary "Kings of Kallstadt," Trump reaffirmed his family roots. "I have great German heritage, I am very proud of it, great place." He also added, "I'm proud to have that German blood. There's no question about it -- great stuff." He then ticked down the list of his typical German characteristics. "I'm strong and I'm very reliable. I'm on time, I get things done -- and that's basically the whole German culture."

Nevertheless, it doesn't appear that Trump's commitment to his German roots has done much to ease his relationship with Germany. Nor does his view of the world seem to have changed much since the Playboy interview. He has repeated many of the passages featured in it in some way or other since his election. Like when he said Americans are laughed at for defending wealthy nations and getting nothing in return. "Our allies make billions by ripping us off."

Over the years, Trump has remained fixated on Germany as the alleged primary beneficiary of American largesse. "Probably the greatest leader in the world," Trump said in praise of Merkel in 2015. But when Time magazine named the chancellor its "Person of the Year" four months later, Trump sent out a furious tweet. "I told you @TIME Magazine would never pick me as person of the year despite being the big favorite They picked person who is ruining Germany."

A Fateful Vote for Merkel?

The odd thing is that it's possible Merkel would not still be chancellor today were it not for Trump. His election in November 2016 came during a time in which Merkel was mulling whether to run for another term or not. People close to Merkel say she was seriously wrestling with the question at the time and that if Hillary Clinton had won the election, the chancellor probably would have stepped down.

As we know today, things turned out differently. When Trump was elected president on Nov. 8, 2016, the chancellor sent her congratulations, but her choice of wording marked a first in German-American postwar history. Her statement contained the usual polite formulations, but ended by admonishing that the U.S. and Germany are united by values such as democracy and respect for human dignity. "I offer the next president of the United States close cooperation on the basis of those values," Merkel said.

It was an affront to say the very least. A German chancellor reminding the American president that he must respect his own, 200-year-old Constitution? When the chancellor visited Trump in Washington for the first time in March 2017, the frosty climate was attributed to Merkel's rather unorthodox congratulatory message.

The chancellor herself viewed the situation differently. In the final days of his presidency, she held a long conversation with Barack Obama during a lengthy dinner at Berlin's Hotel Adlon as part of his last official visit to Berlin in mid-November 2016. From Merkel's perspective, Trump is driven largely by his rejection of the Obama era. As a person considered to be a very close ally of Obama, she is thus a target of the same hostilities.

An Ahistorical President

Initially, many in the German government thought Trump, like so many presidents before him, would eventually be tamed once he was in the White House. But Merkel herself never counted as one of the proponents of that theory. She said early on that Trump would implement his agenda point by point, and she was right.

In Merkel's eyes, Trump is an ahistorical president, meaning that nothing that happened before his term in office holds any relevance to him. That in part explains why he is just as rude in his dealings with the United Nations and NATO as he is with the G7 states. This is further complicated by Trump's tendency to lump problems together.

And it's not as if Merkel hasn't made any effort. During her last visit to Washington at the end of April, she gave Trump an etching dating back to 1705 that includes an image of Palatinate and Kallstadt. Merkel also invited the president to visit the small town.

The chancellor can even see what she views as a very friendly side of Trump. At the same time, she doesn't believe that flattery will work in steering him away from his plans. Merkel followed with a certain amount satisfaction how Emmanuel Macron initially made a major effort to court Trump, one that produced little by way of results.

A Grossly Misleading Economic View

Trump even ordered a confidante to Berlin to assert his very special policies for Germany. Richard Grenell, a former Fox News commentator, seems to be fearless when it comes to interfering in German domestic political matters. He's a U.S. ambassador of a kind never seen before.

In an interview with the right-wing internet platform Breitbart shortly after his arrival in Berlin, he spoke of his desire to help the "silent majority" to power in Europe. Grenell said that "support is massive" for politicians who support "consistent conservative" positions on migration, tax policy and cutting bureaucracy.

The comments were not exactly of a kind that could be expected to establish deeper trust with Merkel. Particularly given that Grenell hasn't been quiet about his friendly relationship with Jens Spahn, Germany's health minister. Like Merkel, Spahn is a member of the CDU, but he is a prominent voice on the party's conservative wing and one of the chancellor's most vocal adversaries. Photos of Spahn and Grenell hanging out together have become a frequent presence on Twitter. On Sunday, Spahn and Grenell, who the CDU politician calls "Ric," met in a VIP box of Berlin's Olympic Stadium for a concert by German pop star Helene Fischer. A few days prior, Spahn and his partner had joined the U.S. ambassador for a reception in Berlin to celebrate the Fourth of July.

Grenell has also been notable for the unusual degree of independence he apparently enjoys. Earlier on July 4, he had hosted the heads of BMW, Daimler, VW and Continental at the U.S. Embassy in Berlin to talk about a solution to the trade conflict between the U.S. and Europe -- even if the European Commission is responsible for European trade policy. "We had hardly left the meeting before the press knew everything," one participant said.

Merkel's government is not particularly pleased that the U.S. ambassador is behaving in Berlin as though he were some colonial governor. His strategy of instrumentalizing those with whom he meets, says one official who was part of a small delegation who met with the ambassador, has had a "toxic" effect on some of those he speaks with.

Christian Lindner, head of the business-friendly Free Democrats (FDP), is one. He had wanted to meet the ambassador, but after Grenell tried to transform the official meet-and-greet into a casual dinner, Lindner backed out of the rendezvous. Previously, Grenell had praised the FDP head along with Spahn and Austrian Chancellor Sebastian Kurz for being ideal examples of politicians who have understood the necessity of listening to the alleged "silent majority" in Europe.

Grenell is offended by accusations that he works together with right-wing extremists, insisting to friends that he has spent his entire life fighting against the far right. He recently told a small group of German foreign policy experts that he sees himself as one of Trump's "staffers," maintaining that he is merely working down a list of priorities identified by his president himself.

At the top of that list is Iran. On the very first day of his official duties, Grenell issued an unequivocal recommendation to German business leaders: "German companies doing business in Iran should wind down operations immediately," he decreed over Twitter.

After Trump backed out of the Iran nuclear deal, Washington began trying to force its allies to adopt the same hardline approach to Tehran. The goal is that of shutting the country out of international financial channels and saddling it with economic difficulties. Officials in Washington are no longer being particularly coy about the fact that they are once again pursuing a policy of regime change in Iran.

'Deeply Concerned'

No wonder, then, that Ambassador Grenell is doing all he can to block the planned transfer of around 350 million euros in cash from the European-Iranian Trade Bank to Iran. Initially, Grenell tried his luck with the German government, but he was told that Berlin has insufficient proof that Iran planned to use the money for terrorism. In response, Grenell used his press contacts to heap pressure on the German government. "We are deeply concerned by reports that the Iranian regime is attempting to move hundreds of millions of euros in cash from a German bank to Iran," Grenell told the mass-circulation tabloid Bild.

Government officials were furious. "We aren't some kind of banana republic," said a Finance Ministry official, adding that the Iranians themselves had reported the transaction to German customs officials and the German central bank, the Bundesbank. Currently, the Federal Financial Supervisory Authority is checking to ensure that the bank is adhering to all related controlling requirements. Only Germany's Central Customs Authority is in a position to block the transaction, but it doesn't currently look as though it will. Soon, German Vice Chancellor Olaf Scholz of the Social Democrats will host Ambassador Grenell for his inaugural visit. The meeting is likely to be a frosty one.

Donald Trump had been in office for just a few weeks when Harald Krüger met him for the first time. In March 2017, the BMW CEO joined Chancellor Merkel for a White House visit and talked about how successful his company's involvement in the U.S. state of South Carolina had been: both for BMW and for the Americans.

Krüger listed off all the superlatives: the factory in Spartanburg, he noted, was the company's largest production facility in the world and BMW had become America's largest automobile exporter. Trump had seemed impressed, BMW said at the time.

Fifteen months later, though, Krüger has become disillusioned. Trump has launched a trade war that is primarily aimed at two countries: China and Germany. And hardly any other branch of the economy will be affected to the degree that Germany's automobile industry will. "Trump wants to hit the paragons of the German economy," says one senior executive at a German automobile manufacturer.

Trump's first move was that of imposing a 25-percent tariff on steel imports and a 10-percent levy on aluminum. Those tariffs have been in place since early June and have not been particularly harmful to Germany. But it is likely just the first step: The U.S. president has announced his intention to deploy punitive tariffs on automobile imports of up to 25 percent. The danger for German producers will become even larger if Trump backs out of the NAFTA free-trade deal with Canada and Mexico, since many German car companies have factories in Mexico.

An Insulting Argument

For years, Trump has been upset by the number of German cars on America's streets, particularly the luxury brands like BMW, Mercedes and Audi. Trump ignores the fact that the companies produce millions of vehicles in the United States: In Trump's view of the global economy, German cars are proof that his country is being ambushed by international trade.

The U.S., Trump recently complained, is losing $800 billion each year in trade with the rest of the world. The ex-businessman does know a thing or two about losing money -- after all, he managed to go broke on four separate occasions during his business career. But he doesn't understand much about macroeconomic accounting.

American imports exceed exports by more than $800 billion, that much is true. The resulting number is referred to as the trade deficit. But referring to it as a loss is grossly misleading, because the U.S. received products in exchange for that amount from countries oversees. And Trump himself has personally contributed to the deficit: His private collection of vehicles is said to include two Mercedes sedans.

Furthermore, Trump's calculations are incomplete. He constantly refers to the trade balance, which includes the exchange of goods. But if he were to include services and capital transfers, which are taken into account by the current accounts balance, a different picture emerges. According to numbers produced by the U.S. Department of Commerce, the U.S. has a considerable current-accounts surplus with the European Union.

But Trump is deaf to economic arguments. As he did when applying the steel tariffs, Trump has justified possible automobile tariffs by citing national security, an insulting argument.

BMW CEO Krüger agrees. The week before last, BMW addressed a letter to Secretary of Commerce Wilbur Ross. The Commerce Department is currently conducting a formal review to determine whether automobile imports represent a danger to U.S. national security. The answer is a categorical "no," BMW writes in the letter, in which the company rips Trump's tariffs policy to shreds.

But Trump isn't likely to back down, unless the U.S. and the EU were to agree on a new trade deal. Only within the framework of such a deal could tariffs on automobiles be reduced to nothing -- a model that Grenell has proposed.

Damaging Bothersome Competitors

Trade issues even played a role at the NATO summit on Wednesday, with Merkel saying that Germany did not want a spiral of escalation. She noted that European Commission President Jean-Claude Juncker would be traveling to Washington in late July to discuss the issue with Trump on behalf of the entire EU. But first, Europe must reach an agreement on what it wants. Thus far, the French have not shown much support for a new trade deal.

BMW head Krüger and other auto industry executives have long since begun working on a Plan B -- or rather a Plan C, as in China. Munich-based BMW is considering ramping up its production in China so that it will no longer have to supply the Chinese market with automobiles built in the U.S. At the German-Chinese economic summit earlier this week, Krüger signed several cooperation agreements with Chinese companies.

As is true of his fight against the European automobile sector, the goal of Trump's attacks against the Baltic Sea natural gas pipeline from Russia to Germany, known as Nord Stream 2, is primarily that of damaging bothersome competitors to the U.S. economy -- or of eliminating them altogether. From the German perspective, his concern that the Europeans are becoming too dependent on natural gas from Russia is little more than a pretext.

It isn't a difficult argument to make. Trump wants to make liquified natural gas from America more competitive in Europe. A pipeline for Russian natural gas would make the natural gas exploited in the U.S. by the arduous method of fracking before being shipped across the Atlantic far too expensive.

The pipeline is to travel from Russia on the Baltic Sea floor to Germany's northern coast. In addition to the Russian company Gazprom, other investors include Shell and the German energy concerns Wintershall und Uniper. Former German Chancellor Gerhard Schröder is chair of the board of directors for the Nord Stream 2 project -- a fact that also seems to ruffle Trump's feathers.

Whereas Trump seeks to shrink the influence of German carmakers in the U.S. by applying tariffs, he has chosen a different set of tolls in the energy sector. Indeed, he is hoping to apply U.S. law overseas: A few weeks ago, Trump threatened Nord Stream 2 investors with sanctions if they don't back out of the project.

'Captive of Russia'

The U.S. president is also increasing political pressure to either put an end to the Nord Stream 2 project or to at least use it as a lever for other concessions. That's why he has garnished his demands for greater NATO-related defense spending with accusations that Germany is a "captive of Russia."

Yet the numbers that he presented during his breakfast with NATO Secretary General Stoltenberg were totally fictitious. Only 38 percent of the natural gas used by Germany comes from Russia, according to German government sources, a far cry from the 70 percent claimed by Trump. As a share of Germany's entire energy needs, it is merely 9 percent.

But it's not just about energy. Nord Stream 2 is divisive in the European Union, with Eastern Europeans and Ukraine joining the U.S. in its skepticism of the project. When Trump links the pipeline with security issues, he can be sure of support from those quarters, and in the NATO summit declaration, alliance members emphasized the need to avoid dependency when it comes to energy supplies.

Trump's political strategy, which is exclusively focused on exerting the greatest amount of pressure possible, could ultimately backfire in Germany. The Nord Stream 2 project, after all, is also extremely controversial in Germany -- but it could end up going forward because the country doesn't want it to look as though it is bowing to Trump's diktats.

American presidents have always pushed hard for American interests in their dealings with Germany and other overseas allies, and the country has every right to do so. But the public pressure being applied by Trump is such that it is no longer possible merely to see the current dispute as a normal spat between partners. Trump is not interested in face-saving compromise; he wants obedience.

Never before in postwar history has a U.S. president attacked a German government as frontally as Trump has done. The German-American relationship has seldom been a walk in the park, and the personal relationships between U.S. presidents and German chancellors have not always been easy. In the 1960s, John F. Kennedy argued with Konrad Adenauer about the construction of a German nuclear weapon; Richard Nixon and Willy Brandt disagreed about West Germany's policy of détente with the Soviet bloc in the early 1970s; Jimmy Carter and Helmut Schmidt couldn't agree on much of anything in the years that followed. Then, after the fall of the Berlin Wall, George W. Bush and Gerhard Schröder had a falling out, with each accusing the other of deception surrounding the 2003 U.S.-led invasion of Iraq.

'Bitter Old Man'

At times, the personal chemistry between the two leaders was off, while at others, national mentalities and interests clashed. Even proven NATO supporters like Adenauer were sometimes subjected to scorn from the White House. The stiff German chancellor, who had grown up in Imperial Germany, couldn't get along with Kennedy, the stylish East Coast intellectual 40 years his junior. Kennedy complained that the German chancellor was a "bitter old man," while Adenauer noted that he was dealing with a "cross between a naval cadet and a boy scout" in the White House.

But the two sides always managed to find a viable working relationship -- even the one time that dislike seemingly turn to hate. That was in 1973, when Nobel Peace Prize laureate Willy Brandt (he was awarded the prize in 1971) governed in Bonn. Nixon and his National Security Adviser Henry Kissinger feared that the German chancellor was going too far in his efforts to improve relations with the Soviets. At the time, Brandt was suffering from a vocal cord infection and had to have a tumor removed. In a telephone conversation at the time with Kissinger, Nixon said that Brandt was a "dolt," and a "dangerous" one at that. "Unfortunately, he's in very good health," Nixon said, in reference to the throat operation. "Unfortunately, he's likely to hang on in there, yeah," Kissinger replied.

Later, Jimmy Carter's staff even engaged a psychologist in an attempt to explain what they saw as Helmut Schmidt's strange behavior. The Americans believed his radical mood shifts were the long-term effects of a thyroid condition.

Schmidt behaves like a "paranoid child," Carter noted in his diary. "Schmidt seems to go up and down in his psychological attitude. I guess women are not the only ones that have periods," he wrote.

What was likely the most bitter conflict thus far between leaders of the two countries took place between Carter and Schmidt in 1980 on the island of Cipriani in the Venice lagoon, where Carter was staying during the Economic Summit Conference. Schmidt was already annoyed when he arrived for the face-to-face because U.S. security officials had initially prevented him from entering and then Carter did not appear to greet him personally. The German's behavior, Carter later noted, was "unbelievable." The meeting lasted for around 40 minutes, during which the two leaders didn't try to hide what they thought of each other. But immediately afterwards, all sides did what they could to play down the disagreement.

'Desire to Be Provocative'

This time, however, the discord runs much deeper. Trump's actions are triggering horror in Berlin no matter where you look. Both among Merkel's conservatives and within her center-left coalition partner, the Social Democrats, Trump is seen as a security risk for the entire West. "It's not about the most outrageous tweet or the best television ratings, but about our joint security," says German Foreign Minister Heiko Maas. Europe, he continues, cannot accept a situation in which "that which has been built up over the course of decades is wantonly damaged simply out of a desire to be provocative."

"With his intentional division of the Western alliance and his contempt for its values, Trump is endangering world peace," says Martin Schulz, the former head of the SPD and ex-European Parliament president. "We are not militarily naïve, and more than anything, we cannot allow ourselves to be treated as subservient."

Despite the shared annoyance with Trump, however, the disagreement over defense spending could drive a wedge between the two coalition partners in the coming years. "Germany can never be allowed to become a robustly armed military power like the U.S. Spending 4 percent of our gross domestic product on defense would be crazy," Schulz warns. "That would transform Germany into a military power at the heart of Europe."

Among conservatives, however, Germany's ultimate adherence to the 2-percent goal set out by NATO is viewed as necessary. "Germany must make a sustainable correction here, out of solidarity with our partners, out of responsibility for the cohesion of the EU and NATO, and out of our own foreign policy interests," says Norbert Röttgen, a foreign policy expert with the CDU. "If we don't deliver, others will have more influence over the long term."

Finance Minister Olaf Scholz of the SPD is opposed to increasing defense spending beyond the levels already agreed to with Merkel's conservatives. He also indirectly accuses the CDU of being responsible for the currently dismal state of the Bundeswehr, Germany's military: "In recent years, the development of the Bundeswehr has been largely neglected," Scholz says.

The stability of NATO "cannot just be measured by looking at the spreadsheet," Scholz says, in a clear reference to Trump. "You also have to work together in fairness and solidarity." At the G7 meeting of finance ministers in early June in Whistler, Canada, Scholz expressed his deep concern over the trans-Atlantic relationship to his U.S. counterpart Steven Mnuchin. He told Mnuchin that he has the feeling that for the first time in postwar history, the U.S. is interested in damaging Germany.

Justified Fears

Fears are rising in the U.S. as well -- at least outside of the Trump camp -- that the president is currently in the process of destroying 70 years of American foreign policy. This week's NATO summit was just the most recent proof of how justified such fears have become.

Germany, for its part, must address the question as to how it should deal with the animosity coming out of Washington. Can Trump simply be ignored until his tenure comes to an end? Will everything return to normal after that? How much should Berlin be willing to accept?

None of those questions are easy to answer, and Trump's penchant for unpredictability makes it that much more difficult. Merkel got a dose of that unpredictability just before the NATO summit came to a close. The heads of state and government were engaged in their final working meeting of the summit on Thursday afternoon and a tired Merkel was reading out her statement on Afghanistan.

Suddenly, Trump was standing directly behind her. He tapped her on the shoulder and indicated that he wanted to say his goodbyes. As Merkel rose in bewilderment, Trump gave her a hug and then planted a kiss on her cheek. He turned to the gathering of NATO allies, grinned and said: "I love her."

By Markus Becker, Matthias Gebauer, Martin Hesse, Julia Amalia Heyer, Christiane Hoffmann, Martin Knobbe, Susanne Koelbl, Veit Medick, Peter Müller, Ralf Neukirch, René Pfister, Christian Reiermann, Christoph Schult, Samiha Shafy and Klaus Wiegrefe

Brexit and a not-so-special relationship

Brexiters promote the delusion Britain and the US can recreate a mythical partnership

Philip Stephens

Politics throws up excruciating coincidences. Just as Theresa May’s cabinet cracks under the strain of Conservative infighting about the shape of Brexit, Donald Trump tips up in Europe with a reminder that the Atlantic alliance is crumbling. Until 2016 British foreign policy blended partnership in Europe with influence in Washington. Now its ship of state is navigating without a compass.

Those who enjoy politics as reality television have been feasting this week. The US president has smashed the furniture at Nato. Boris Johnson has quit the Foreign Office, charging, in Trumpian terms, that Mrs May is leading a deep state conspiracy to turn Britain, post Brexit, into a “colony” of Brussels. The cabinet’s Brexit negotiator, David Davis, also resigned, albeit with a measure of the dignity that forever eludes the former foreign secretary.

Mr Trump and Mr Johnson share an abiding narcissism. There is something ineffably childish about the way they look at the world. The president is unabashed in his mendacity; Mr Johnson’s self-crafted image as a maverick scarcely conceals a record as a cheat and a liar. His officials marked down the former foreign secretary as possessed of a front-rank ego and second-class mind. His resignation letter, an extended tantrum, was true to character.

Mr Johnson’s departure will restore some intelligence and probity to British diplomacy; it will do nothing to end the Brexit headache. Mrs May has come up with a plan for the future relationship with the EU that will satisfy no one. And it may be there will be no version of Brexit that will command a majority in the House of Commons. For his part, Mr Johnson has returned to his obsessive quest for the keys of 10 Downing Street. This looks like self-delusion. Yet something of the same was said of Mr Trump’s run for the White House.

America had scarcely stopped counting the votes in the 2016 election before Mrs May had dispatched her invitation to Mr Trump: Come to Britain. Meet the Queen. Have your picture taken at Buckingham Palace. American leaders love the pomp and pageant, and the Queen has serious pulling power. This was before, though, the Brits had caught clear sight of Mr Trump.

This week’s visit was duly pared down from a state occasion — with all the paraphernalia and regalia — to a series of “working” meetings. The president’s time in London has been cut to almost nothing to avoid collisions with public protests. He still gets to meet the monarch, but at Windsor. His talks with Mrs May will be at her country residence, Chequers. He will then be packed off to the golf course he owns in Scotland.

The Queen likes and admires Barack and Michelle Obama. Aides speak of a genuine warmth in the relationship. They have not said anything about what she thinks about taking tea with Mr Trump — they do not have to.

To be fair, most of Mrs May’s predecessors would have issued the same invitation with similar speed. British prime ministers have been burdened with the notion of a “special relationship” with Washington ever since Winston Churchill popularised the phrase in his 1946 “Iron Curtain” speech in Fulton, Missouri.

Britain’s wartime leader embellished the notion with all sorts of flummery and myth about eternal bonds, familial ties and cultural affinities. He imagined, of course, a partnership of equals. When he had sat down in Potsdam with Harry Truman and Joseph Stalin a year earlier it had been as one of the “Big Three” — a phrase the British clung to for another decade. The task of prime ministers since has been to preserve the idea of a unique bond even as the realities of relative power have widened beyond anything Churchill imagined.

Some have been more successful than others. The English patrician Harold Macmillan struck up an unlikely rapport with John F Kennedy, an Irish-American Catholic. Margaret Thatcher’s unabashed Atlanticism gave her permission to speak her mind to Ronald Reagan. Even before the Iraq debacle, Tony Blair’s courting of George W Bush risked veering too close to that of supplicant rather than partner.

In other circumstances, the Trump presidency might have been an opportunity to normalise things — to acknowledge the strategic importance of the alliance with Washington while re-affirming Britain’s right to make its own choices. Having blown up the bridges to Europe, however, the Brexiters have promoted instead the delusion that Britain and the US can recreate the mythical special relationship.

Fine, says Mr Trump, as long as Brits can be force-fed American chlorinated chicken and hormone-treated beef and will sign over the National Health Service to US businesses. The president does not believe in Atlanticism. Nor in alliances grounded in shared interests and values. The US has to win — every time.

As for Brexit, Mr Johnson and his gang are promising to vote down any deal that Mrs May brings back from Brussels. Oddly enough, this provides the only glimpse of light for a nation watching the twin pillars of its foreign policy being reduced to rubble.

If Mr Johnson, for once, is true to his word and wrecks talks with the EU27, the result is less likely to be a chaotic cliff-edge Brexit than an indefinite extension of the status quo and, ultimately, a second referendum. Thankfully, the former foreign secretary has not thought this one through.

Time to Untie the ECB’s Hands

Stefan Gerlach

ZURICH – The European Central Bank’s recent announcement that it will try to end asset purchases by this December means that it has confidence in its ability to achieve price stability. But those who decided that price stability should be the ECB’s single, overriding policy goal may have shot themselves in the foot, not least by denying policymakers much-needed flexibility.

The ECB defines price stability as inflation “below, but close to, 2% over the medium term.” That is a lower inflation rate than even the Bundesbank achieved during its celebrated pre-euro history, and it is a tighter target than virtually all other central banks pursue. For some, too much of a good thing is apparently wonderful.

To be sure, the ECB’s definition of price stability was not a problem during the period between the global financial crisis and the adoption of quantitative easing, when inflation was well below 2%. To those who believed that monetary policy had been too tight, the ECB was right to do whatever it could to push inflation up toward the target range.

Yet for those in favor of the ECB’s “stability-oriented monetary policy” – a term suggesting that others disregard the risk of monetary instability – the price-stability objective has evidently become too constraining. From their perspective, asset purchases never should have happened, and interest rates should have been raised long ago, despite the eurozone’s too-low rate of inflation.

It is safe to assume that those who hold this view were highly supportive of the ECB’s hardline price-stability objective. They would contend that low interest rates raise financial-stability risks that grow more acute with time. That is probably true. And yet it ignores the fact that raising interest rates prematurely can also fuel financial instability. In any case, the argument is moot, because the ECB’s mandate rules out any rate increase that could conflict with price stability.

Of course, those in favor of higher interest rates would counter that inflation of 1% or even less is in fact “close” to 2%, implying that price stability has been achieved and monetary policy can be tightened. In other words, they do not share the view that “close to 2%” means something in the range of 1.7-1.9%. But this is a pernicious argument. Running inflation below the level debtors had reason to expect translates into high real interest rates, which in turn risks triggering defaults among borrowers, including mortgagors, firms, and governments.

Undershooting the inflation target is also dangerous because inflation expectations and interest rates will decline over time, which makes it more likely that the ECB will reach the zero lower bound when the next downturn occurs. It also increases the likelihood that asset purchases will become necessary once again.

Those in favor of a policy tightening would also note that low rates are problematic for savers, insurance companies, and pension funds, whose portfolios often include few equities. But nowhere does the ECB’s mandate say that monetary policy should be set in the interest of savers or the financial industry.

As a practical matter, the ECB’s price-stability objective, originally designed to protect the eurozone from Italian-style inflation, has ended up protecting it from German-inspired deflation. But just because the ECB’s mandate has forced it to do the right thing on occasion does not mean that we will be so lucky in the future.

The global financial crisis required advanced economies’ central banks to contend with circumstances that those who crafted their mandates scarcely could have imagined. The fact that things often do not work out as expected is precisely why central banks’ objectives should be written to give policymakers flexibility – or poetic license to bend the rules – when extreme events occur. Otherwise, policymakers will be less effective than they otherwise could be.

Because the ECB’s price-stability mandate is legally codified by the Treaty on the Functioning of the European Union, it cannot be altered without a treaty amendment. But the phrase “below, but close to, 2%” is the ECB’s own, and thus can be changed with the stroke of a pen.

As such, the ECB should consider two alterations. First, it should get rid of the ambiguity inherent in the words “close to,” by setting a point target to provide clarity to the public – and to ECB Governing Council members – about what its monetary policy aims to achieve. Whether that target is 1.8% or 2%, or whether it is surrounded by a range, is less important.

Second, the ECB must clarify how financial stability and business conditions factor into its policy decisions. Many have argued that lengthening the policy horizon by precisely defining “the medium term” would give policymakers room to pursue other objectives temporarily. After all, because financial crises and deep recessions are deflationary, they, too, jeopardize price stability.

With the ECB finally exiting the last crisis, now is a good time to reflect on what lessons it has (or should have) learned. The ECB must not delay in positioning itself for the next downturn.

Stefan Gerlach is Chief Economist at EFG Bank in Zurich and Former Deputy Governor of the Central Bank of Ireland. He has also served as Executive Director and Chief Economist of the Hong Kong Monetary Authority and as Secretary to the Committee on the Global Financial System at the BIS.

BoJ steps in again after 10-year bond yield hits 18-month high

Japan’s second intervention in a week comes ahead of central bank meeting

Emma Dunkley and Hudson Lockett in Hong Kong and Leo Lewis in Tokyo

There is speculation that the Bank of Japan will announce changes to the balance of its ¥6tn-a-year exchange-traded fund buying programme © Bloomberg

Japan’s central bank has made its second intervention in a week to support the domestic bond market after the yield on 10-year government debt hit its highest in 18 months.

The Bank of Japan on Friday launched a special bond-buying operation to suppress yield, which moves inversely to price, back below 0.1 per cent. Investors had sold out amid reports that the central bank might scale back its stimulus programme next week.

In a rare move, the BoJ offered to buy unlimited amounts of the 10-year notes at a yield of 0.1 per cent, 1 basis point lower than its operation on Monday at 0.11 per cent. The yield on the ten-year note closed a basis point higher at 0.09 per cent.

Analysts said Friday’s move by the BoJ was in part driven by mounting speculation over next week’s meeting and the various theories in the market about what — if anything — it planned to announce.

The central bank used Friday’s operation — and the surprise setting of the purchase rate 1 basis point lower than its operation on Monday — to show the market that it can change its fixed rate operation at any time, said Shuichi Osaki, Bank of America Merrill Lynch’s Japan rates strategist.

There is additional speculation that the BoJ will announce changes to the balance of its ¥6tn ($54bn) exchange-traded fund buying programme.

That scheme is based on a basket of stocks — including Uniqlo owner Fast Retailing — which is more heavily weighted in the Nikkei 225 average that has seen huge swings in recent sessions relative to the less volatile Topix index.

Nicholas Smith, Japan strategist at CLSA, noted the potential for more volatility if the BoJ did make changes to further favour ETFs, based on the Topix. “Do not underestimate the impact from changing ETF weights,” he said.

Japan’s central bank faces pressure to rein in its ultra-loose monetary policy, which has failed to boost inflation to its targeted level, while weighing heavily on bank profits. The yield curve control policy was introduced in late 2016 in part as a measure to offset some of the pain of the negative interest rate policy it introduced earlier that year.

Analysts who expect the BoJ to move sooner rather than later said it would do so because the policy is losing its effectiveness in terms of protecting the banks.“

The BoJ views the steepness of the curve as an important factor in determining bank profitability,” said Joachim Fels, global economic adviser at Pimco, the US-based bond fund manager. “That is why we think at some stage, maybe already at the next meeting . . . we may see a step towards allowing somewhat higher 10-year yields.”

He added that 10-year US Treasuries were more attractive, as the yield is much higher and the price has “room to rally” if “something goes wrong” in the global economy.

“Our view is that yields can go back to 3 per cent in the US . . . I wouldn’t even rule out that we move to 3.25 per cent, but we would typically see this as a good buying opportunity if and when this happens,” Mr Fels added.

Takahiro Sekido, an analyst at MUFG, said recent media reports on the BoJ have caused Japan’s currency to strengthen. The yen was fractionally stronger on Friday, rising 0.3 per cent to ¥110.95 per dollar.

Mr Sekido said that Haruhiko Kuroda, BoJ governor, was “unlikely to outline his view of monetary policy entirely” at the meeting next week.

We Give Up! Part 3: China Stops Deleveraging,

China’s growth over the past decade has been not just impressive, but historically unprecedented. No single country has ever added this many factories, roads, airports and entire new cities in so short at time.

But the transformation has come at a cost, in the form of a debt bubble that’s starting to look unstable. Beginning in 2015 non-performing loans and bond defaults both started trending upward and are now close to levels at which the risks become systemic. The following three charts tell that tale:

China debt
China non-performing loansChina corporate bond defaults

In response, China’s government has been trying to slow the bubble’s expansion without bursting it (which a quick glance at America’s track record would imply is impossible). Among other things, Communist Party leaders (that’s right, the Party is still in charge) have been tightening bank lending regulations and telling local governments to cut back on the empire-building.

But then – and this is how it always works for debt-addicted systems – a couple of things happened to make staying on the wagon much harder. The US began a trade war with China and other major trading partners (though mostly with China), which will if it continues, slow down global trade and cut the inflow of foreign capital to export-dependent economies. And the past couple of years’ credit restrictions have started to bite, slowing China’s domestic economy and making it harder to provide jobs for all the people who have come to expect upward mobility and might take to the streets if they don’t get it.
So – again as addicts tend to do – China has decided that maybe it’s wise to delay the tightening for a while and allow the leverage machine keep running. According to yesterday’s Wall Street Journal,

China’s Effort to Control Debt Loses Steam
BEIJING—China is letting up on its drive to keep a lid on debt growth as it faces a softening economy at home and escalating trade tensions with the U.S. 
Senior Chinese leaders led by President Xi Jinping have been sending unmistakable signals that the campaign to rein in financial risk isn’t the overriding priority it has been.  
Financial regulators are delaying the release of rules to curtail risky lending by banks and other institutions out of concern that the regulations would choke off a source of funding and rattle financial markets already shaken by worries over trade and the economy, people familiar with the decision said. 
In a turnabout, the State Council, China’s cabinet, stopped hectoring city halls and townships to restrain spending and instead last week launched an inspection to urge them to speed up already approved investment projects to re-energize growth. The central government often uses inspections as a way to evaluate local officials and get top-level directives across. 
An April meeting of the Politburo, the inner sanctum of power, offered an initial sign of the shift in government priorities toward growth. Mr. Xi, who presided over the meeting, called for expanding domestic demand as authorities continued to contain financial risks. Such pro-growth emphasis had been absent in Politburo meetings since 2015. 
China’s economic growth has been on a controlled descent for most of this decade, propped up at times by shots of easy credit that have helped make debt a long-term threat for the world’s second largest economy. With growth still buoyantly above the government’s 6.5% target, Mr. Xi has taken aim at debt and other financial risks the past two years to put the economy on sounder footing. 
Now, that campaign is taking its toll. Signs are building that the economic expansion is losing steam—from weakening investment in factories to anemic household consumption and rising corporate defaults. 
The trade fight with the U.S. puts growth further at risk, making Mr. Xi’s initiative look unsustainable, government advisers said. 
The central bank in April began freeing up more funds for banks to make loans. The Chinese leadership is expected to further loosen China’s fiscal and monetary stance at a meeting later this month of the Politburo, government advisers and economists said. 
Debt levels, especially for companies and local governments, have soared since China unleased a massive financial stimulus to ward off the 2008 financial crisis. Debt stood at 242% of economic activity at the end of 2017, according to Macquarie Group.  
“If China has an across-the-board loosening up again, borrowing by state-owned enterprises might get more relentless,” said Zhu Chaoping, a market strategist at JP Morgan Asset Management. “This is the risk here.”

To paraphrase Joni Mitchell, all credit bubbles meet this same fate someday, as the prospect of stopping becomes too scary to contemplate. So the debt binge continues, with leaders promising to “contain financial risks” when really they’re just riding the tiger, hoping to hang on until … well, something happens to save them.

But experience – and we have a ton of it now – teaches that nothing can “save” a system that has taken on way too much debt. “Inflate or die” becomes the guiding principal right up to the end.