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Prospects for international economy: markets, corporations and political risks in an electoral year

  • Milan
  • 5 February 2024

        The contemporaneous outbreak of a series of crises across the world has led to the intensification of latent problems stemming from economic deglobalization. These underlie some existential and unruly risks such as the isolation of nuclear powers (Russia, for example), the growing rivalry between the United States and China, and the possibility of confrontation between the West and Iran. 

        Europe is the continent most exposed to the negative effects of this new scenario. If a return to an Israeli/Arab dialogue is the prevailing hope for the Middle East situation, the Ukraine conflict and rupture of trade ties with Moscow seem destined to deal a hard blow to the European economy, policies and society.

        The situation in the United States is different. The nearing of a potentially destabilizing presidential election marked by deep division and a probable repeat of the 2020 duel do not appear to be having a significant impact on the country’s economy. A robust injection of financial resources over the past two years, equal to 40% of GDP, has kept an already vigorous economic engine running. Thus, the threat of an American recession has abated as the country launches into a period resembling a sort of “soft landing”. 

        Proof of the soundness of the U.S. economy lies also in the capacity for conversion it has displayed over the past decade, offsetting de-industrialization with an unrivalled preeminence in high technology. Not least for this reason, markets seem not to be labelling the American scenario a risk; indeed, according to investors remaining open to the possibility of new protectionist measures, Trump’s reelection as president would in any case offer opportunities from the standpoint of lower taxes.

        All the while, China struggles with an economic performance below expectations. The People’s Republic maintains a certain caution toward its future also in light of deep demographic problems that run the risk of the country’s “ageing out” before having achieved satisfactory levels of economic prosperity. The resulting impression, in other words, is of an overall picture in which observers continuously underestimate the significant resilience of the United States while at the same time overestimating China’s. 

        America’s resilience is good news for Europe, and the axis with the United States remains an important anchor for a continent that appears quite weak at the moment. A union devoid of raw materials, technological leadership, a truly integrated financial market, common defense or foreign policy continues to be short on negotiating weapons. To be hoped for is a resumption of a continental integration process capable of surmounting obstacles such as the current decision-making mechanism with veto right and of reigniting the drive with which Europe emerged from the pandemic. Urgently needed at the same time is stimulus and support for an economy that twenty years ago was comparable to that of the U.S. but today lags at least 25% behind. Industry remains the core of the EU which is in fact less de-industrialized than the U.S. and ranks second in the world for manufacturing after China. The sector needs support and pragmatic guidance in the energy transition in order to avoid any further loss of competitiveness. 

        Nevertheless, a parallel weakness persists in the most innovative sectors, where concern is concentrated on the advanced technologies needed for the energy and ecological transitions, especially as regards dependence on Chinese imports. This weakness is also reflected at the level of investments. While public sector spending is comparable to U.S. levels, what Europe is missing is real impetus from businesses. Moreover, the strong focus on competition has prevented the continent from nurturing national champions in various sectors, and there is significant evidence of this in both the financial and technological sectors. America’s “magnificent 7” tech companies have a capitalization that surpasses that of the world’s largest five stock market quotations – Tesla alone, the least capitalized of the group, is valued at more than the entire Milan stock exchange.

        Thus, the need for a new vision of the community project. The progressive and positive idea of building a single market whose treaties make no mention of the word “crisis” has come to an end. Europe must go back to uniting, and in order to do that, new institutional hardware and new political software are called for. The 2024 elections in Europe and in the US may offer a turning point both in the hoped-for continued continental integration as well as in the evolution of relations – trade, industrial and defense – between the two shores of the Atlantic.