A closer look at the implications of today’s challenges

Looking ahead, we must face the fact that many of today’s challenges cannot be eliminated rapidly, and that the cost of resolving them will be significant. This will put diverse societies to the test.

The illusion that we don’t have to pay a price for money, security, or energy has now been shattered. Further, the hubris-induced monetary and fiscal bubbles that had formed have no burst: major central banks in developed countries have embarked on the painful path of interest rate hikes and gradual quantitative tightening. Widespread fiscal carelessness reached its limits with Liz Truss’s failed mini budget – if not beforehand. We have to recognize that there are no more monetary or fiscal measures that can be used to spread the costs of upcoming challenges across all members of society or to defer those costs to the future. In economists’ speak: This is not a V-shaped but rather a U-shaped crisis.?

The energy crisis triggered by the war in Ukraine, and the resulting effects on energy pricing, will have a major impact on the way we address the challenge of climate change and the speed at which much-needed action can be taken. In addition, the world seems to be on an unstoppable course towards a multi-polar era. The strategic competition between the US and China seems to be evolving at lightning speed from trade war to tech war to cold war. In view of the latest round of US sanctions in the high-tech sector and the announcements regarding the leadership of the Communist Party of China made at its 20th National Congress, there is no sign of these tensions diminishing. At the very least, these developments will lead to the restructuring of global supply chains and possibly to increased regionalization and greater resilience. In the short term, the energy crisis and the overhaul of energy infrastructure, on the one hand, and the restructuring of supply chains, on the other, will drive up consumer prices in the West and dampen global economic output. And this is all happening as China, as a major global supplier, emerges from restrictions due to its Covid policy, which it has been easing.?

All of this has implications for consumers in major western countries. Life will become more uncertain, and the cost of living will increase. In Europe, the Consumer Confidence Indicator has fallen to its lowest level in more than 25 years. In the US, where the direct impacts of the war in Ukraine are much less visible, the Consumer Confidence Index has fallen significantly from its all-time high a year ago. This has consequences for the same set of people if you ask them in their capacity as eligible voters, as demonstrated by the results of voting in many western democracies where the political margins have increased. These are developments that are being driven by voters in today’s middle classes who are, themselves, motivated by their fear about a loss of status and prosperity.?

This uncertainty is also reflected by the Edelman Trust Barometer, which has been widely cited for years: The majority of the respondents around the globe expressed the view that capitalism in its current form causes more harm than good in the world. And 33 percent of the respondents in 21 democracies are convinced that centrally planned economies work better than free market economies.?

In recent years, many of these societies have also seen massive demographic changes: They are no longer homogenous in terms of the ethnicity, language, or religion of their people, and they therefore have greater difficulty in achieving consensus in their democratic processes. And they often have an ageing population and have to deal with challenges related to healthcare costs and the distribution of wealth. These societies should now tackle those problems which – as we know from political economics – are notoriously difficult for diverse societies to solve. We are talking about solutions that will create a small number of known and well-organized losers – for the benefit of a large number of fragmented, politically disorganized winners in the future. How is that supposed to work?

In his most recent book entitled “The Great Experiment – How to make diverse democracies work”, Yascha Mounk, Professor of International Affairs at Johns Hopkins University, provides some excellent pointers, which I am freely summarizing here. For diverse societies to be able to reach a stable political consensus, their institutions and rules need to fulfill a series of conditions:

• Increasing per capita wealth, which leads to a dignified standard of living for people across the entire income scale;
• meritocratic equality of opportunity for all, underpinned by social solidarity and redistribution, but without a targeted, patronizing minorities policy that all too often erodes the social consensus for solidarity;
• effective and stable institutions that are trusted by citizens and provide legal certainty and equal rights; and
• mutual respect, e.g., between the losers and winners in democratic processes, as well as towards the institutions that oversaw the socio-political debate.?

It is up to each individual to decide where different societies stand in terms of these success factors. However, the article “Poor societies with some very rich people” published in the Financial Times a few weeks ago offers food for thought on this topic, as does the work of the US thinktank Fund for Peace, with its Fragile States Index. The fact that Switzerland scores highly in many of these rankings is confirmation of the quality of its institutions and rules that have developed over centuries. When Switzerland was created, it was a groundbreaking nation in terms of the structures: A parliamentary system with two chambers, with massive support for the weaker regions at that time, as well as direct democracy, federal structures, and subsidies to support the building of the state from the bottom up. A modern social welfare system was introduced at the start of the 20th century – just in time to render obsolete any extension of the Swiss general strike.?

Enormous challenges lie ahead for diverse societies that wish to remain democratic. The solutions needed to address many imminent problems involve taking steps that run contrary to the individual, short-term maximization of benefits. It will be essential to conduct an intensive, open and honest dialogue in this context. I will support these efforts with conviction. As we look ahead, I wish you and your families, partners, and friends a happy, healthy and successful 2023!

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My name's Zeno Staub. I'm the Chief Executive Officer at Vontobel – a globally operating investment manager. Professionally and privately, I'm a passionate reader, keeping a close eye on trends and debates in economics, politics and society.

Why is investing the new saving? What's the historical and future impact of globalization? And how can we use the power of freedom and knowledge to actively shape the future? Such questions inspire my activities on LinkedIn. Follow my profile to stay in touch.