by Jörg Zeuner, guest author of Euro am Sonntag
An the face of the Ukraine war and the economic decoupling of the West from Russia, the 1990s seem like something from another world. At that time, the fall of the Berlin Wall and the end of the Cold War drastically accelerated economic globalization, closely linked to China’s economic rise. World trade and foreign direct investment rose sharply, supply chains emerged involving a large number of countries. To put it bluntly: Everyone traded as much as possible with (almost) everyone – regardless of political systems.
That’s over now. The organizing principle is no longer globalization, but – again – great power competition. The focus is on the strategic competition between the US and China and NATO’s rivalry with Russia. Cross-connections are also intensifying: Russia, economically decoupled from the West, is orienting itself more towards China. At the same time, Europe’s ties to the USA are becoming stronger again.
These tectonic shifts leave traces. The higher geopolitical instability leads to greater fluctuations in the markets. Given the geographic proximity to Russia, European assets also come with a geopolitical risk premium. The Ukraine war raises the topic of international strategic dependencies, which have already become apparent as a result of the corona pandemic, to a new level. On the one hand, other dependencies are coming more into focus. Above all, the topics of armament and energy. But the agricultural sector is also affected – and not to forget a number of metals such as palladium and nickel.
In the face of war, the West therefore takes an old adage to heart: In times of need, put disputes aside and pull together! This applies to the transatlantic relationship as well as within the European Union. In particular, the US Treasury Secretary is appealing for “friendly countries” to move closer together economically Janet Yellen. “Friend-shoring” does not only mean relocating production closer to or to the home country – the so-called “near-shoring”. “Friend-shoring” goes further and divides between friendly and non-friendly states.
Stagnation tendencies only a temporary phenomenon
At the same time, China is also striving for increasing decoupling from the global economy by building a “circular economy” with a stronger focus on the domestic market. All in all, this means less globalization. And: The economic advantages of the international division of labor are reduced. This leads to relocation of value chains and higher prices. Not more efficiency, but resilience is the decisive criterion. Export-oriented Germany is definitely one of the countries with the greatest challenges.
We expect these shifts to trigger a surge in innovation and investment. If this turns out to be sufficiently dynamic, the current stagflation tendencies should only remain a temporary phenomenon, even if they may last for a few more months. Pressure for more investment has continued to mount, for example in defence, energy, digitalization or cyber security. All in all, the reduction of strategic dependencies could lead to a parallel development of higher growth rates and permanently higher inflation in the medium term.
As a result, interest rates should also rise. They are also being buoyed by increasing demand for credit, which finances investments needed to reduce strategic dependencies. In addition to the sustainable transformation of the economy, strengthening defense capabilities and reducing strategic dependencies will require high levels of public and private investment. Linked to this is the opportunity for greater integration of the EU. It would have the potential to further reduce the “domestic” risk premium for European assets from the time of the sovereign debt crisis.
However, investors need to be aware that different regions of the world start this process from different levels. Apart from a greater need for protection against inflation, the turning point also initially brings with it uncertainty – and thus greater fluctuations on the capital markets. Investors, on the other hand, can best arm themselves with broadly diversified portfolios.
Jorg Zeuner
Head of Research & Investment Strategy, Union Investment
Zeuner has been chief economist since June 2019 and heads the Research & Investment Strategy division of Union Investment’s portfolio management. Previously, he was chief economist at KfW.
Union Investment is the fund company of the Volks- und Raiffeisenbanken. With around 430 billion euros in assets under management, it is one of the largest German asset managers for private and institutional investors.
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Image sources: Union Asset Management Holding AG, Thomas Northcut/Getty Images
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