The financial march to war

Since global financial stability must be seen as a public good, many international institutions are committed to creating the conditions for its maintenance. However, geopolitical conflicts often lead to a change in thinking: suddenly instability becomes a useful tool to protect one's interests in global competition. In our era of trade wars, cross-border supply chains and restrictions on access to key technologies - call it "geotechnopolitics" - a new version of this old dynamic is emerging. If history is to be believed, a financial war is not far off.

In the twentieth century, world wars were preceded by the formation of opposing blocs and an increase in the number of targeted financial attacks. As diplomatic tensions escalated, each side sought to undermine the potential of the other through a financial war of attrition. Thus, in the period up to 1914, financial mobilization preceded military mobilization.

For example, during the second Moroccan crisis in 1911, France responded to the German placement of a gunboat in the coastal city of Agadir by organizing a flash sale of German securities, which caused a financial panic in Germany. At the same time, Austria-Hungary, whose firms wanted access to the French capital market, abandoned its German ally and sided with Paris. Therefore, Germany felt less secure about Austria's support and was determined to create economic problems that would force the Habsburg Empire to return to its side.

The path to war in 1939 was even clearer thanks to financial attacks. The Great Depression showed how panic and bank failure can demoralize and destroy entire countries, so strategists found themselves an obvious weapon. Since a collapse in bond prices or an outflow of money would force governments to resort to austerity as a fiscal countermeasure, creating a financial crisis was an effective way to reduce a rival's defense spending (always the largest budget item).

Thus, starting in 1936, German economic planners repeatedly used the Bank of Amsterdam to attack the French franc, which eventually led to the restriction of France's military budget. This financial mobilization for the war became a trap that closed for France after the invasion of Nazi Germany in 1940.

In the conditions of increased tensions in the world after the covid-19 pandemic and the Russian invasion of Ukraine in 2022, there is reason to fear that the international order is collapsing and that other priorities are crowding out the search for financial stability as a global public good. The old winning strategies in the zero-sum game are becoming relevant again, and the financial war is back with a vengeance in the form of sanctions.

In fact, it seems only a matter of time before hostile financial speculation joins the arsenal of hybrid warfare alongside cyber attacks and mass disinformation. Tightening interest rates have made turmoil in the bond market more likely. The conditions for financial attacks are ripe.

Vulnerability is evident worldwide. The low interest rate regime of the last 15 years has fueled a construction boom around the world; but covid-19 has changed the way we live and work, leading to a broad shift in expectations around how buildings and associated infrastructure will be used (if at all). With the decline in the number of offices in major urban centers, commercial real estate has become particularly vulnerable. We have already seen the spectacular collapse of leading real estate investors such as Evergrande in China and Signa in Austria and Central Europe.

The turmoil is also reflected in the stock markets. Russia's MOEKS Index is down more than 50% annually after October 2021; although it started to recover in October 2022, it is now in decline again.

Similarly, China's Shanghai Composite Index fell by nearly a third from September 2021 to the end of January 2024. Since then, Chinese authorities have taken increasingly ambitious measures to curb speculation and stem the collapse. The situation in Hong Kong, a key financial intermediary between China and the world, looks even worse.

One can interpret these market signals as a financial verdict on Russia and China. At the end of the day, the geopolitical West looks great: Japan's Nikkei and European and US stock markets are up, and the problems with commercial real estate haven't led to any form of general panic. On the contrary, Western institutions are increasingly proud to ensure financial and economic sustainability.

It is difficult to imagine any method by which geopolitical rivals could cause a collapse in the West as a whole. There is no obvious equivalent to the Bank of Amsterdam in the 1930s, which crashed the French franc in a precisely timed attack designed to weaken the enemy before an invasion.

All that remains is - rhetoric. Like so much else, finance follows constructed narratives that can change dramatically and cause general rethinking. The most fascinating - and telling - part of Russian President Vladimir Putin's recent bizarre interview with American right-wing commentator Tucker Carlson was not an irrational journey through a millennium of Russian history, but his apparent attempt to rewrite the financial market narrative.

Putin began by noting, "The dollar is the cornerstone of the power of the United States." He then sketched a scenario in which the world would turn against the dollar and destroy a weakened America: "But they won't stop printing. What does the $33 trillion debt tell us? O that it is a show".

This was, no doubt, a call to attack America's dominant financial position. True, it can also be attributed to Putin's habit of making noise. He did something similar with previous threats of nuclear war, but the effect of that pressure quickly faded.

However, given that global financial vulnerability will continue to increase, combat operations in the hybrid warfare theater seem much more likely than the use of nuclear weapons. We can be sure that American rivals will increasingly rely on the power of narrative to open cracks in major Western markets.

The author is a professor of history and international affairs at Princeton University

Copyright: Project Syndicate, 2024. (translation: NR)