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Assessing risk: intersection of global economy and geopolitics

    • Meeting in digital format
    • 24 March 2021

          The years 2020-2021 have inevitably been dominated by the pandemic crisis, which is still generating uncertainties on an enormous scale, both directly in terms of the prospects of economic recovery, and indirectly due to the social and political repercussions, some of which may bring highly significant medium- and long-term geopolitical consequences. Here are the main points that emerged in our discussion – not always in unanimous form – among the participants, which we consider to be the key takeaways:

          • In the current phase, the prevailing business sentiment is rather positive with regard to the short- and medium-term recovery, especially because it has already faced the crisis’s significant costs and reflects the more positive prospects, particularly in terms of relaunching consumption, the investments that were slowed in past months, strong governmental support (expenditure packages and various incentives), and some forms of improved digital efficiency. The financial sector got moving ahead of the real economy, but might foster its recovery thanks precisely to the optimistic projections.
          • The stimulus measures adopted by the major economies are extraordinary in size: this is certainly the case for the budget launched in the United States, but also for the Next Generation EU. In the meantime, China has already embarked on a robust growth trajectory, which will contribute towards relaunching international trade in spite of the problems in this crucial sector. The greatest doubts are concentrated on the emerging economies and on the less advanced ones.
          • In the United States, the most concerning problem is unemployment given the strong shift towards part-time jobs that has been observed, and a major portion of workers has left the job market altogether. In the meantime, the share of problem loans has grown, while the data on absolute poverty have worsened. In this framework, the theme of inequality inevitably remains centrally important, also in view of the upcoming midterm vote in 2022. However, inflation-related concerns are for the time being outweighed by the objective of accelerating the recovery and containing the immediate damage of the crisis, and interventions are oriented towards supporting demand (against the background of a lower propensity to save than in Europe).
          • It is precisely the massive size of America’s federal intervention that has in fact created a “time lag” between the two shores of the Atlantic, and it is estimated that getting back to pre-pandemic economic data will take a year: Europe will grow more slowly, partially for structural reasons predating the 2020 crisis. But the UE has also laid the foundations for a better use of the available resources (aiming at a green and digital “double transition”), with a view to greater solidarity, and therefore with a greater multiplier effect for public intervention. The challenge for Europe is concentrated in two points: how to establish tax policies that effectively guide investment in the most productive and innovative directions; and how to implement more anti-cyclic rules, also through improved coordination between national policies and European bodies. For now, it appears essential to complete the first transfers of resources before summer. Over the longer term, it will be necessary to clarify how much of the new approach may be considered as a permanent change of pace, and how much as only an extraordinary intervention.
          • On the global level, leaving the pandemic fully behind remains an element of uncertainty: in fact, a scenario of overcoming the restriction due to Covid-19 infection over the course of several months (graduated based on the epidemic situation of each country) may be outlined, but there is also an alternative scenario of recurring hotbeds (and possible lockdowns) that would strike above all the most damaged sectors, like travel and tourism, part of the retail trade, and so on. Also to be very carefully considered are the medium and long-term sociopolitical repercussions, above all from the perspective of inequalities, lack of social cohesion, efficiency of support policies, and sustainability of public budgets in a situation of very high government debt. The vaccination campaigns themselves are causing strong tensions: globally, within the European bloc, and even between national and regional authorities in individual countries. Similar situations may also arise in the phase following mass vaccination. Over the longer term (in a ten-year perspective), the two main scenarios relate to real interest rates: will they stay low? Or will they grow, placing enormous pressure on the trajectories of government debt?
          • The pandemic crisis has put all political systems to the test, emphasizing differences in terms of organizational capacities and cultural predisposition, which essentially cut across the distinction between democracies and authoritarian regimes. In this sense, we will continue to see strong asymmetries in the economic recovery, linked in part to the ability to build consensus/contain dissent and social tensions.
          • Major effects of the pandemic have been intertwined with phenomena already underway for several years, acting almost always as accelerators: international volatility in the commodities sector; bitter commercial and technological conflicts between the United States and China; the many uncertainties connected to energy transition and that of production models; the trend towards reshoring certain activities with a reduction of supply chains; the government’s increased role in the economy in order to manage globalization; and the rapid digitalization of flows of production as well as of services. All these trends are now to be assessed in light of the political choices of the last year, which in their turn are contradictory on one central point in particular: while governments are showing an attitude that is more inward-looking and more “defensive” of the attributes of sovereignty, there is also the awareness that new forms of multilateral coordination are becoming more necessary than ever for the management of transnational problems.
          • A specific problem in view of an overall transition accompanying the recovery relates to the energy sector: over the next five years, there is the risk of a serious imbalance between demand (growing) and supply (declining, due to the lack of investment in fossil fuels), and inevitably a geopolitical risk for the future of the countries that are the biggest exporters of traditional sources. In other words, although the shift in investment towards renewable sources is justified, account will have to be taken of the economic and strategic impact of abandoning traditional sources.
          • Looking to trans-Atlantic relations, the business world expresses a certain confidence in the revitalization capacity of international trade, based on a balanced mix of competition and consumer protection. The principle of solidarity in the crucial sector of public health will also give impetus to Euro-American collaboration, in spite of certain differences of approach and differing sensitivities. However, tensions remain as regards managing the major digital players, and above all as regards China and Russia, which have become geopolitical risk factors in a different way from in the past – China as a global and systemic issue, and Russia as an opportunistic power intent upon sowing division in addition to increasing its military presence in various crisis theatres. From a European perspective above all, Russia’s energetic role still implies that it must be considered as an integral part of the value chains in the years to come, and that there is therefore a sort of “strategic triangle” with China – also from the trans-Atlantic standpoint.
          • The Chinese economy raises a conceptual dilemma for the rest of the world, with fundamental geopolitical consequences: the size of its population and its productive potential naturally lead to scenarios in which its increased global weight is destined to continue for a long time to come. Any eventual effort to “contain” Chinese growth must take account of this structural fact. Therefore, the Chinese challenge must be properly framed: it is not only (nor, for now, above all) a geopolitical-military conflict, but a technological competition, and therefore a geo-economic clash. Although the American attitude more oriented towards military containment is understandable given Washington’s strong exposure in the Indian/Pacific region, the importance of the network of alliances (in Asia and Europe alike) must be borne in mind: for its characteristics, the Chinese challenge requires the active collaboration of allies and partners. Precisely with a view to multilateral strategies, open conflict is not inevitable, even though certain issues – starting from Taiwan – might increase the risk considerably. A reinforcement of multilateral forums is therefore necessary and possible, balancing the needs for deterrence with those of managing interdependence.
          • From the American perspective, the Biden Administration must overcome the pandemic crisis by adopting the election slogan “Build back better” in a tangible way: effectively dealing with the problem of America’s large infrastructures is a precondition for relaunching the country’s overall competitiveness, and therefore for being able to bargain with China from positions of strength.