The new international scenarios and the butterfly effect

“Globalization will make our societies more creative and prosperous but also more vulnerable” – Lord Robertson

In mathematics and physics, the butterfly effect is a locution that encapsulates the more technical notion of initial condition-sensitive dependence found in chaos theory. The idea is that small variations in initial conditions produce large variations in the long-term behavior of a system.

Russia’s invasion of Ukraine is changing global dynamics in every aspect, political, economic and social. The butterfly beat of the war in Ukraine can already be felt around the world.

However, lately we are beginning to hear of difficulties for Russia, due to a flight of men from the nation, opposed to conscription, and a technological superiority of the West (NATO) that is allowing Ukraine to defend itself with excellent results.

However, an equal conflict equals a lasting conflict, which is obviously not what the World needs at this time.

There is a stalemate now, partly due to the fact that a group of countries comprising 50%  of the world’s population, including India and China, are not taking sides. This may generate unprecedented dynamics with a view to a new globalization. Countries such as India and Saudi Arabia struggle to establish pacts with other nations but choose on a case-by-case basis according to their own interests. While Russia is slowly cutting ties with the West and becoming increasingly “Asian”.

Speaking of new globalization, we cannot help but talk about how the World is becoming more and more protectionist, certainly also because of the pandemic and the consequences that resulted from the Russia-Ukraine conflict. This has caused a shock in global value chains, generating a slow but growing process of deglobalization: large multinationals, and others, now prefer to move their production facilities to countries geopolitically closer to them (friend-shoring), so as to reduce risk, even while facing higher labor costs.

Friend-shoring (we have discussed it before) is just one of the phenomena that are changing the way global trade was thought of until a few months ago. In fact, back-shoring, or the return home of companies that moved production to developing countries to take advantage of their low labor costs, is gaining momentum in Western economies. The United States themselves, those who “invented” the offshoring of production, initiating the first major globalization, under the Biden administration has allocated as much as $280 billion just for the development of domestic semiconductor production. Italy is also following the trend, and in less than a year there are already more than 120 companies that have brought all or parts of their production stages back home.

Meanwhile, scenarios are changing in the rest of Europe as well, with a shift in the center of gravity of the European Union toward the north/northeast, with a large and growing strategic importance of Poland, a European nation that has better understood the conflict and how to act. Indeed, Washington is very much aligned strategically with Poland, despite the different political visions of the two governments.

In contrast, we are facing a crisis of the German model (very influential in the performance of the main Italian markets): in the early 1990s Germany was the “sick man of Europe.”

Welfare reforms, relocations to the European Near East of many activities, cheap Russian gas, and a wide-open Chinese market were key factors for the “second German miracle.” The last two factors have failed and now Germany is once again the “sick man of Europe,” and if Germany is weak, Europe is weak.

There is a first attempt to rebuild the German economic model:

– Allocation of €200 billion to increase purchasing power and cope with the energy crisis

– Revision of energy policy (too dependent on Russia)

– Revision of some environmentalist dogma (saved two closing nuclear power plants)

– Revision of the state’s role in the national economic balance

To get out of this impasse once and for all, Europe must change its competition policy, which is too far behind the U.S. and China. The Mediterranean needs to be given importance again, make a geographical twist, opposite to that of 1973 with the first oil crisis, and move away from Russia, on which it is too dependent energetically, and instead toward the Mediterranean.

Going even further south we find an African continent that had benefited most from the last globalization, but now finds itself suffering the most damage from conflict. Economic growth that has lasted more than twenty years is in danger of coming to an abrupt halt, causing imbalances throughout the continent, and risking a new migration movement northward.

A reversal of rate trends is needed to get out of the current inflationary situation quickly; the “superdollar” gets half the world in trouble that is indebted to the US. Warren Buffet said “It’s only when the tide goes out that you learn who has been swimming naked”.

Despite concerns about supply shortages, fears about deglobalization and the expected shift in global supply chains, new opportunities may emerge in regions where production is shifting, as well as in areas that production is leaving.

It is therefore up to individual states and individual companies to identify what are risks and what are instead opportunities arising from this situation, taking into consideration the factors we have analyzed, with an eye toward what might happen globally in the future.

 

 

Giovanni Mannu