David Harrison / Aug 2025
Image: Shutterstock
If the postwar economic order cannot be sustained globally it can be strengthened in Europe.
The protectionist Trump trade tariffs of 2025 – the highest since the infamous and self-defeating Smoot-Hawley tariff of 1930 – are contrary to the rules of the WTO and a serious blow to the stability of the postwar global economic order.
But they are by no means the first. In 1971 another US President – Richard Nixon – unilaterally ended the Bretton Woods global monetary system, dating from 1944, by severing the link between the dollar and gold.
Today’s financial instability is the result. In 2008 came the global financial crisis, followed by the euro area crisis in 2010. The European economy is still affected by the worst downturn since the 1930s. Ten years earlier, in 1998, a financial crisis in Russia brought the curtain down on the Yeltsin years and set the scene for the Putin era. The Russian crisis was itself an after-effect of the South-East Asia financial crisis of the 1990s, when international short-term capital withdrew suddenly from emerging markets. The South-East Asia crisis came in the wake of the Japanese financial crisis of 1990, and the collapse of an enormous Japanese property bubble built up in the 1980s. And before that was the Latin American debt crisis, following excessive commercial bank dollar lending to governments and government-owned firms in the 1970s in Mexico, Brazil, Argentina and elsewhere.
In the opening words of the 2011 edition of Manias, Panics and Crashes, the classic history of financial instability since the seventeenth century by Charles Kindleberger and Robert Aliber:
The years since the 1970s are unprecedented in terms of the volatility in the prices of commodities, currencies, real estate and stocks. There have been four waves of financial crises; a large number of banks in three, four or more countries collapsed at about the same time. Each wave was followed by a recession, and the economic slowdown that began in 2008 was the most severe and the most global since the Great Depression of the 1930s.
During the Bretton Woods era there was, by contrast, financial stability, minimal capital movements and no international financial crises. The period from the end of the Second World War up to the 1970s is now seen as the golden age of high growth, reconstruction and expansion in Europe.
Returning to a global regime like that of Bretton Woods may not be possible. But, with a large continental economy and a population of half a billion, democratic Europe could build better conditions for economic prosperity, remove the main internal causes of crises and provide a buffer of economic security against those crises likely to arise externally in future – not least from instability and bubbles in Trump’s United States.
To do this, Europe needs to raise its investment rate. To restore lost competitiveness the Draghi Report suggests the EU requires unprecedented additional investments amounting to nearly 5% of its GDP - more than under the postwar Marshall Plan. For defence and security, NATO allies need to invest at least 3.5% of GDP for core defence requirements for military and NATO purposes; and 1.5% of GDP for protecting critical infrastructure, defending networks, ensuring civil preparedness and resilience, enhancing innovation and strengthening the industrial base. And according to the McKinsey Global Institute, net investment in Europe in the twenty-first century has been consistently below the US – falling by about three percentage points of GDP after the global financial crisis, and averaging only a meagre 3.3% of GDP from 2009 to 2022. To quote from “Investment: Taking the pulse of European competitiveness” (2024):
A region that is not investing cannot be competitive, and a region that is not competitive will fail to attract domestic or foreign investment: a vicious circle. For Europe, defined here as the 27 member states of the of the European Union (EU) plus Norway, Switzerland, and the United Kingdom (also referred to as Europe 30), failing to increase investment puts Europe’s prosperity, way of life and place in the world at risk.
These issues all interconnect. Prosperity, a way of life and a place in the world will not be maintained without growth, and future growth will not come without current investment. Feeble business investment since the 2008 crash requires public policy to correct it. Defending and securing European democracy requires strengthening the industrial base - also necessary to regain competitivity. And improving the resilience of civil preparedness requires investment to be spread everywhere – as does action to combat inequality.
Yet there is no invisible hand, or ghost in the machine, to ensure the sufficiency of investment. Capital assets depreciate and are impaired over time, and the long-term postwar trend in both the US and Europe has been for net investment (taking account of depreciation and impairment) to diminish gradually – and fall quickly after a financial crisis. The global financial system favours short-term speculation over volatile currencies, commodities, real estate and stocks rather than investment in productive capital assets. And in national financial systems – like those of the US and the UK - institutional investors, including pension funds, have preferred short-term share price appreciation over the long-term investment allowing companies to upgrade their capital stock, and remain competitive.
A big investment push, extending to public and private investment across all of Europe, is therefore needed to break out of today’s vicious circle, and a concerted plan to raise net investment rates everywhere over a credible timescale.
And while the WTO trade rules are ignored by the US, in the opening preamble to the 1994 WTO Agreement the parties recognise that that “their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services […]”. Effective demand consists of a sufficient volume of consumption expenditure and a sufficient volume of investment expenditure, meaning that a policy to increase investment in Europe, making effective demand large and steadily growing, fits with WTO objectives.
And while today’s global financial order, given to crises, bubbles and crashes, results from an earlier breakdown in the postwar economic system, IMF members remain to this day committed under Article IV to directing their economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability; and “to seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions”.
Europe may not be able to turn the clock back to the stable postwar economic world. But it could realistically create a more stable and prosperous continental economy which reinforces democracy by reducing inequality between citizens, has orderly economic and financial conditions, a monetary system not tending to erratic disruptions and financial crises, a competitive single market and sufficient investment to ensure effective demand for the goods and services produced.
If the US really wants to return to Smoot-Hawley and 1930, it cannot be stopped. But the 1930s was not a decade anyone in their right mind in Europe would want to live through again. The postwar order in Europe was built expressly to avoid the mistakes of the inter-war years, and succeeded in doing so. It does not need overturning. It needs strengthening.
