A five-part blog series deals with the world’s risk maps. In this second part of the series, we are taken on a journey of remembrance over the world’s most recent crises.
The world risk map is in turmoil. Five years ago, many of the risks that have materialized recently were as distant as the fiction of the world of cinema. Now we have woken up to completely new types of threats, and there are unpredictable risks on the horizon.
The most recent pandemic, the Hong Kong flu, spread worldwide and sickened more than a billion people more than 50 years ago, between 1968 and 1969. Advanced medicine, especially in Western countries, has created a considerable sense of security, which was collapsed by the COVID-19 pandemic.
Since the collapse of the Soviet Union, there has been a sense of peace, which has allowed Europe to focus over the past decades on technological development, prosperity, and the exploitation of the global economy. The greatest risks have been linked to economic threats and, to an increasing extent, to climate changes over the past decade.
Productivity targets steered manufacturing to Asia
In recent decades, European industry has focused on outsourcing and relocating production to countries with cheaper labor or closer to new growing markets. At the same time, efficiency improvements have led to increasingly complex raw material supply chains and complex outsourcing of services. The relocation of production to Asia has continued for almost 30 years. The decisions made have been good from the point of view of productivity. However, when productivity guided the strategy, it was partly left unconsidered what is so strategic that it would not be worth outsourcing. We also forgot to think about what is so critical that its manufacture should be geographically close.
The darkest moments of the global economy came during the banking crisis that spread in 2008, when banks, companies and, eventually, even governments had to be bailed out from bankruptcy. The economic crisis also slowly triggered a change around digitalization.
Disruption of cyber security led to a lack of trust
The changes created a whole new world of risk, the cyber front. The public got their first taste of cyber phenomena after the Stuxnet malware hit Iranian nuclear power plants. A report by security firm Mandiant highlighted the massive Chinese capabilities in cyber espionage. This was very quickly followed by the Snowden case, which exposed the extent to which U.S. intelligence agencies cyber-spied on citizens under the Patriot Act of 2001.
Americans’ capabilities in the cyber world drove the EU and the US into a digital trade war and a lack of trust. The change in global trade policy was a big one. Yet a third confidence-breaking cyber wave came when Russia’s cyber operations and hybrid influencing became public.
Risks materialised in Russia and the peace framework eroded
The collapse of the Soviet Union was a surprise and quickly materialized. The Western world thought that the change would be permanent and that Russia would become a democratic state in Europe. Investments in Russia, increased trade, cheap energy, and cheap raw materials blinded companies and states. Risks turned into opportunities, even though the risk map was very significant.
The short-termism of operations is inherited from the structure of the quarterly economy. However, by focusing on the market and understanding its structure, many things would have been more predictable.
Since then, the realization of risks has been continuous. Trump’s election as president and the subsequent rapid polarization of the world surprised the entire Western democracy. The EU was created to guarantee peace in Europe, and now that frame of reference was beginning to erode.
The EU’s security policy axis was based on the military power of France and Britain. After Trump was elected president in the United States and the UK left the EU, a security policy vacuum was created.
Global economic risks escalated
The first financial crisis of the millennium began in 2007 with the rise in subprime mortgage rates in the United States. The world was used to and prepared for economic crises. However, investment banks Lehman Brothers and Morgan Stanley had broken the rules of the banking world by investing their own funds with more than 30 times the leverage. This was new in scale and eventually led to a crisis of confidence in the entire banking world, which many governments and central banks had to deal with. The effects of these events can still be seen in the markets today.
Many investors lost their assets when banks fell into state ownership or could not be saved from bankruptcy. Even the risks that had been prepared for were not under control.
Natural phenomena are normal, but even they are poorly prepared. For example, a volcanic eruption in Iceland blocked air traffic throughout the EU for several weeks.
The freighter Ever Given got stuck in the Suez Canal due to human error by the captain and blocked the passage of more than 400 other ships through the canal. Freight traffic to Europe was suspended. Again, a risk was realized for which no provision had been made. However, the increase in the size of cargo ships and the dramatic increase in traffic through the canal would have been signs of a growing threat.
The Ever Given episode cost global trade more than $50 billion. Some ships had to circle the entire southern tip of Africa to reach Europe. This resulted in unexpected delays in supply chains, additional costs, and production constraints around the world.
A small virus shut down the whole world
The world has moved from one economic crisis to another almost continuously since the beginning of this millennium. The COVID-19 pandemic was the latest link in the chain.
How can so small become so big? The epidemic reportedly started in a market in Wuhan from organs of wild animals that the Chinese used for food against regulations. The old tradition proved fatal, and the wave of illness spread exponentially throughout the world. Whether the virus actually originated in a Chinese test laboratory remains a mystery. However, the effects were really surprising, and the whole world shut down for a couple of years. In a panic, governments supported companies so that they would not go bankrupt and cause mass unemployment.
People died and global health care was thrown into chaos. There were only a number of bad or even worse options to choose from. At the same time, a huge digital leap was made, which without the pandemic could easily have taken decades or even not materialised at all.
Under enormous pressure, the pharmaceutical industry was given the opportunity to develop new RNA-based vaccines. The development and testing of drugs is usually strictly controlled and can take decades. Thanks to emergency laws, new drugs were now flowing onto the market after only months of testing.
The pharmaceutical industry was able to shed gold, but at the same time, new types of black clouds rose in the sky of risk. In the pharmaceutical world, claims and litigation are common. Are they ahead, or did this create an exception path that defies the traditions of the industry?
We survive one, we move on to the other
Once all this had been experienced, there were no more surprises. But what should never have happened again began: a large-scale war in Europe.
The occupation of Crimea in 2014 was the first step in the war in Ukraine. War would have been predictable, but warnings were refused. Europe and the world, ravaged by COVID-19, are immediately moving into the next crisis and new economic distress.
The division of the world was strengthened. Trade was sanctioned and the energy sector went haywire. Oil and natural gas prices soared, fuelling inflation. Zero and negative interest rates and huge government subsidies had pushed the entire world into a state of emergency of supply and demand, where the energy crisis was like gasoline being set on fire.
Now the Western world is facing yet another economic problem. Not long ago, we were wrestling with almost deflation, where the borrower of money was paid interest for receiving money and prices remained the same or even fell. Central banks quickly began raising interest rates to fight inflation. The change destabilized the economies of consumers, businesses, and governments, as they were already used to an almost interest-free world.
A spiral of government debt began. Economic risks materialize strongly, undermining confidence in the global economy. High government borrowing costs will increase tax pressures and private consumption will fall rapidly.
What happens next and what new opportunities open up? I will return to that in the next post.
The writer’s expertise includes ICT, industrial automation, cyber security, 5G, new technologies, and business strategies.