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Analysis

Wars are causing economic fears, but the military sector is thriving

An energy crisis, a resumption of inflation, then a recession – this possible chain reaction is raising worries among European chancelleries today. It would be a gloomy scenario for Italy, in which financial stability would also be put at risk.

Wars are causing economic fears, but the military sector is thriving
Luigi Pandolfi
4 min read

World Bank President Ajay Banga raised the alarm a few days ago: “I think we’re at a very dangerous juncture,” he said, adding that the impact of the war between Israel and Hamas could deal a “serious” blow to global economic development.

His words were echoed shortly thereafter by IMF Director Kristalina Georgieva, describing “radical uncertainty” in a world still suffering from “instability.” We can read their message as follows: the effects of this new conflict are going to impact an economic situation already severely affected by the pandemic and the war in Ukraine (inflation, trade tensions) and weakened by restrictive central bank policies.

The most immediate risk could be a squeeze on oil and gas exports by Arab countries, leading to a rise in the price of these commodities (the price of oil has already risen by 5 percent, with Brent crude hitting $90.1 a barrel on Sunday). First of all, this will be a problem for Europe, which, after the breakdown of trade relations with Russia, has divided its energy supply between North Africa and the Middle East (in addition to the United States for LNG).

And it would also spell trouble for Italy. It’s enough to point out that our country imports 44 percent of the crude oil for its energy needs from the Gulf countries (31 percent from Libya and Iraq alone). And the same also applies for gas: the percentage of Russian gas is dwindling towards zero (at 8%), while the volumes imported from Algeria (31%) and Azerbaijan (14%) are growing.

An energy crisis, a resumption of inflation, then a recession – this possible chain reaction is raising worries among European chancelleries today. It would be a gloomy scenario for Italy, in which financial stability would also be put at risk (in terms of the debt-to-GDP ratio). We have already gotten a warning sign: due in part to the closing of the ECB spigot, we’re paying higher interest on debt not only compared to the Germans and the French, but also to the Spanish, the Portuguese and even the Greeks (the spread is above 200 basis points).

In Brussels, they’re already on alert: “There is a possibility of a gas price increase,” EU Energy Commissioner Kadri Simson said in recent days, adding that the Commission is considering an extension of the price cap. If the conflict grows larger, this would be little more than a band aid.

Nonetheless, the reason why the world economy is not yet back in recession is partly because governments are pumping massive resources into the war industry. The year 2022 was a record year for global military spending: $2,240 billion (up 3.7 percent from the previous year). Five days ago, the U.S. president asked Congress for as much as $105 billion to continue military support for Ukraine ($70 billion), to aid Israel ($14 billion) and to ensure Taiwan’s “security” ($7 billion). The remaining funds are for armoring the border with Mexico.

Thus, the plan is to supply the “allies,” replenish the stockpiles and retrain and expand the country’s production capacity in this sector – a policy that could be called a “neo-mercantilism of arms.” This begs the question: is it war, as an unforeseen event, that requires this financial commitment, or is it the latter that requires wars and consumption of ammunition?

As we know, capitalism tends toward stagnation and thrives on cycles. During phase transitions, military spending as a component of global government spending can also serve as an “antagonistic cause,” as Marx put it. This means that world demand is currently being kept alive partly due to the enormous investment in the defense sector. This is a decades-long process, which the war in Ukraine has only accelerated. The numbers speak for themselves: between 2010 and 2020, the global arms industry had a turnover of as much as $5 trillion. Of this, $3 trillion is connected to the U.S. military-industrial complex alone.

2014 was a watershed moment (regime change in Kyiv, the Russian annexation of Crimea). In one year, from 2014 to 2015, the arms sales market grew by 7.68%. From 2015 onward it has been in a constant crescendo. According to the Stockholm International Peace Research Institute (SIPRI)’s Yearbook 2022, arms production worldwide withstood the economic downturn caused by the COVID-19 pandemic: while the global economy contracted by 3.1 percent in 2020, the aggregate sales of the top 100 arms companies increased.

Among those top 100 arms companies, 41 are U.S.-based (accounting for $285 billion in 2020). Furthermore, the investment funds that control the major European arms industries are also U.S.-based (BlackRock, Vanguard, to name just a few). War and the arms race are conductive to speculation on the value of war industry stocks. A game played by an elite few, and a very dangerous one indeed.


Originally published at https://ilmanifesto.it/guerra-e-economie-la-paura-e-globale-ma-il-settore-bellico-ha-il-vento-il-poppa on 2023-10-28
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