CAMBRIDGE – The world economy faces considerable uncertainty in the short term. Will the eurozone manage to sort out its problems and avert a breakup? Will the United States engineer a path to renewed growth? Will China find a way to reverse its economic slowdown?
The answers to these questions will determine how the global economy evolves over the next few years. But, regardless of how these immediate challenges are resolved, it is clear that the world economy is entering a difficult new longer-term phase as well – one that will be substantially less hospitable to economic growth than possibly any other period since the end of World War II.
Regardless of how they handle their current difficulties, Europe and America will emerge with high debt, low growth rates, and contentious domestic politics. Even in the best-case scenario, in which the euro remains intact, Europe will be bogged down with the demanding task of rebuilding its frayed union. And, in the US, ideological polarization between Democrats and Republicans will continue to paralyze economic policy.
Indeed, in virtually all advanced economies, high levels of inequality, strains on the middle class, and aging populations will fuel political strife in a context of unemployment and scarce fiscal resources. As these old democracies increasingly turn inward, they will become less helpful partners internationally – less willing to sustain the multilateral trading system and more ready to respond unilaterally to economic policies elsewhere that they perceive as damaging to their interests.