Dear Friends,
Deep down in our hearts we all wish economics were a precise science, and despite all our experience and studies, we still get upset when our attempts to predict the consequences of a given event go wrong.
It would be very reassuring if this were not the case, but, just as disillusionment is imprisoned between desires and certainties, economics is imprisoned in a cocktail of politics, geopolitics and, today, technology.
2025 was a year of great “abundance”: an abundance of incongruities, of volatility, of political and geopolitical shocks with a direct impact on markets. It was the year of America First, opening with a major turning point on the stock exchange, triggered by tariffs, trade tensions and conflicts that are still ongoing. Events and declarations from overseas had a major effect on the economy during the year, and continue to be a strong influence today.
We find ourselves in a situation of unprecedented levels of global uncertainty, as demonstrated by the World Uncertainty Index.
And yet, paradoxically, financial markets have reached new peaks, as may be seen by the trend in S&P 500 and MSCI World, indexes which have grown by more than 17% and 20%, respectively, in the past 12 months alone.
On the whole, the economy appears to resist. And yet a number of important signs of weakness are emerging which must be taken into account. These include a high level of concentration of US stock markets, with the “Magnificent 7” alone accounting for a third of the S&P 500, and global debt, which is estimated to exceed global GDP in the years to come, partly due to increased defense spending, the aging population and major investment in the energy transition.
To these factors we must add the growing risk linked with financial intermediaries other than banks, operating outside of the conventional perimeter of regulation, increasing financial leverage and systemic interconnection.
These are factors that could favor correction of the economic scenario. If this change comes about, much will depend on the signals coming from the US government, which has so far stood out for its particularly bold tone and actions, especially in international politics.
Europe and the United States are still profoundly interconnected economies; it would be unrealistic to fantasize about complete independence of the European economy from the American one. But it is plausible that the recent dynamics may offer encouragement for Europe to develop a greater capacity to respond, to find a virtuous balance between regulation, competitiveness and entrepreneurial, financial and technological dynamism. The European economy could thus be made less vulnerable to swings from abroad.
Now that 2025 is behind us, it is reasonable to expect the new year to bring more significant events like those we have been seeing recently. But we can only partially foresee their consequences. We must remember that, even when it is based on complex mathematical models, economics is essentially a social science, studying the behavior of individuals and optimal use of the available resources. Europe has plenty of resources to count on, both tangible and intangible; these include the ability to build systems (economic, financial, and of markets) which may be slower, but are certainly more stable over the years. And, above all, Europe has a talent of inestimable value for the production of know-how and new knowledge.
I look forward to seeing you all again soon, and I wish you all the best in 2026.
Andrea Mennillo
Founder and Managing Director, International Development Advisory
Photo credit: Resource Database (link: https://unsplash.com/it/@resourcedatabase )