Security, energy and money have a cost

In truth, we all knew that the world is not a place of peace. In 2021 alone, there were 40 conflicts around the globe that were categorized as wars. And yet those of us living in the West and in Europe had the one-sided view that we were living in a peaceful world – after somewhat arrogantly proclaiming the end of history. We were wrong. February 24, 2022 marked a turning point. The conflict in Ukraine has taken on a political dimension that is reminiscent of the Cuban crisis of 1961, and the images of human suffering we are seeing remind us of all previous theaters of war that we only witnessed from afar.

War harshly exposes mistakes, errors of judgement, and other failings. Three illusions that exist primarily in Europe – i.e. that we don’t have to pay a price for our security or for our energy and money supply – have literally gone up in smoke as a result of this war.

Security

After the Iron Curtain came down, politicians were convinced that security no longer had a price. Governments factored the “peace dividend” into their budgets more zealously than anything else. Closer economic and cultural ties between nations were supposed to secure – or even create – peace. Unfortunately, however, the Romans have proved right with their observation:

“Si vis pacem, para bellum”

(“If you want peace, prepare for war”)

In 2020, only 11 out of 30 NATO member states achieved their self-imposed target of investing at least 2% of GDP in defense. In 2020, Russia’s defense spending amounted to around 4.3% of GDP, compared to around 3.7% in the US and 5.6% in Israel. Spending on security is now set to increase around the globe, and many countries are discussing whether military service should be made compulsory for their citizens. Each nation can only achieve self-determination in matters of freedom if it is considered willing and able to secure its own borders – be it on land, at sea, in the air, and, in today’s world, also in cyberspace – either independently or as part of an alliance.

Energy

Like countless other supply chains, the energy supply has been globalized in an uncompromising way and has been optimized to achieve the lowest possible costs – with redundancy in the supply chain being eliminated as a result. The pressing scientific need to tackle climate change and the political pressure to respond to the Fukushima nuclear disaster have further weakened the resilience of today’s energy supply. Simple compromises in the area of climate protection cannot be viewed as an alternative to ensuring energy security in the wake of the Ukraine conflict. Realism, action, and courage are now more important than ever. If we take our responsibility for future generations seriously, then we must transition to a net zero world.

The energy mix of tomorrow – which will place an emphasis on climate protection and on achieving the greatest possible independence of supply – will, however, still include some fossil fuels. We will need to deploy every technology available today and in the future to ensure a reliable and green energy supply. This will require policies that provide a reliable basis for future planning, set incentives, and avoid excessive interventions in market mechanisms. With appropriate carbon pricing, competitive forces should enable the best solutions to prevail. The development of the Covid-19 vaccine has shown what science is capable of when it is afforded the necessary space and freedom. Within a very short space of time, the population of the Western world had not just one but more than three effective vaccines at its disposal.

Money

The rise in energy prices and the renewed pressure on global supply chains has not only dispelled the illusion of “free money” – i.e. that it is possible to print money to finance government spending without triggering inflation. Countries will have no option other than to wean themselves off this free money and absorb the resulting costs. Every economic area will need to decide how these costs are allocated between different generations and to the different economic levers of consumption, assets, and taxes.

Abandoning these three illusions is already proving painful. However, we should address the fallout from this process rapidly and decisively, as the war and its long-term consequences will put two further hypotheses to the test. And we cannot allow these hypotheses to become illusions. The cost of doing so would simply be too great.?

Community of values

The first hypothesis is that free, open societies can deal with almost unlimited levels of migration and become better, more inclusive, and more diverse societies. This is only true if the internal “community of values” within those societies is preserved and continuously strengthened through targeted efforts to promote integration as well as a willingness to integrate. The refugee crisis caused by the war and the repercussions of the crisis, including hunger in numerous regions of the world, will challenge this hypothesis. While it is absolutely right to offer a safe haven to people fleeing the war, it would be wrong to believe that emergency humanitarian aid is all that is needed to ensure the successful integration of these refugees into a community of values.?

Engaging with society

The second hypothesis is that our global institutions and communications processes make it possible to steadily navigate a world with closely interlinked economies – moving from a rigid bipolar world order that existed until 1989 to a unilateral, flat world and on to a multipolar, uneven world. We will only be able to successfully follow this inevitable path by engaging with society and by not allowing those individuals with easy answers to have the final say. After all, the path that leads from this hypothesis to illusion is paved with protectionism, xenophobia, economic crises, and scapegoats. If we want to avoid taking that direction, it is important for small and open societies such as Switzerland to also do more.

If, in contrast to Karl Popper, we want to prove that these two hypotheses are correct based on our actions, then we will only have the power to do so if we recognize once again that security, energy, and money all have a cost. The road to achieving this offers opportunities to secure greater peace over the long term, to build a more sustainable world, and to create a world with clear pricing to drive increased prosperity for more people.

It will be worth the effort.

As always, I look forward to your comments, whether you agree or disagree with the ideas presented here.

-----

My name's Zeno Staub. I'm 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.