A transparency of a simple bar graph compresses the sign of the times. It is presented by the head of macroeconomic forecasts of one of the world's top banks, who explains that the biggest cushion against inflation in the US after Donald Trump's attack on Iran is the halt to tariffs imposed by the Supreme Court on Donald Trump himself. He estimates it will subtract 0.76 points, but the figure is beside the point. What is striking is the paradox it reflects, emphasizing that the economy is losing its compass status to adopt that of a mirror of the unilateral decisions of those who govern the world without defined rules or stable alliances.
The slide briefly illuminates the large screen at Hotel Vila d'Este in Cernobbio, Italy, where The European House Ambrosetti's Financial Workshop is taking place, the most important think tank on the continent. The coincidence, or as it is now called, the new world order, has led to this year's edition being held after the so-called Liberation Day - the announcement of reciprocal tariffs imposed by Trump - and this year's happening with American and Israeli bombs falling on Iran and the Strait of Hormuz. "Does anyone have any doubt that the US is no longer an ally of Europe, that NATO has ceased to exist?" asks a veteran former prime minister. And the question, until recently unthinkable, hovers over all the sessions.
Over two days, political figures, economists, and financiers representing 33 trillion euros in assets under management take the stage. They speak freely before 200 top executives and international company presidents following Chatham House rules. The content of their speeches can be known, but not the speakers. What follows is based on notes and conversations gathered during the 48 hours.
Macroeconomic models do not have variables to measure the unleashed geopolitical ambition or even the mood of world leaders, but the trend is unanimous: "We are heading towards a scenario of more inflation and less growth, and it is still unknown how much." The most adverse scenarios, with oil above $150 per barrel, foresee inflation above 5% in the US and 6% in Europe, and a slowdown that could push Eurozone economies into a brief recession and the American economy to growth below its potential. The more benign scenarios foresee a quick recovery in the second half of the year. The word "stagflation" hovers in the air.
The sessions take place on March 26 and 27, before the ceasefire. But, aside from numbers, no one falls into the temptation of considering the Iran crisis as a nightmare from which to wake up sweating, but rather as another eruption of the geopolitical tectonic movement that has only just begun and has many years ahead. "The US came to the conclusion years ago that the system no longer serves them. First, the myth of the American factory fell, because with globalization, the Chinese took the industry, and then they realized that they are also being overtaken in technology. They tried to stop this by halting chip exports, but they backed down because they were blocked from rare earth minerals." Solution: "They have bought Latin America, especially Argentina, which has rare earth minerals, and have secured energy independence with the blow in Venezuela."
This new world without defined rules is proving more costly for its inhabitants and will be even more so. "We are moving towards a self-insurance system in which powers, and in general all countries, have to ensure their supply by their own means. It is a much more inefficient system." Inefficiency is the lack of ability to achieve the best outcome from minimal resources, but it is also a euphemism for inequality, indebtedness, and, in less developed economies, poverty. Globalization has generated problems in many parts of the West, but if it disappears, its anti-inflationary effect also dissolves.
Not everything is so planned. "The Iran situation is not entirely related to this. Trump wanted to leave a legacy that none of his predecessors could achieve. He has come to the conclusion that he will lose the Congress in the midterms, and we will see about the Senate, but that is a problem for JD Vance and Marco Rubio." That does not mean he is immune. "The serious risk is that the crisis will be transmitted through debt," says a monetary policy authority. The bond market volatility - during the forum, the treasury (10 years) was around 4.5% - suggests this. The problem is the limited fiscal space when one crisis follows another. "What will France do, what will Italy do, what will the ECB do if the barrel reaches $200, cool the economy further? It will already be frozen."
Still, an executive from an international fund tempers the pessimism. "The markets' ability to absorb the generated debt is underestimated. Right now, the bond is at a similar level as with Biden, and no one publicly contemplates interest rate hikes." The market's excess liquidity has to go somewhere, and on the other hand, economies have developed enormous resilience in very adverse environments.
The uncomfortable question continues to circulate in forums like a death sentence. "Who will believe that Trump will send troops to protect a European ally?" insists a veteran former prime minister. "He is not an ally and is becoming more and more reckless," he asserts, before warning: "European leaders must finally break free from the psychological subordination to him, move out of the infantile paralysis he imposes, and establish an adult relationship." Any ideas? "Take out the anti-coercion instruments for trade relations and establish agreements with other countries like Canada, Australia, New Zealand, or the UK."
One might think that at that moment there would be a reference to the Spanish Prime Minister's opposition to the US leader. However, the main proposals revolve in the opposite direction: the need for military autonomy and ways to finance it. "The key to innovation is defense; if you want to innovate more, you have to invest more in defense. Its greatest advantage is that it creates a virtuous circle between national interest and security. Military innovations generated through public funds are developed and scaled by the private sector. We have seen it with the internet and there are hundreds of other cases."
The reports from former Prime Ministers Enrico Letta, present at the sessions, and Mario Draghi resonate like a litany. "They are like a platonic love, but they must become a reality. We must stop being so polite with European leaders who resist reforms." To finance defense and also the digital transformation of the continent, it is necessary to unlock the savings that citizens have in deposits (around eleven trillion euros) and try to retain those crossing the Atlantic in search of better returns.
"Mississippi is the poorest state in the US and has a higher per capita GDP than Germany and France." The US absorbs savings from around the world because investors seek assets that are as liquid as possible, which only happens with an integrated and non-fragmented capital market like that of the Eurozone. It is ironic that this is being debated while Germany is torpedoing the purchase of Commerzbank by the Italian Unicredit, but not only Trump incurs contradictions.
The US leader's presidency and the uncertainty it poses regarding the dollar's stability present a unique opportunity for Europe. "The financing of artificial intelligence in North America has been possible thanks to the attraction of its financial market, but now we are at the beginning of a capital relocation process that can only be seized with greater integration. If this opportunity is missed, there will be a strong force towards European disintegration."
If there is a two-speed Europe, it is reflected between those with pay-as-you-go pension systems and those who have reformed them. That is, Sweden, the Netherlands, or Germany versus Spain, Italy, and France. The former have evolved towards a combined version of pay-as-you-go and capitalization, transferring part of the responsibility to citizens on how to invest their savings. Besides achieving actuarial neutrality, the method allows capital to move beyond public debt. Southern countries remain anchored in increasingly deficit-ridden pay-as-you-go systems that also discourage savings. "Europe is breaking apart instead of coming together. In the Netherlands and Sweden, they invest in private equity, which indicates where innovation lies. They are approaching the US without abandoning the protection system, only mobilizing their savings."