By Giovanni Tria and Angelo Federico Arcelli

The globalization process we had come to know in recent years has reached a critical juncture. The pandemic crisis has suddenly created an obstacle to a seemingly unstoppable process, which had led to growing production and financial hyper-connectivity for practically all countries around the world, and had accelerated the movement of goods and persons as well as of ideas, knowledge, uncertainties and fears.

Today, the word “globalization” has assumed a new meaning and a new face. Some weeks ago there was still uncertainty about the possible scenario after the explosion of the pandemic in China. Estimates of the potential direct economic impact of the measures taken there to stop it were basically focusing on what the shock to the Chinese economy would mean for global growth. Now we face the globalization of the pandemic and pervasive uncertainty with regard to its length and geographic containment.

The economic consequences of Covid-19 will depend on its spread and its duration, and by the subsequent ripple effects it generates across vast chains of supply and demand. The ultimate consequences will also be determined by the speed and nature of expansionary government fiscal policies and relaxed monetary policies.

These overall direct effects, however, relate to the short-term. All the energies of governments and institutions seem today mostly focused on coping with the current danger and to imagine the immediate aftermath in the next 4-6 months. We need to focus as well about the longer-term consequences, particularly how our way of life will evolve over the next decade.

More attention and concern must be directed to addressing expectations and fears that could determine drastic changes in consumer behavior and condition strategic investment choices at a global level. Today there is no clear expectation about the future of the globalized economy and no clear pathway designed for what were once the “Western democracies.”

This uncharted territory also puts into question the recovery capability of the economy itself. Lack of clear expectations may determine economic players’ ability to anticipate the best way forward. In recent years it seems that the flood of information and disinformation that engulfs us each day amplified local fears and uncertainties into global crises.

John Maynard Keynes used the term “animal spirits” to describe the instincts, tendencies and emotions that were not the engines of human behavior that alo shaped economic interactions. In our digitally-driven world we can see how they amplify their effects through global connections and supply chains, as they are filtered through local cultures and national traditions.

Seventy-six years ago, in the midst of World War II, Keynes and other financial leaders met at Bretton Woods, New Hampshire to devise a global financial and trade architecture which – with notable changes and adaptations — has largely ensured the stability of the financial order to this day. At Bretton Woods, Keynes and his colleagues devised the International Monetary Fund as a guardian of financial stability and trade. Even today we still have the U.S. dollar as the main international reserve currency.

Today the existing global financial and trade architecture has been pushed to its limits. The private sector must find ways to sterilize, perhaps in innovative ways, current risks to global value chains. Global trade is a complex network of international exchanges of intermediate inputs regulated by international commercial contracts, in addition to national and international norms, in turn accompanied by an equally-complex network of financial and insurance contracts. It is a sort of neural network that must face the risks deriving from potential temporary interruptions of the numerous interconnections adopting the necessary adjustment and compensation mechanisms. A private sector response, however, may not necessarily be sufficient on its own, and may entail stability risks around the world for the long term.

Nation-states, too, may offer responses that come up short, either because they do not sufficiently understand the nature of the interconnections that bind their economies in the global market, because they focus on the short-term at the expense of the long-term, or they follow their fears and chase the twin chimeras of “self-sufficiency” or “decoupling.” The latter trend is particularly troubling. Unless managed well, intensified competition between China, on the one hand, and the United States and its allies on the other, could lead to a progressive shredding of the world order.

The idea of decoupling is driven essentially by the fear that China’s technological growth could translate into geopolitical hegemony. This view may lead to a world divided into two technological blocs, where innovations would not freely expand globally, but only within two competing areas, one controlled by the United States and the other one by China.

A decoupled world seems scary, because it is dangerous and uncertain. It will not be our world in 2020, but the economic consequences of wrong choices in the direction of de-globalization can be sudden, devastating, and would immediately damage  European economies, including that of Italy.

It must not be forgotten that one of the positive effects of an interconnected world is the production of global common goods, like the fight against climate change and pollution, the diffusion of knowledge and education, scientific progress, human rights, the conquests of medicine and the global fight against endemic illnesses.

The only way to avoid such a costly “financial war,” which Europeans are likely to lose, is to join in a concerted, coordinated effort among leading and emerging economies to create a “new Bretton Woods” deal that would reconstruct the global monetary system. A renewed EU-US transatlantic bargain, in which both partners agree to more closely align their policies, would be an important first step.


Giovanni Tria is former Italian Minister of Economy and Finance and a full professor of economics (ret.) at Rome II University Tor Vergata, where he has also served for many years as the dean of economics.

Angelo Federico Arcelli, PhD, is a senior fellow at the Transatlantic Leadership Network and a full professor of economy of international institutions at Marconi University, Rome.