New sources of economic instability have recently emerged on an already uncertain international security scenario where the (Western-branded) global order is being widely contested.
Following the difficult post-pandemic recovery, a series of economic decisions based on domestic political considerations have almost entirely ignored the international context and, in any case, have not been coordinated. The effects of this came glaringly to the fore in the wake of two recent bank failures (in the US and in Europe) that, although they as yet seem not to foreshadow a systemic crisis, they certainly complicate short-term policy calculations for governments and monetary authorities, not to mention large investors and consumers. Overall, we are faced with a widespread economic volatility that, on the macro scale, surely sees a growing role for China in finance and trade, notwithstanding several obvious snags in its plans for development and the well-known “middle-income trap”.
On the upside, the global post-pandemic recovery has been more rapid and robust than predicted, despite the complicated situation created by the Russia/Ukraine war. Nevertheless, widespread hopes for a rapid shift to reshoring were soon downscaled in anticipation of inflationary trends that would certainly be further accelerated in the case that some consumer goods production plants were to relocate to countries with higher labor costs.
This quasi-structural volatility becomes unmanageable if analytic and forecasting instruments are skewed or insufficient, as suggested by the fact that pundits in specific sectors – the economy, security, certain technologies, etc. – have in any case repeatedly been caught off guard by market dynamics and, above all, by domestic political dynamics that have gone on to have international or trans-national repercussions.
The recent events in the banking world call for reflection on the entire sector and on how big finance figures in the overall economic picture. The underlying conditions for a large-scale banking crisis are, in effect, present, given the substantial rise in interest rates and the “digital bubble” produced or accelerated by the pandemic, but much will depend on contingent factors. If banking sector difficulties were to combine with generalized recession (which, at least in some European countries, would be quite severe) the financial problem would be impossible to contain. Opinions vary however at the moment on the probability of an eventual American recession contaminating the eurozone given the significant differences in the macroeconomic data.
Precisely in light of these risk and volatility factors, participants agreed almost unanimously on the positive short- and long-term effects of a strengthened transatlantic economic area that would take its cue from the Trade and Technology Council currently in force and address some of the open issues with the Transatlantic Trade and Investment Partnership (TTIP).
The role China will play is obviously pivotal to global economic prospects, despite the difficult phase the country is experiencing with regard to economic policy decisions. The Chinese economy’s objective is to reach a par with OECD countries in terms of per capita income, but to do that it has to innovate, not merely copy the models of others. The key to this step, according to many participants, is to focus on software technology, which would also involve political institutions and completing a series of structural reforms that are currently at a standstill – a wide-ranging challenge for the Chinese model.
To an even greater extent, in a framework of this sort, foreign policy too tends to become a demonstration of domestic political dynamics interlaced with security concerns. The danger lies precisely in Beijing’s economic development obstacles pushing its current leadership toward a full blown geopolitical, and even ideological, standoff with the West. The American and European attitude seems to lean toward the search for some form of selective cooperation with Beijing, despite the growing problems and difficult choices to be made between economic interests and security considerations.
The Russia/Ukraine war has by now become an “existential” conflict for both sides, thus at the moment there are not enough incentives to begin negotiations. Moreover, the negotiable objectives regard not only their respective leaderships but also broad segments of public opinion in both countries.
A decisive factor in maintaining at least a precarious stability will, in any case, be Ukraine’s integration into Euro-Atlantic institutions, both as a direct form of security assurance and as support for the reconstruction and strengthening of its inherent capacities for self-defense. The conflict has global implications from at least four separate standpoints: the basic rules of international law (respect for sovereignty and war crimes); the effect on energy markets (thus on the sustainable transition itself) and some logistical chains; the role of China as ally to Russia (albeit with some hesitations and conditions); and the wavering stances of many “global South” countries.
The Middle East seems to be undergoing a series of diplomatic developments that, on the one hand, make it more “self-regulated” than in the past, while on the other hand allowing several external actors to get involved in a dynamic and innovative way – starting with China, which was a frontline “facilitator” in the recent Iran-Saudi reproachment.
The general perception throughout the region is that US commitments are not sufficiently reliable, especially because they are overly susceptible to the effects of deep and sudden shifts in domestic politics. The combination of these dynamics can bring about real change in the overall balances in the Middle East, but it is too early to fully assess China’s ability to exert a direct influence.
It is also too soon to assess the actual extent of the change in terms of Chinese and American influence in the region. This in light of the persistent US military presence as well as of the complexity of the internal and transversal conflicts with which international diplomacies continue to contend, from Libya to Syria, Iraq to Yemen and in Algerian/Moroccan and Israeli/Palestinian relations.
Meanwhile, the conference confirmed the EU’s nearly total absence as a proactive player in the region, and this despite the economic heft Europe has at its disposal and the interests at stake in some vital cases.