At the beginning of last year, UN Secretary-General António Guterres spoke about the four major risks for the world: geopolitical tensions, growing mutual distrust, climate change, and the dangers of modern technology. He referred to this quartet as the Four Horsemen of the Apocalypse.
More than a year later, two more riders have joined Guterres’ foursome: the corona pandemic and massive economic headwinds. The six riders are galloping together at a very rapid pace, sometimes one restraining the other – an example being the pandemic triggering the collapse of economic activity, with greenhouse gas emissions declining correspondingly.
Unfortunately, the riders stir each other up in most cases. Geopolitical tensions and mistrust reinforce one another. In addition, modern technology provides international players with tools to thwart others, and it makes countries feel more vulnerable.
The corona crisis is having a massive economic impact, with a decline in activity that is unprecedented in peacetime. The immediate economic pain is still relatively limited in many places because governments have stepped in en masse to boost employee incomes (especially in the US) and keep companies afloat (especially in Europe). At the moment of writing, governments worldwide have allocated US$14,000bn to cope with the pandemic and economic fallout. This amount for support measures will increase to far higher levels this year. This also means that public debt will rise rapidly in two ways: on the one hand, the government will borrow far more to be able to pay for all the support measures, while revenues will decline at the same time because fewer taxes are received as a result of lagging economic growth. This therefore also means that debt/GDP ratios will rise rapidly.
In the opinion of most economists, these rapidly increasing and soaring debts – incidentally, debts of private individuals and companies have also risen considerably in recent years – do not necessarily need to be a problem. This is due to the fact that interest rates are very low, and because it is assumed that the support measures will keep the earning capacity of countries at current levels.
Some analysts even believe that we are on the eve of a second Roaring Twenties. Following the First World War and the Spanish Flu pandemic, the world – and the West in particular – experienced an enormous growth spurt due to postponed expenditure, reconstruction and the large-scale roll-out of electricity and the internal combustion engine, for example. It would not be odd to anticipate this again: savings in many countries have risen rapidly, people will want to go on holiday and visit restaurants en masse – for instance – when the worst of the pandemic is over. Also, the amazingly fast development of vaccines with often entirely new methods are proof that all the negativity about the lack of technological breakthroughs was and is perhaps a little premature.
This optimism is offset by the fact that aspects that shaped the economic boom of the 1920s (and booms in later decades) are far less relevant to Western countries now: a century ago, the size of the workforce increased very rapidly, and huge strides forward were taken in terms of education for the masses. At this point, the increase in the workforce is stagnating (or even declining) in many industrialised countries, and a large part of the population is already (highly) educated – to the extent where more giant leaps in this area are unlikely.
It therefore seems realistic perhaps not to expect a Roaring Twenties after the corona crisis, but maybe a Modestly Swinging Twenties. In addition, the springboard that has been created and which will be in place for a modest boom – large-scale monetary and fiscal stimulus – will, at the same time, be a potential pitfall if the accelerator is fully depressed now, without pondering the question of how to responsibly find an exit in the future for the splashing out of money which is deemed necessary at this point.
Economic orthodoxy has shifted out of the picture, and the Chicago and Austrian school of economics – with figureheads such as Friedman and Hayek – has been muted in favour of economists who are dismissing traditional, responsible budgetary policies.
So the current and coming fiscal and monetary support measures are embedded with lots of risks and they could even result in economic headwinds turning into a storm if interest rates start rising. Economic pain will then remain one of the aforementioned Six Riders together with abuse of modern technology, mistrust, climate change, the pandemic, and geopolitical animosity.
That latter issue is one of the biggest long-term risks to the global risks; to be more precise: the growing divide in the world between two camps, one led by the US and the other led by China.
The corona crisis has accelerated the process in which China could enter the fray as a serious challenger to the US. Up to now, China has weathered the corona crisis far better than the vast majority of Western economies. As a result, China is likely to overtake the US as the world’s largest economy even faster than previously believed.
What is more, Beijing is trying to reinforce its position on the geopolitical chessboard via corona diplomacy – ie supplying Chinese vaccines to countries that are friendly to Beijing. And this position had already been strengthened in recent years by the reliance of many countries – including Western ones – on Chinese tech companies. The last year in particular has seen far more opposition to this in the West.
America is fairly clear about its stance towards China: the new Foreign Minister Antony Blinken has already mentioned that he will largely maintain the predominantly hard line of the previous government towards Beijing. For the time being, the import tariffs introduced by Trump will not be reversed. A very critical attitude towards human rights has been added to this policy.
Europe, on the other hand, does not seem to be making a clear choice. On the one hand, European capitals largely voice the same sentiments as Washington where China is concerned but, at the same time, Europe recently concluded an investment agreement with Beijing, where China was let off lightly on many sensitive issues. Europe seems to want to steer a course in which it prefers to stay close friends with America, without offending China too much. This policy does not seem to be sustainable in the longer term.
Nobody can fail to notice that more and more countries are becoming unnerved by China. China has grown more assertive on the world stage, especially since Xi Jinping took the lead. The US is no longer all-dominant, there is a new pretender to the throne. And the past shows that these are risky periods; times in which a ruling and rising power are facing each other.
The interplay of the Six Riders infuses the system with a great deal of political uncertainty. Biden’s presidency and large-scale fiscal stimulus programmes provide some stability. However, the world remains in a state of significant political risks that reinforce each other and slow down the economic revival which we anticipate in the second half of this year: the struggle between America and China for global dominance, tensions in and with other major countries (eg the protests in Russia), mistrust of the tech giants, growing dissatisfaction within societies (eg the violent protests in the Netherlands and the storming of the Capitol in the US) and the corona pandemic which will still wreak havoc for some time to come.
