The world that went to war in 1914 was rich following several decades of peace. International commerce was at its zenith as raw materials from Europe’s extensive colonies fed the industrial machines of their powerful post-agricultural economies. They are cosmopolitan and cultured one moment then nationalist and barbaric the next. How could it have gone so wrong?

The empires that had held the world together were already straining under their own weight, so when an Austrian archduke was assassinated in a relatively obscure, if troublesome part of the vast Austro-Hungarian Empire, what had appeared as healthy competition descended into beggar-thy-neighbour rivalry and chaos. Commerce and cross border lending and investment stopped, not to resume fully for another forty years after a second war.

The European blocs that fought each other in 1914 comprised the Austro-Hungarian Empire teamed up with the mighty Prussian military machine, opposed by Russia, France and its allies, which ultimately included Britain. For most of the duration, the USA self isolated.

Fast forward forty odd years, the European Coal and Steel Community that was born after WWII aimed to replace competition for raw materials with cooperation and shared endeavour. In the form of the EU, it succeeded in making all but unthinkable the idea that its members would start bombing each other again. Europe, the epicentre of war in 1914 became economically integrated to the point of being a united power on a global stage. Peace and wealth is the product of the continuous dialogue and cooperation that enabled that integration.

Today’s rivals and allies no longer sit within Western Europe, but span the globe in the form of China, Russia and the USA. Now, as then, what had seemed a tightly interconnected world of commerce, where the main economic blocs fed impressive economic growth and technological progress, is degenerating into rivalry and mutual suspicion reminiscent of 1914. Mounting tensions between China, the USA and EU over accusations of intellectual property theft, interference in democratic institutions and human rights abuses bump up against the conviction that the West is trying to ‘keep China Down’, as if global commerce were a zero sum affair, where one party’s gain must be another’s loss. Deteriorating relations, hence communication, between blocs threaten collaboration in research and production, and the healthy rules based global commerce that, among other things, lifted a billion or so people out of poverty. Tit-for-tat trade wars and restrictions on cross border investments echo the self imposed 1914 freezes in lending and investment between erstwhile trading partners.

Putin’s invasion of Ukraine has crystallised blocs comprising Russia and its client states, opposed by the EU and the USA; with China, though reluctant to incur the wrath and crippling sanctions of the West, finding itself unable to side with it against the might-is-right theology it shares with Putin. Like the USA in 1914, China is finding its self isolation untenable.

When cross border capital stops flowing, banks and businesses go bust. People lose jobs and prices of basic necessities, cut off from the most cost effective sources rise significantly. Governments do what they can to dampen the shocks, but short term measures, such as cash payments or price freezes are unsustainable. More durable adjustments, such as developing the infrastructure needed for self sufficiency in energy, base metals, grains and key industrial and technological components, take much longer and, in the end, reinforce the isolation. That process, which arguably had started before WWI, was a main contributor to the Great Depression that followed. In this century it had restarted even before the pandemic; while threats over supplies of gas, oil, base commodities and grain supplies brought new urgency.

Leaving aside the current war induced isolation of Russia, America’s and Europe’s increasing distrust of China has, for some time, encouraged that country to seek its own self sufficiency, both of capital and of technology. It has a long way to go, but China will, in time, catch up with the West, in the same way that it will develop its own advanced semiconductors and other key inputs that are now bought from the EU and the USA, Europe will survive the energy shocks and develop alternative sources of energy, base metals and grains. But in the long term, an almost certain sharp reduction in cooperation in all areas of scientific research, exacerbated by less interoperability of electronic and communications kit, among other things, will crimp innovation, raise costs and, worst of all, impede cooperation and collaboration that is vital to the positive sum world of peace and prosperity.

Whatever the outcome of Putin’s aggression in Ukraine, the world will emerge from this conflict a very different place. The hope is that enough lessons have been learned from the aftermath of WWI to avoid the prolonged catastrophe of the early twentieth century.

Image by Pascal Ingelrest on Pexels.

Frances Cowell
Australian-born and European by adoption, Frances Cowell writes and speaks at conferences about investment risk and governance, financial market stability and business ethics in financial markets – and the implications for the wider political economy. She believes Europe must urgently assume the lead in protecting and preserving liberal democracy, the rule of law and the multi-lateral institutions and alliances that it depends on.

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