The Economist: The liberal international order is on the brink of collapse. The collapse of the global economy would be sudden and irreversible

At first glance, the world economy seems to have held up brilliantly in the face of all the challenges it has had to face lately: America is on the rise even after the trade war with China started, and Germany avoided an economic disaster after which gave up gas imported from Russia. The war in the Middle East has not produced any major shocks to the oil market and the Houthi rebels’ missiles have had a limited effect on global trade, which has recovered from the pandemic period and is expected to grow quite strongly this year, according to estimates . On closer inspection, however, the order that has governed the global economy since the end of World War II has eroded, and today it is close to collapsing, writes The Economist.

An alarming number of events could trigger the descent into anarchy, where military force makes law and war once again becomes the preferred tool of the great powers. Even if there is no full-scale conflict, the effect of a world where the rules are no longer followed on the economy could be swift and brutal.

The disintegration of the old order is visible everywhere. Sanctions are used four times more than in the 1990s – America recently imposed “secondary” penalties on entities that support Russia’s military.

A subsidy war is underway as other countries try to copy the sweeping measures imposed by governments in Washington and Beijing to support “green” manufacturing.

Although the dollar remains the dominant currency and emerging economies are more resilient, global capital flows are beginning to fragment.

The institutions founded to ensure the smooth functioning of the old system are already being abolished or are rapidly losing credibility. The World Trade Organization will be 30 years old in 2025, but for the past four years it has floundered, largely due to America’s disinterest.

The International Monetary Fund is going through an identity crisis, caught between supporting the green agenda and ensuring financial stability.

The UN Security Council is paralyzed and supranational tribunals, such as the International Court of Justice (ICJ), are increasingly being used as a political weapon by warring parties.

US politicians, including Senate Republican leader Mitch McConnell, have threatened the International Criminal Court with sanctions if it issues arrest warrants for Israeli leaders who are accused of genocide by South Africa at the ICJ.

A chaotic and devastating crash can erupt at any moment

So far, this fragmentation and decay of the old system has quietly hit the global economy. Unfortunately, however, history shows us that more chaotic and devastating crashes are possible and can erupt at any time after the decline begins.

World War I ended the golden age of globalization that many at the time thought would never end.

In the early 1930s, with the Great Depression and the implementation of protectionist trade policies (Smoot-Hawley tariffs), America’s imports collapsed by 40% in just two years.

In August 1971, Richard Nixon unexpectedly canceled the conversion of the dollar into gold, and 19 months later, the Bretton Woods system that had until then governed international monetary relations between the US and more than 40 other countries collapsed.

Today, a similar rupture does not seem at all unimaginable. Donald Trump’s return to the White House would continue the erosion of international institutions and norms. The fear of a second wave of cheap imports from China could accelerate this process. A war between America and China over Taiwan or between the West and Russia could cause a total collapse.

The era of the “Washington Consensus” that today’s leaders are trying to replace was one in which poor countries began to enjoy economic growth and narrow their deficits with the rich world.

Falling into anarchy

The decline of this system threatens to slow progress or even reverse it. Once destroyed, it is unlikely to be replaced by new rules. Instead, foreign affairs will fall back into their natural state of anarchy which favors theft and violence.

The problems facing the world will be tackled separately by each group of countries with common interests, which will often lead to conflict. When cooperation is replaced by intimidation, countries are less motivated to keep the peace.

It is true that the system established after World War II aligned America’s internationalist principles with its strategic interests. But the liberal order has also brought vast benefits to the rest of the world.

Many of the poor countries are already suffering from the IMF’s failure to resolve the sovereign debt crisis that followed the Covid-19 pandemic.

Developing countries like India and Indonesia are trying to take advantage of the opportunities offered by the fragmentation of the old order, but ultimately rely on the fact that the global economy will remain integrated and predictable.

The prosperity of much of the developed world, especially smaller open-economy countries like the UK or South Korea, is entirely dependent on global trade.

Although it might seem that the world economy can survive any challenge with America’s help, this is a misleading impression.

Editor: Raul Nețoiu

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