A Great Breakdown?

ISTANBUL – This month – the centenary of the outbreak of World War I – is an opportune time to reflect on big risks. As Michael Spence recently warned, the international order’s widening security deficit, reflecting the weakening of whatever global governance we have, is fast becoming the biggest risk facing the world economy. The same point could have been made a century ago.

On July 30, 1914, Austrian warships bombarded Belgrade, five weeks after the assassination of Archduke Franz Ferdinand in Sarajevo. By mid-August, the world was at war. The armistice that was agreed four years later, after about 20 million people had died, amounted only to an interlude before the horror of World War II.

In the years preceding August 1914, until the assassination of the archduke, the global economy performed relatively well: trade expanded worldwide, financial markets seemed healthy, and the business community shrugged off political problems as either temporary or irrelevant. It was a political breakdown that led to three terrible decades for the world economy.

Markets and economic activity can withstand a great deal of political stress and uncertainty – up to the point that the international order breaks down. Today, for example, the economic mood is rather upbeat. The International Monetary Fund forecasts 4% growth for the world economy in 2015, while stock-market indices are up in many parts of the world; indeed, the Dow Jones reached an all-time high in July.