Segnalazione da CEPS: Geo-economics and the risk of fragmentation

 

Analysis of developments in EU capital flows in the global context (2023)

Geo-economics and the risk of fragmentation

Cinzia Alcidi / Farzaneh Shamsfakhr / Doina Postica / Damir Gojsic

With the start of the war in Ukraine, geo-economics and the risks of economic fragmentation are at the centre of the debate. A fast-evolving scenario has unveiled the extent of global interdependence and intricate interconnections through trade linkages, value-chain exposure and cross-border investment. Risks associated with supply-chain disruptions and the weaponisation of trade dependencies could lead to a reconfiguration of capital flows, and in particular foreign direct investment (FDI).

The potential relocation of FDI to geopolitically aligned countries or a structural decline in inward FDI can have major implications for growth. Globally, the EU is one of the most important sources and destinations of cross-border investments, contributing to the EU’s role as a global actor and its prosperity. For this reason, changes in FDI flows are attracting EU policymakers’ attention.

In 2022, inflation reached 40-year highs in several advanced economies, driven by a rapid post-Covid recovery and a dramatic increase in energy prices. High inflation prompted central banks to tighten their policy stance, marking a considerable and rather abrupt change in macroeconomic conditions. While headline inflation has eased in most advanced economies, the inflationary pressure of core items is easing more slowly.

While central banks are expected to maintain their stance or even ease it, the repercussions of the tightening measures are beginning to manifest in the economy. Notably, financing conditions have tightened resulting in more stringent credit standards and diminished demand for credit. Risk premia on euro area government and corporate bonds have experienced some increase, but without notable disruptions in financial.

Overall, geopolitical uncertainty and a less benevolent macroeconomic context, characterised by high inflation and higher interest rates, has exerted downward pressure on growth. This combination has had an adverse impact on capital flows and financial integration. Against this backdrop, this report presents an analysis of the main trends and developments in global and EU capital movements up to mid-2023.