Geopolitics: Europe’s Place on the Global Stage

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Welcome to Fixing Your Interest. Today’s episode features two leading voices in global economics and policy. The Right Honourable Gordon Brown—Chair of PIMCO’s Global Advisory Board and former UK Prime Minister—shares insights shaped by decades in government and international finance, plus his ongoing work with the UN and global development. Joining him is Andrew Balls, PIMCO’s CIO for Global Fixed Income. Based in London, Andrew brings over 25 years of experience in macroeconomic strategy and portfolio management. Together, they explore Europe’s role in a fragmented world—from rising protectionism to the future of security, innovation, and growth.

ANDREW: Welcome to this episode of the podcast. I'm here with Gordon Brown. Gordon we're going to be talking about geopolitics. Let's start with the US. You said ahead of President Trump's inauguration, that we were going to be facing a changing world order not quite a year later, but how do you think things are progressing?

GORDON BROWN: I think the world's never going to go back to where we were before, but I don't think you should blame President Trump as if he's the cause of change. I think what's happening is over a long period of time, because of the changing balance of economic power in the world, we're moving to a more multipolar world where it used to be unipolar. Now, that doesn't mean to say that every power has equal power.

It means we've got multiple decision-making centers. So, you've got China, you've got Russia, you've got the European Union, you've got America as major players in the game. The second thing is, we're moving to a more power-based order from a rules-based order. So, if you think of the last 30 or 40 years, the rule of law, democracy, international cooperation, humanitarian aid, you know, all these things were almost taken for granted.

The rules are going and it's a power-based order where might seems to be right and certainly when you look at Ukraine and you look at Gaza, it really is about a power play by major countries. And I think the third thing, and I think Andrew, some of the things that you've done is reflected this is politics is driving economics, whereas when I was the finance minister, economics was driving politics.

And what that means in practice is protectionism. So, you're making decisions about national interests that are not directly related to an economic analysis, but about the protection of your country. Perhaps in some cases for security reasons, industrial policy, you're trying to become more self-sufficient, again, because there's a protectionist element within your country. So, politics is dictating economics in a way it didn't do before. And underlying that, I think there is a greater nationalism.

So countries are pursuing the national interest, mercantilists, you may say, in some cases anti-immigrants, certainly anti-trade in some countries. So the world is very different now. I don't see us going back to the unipolar order. I don't see the rules-based order coming back in its old form, although I think we could remake it.

And at the same time, the question is, are we moving to a one world, two systems, China and America, China centric block, or an American centric block, or are we moving to spheres of influence, or can we restore some semblance of a global order that every country will sign up to?

ANDREW: I want to come back to that just before that on the US, China specifically how do you see the current trajectory? Is this manageable situation or are we going to face, you know, an extended period of confrontation? How is this going to play out do you think?

GORDON BROWN: I think uncertainty because you will have deals every now and then on individual issues. So, you may have a deal on rare earth, you may have a deal on technology, you may have a deal on something like some aspect of trade. But I think there are so many long-term unresolved issues that this is going to be a burning bone of contention over the next few years. So you've got Taiwan, which is an outstanding problem.

Will China seek to take it over? You've got the religious minorities in China and people's view that there is suppression taking place. You've got the whole issue of Hong Kong, which is still a live issue about its relationship with China. But then you've got a whole series of economic issues about the way China is using industrial policy over capacity in its economy, flooding markets overseas, how it treats its currency.

Is it deliberately devaluing? What about intellectual property? And whether there's surveillance of other countries. You can go through the issues. What is it going to do in the environment? These are all issues where America and China don't share the same positions. AI is a good example because AI is governed in one way and in the American sphere and in another way in China where it's more state control.

And with a lot of surveillance of individual people. So, can you come to any common agreements on this in the future? And I think these will remain outstanding issues for a long period of time. And I cannot see one meeting or one set of meetings ever resolving this. This is a question of whether you can find a basis for cooperation in the future, then gradually sort out some of these issues that are contentious. But China is already decoupling its trade from America.

Trade in America is falling quite heavily, and it's moving its trade towards the global south it’s causing some sort of reactions actually in the rest of Asia where they feel their markets are being flooded so that some of the Asian countries are putting protectionist measures in place. So, this is a much changing world, but you're not going to go back to where it was. The question is, can you find a modest vivendi for the future?

ANDREW: Yeah. You are the former Prime Minister here, of course. Mark Carney, our former colleague is, in, the Prime Minister of Canada. Now, as the, you know, medium-sized countries where rules-based orders are clearly beneficial, what can you do, do you think, the UK government, Canadian government and others to try and get back, I mean, towards a rules-based system away from the more power-based system?

GORDON BROWN: So, what's happened in the last few months is since President Trump has come in, every country has been pressured into doing a bilateral arrangement, a bilateral negotiation with President Trump. So Canada and Britain have a great deal in common. We're not only, you know, what's 40 million, 60 million countries of that sort of size, we're also very big trading nations.

So we have depended on trade for our livelihood in a way that America does not rely in as the same percentage of its national income on trade. So we need a trading system that works, both Canada and Britain, but so does the European Union, which thrives on trade and so do many other parts of the world. And what is perhaps surprising is that new alliances are not being built.

So, okay, if America doesn't want to join, perhaps Canada, the European Union, the United Kingdom, and even countries in the CCTP, the comprehensive trade partnership in Asia, now that would be a group of about a billion people.

You could see them having a common interest, UK and Canada, a member of that organization, the EU isn't at the moment, but you could see there's a common interest in them coming together and setting rules, both for trade and maybe for things like AI and other sort of intellectual property issues, and so on and so forth.

And of course, you can see other alliances developing for security. So, NATO is obviously expanding and that includes America, of course. But you can see security alliances developing in the Pacific as well. So, what I think you’re going to see is a lot of over time, it's all been bilateral the trading deals in recent months. But I think over time you will see alliances developing, and you will see a transactional basis where people may be a member of an alliance on security, but not on economic matters.

There may be an alliance simply to deal with cyber security or AI or something like that. India is a classic example where they're wanting a relationship with Russia for whom they're buying oil and gas, and they want a relationship with America for weapons and arms. And they want a relationship with China now for trade, even although China is of course a rival and there are border of disputes. So, India's taking a very transactional view to this new world.

And so, there'll be some countries that are fence-sitters, there'll be some countries that are hedgers, and they'll hedge the bets. Some countries will be swing states. So move between supporting an alliance here and then moving to another alliance there. So the world is in flux, partly because it is multipolar in nature more than it is unipolar now.

And therefore, countries will be trying to take their best interest at heart, by making the kind of alliances that suit them, and this is probably the pattern for the next few years, but it may cement with a China block and an American block or with spheres of influence where you've got no choice but to be part of this group, but at the moment, I think it's far more fluid.

ANDREW: You've met President Xi many times over the years. From the China perspective, what does he want to achieve you know, a lot of commentary you get that this is working out pretty reasonably from the Chinese point of view, but how, what's he trying to achieve? What does he want to achieve? 

GORDON BROWN: Well, I think the interesting thing is whether you accept the China view of the world. Because when I last met to President Xi, he said, we have got to avoid two traps as China. And this to me was very interesting 'cause you don't normally meet a politician, another politician.

And he talks in theory, he said, we've got to avoid the middle income trap, which of course is China avoiding being essentially caught and trapped in middle income status and never becoming a high income country because he's promised his people, and he's judged on that, that China will move to a high income economy. And that's clearly their ambition. But he said, we've got to avoid a second trap. And he called it the Thucydides trap. And that is when the rising power challenges the entrenched power.

So he's telling me as he's telling other people, obviously, that China wants to avoid this contest with America, and it wants to escape, if you like, what happened to Athens and Sparta, what happened to Germany and Britain, what, you know, what's happened in past histories where a rising power has got into a war with an entrenched power China versus America. Now, do you believe that, is that what he really wants?

I think China has become more self-confident. I think China has become more aggressive in the way it treats the world. I think also China thinks it's got a lot of, this is what you were talking about when you asked the question, I think it's got a lot of weapons in a trade war. It's got the rare earth but it's also got, you know, battery development.

It's, there's a lot of raw materials for which China is the major source. America, on the other hand, has got a huge amount of advantages as well. So, you know, it's difficult to see how in the end, all these issues can be resolved. But I would say that President Xi will have to remember, even if he has designs on Taiwan, and a lot of people feel that 2027 is the year when he might choose to blockade or even invade Taiwan.

But he's got to bear in mind that his success is dependent on him giving economic prosperity to Chinese people. And there's a lot of Chinese people who are losing out a lot of youth unemployment, a lot of problems in the real estate market, a lot of problems with high levels of debt of local authorities.

A lot of problems, 'cause it's got, they've got over capacity and steel and other industries. So, he has got to bear in mind that he will be judged as most leaders are on whether he can bring economic success to the country. And of course, in the absence of elections, it's even more important that he can show he's got an economic record that people are not going to demonstrate against. So, I think the verdict is open as to whether he is seeing himself as a regional power, China as a regional power, or seeing China in a sense trying to take leadership.

ANDREW: Okay. Yeah. So, ongoing uncertainty, the politics driving the economics making it harder for investors to navigate, I wanted to ask you about Europe. The idea is in this podcast we have a European focus. So US, China geopolitical challenges, Europe stuck in the middle. What are the implications for Europe trade security as well, given of course, what's happening in Ukraine?

GORDON BROWN: So we've got to remember for the whole of the world, that trade was expanding at twice the rate of growth for many, many years. And now, trade is stalled. It's not collapsing, of course, because there's a lot of regional trade and there's a lot of trade within blocks. But global trade itself is, is not going to be as strong in the years, the years to come. And that really affects trading economies.

Europe has been trade dependent, particularly on being able to sell massively to China particularly Germany and Netherlands. Europe is security dependent on America, and that's what it's trying to break from with spending more on defense but wanting the American umbrella. And of course it's been energy dependent on Russia and now to some extent on the Middle Eastern America from which it's importing quite a lot.

So Europe has got to be a successful trading nation to pay for its security, to pay for its energy. And therefore, the problem that Europe's got is that we do not seem to be able to break out of this sort of 1% trend growth. And it's an issue of course that is now causing, because of the pressures of spending on defense without the degree of growth, you want to pay for it, the pressures of aging.

Europe's got an aging population, the pressures of the energy transition, which is costly, of course Europe is now starting to run up debts and deficits, and even Germany and Finland, which have probably been with Netherlands you know, the most abstemious of countries are raising the debt break in Germany is going.

So I think the challenge for Europe is can it develop the new industries? Clearly it was very successful in the old industries and engineering in Germany, very successful, a car industry, incredibly successful for many years, but cannot develop the new industries and the new technologies within the old industries to make it successful again.

And then, you've got to look at, well, what is the level of investment that's taking place in Europe? And can Europe attract more investment? There's an attempt at a savings and investment union. Again, it used to be called Capital Markets Union and so on and so forth. But the record of success in raising the level of investment has not been good enough.

 And therefore, Europe has not got the major technology companies, the Amazons and the Apples and the Facebooks that America has. It's got some very good high technology companies in Netherlands and Sweden and so on and so forth, and some in Germany and France.

But it hasn't developed the new technologies in the way it should. And the question really is, can Europe get the benefit of this AI productivity revolution that is going to happen sometime, or whether that's going to go to America and China? And I think that is really the economic question for Europe.

The security question, of course, about being in a sense dependent on America, but still wanting America to be part of the NATO and Atlantic Alliance is sorely tested in Ukraine where it cannot be said that we are being successful when Ukraine is what, 28%. Well, a large part of the Donbas is now controlled by Russia.

ANDREW: On Germany, you know, one significant change this year is the German approach on fiscal policy. How real do you think the change is? There's a lot of excitement then some of the people who I know who know Germany best, think that it will be hard to spend the money. There'll be lots of reallocation of spending, which is called defense spending. But how big a change do you think it's going to be, and is there any reason for optimism in terms of this feeding into economic growth?

GORDON BROWN: It is really interesting because Angela Merkel won elections on the debt break on saying that she was going to be so abstemious in the way she used public money and the debt break survived. And it's almost an irony that it's a Christian Democratic Union chancellor who is the successor of Merkel in her own party that is abolished the debt break.

But they've also, of course, signed up to the escape clause in the Stability and Growth Pact in the European Union. So you've got the debt break removed possibly German debt could rise from 60% to 80%. So, I mean, that is a major, major shift. And some people say that that is as big as what was happening when they recap capitalized east Germany. So it, theoretically, it's a huge change.

The question is, will the money be spent and will the money be spent on the things that matter for the future? Because there's all sorts of tensions in a coalition when you've got the Social Democrats and the Christian Democrats question about social security spending, questions about employment reforms, questions about welfare reform itself.

And it may be that A, a lot of the money will not be spent because the projects are not developed in time, B, that some of the money will be diverted to some of the social security and welfare issues. So it is not yet clear whether this is a permanent boost to the German economy. I mean, possibly it's only about a third of 1%, even if it's successful in the next year or two. And of course, the European economy Germany’s ] growing at 0.2% this year.

So Germany's got a long way to go to recover the rates of growth that had 10, 20 years ago. I think what's really interesting is the Stability and Growth Pact has got what they call an escape clause, because what, 10 years ago, 20 years ago, any one of us would've said, this is Europe giving up on its fiscal prudence by talking about escape clauses. But when you actually look at the small print, I think less spending is being allowed than seems to be apparent on the surface, when you talk about things like escape clauses.

ANDREW: On France fiscal challenges, in France, you know, political challenges in France, we've been quite impressed that the markets of prices is a pretty French specific issue, no real spill over into other sovereign markets into credit markets.

I think it's another sign of kind of greater stability in Europe. So I wanted to ask you about both those things. First, the French challenge, and then secondly, the broader stability of Europe and all sorts of challenges from the US from the Ukraine, from France, but stability in terms of European markets.

GORDON BROWN: So President Macron is in this position where his parliament is divided in three ways. You've got the socialist left, you've got the far right, and you've got a middle, and they cannot find a basis on which they can govern in a way that is continuous. And so, you keep having new prime ministers, you keep having votes in parliament, you then have the relaxation of what was his central policy, the reform of the pension laws.

So France is probably going to go from if you like, parliamentary sort of vote to parliamentary vote until there's some resolution in a further election and maybe it will take until a new presidency for that to happen. But it does mean that France is stuck and it cannot make the big decisions about its future.

So if I'm saying Europe's got to invest in AI and the new technologies, the question is, can a government, because so many of these decisions rely on national governments, not European Union decisions, has it got the power to make the kind of decisions that are vital for the future? The background, however, in Europe is not that, not just France, but almost every major country has seen the rise of this populist right.

And so, it's a nationalist populist right Le Pen and France voters in Netherlands, AfD, the party in Germany, Auburn in Hungary, Slovakia, Belgium, right across and Britain as well. So you've got all these countries where leading in the opinion polls at the moment are parties that are against immigration, against environmental change usually and also quite resistant to trade, actually quite protectionist on trade.

So Europe, a trading economy has got to move forward and develop the products and processes that can actually sell to the rest of the world. And then you've got this pressure, which is more protectionist coming in on Europe. And so, it's difficult to see how you can resolve this quickly. And it does mean that when you've got national governments that are quite uncertain about their future, the European Union is not going to work as effectively as it should.

So, I see Europe being able in the next few months and years to benefit from lower interest rates, to benefit from some fiscal boost, to benefit in a way from probably some relaxation of the trade tariffs by negotiation. So there are possibilities of Europe continuing to grow, but whether Europe can get to higher trend rate of growth quickly, I think is the issue that it faces.

ANDREW: Clearly there's other challenges in Europe, war in Ukraine, the challenges in the Middle East. I wanted to ask you about the difficulty for governments in Europe to focus on domestic issues, economic agendas at the same time when such big demands in terms of foreign policy. How does this, I mean, you've lived in this world as well. How does this impact the ability of governments to focus on the domestic priorities when there's such important international affairs to focus upon?

GORDON BROWN: So the irony, I think in modern politics is that prime ministers and presidents have got to spend so much of the time on foreign policy issues at the expense of an attention to some of the domestic concerns.

But they get absolutely no credit for it when it comes to the electors, because the electors are judging you on whether you can create economic growth, raise standards of living, improve your public services, and if you're spending all your time having to deal with Ukraine, Gaza, the China-America relationship, tariffs, all these are internationally sort of important issues. And you can't ignore them.

And in most cases now, it's got to be leader to leader contact to be able to resolve them, and we're far away from the days when you just handed it over to your ambassador. People expect because of video, but also expect because of the ease of travel that people can actually meet each other very quickly.

And so, I do think it is an irony of modern politics that you're judged as leaders by the success you can bring to the local and domestic economy, but you have to spend so much of your time on foreign affairs. Now, if you take Ukraine, it's taking up a huge amount of time because, you know, there's so much uncertainty about what the American position has been and will continue to be.

And yet, Europe, all the European countries, are at risk in some way, if NATO fails to be effective in holding back and the Ukrainians are ineffective in holding back Putin. But we're also drawn in Europe into what's happening in the Middle East. Because it's an important element for oil supply, but also all these countries in Europe have been committed in one way or another to the creation of a Palestinian state.

And of course, Europe is much affected by what happens in China because so much of European trade in recent years has been with China. And if the relationship becomes damaged and if there's export controls put on by China or by Europe on top of the tariff issues with the United States, then you've got to spend all your time talking on these issues as well.

So this is a very complex, well partly because as I said at the beginning, we've moved to a multipolar world. So you know, maybe in the past you could phone up America and you would know what was going to happen because they had so much dominance. Now you've got to be aware of all the other centers of decision making power, not as strong as America, but centers of decision making power that you've got to deal with in their own right

ANDREW: Here in the UK, Keir Starmer has received, plaudits in terms of his efforts in terms of international diplomacy, but clearly there's challenges domestically, the government's committed to the growth agenda. But this is a difficult challenge here in the UK as in many other countries. What should the government be doing to push forward a growth agenda? What would you advise?

GORDON BROWN: So this is exactly the problem that most European leaders are also facing, that they're spending the time and having to spend the time on foreign affairs. And yet, the issue on which they'll be judged is whether as they promised to do, they would increase the growth potential of the British economy. So maybe 20 years ago, the British economy trend growth rate was over 2%, maybe even nearer two and a half percent.

In the last 15 years, it's really fallen to something like one to one and a half percent. And therefore, if Britain is going to succeed in the future, it is got to be able to raise its performance. And that requires productivity growth. You know, can rely on immigration, but that's a controversial issue in Britain as in every other European country. So you've got to increase productivity growth if you're going to get to this higher level of growth.

Now, the question is, is there sufficient innovative capacity within the British economy so that Britain can create, as the French and the Germans and others are trying to do, world leading companies that have got the newest technology, are sophisticated in their inventiveness can sell to the rest of the world with huge export potential, because that's where the future of any of these European countries lies.

And the problem at the moment is we don't have companies of the size of the Amazons and the Apples and the Facebooks in Britain or in the rest of Europe. And I think every country's grappling with this, that we know AI, and IT generally is the key to productivity growth in the future. It's probably the diffusion of it to new companies and to small and medium sized companies that will actually create the productivity growth that you need.

Because then it's across the whole economy. We've got great universities in Britain, high standards of research. We've also got great creative industries in Britain, and that's also a source of future growth.

I think the question is can Britain raise its trend rate of growth over the next few years based on clusters of innovation that develop into very successful, job creating and, well paid job creating industries with a good service sector around them. And I think that's the challenge that Britain's facing, but it's the challenge that every other government in Europe is facing at the moment.

ANDREW: Yep, absolutely. Wanted to change and talk a little bit about your role at PIMCO, you chair our Global Advisory Board. I just wondered if you could make a few comments on that. I'm always really interested in what people disagree about. So what are the big disagreements when the Global Advisory Board meets at the moment in terms of the outlook, the issues we've been discussing?

GORDON BROWN: So the fascinating thing is you're getting views from all over the world and that's why it's called the Global Advisory Board. So you've got Janet Yellen and Josh Bolten from America, you've got Michele Flournoy, who's an expert on Defense around the world, and really a world leading expert, you've got Raghuram Rajan who used to be governor of the Central Bank of India, but also was at the IMF in a very senior role.

So we've got the advantage as we had when we had Mark Carney on the board with Ben Bernanke, who was the past Chairman of great expertise. And the question is, can we, we don't have the day-to-day expertise that you have within PIMCO when you're making decisions as an investment committee, but we can take an overview of what we think are the likely trends in the future.

And I suppose what the disagreements are not as fundamental as they may seem but obviously people take a different view of the China-USA relationship. So that, there are people who believe that this can only end in tears, and there are other people who believe, as do many in America itself, of course, as well as other countries, that you've got to find a way of working this through.

That raised a question that we had at another meeting and then one of our secular seminars. I mean, what do we think about the likelihood of Taiwan being subject to blockade or invasion? And I think there are different views on that, whether China would take the risk or whether it could afford to take the risk given the priority of economic development for China itself and breaking the middle income trap.

And so I think there's different views on that. The importance of AI, I do think that people are not yet sure as to whether AI will be diffused in such a way that it will be both job creating for new jobs without being job destroying. And whether it will actually give all the productivity gains that we expect of it, because I think the computer took a long time to make a difference.

I think people are still quite skeptical about some of the claims that are being made for AI, and that's going to be a subject of debate. Clearly, you come back because a number of people on the board are experts on fiscal and monetary policy. You come back to, you know, what is an acceptable level of debt in the advanced economies.

What is going to happen, if you like, to all the fiscal rules that countries have adopted where new defense expenditure has actually raised big questions about whether you can keep to the fiscal rules.

I don't think there's much disagreement on the inflation issues, I mean, you could argue that a lot of events of recent years have made inflation targeting less attractive in the precise way in which it's been done. But I think there's the general agreement that if countries actually broke their if you like inflation rules that they've set themselves, then they would lose credibility at this particular point in time.

ANDREW: To close. Bond market people can often be seen as a bit pessimistic. The glass is normally half empty, not half full. So let's end on an optimistic note. Tell me something that you personally feel very optimistic about, firstly on the UK and then secondly on the world.

GORDON BROWN: Well, innovation, and not just AI, I've just been talking about AI, but I think medical innovation is going to be of such a phenomenal importance in the future. And those countries that are good at it, will do incredibly well. Britain is one of these countries, America obviously, but there are many if you like smaller countries that are developing expertise in particular areas.

And when you see, I mean, in Britain in the last few days, there's been this new medical advance that allows people who are blind to see again. And, you know, if you've got a particular macular degeneration, you could, you can actually get the help to see. And it's been, I think, 70-75% successful. I was talking to someone, you know, there's this huge issue about resistance to antibiotics, but as a result of AI, people have been able to diagnose what are the particular conditions that lead to that resistance.

And it's different things for different people, but because you can actually say in advance what you're susceptible to, you can actually prevent this resistance being lethal and fatal in some cases. So there's all these breakthroughs. Some of them look very small, but they'll add up to something a lot bigger.

But I think medical technology has the seeds within it both to be a huge, if you like, life enhancing technology for the future that will save lives and make for healthier lives. But it's also a source of economic growth. And I, I think the more we look at the possibilities that are coming from invention, if you think of it in the last 50 years, we, you know, we've obviously had the development of the computer and we've had all these, these things related eventually the iPhone and everything else, but perhaps we're in a new period where invention is going to be at a more rapid speed.

And the question then is, is it going to be diffused sufficiently well, so that the jobs can come from a, you will see jobs destroyed, but you'll see jobs created, but lives can be made better as results. So medical technology as well as AI and as well as environmental technologies, which are moving fast.

And of course, China has got a huge advantage there because of solar power, where it's really focused its energies on that now in electric cars and batteries. But again, Europe has got things that it can offer in this area too, wind power and everything else. So the excitement about invention is still there, and I think the next few years can yield a huge amount of potentially life transforming, but also productivity enhancing and wealth creating sort of breakthroughs.

ANDREW: Excellent! Good! So we'll end on the positive note.

GORDON BROWN: Absolutely! Because I think we're all optimistic about a future that we can create together.

ANDREW: Great! All right. Thanks very much, Gordon!

GORDON BROWN: Thank you!

Thanks for joining us on Fixing Your Interest as we explored Europe’s evolving role amid protectionism, shifting power centres, and new security challenges. From tariffs and tech to defence and innovation, today’s discussion highlighted how Europe is adapting to a more fragmented world. Continue with us as we navigate the dynamics of investing in a changing Europe. For deeper analysis and resources, visit PIMCO.com