A new term is now popular to describe the complex context in which we find ourselves: polycrisis. Well-known economist Larry Summers, former US Treasury Secretary and President of Harvard University, in a Financial Times interview attributed the term to Adam Tooze, an English historian and professor at Columbia University.

The term polycrisis aims to capture a unique combination of developments occurring simultaneously and mutually reinforcing. After all, the world has experienced such developments before: geopolitical tensions, wars, economic crises, inflationary spikes, political instability. But here they are now, all present together, at risk of shaking the world’s economic and geopolitical order.

Faced with such a serious, yet exceptional situation, the question is: where did it all start? What were the causes that brought us here?

And my answer, perhaps paradoxically, is that all these developments in so many different areas, economic, political, military, have in fact a common denominator: the lack of credibility.

Lack of geopolitical credibility

In recent years we have witnessed an intense process of repositioning China in relation to countries and geographical regions in its vicinity. And here I am thinking of the tensions generated by the claim to control the South China Sea, ignoring the aspirations of six other countries in the region, or the tensions arising from the constant threats to Taiwan. Over the past decade, this new stature of unchallenged regional power that China has created for itself has led to the emergence, alongside Russia, of an important new power pole that challenges the US role as a global power.

These developments have been seen by Russia as a historic opportunity, which has encouraged it to demand an acceptance of the widening of its sphere of influence and the withdrawal of NATO’s presence from Eastern Europe.

Should such developments have surprised us? Perhaps not, if we unravel time backwards. Let us recall the US economic and political withdrawal from Asia, initiated by President Trump, or the friendly relationship and admiration he had for President Putin. All the while, Europe’s economic dependence on Russia has only grown, both in terms of imports (of gas) and exports or foreign direct investment.

All these trends have been accompanied by increasingly serious discussions questioning the soundness of the US commitment to NATO or promoting the idea of a European military that is less dependent on its American ally. NATO was becoming weaker and weaker.

For decades, most US allies have aspired to and enjoyed the benefits of political and especially military protection offered by this superpower. The list of beneficiaries included Germany, Central and Eastern Europe, Middle Eastern countries, Japan, South Korea, and the list could go on. Slowly but surely, the US has been faced with mission impossible as the emergence of new regional power centers has increased its list of geopolitical competitors, now including Russia, China, Iran and North Korea.

And in order to understand the increasingly complex situation that the US had to face, I propose a topic for reflection: what would have happened if while Russia was attacking Ukraine, China had attacked Taiwan?

This relative “weakness” of the US is correctly noted in an article entitled “The Overstretched Superpower”, published in January 2022 by Professor Hal Brands in Foreign Affairs magazine. In the article, the author points out that it will be impossible for the United States to continue to pursue a defense strategy that is deeply at odds with the foreign policy it supports.

In the context of the Cold War, the US had a defense strategy that involved the ability to fight two major regional wars: the Soviet Union and a second state. As the years have passed, it has become increasingly obvious that sustaining two wars in parallel is no longer realistic. In the early 2010s, in the context of budgetary constraints, the new strategy was that of “one-plus” war, aimed at defeating one major aggressor and blocking the second. Eventually, President Trump adjusted the strategy to that of winning a single war.

In fact, it was from this continued weakening of the US ability to project a credible force in all areas of the world where it had commitments that President Putin’s logic took off. His conviction was that by focusing primarily on China, the US would be willing to accept the redesigning of the areas of influence that Russia was achieving by force of arms.

As Professor Brands notes, “historically, superpowers have ended up having to make difficult choices to deal with imbalances between commitments and capability”. Such an imbalance was not beneficial to the credibility of the US and the alliances it led.

Lack of credibility of governments and main parties

In the context of globalisation, we have seen in the last two decades a disconnect of the agenda of the political class in developed countries from the agenda of the general public. As the migration of capital transformed emerging countries and the world’s elites into the main winners of globalisation, the middle class in developed countries became the obvious losers. It was the ‘elephant in the room’ that politicians pretended not to see, as the concerns of the masses had no place in the electoral programmes of established parties and politicians.

Such disconnect made the population, using the weapon of the vote, seek justice and “solutions”. This has led to the UK’s exit from the EU, President Trump’s rise to power or the spectacular rise of populist or far-right parties in countries such as France, Germany and Italy. In the end, a paradoxical situation was created, defined by the Financial Times as a “normalisation” of the presence of far-right parties in the political landscape, through a substantial representation in parliaments, the use of their political support or the use of some of their slogans by mainstream parties in search of lost voters.

The most recent argument in support of the idea of discrediting the political class in the West is the British bond crisis, where the announcement of a fiscal support programme without adequate substantiation has led to a major crisis of confidence in British government policies, a reaction that many analysts consider to be historically specific only among developing countries.

Another symptom of the lack of political credibility is provided by France, where The Telegraph notes a steady economic, social and educational decline. In fact, in an IPSOS survey a few years ago, the French were the most pessimistic of the 25 countries surveyed. 90% of the French thought their country was heading in the wrong direction, compared to 60% of American or British respondents.

The political credibility of the main parties and leaders of the Western world is in steep decline.

Lack of central banks credibility

“Economics is not an exact science. It’s a combination of an art and elements of science,” said Paul Samuelson, the first American to win the Nobel Prize in Economics. Apparently, it is the essential element that the big central banks ignored when they embarked on an initially motivated and later excessive campaign of quantitative easing, increasing the money supply beyond imagination.

In wars, minimizing collateral damage when using powerful bombs requires the use of highly accurate guidance equipment. Central banks had only a “compass”, and this did not prevent them from using the “atomic weapon” of quantitative easing for more than a decade.

Despite the lack of economic models to provide an accurate assessment of the consequences, during the pandemic the big central banks tripled – compared to the 2008 crisis – the amount of money printed to help their own governments and prevent a recession. Basically, they underestimated the strength of the economic recovery they were about to produce hand in glove with governments, which generously used the money they were offered.

The demand shock has induced major tensions in global supply chains, energy markets and labor markets. The war-induced energy crisis has only added to these existing trends.

Inflation has exploded. Price stability, the primary objective of all central banks, was severely undermined, and with it their credibility.

Towards a restoration of credibility?

From the point of view of geopolitical credibility, we have witnessed important changes recently: the substantial strengthening of existing military alliances (NATO, QUAD – formed by the US, India, Australia and Japan) and the emergence of new ones (AUKUS – Australia, the UK and the US). On the other hand, important US allies have stopped aspiring to a “free lunch” and have decided to increase their military spending, notable examples being Germany and Japan.

Russia’s aggression against Ukraine has been a catalyst for NATO, which has become the main point of support for Ukrainian defense. The US has taken the lead role, providing military, financial and humanitarian assistance estimated at USD 50 billion.

On the other hand, there are already signs to suggest that the lesson of Europe’s over-dependence on Russia is now being heeded in order to similarly avoid over-dependence on China. The world seems to be moving slowly but surely from globalisation to regionalisation based on common security interests and shared values, from “off-shoring” to “friend-shoring”.

Concerns about the cost of such moves appear to be contradicted by a 2021 analysis by the Boston Consulting Group, which estimated that more regionalized manufacturing would add just 2% to the cost of a USD 35,000 car, 1% to the price of a smartphone, or 3% to the price of a USD 200,000 home.

While the news on this dimension is good, the domestic political credibility of developed country leaders remains a cause for concern. There seem to be no convincing signs to suggest that the European political leadership crisis will be resolved any time soon. Europe still offers a picture of rather weak governments, relying on fragile alliances, which makes them unable to command enough popular support to inspire and point the way.

Political fragmentation not only continues, but seems to be increasing in countries such as the US, France, Germany and the UK, suggesting that the big fear should not be the emergence of autocratic regimes, but rather political instability and, at the limit, anarchy.

Finally, to restore their credibility, central banks must now fight with all their might. And restoring price stability is a fight they cannot afford to lose. They seem to be aware of this and, despite the markets’ disbelief, seem determined to go all the way with interest rate hikes to bring inflation back to low levels.

A potential recession is seen as the lesser evil, as the inflationary expectations of the population and economic policymakers need to be re-anchored. But restoring the credibility of central banks will also require a move away from the policy decisions they have excessively entertained in the context of quantitative easing. In prospect, this should only be used to avoid systemic risks. Avoiding economic disaster should be the only reason for returning to quantitative easing, guided only by a “compass”.

Reality has shown us once again that, once lost, credibility is terribly hard to regain.

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