Rising Economic Uncertainty Tests Global and European Stability

Amidst rising trade tensions and geopolitical uncertainty, the global economic outlook has darkened, with recent fiscal and monetary decisions casting a pervasive influence over investment, trade, and financial markets.

In recent months, international tensions have intensified, particularly following significant U.S. tariff hikes that have fueled market volatility and depressed investor confidence. The International Monetary Fund (IMF) has revised global growth projections downward to below 3 percent, a level noticeably weaker than previous decades. The ensuing flight to safer assets has elevated the price of gold, while long-term U.S. Treasury yields have dropped and the dollar has weakened, continuing even after a partial easing of financial tensions. These shifts raise critical questions about the continued dominance of the U.S. dollar as the world’s reserve and invoicing currency.

The resurgence of protectionist policies, primarily originating from the United States, reflects broader dissatisfaction with globalization and its perceived contribution to inequality and stagnating employment opportunities for lower-skilled workers. While technology and unfair trade practices have played major roles, many low-income countries remain mired in poverty and high debt, and emerging economies seek greater recognition in multilateral decision-making spaces. Tariff increases have already reached historic highs, threatening to shave off nearly 1 percent from global growth and double that impact in the U.S. The consequence is not merely economic disruptions—these policies also threaten to reduce international trade by around 5 percent, reconfigure supply chains, and diminish overall efficiency and integration, with the added risk of fueling political instability and impeding innovation.

Despite the shift in trade tensions, international trade in services—largely propelled by digitalization—has become an increasingly important growth engine. The U.S. maintains a large surplus in digital services, while the expansion of remote services has prompted an average growth rate that outpaces traditional categories. However, these developments are accompanied by growing market concentration in a handful of global tech giants, underscoring the need for effective regulation to safeguard competition and consumer rights.

Another pivotal challenge is the rise in global public debt, which has surged after a series of global shocks. Sovereign debt vulnerabilities are acute in both advanced and low-income economies, with multiple countries facing unsustainable debt servicing costs and a fragmented creditor landscape complicating crisis resolution. The report highlights the urgency of a more robust, cooperative approach to debt restructuring for vulnerable nations and stresses the importance of credible and gradual fiscal consolidation to ensure economic resilience and sustained growth.

Within the euro area, modest growth returned in 2024, though concentrated inflation pressures and fragile consumer demand reflect prevailing uncertainty. European economies are particularly vulnerable to ongoing trade disputes, given their dependence on exports to the U.S. and exposure to redirected Chinese exports. The European Central Bank (ECB) has initiated substantial interest rate reductions, aiming to stimulate activity without surrendering inflation control, but policymakers face ongoing challenges in balancing flexibility with prudence amidst persistent economic weakness.

Europe’s structural weaknesses—lagging productivity, reliance on foreign markets, higher energy costs, and modest innovation—threaten its long-term competitiveness. The report advocates for a new strategic growth model centered on investment in research, integrated capital markets, common European bonds, and greater autonomy in strategic sectors like energy and technology. Crucially, the creation of a unified European capital market and increased public and private investment are seen as essential to reigniting sustainable growth and reinforcing Europe’s strategic position.

The Italian economy stands out for its recent gains, with faster growth than the euro area, robust employment figures, and incremental improvements in productivity and technological adoption. Yet, the challenges of declining productivity in 2024, weakening exports, an aging population, and continued low private investment in research persist. The report underscores the importance of leveraging innovation, public investment, reform consistency, and demographic inclusion to sustain Italy’s growth trajectory. Furthermore, prudent fiscal management remains a priority as public debt, though more sustainable than in previous decades, is still vulnerable to macroeconomic shocks and demographic pressures.

Italy's banking sector demonstrates resilience, marked by continued profitability, strong capital positions, and a favorable cost-to-income ratio, even as falling interest rates begin to curb profits. Robust internal financing across Italian firms has lessened reliance on external credit, though continued diligence is necessary to monitor credit to small businesses and ensure support for investment-driven growth. Financial sector consolidation is ongoing, emphasizing the need for transactions that enhance value and support innovation and competitiveness.

In the evolving landscape of crypto-assets, risks associated with volatility, regulatory arbitrage, and illicit activity are increasing as crypto’s links to mainstream finance deepen. The introduction of the European regulatory framework (MiCAR) aims to provide consumer protection and market order, but international regulatory divergence persists. The report calls for a dual strategy—international cooperation on regulation and advancement of secure, central bank digital currencies—to safeguard monetary stability and spur secure innovation.

In summary, the report stresses that the shifting global order, fueled by technological change, protectionism, and demographic challenges, demands an agile, coordinated policy response anchored in reform, solidarity, and innovation. For Europe and Italy, the path forward must combine renewed investment in productivity and resilience with the completion of core integration projects and prudent fiscal strategies to secure prosperity and stability in an increasingly multipolar world.

This confluence of risks and opportunities highlights the critical importance of robust, forward-looking economic policies and enhanced cooperation to secure enduring growth and financial stability.