In a fragmented world, is there room left for economic policy?

2025 will mark the year in which we leave behind globalization as we knew it after the end of the Cold War. In turn, the model of frictionless openness and multilateralism now enters a stage of unpredictable transition.  

Donald Trump's reelection is not so much the beginning of this shift as its acceleration. The big question hovering over governments, central banks and businesses has no easy answer: can economic policy be made in times of geostrategic fragmentation, trade tensions and disputed frameworks? 

EsadeEcPol's Economic and Financial Report #37 identifies the key elements of the global shock, the emerging challenges, Europe's position and the uniqueness of the Spanish case.  

From globalization to "conditioned globalization"

Disputed rules, contested frameworks, powers in transition... What has happened in recent years? In fact, nothing entirely new: the current situation is merely the acceleration of certain trends and movements that had already begun a few years ago, such as the new protectionism and the aspiration to re-regionalize value chains.  

The US is abandoning the role it once had as arbiter of the global system and is now playing the role of a strictly self-interested power. It combines economic isolationism with geopolitical neo-imperialism without complexes. There are no allies, only transactions. Tariffs become a tool and a lever. As a consequence, multilateralism gives way to derisking, friendshoring and bilateral pressure.  

China is responding by strengthening its autonomy. Europe, still a relevant player, is looking for ways to take a position. Meanwhile, uncertainty is increasing and is particularly felt on the business front: more volatility, more pressure on supply chains and less regulatory clarity.  

In this context, growth forecasts are cooling. The IMF forecasts 1.4% for advanced economies and 3.7% for emerging economies in 2025. The general feeling is that the old model no longer holds and the new one has not yet taken shape.  

Less room for economic policy  

In this scenario, the traditional levers of economic policy have been weakened. In the aftermath of the pandemic, governments are dragging high levels of public debt, to which must be added the subsequent upturn in inflation. Inflation remains at levels that limit the ability to relax interest rates, while fiscal space is shrinking due to the rising cost of debt. As a result, monetary policy tools have lost some of their effectiveness. 

Central banks face a particularly intense challenge: to keep inflation expectations anchored without compromising financial stability. In cases such as Europe, the balance is delicate, and the predictable play (lower rates or increase spending) does not seem feasible. Even so, the euro has appreciated by more than 10% against the dollar, reflecting relative international confidence.  

What room for maneuver is left? Governance, selective international cooperation and structural reforms with real impact. In the short term, international agreements such as the EU's agreement with New Zealand or the deepening of the single market set the direction.  

On the other hand, industrial policy must be handled with care. The limited margin for fiscal policies requires a precise cost-benefit analysis, avoiding the diversion of resources to non-strategic sectors. 

Europe between opportunity and irrelevance  

Faced with a more fragmented global landscape, the EU faces a choice: it can either consolidate its position as a regulatory, commercial and technological power, or be relegated to a reactive role if it does not act quickly and coherently.  

In their contributions to the report, researchers Elina Ribakova and Federico Steinberg agree that the EU, following the US retreat, should aspire to lead a new open liberal international economic order. 

Both point out that the time has come to move from diagnosis to action. Ribakova proposes moving forward with the capital markets union, creating a European insurance asset and launching the digital euro as a shield against extraterritorial sanctions. Steinberg reinforces this view with a more political agenda: complete the banking and fiscal union, issue European Eurobonds to finance strategic public goods (defense, innovation, green transition and energy), activate the anti-coercion instrument in the face of US pressures, and weave agreements with countries in the global South to help diversify both suppliers and export markets.  

Europe has strong pieces on the board: a robust internal market, a network of reliable treaties, regulatory capacity and reputation, and a currency that is gaining weight as a safe haven. But it also has weaknesses that are holding it back: institutional slowness, regulatory fragmentation, lagging innovation, and energy and technology dependencies.  

Spain: an outliner bucking the trend  

While much of the euro zone barely scrapes 1% growth, Spain maintains forecasts of 2.3% to 2.6% for this year and was recognized as the best economy in 2024.  

Among the factors that explain this performance are the resilience of domestic consumption, a good rate of exports, a surprisingly dynamic labor market with a falling unemployment rate, high levels of household savings, and tourism that has surpassed pre-pandemic levels.  

The expansion of renewable energies strengthens industrial competitiveness, and net immigration acts as a corrective factor for demographic deficits.  

But it is not all advantages. Spain is still exposed to real risks: an unrelenting public deficit, tensions in the housing market, dependence on tourism, and exposure to tariffs in key sectors. The current good position looks more like a tactical advantage than a strategic victory.  

Geo-economic pressure and the volatile economic situation also have an impact on the national economy. According to the Minister of Industry and Tourism Jordi Hereu in a recent talk at Esade, we have to bet on a strategic reindustrialization and think of an industrial policy "more active and aware of geopolitics". 

Transition policies  

As the report states, "the biggest risk is not fragmentation, but chaotic fragmentation". An abrupt decoupling could cost the world up to 7% of global GDP, according to the IMF. But if a gradual and orderly transition takes place, this transition can open a window of opportunity to reorder, diversify and create new leadership.  

All is not lost, nor is anything guaranteed. Europe has the possibility—and the need—to exercise economic leadership from a position that combines resilience, selective openness and regulatory clarity. But it needs to act with speed and cohesion, to react to the short term with a long-term vision.  

Spain, for its part, needs to consolidate its current advantage by transforming it into structural resilience. Reforms in taxation, innovation and housing will be key to achieving this. It also needs to protect itself against external shocks.  

We are facing a change in the geopolitical chessboard, with movements that require agility, skill and coordination between different policies (economic, industrial, commercial, R&D, energy...). The game requires analysis, calculation and boldness. Those who do not know how to adapt run the risk of being out of the game sooner than expected.