An article by: Tommaso Baronio

For decades, the world economy has expanded, creating enormous wealth. After 2008, globalization started slowing down and then came to a halt with the war, while inflation skyrocketed.

Forecasts have grossly underestimated this possibility, while measures taken by ECB and the Feds have essentially failed.

From economic heart attacks during self-isolation, through the gradual post-Covid reopening, to the shock of the war in Ukraine, one word has returned to fill the front pages again with an alarming tone: inflation. Even the most stubborn people, who don’t follow current events and public debate, took their heads out of the sand, once they acknowledged the price increase for coffee, in bars, and for public transport tickets.

Indeed, inflation has risen at an alarming rate. If we take the case of Italy, inflation reached 11.6% in December 2022 and 10.1% in January 2023 – a level fifty times higher than recorded by the Italian Statistical Institute in the same month two years earlier, when annual inflation was only 0.2%.

Forecasts have grossly underestimated this possibility, while measures taken by ECB and the Feds have essentially failed.

However, galloping inflation is explained not only by erroneous forecasts and unsuccessful measures, but also by structural reasons. And one of them is a sudden stop, for optimists, or the end, for pessimists, of globalization.

Between 1995 and 2010, world trade grew twice as fast as global GDP.

For decades, the world economy has expanded by reducing trade barriers and the possibility of using capital and labor from around the world. The production of goods has moved to where it was more convenient, so consumers enjoyed lower prices. Christine Lagarde, President of the ECB, in a speech on globalization at the annual meeting of the IMF, after the pandemic in 2021, personally explained how world trade has benefited from the removal of barriers. An economy built on global chains has combined the advantages of every country in the world. What was the result? “Between 1995 and 2010, global trade grew twice as fast as global GDP, and the nature of trade was transformed as a result of expansion of global value chains, networks of interconnections that evolved with the disaggregation of production across borders.” In Europe, between 2010 and 2017, 36 million jobs were created thanks to globalization, precisely through exports to the rest of the planet.

The European continent has been very impudent in this process, opening up more than the Americans whose GDP grew by only 23-26% between 1999 and 2019, a pace that in Europe rose from 31% to 54% in the same twenty years. Openness to world trade also results in resilience to external shocks that are more destructive for Europe. Stefano Feltri comments in his recent essay Inflation, “During the pandemic, the European Union discovered how delicate it can be that 45% of the active ingredients in the pharmaceutical industry are imported from China, as are 98% of materials and products from the so-called ‘rare earths’ that are fundamental to the ecological transition.”

However, the war in Ukraine wiped out all growth prospects

But the slowdown in globalization did not happen suddenly due to the combination of Covid and the war in Ukraine. Lagarde explains that “after 2008, the pace of globalization slowed down, and global trade growth no longer exceeded global GDP growth.” In fact, global trade growth in 2019 was more than halved compared to the previous year. This contributed to a manufacturing recession in the eurozone on the eve of the pandemic.

However, the virus did not completely destroy the global supply chains, so the economy was able to recover in a short time, managing to raise the pace of global trade above the levels estimated in the absence of Covid, already in the third quarter of 2020.

However, the war in Ukraine wiped out all growth prospects: The International Monetary Fund states that global growth in 2023 will remain weak, with a decline that starts at 6% in 2029, moves to 3.2% in 2022, and reaches 2.7% in 2023.

The slowdown in growth occurs simultaneously with rising inflation

“It is interesting and alarming,” Feltri notes, “that the slowdown in growth is happening simultaneously with the rise in inflation, which is up globally from 4.7 percent in 2021 to 8.8 percent in 2022 and is expected to decline slightly in 2023 to 6.5%. The combination of low growth and high inflation apparently supports the thesis that globalization has contributed to development through lowering prices.”

A world different from the one we knew

But if globalization slows down, prices start to grow because less international competition allows companies to hold higher prices without retaliation, and when the geopolitical scenario is uncertain, manufacturing moves closer to making its own countries stable and self-sufficient, while foregoing favorable prices of globalization.

A number of factors, as well as the calculation of raising interest rates to curb inflation, will create a different world from the one we’ve been used to for forty years.


Tommaso Baronio