The New Cost of Geopolitics

The global economy is entering a new phase.

For decades, finance, trade and investment were increasingly built around the assumption that economic integration would continue to deepen. Capital could move across borders, companies could build global supply chains, energy could be sourced internationally, and financial institutions could operate within an increasingly interconnected system.

That assumption is now being challenged.

War, sanctions, energy shocks, defence spending, tariffs, strategic competition and financial fragmentation are becoming structural economic variables.

The result is not simply slower growth.

It is a higher cost of uncertainty.

After more than four decades working across finance, corporate management, international banking and financial services, I believe that this is one of the most important changes facing financial professionals, investors and business leaders today.

The central question is no longer simply whether the United States or Europe will grow faster.

The more important question is:

Which economic system will prove more resilient in a world where geopolitics increasingly determines the cost and direction of capital?

The economics of war

Europe is experiencing perhaps the most profound change in its economic priorities in decades.

The war in Ukraine has transformed the European debate around defence, energy security, industrial capacity and strategic autonomy.

European Union defence expenditure reached approximately €418 billion in 2025 and is projected to rise to €454 billion in 2026, equivalent to around 2.4% of EU GDP. Defence investment is also increasing rapidly.

From a strategic perspective, this is understandable.

European countries need stronger defence capabilities.

But economics requires us to recognise the other side of the equation.

Every additional euro directed toward defence has an opportunity cost.

It cannot simultaneously be spent on infrastructure, education, healthcare, technological development or other investments capable of increasing long-term productivity.

This does not make defence spending economically negative.

It means that Europe must ensure that security expenditure also becomes an industrial and technological investment, rather than simply a permanent fiscal burden.

That distinction could become decisive.

Sanctions have transformed international finance

The sanctions imposed on Russia represent another structural change.

The European Union’s latest sanctions package has expanded restrictions on Russian banks, financial institutions, crypto platforms, oil traders and circumvention networks.

The European Commission says that the 21st package further restricts Russia’s ability to finance the war and that more than two-thirds of the liquid assets of Russia’s sovereign wealth fund have been depleted since the beginning of the war. More than 100 Russian banks are now subject to transaction bans under the EU framework.

This is significant beyond Russia itself.

The international financial system is increasingly being used as an instrument of geopolitical policy.

Asset freezes, transaction restrictions, beneficial-ownership analysis, regulatory compliance, regulatory compliance, sanctions screening, crypto controls and anti-circumvention measures are becoming central components of international finance.

For financial institutions and international businesses, geopolitical risk is therefore becoming increasingly inseparable from financial risk.

The ability to understand where capital comes from, where it moves, who controls it and which jurisdictions are involved has never been more important.

Europe: security versus growth

Europe now faces an unusually difficult economic equation.

It needs to:

• increase defence expenditure;

• strengthen energy security;

• invest in artificial intelligence and digital infrastructure;

• improve productivity;

• rebuild industrial capacity;

• manage demographic ageing;

• and maintain fiscal sustainability.

At the same time, economic growth remains relatively weak.

The IMF projects euro-area growth of only 0.9% in 2026, with inflation projected at around 2.9%. The IMF also warns that risks remain tilted toward weaker growth and higher inflation, particularly because of energy disruptions and geopolitical developments.

The OECD’s June outlook was similarly cautious, projecting euro-area growth of 0.8% in 2026.

This creates a difficult structural problem:

Europe needs to spend more precisely when its underlying growth engine is relatively weak.

But there is another side to the European story.

Europe should not be described simply as the weaker economic bloc.

Recent market behaviour has demonstrated that investors are increasingly reconsidering the European opportunity. Reuters reported on August 21 that European equities were attracting renewed interest, the STOXX 600 was approaching record levels, the euro had strengthened and European valuations remained at a significant discount to US markets.

That is an important distinction.

Europe has problems.

But it also has assets.

The United States: stronger growth, greater fiscal pressure

The United States remains the more dynamic major economy.

Its technology sector is dominant.

Its capital markets are deeper.

Its productivity performance has been stronger.

Its ability to attract capital remains exceptional.

The IMF expects US growth of approximately 2.4% in 2026, considerably above the euro-area forecast.

The IMF also highlights the strength of US productivity, innovation and entrepreneurial activity.

But the United States has another side to the equation.

General government gross debt is projected at approximately 125.8% of GDP in 2026, with the IMF projecting it to exceed 140% by 2031. The general government deficit is expected to remain around 7–7.5% of GDP.

This creates an interesting paradox:

The United States currently offers stronger growth, but carries significant fiscal and financial vulnerabilities.

Europe has weaker growth, but some of its major economies retain substantial financial resources, industrial capacity and relatively lower sovereign debt burdens.

The comparison is therefore much more nuanced than the traditional narrative of “dynamic America versus stagnant Europe.”

The Trump factor

This is where the current economic debate becomes particularly important.

It would be intellectually simplistic to argue that Donald Trump created the economic problems confronting the United States or Europe.

He did not.

Ageing populations, debt, weak productivity in parts of Europe, the consequences of the pandemic, the war in Ukraine, energy shocks and structural changes in global trade all predate his second administration.

But something else is also difficult to ignore:

the return of Donald Trump has materially increased the level of uncertainty surrounding international trade, investment and geopolitical relations.

His administration’s use of tariffs has changed the calculation faced by companies operating across the Atlantic.

A tariff is not simply a political instrument.

It is an economic cost.

It changes prices.

It changes supply chains.

It changes investment decisions.

And, perhaps most importantly, it changes expectations.

The IMF has explicitly incorporated the effects of tariff changes into its US outlook and notes that tariffs contributed to higher goods inflation in 2025.

But the more important issue may not be the tariff itself.

It is the uncertainty surrounding future tariffs.

The price of uncertainty

A company can adapt to a known tax.

It can adapt to a known tariff.

It can adapt to a known regulatory requirement.

It is much more difficult to make a five- or ten-year investment decision when the rules can change rapidly.

This is where the Trump administration’s policies become economically significant.

Reuters reported this month that German companies’ direct investment in the United States fell to €4.3 billion in the first half of 2026, almost two-thirds below the previous year and nearly 80% below the level recorded in the first half of 2024. The German Economic Institute attributed the continuing decline partly to uncertainty surrounding US trade policy.

This does not mean that American markets have suddenly become unattractive.

The same report noted that companies already operating in the United States continue to reinvest profits.

That is an important nuance.

America remains attractive.

But uncertainty is influencing the decision to commit new capital.

And capital allocation determines future productivity.

Trump has changed more than trade

The economic impact of the Trump administration should therefore not be evaluated exclusively through tariffs.

There is also a broader geopolitical dimension.

The relationship between the United States and its traditional European allies has become more transactional.

Defence burden-sharing has become a central issue.

Trade policy has increasingly been used as leverage.

International institutions and multilateral arrangements face greater uncertainty.

For businesses, this means that the traditional assumption of a relatively predictable transatlantic economic relationship can no longer be taken for granted.

This is where I believe the Trump effect becomes particularly relevant.

It is not simply that individual policies may increase costs. It is that the predictability of the international economic environment has deteriorated.

For financial markets, predictability has value.

For investment, predictability has value.

For long-term business planning, predictability has value.

The social cost of economic fragmentation

There is also a dimension that is often underestimated in macroeconomic analysis:

uncertainty has a social cost.

Higher energy prices affect households.

Higher borrowing costs affect mortgages and businesses.

Inflation reduces purchasing power.

Defence expenditure competes with other public priorities.

Trade barriers threaten businesses that depend on global supply chains.

And geopolitical instability creates uncertainty about employment, investment and future economic opportunities.

The IMF has warned that the European outlook is vulnerable to weaker confidence and financial stress, while the European Commission has highlighted concerns around inflation and consumer confidence.

Economic fragmentation can therefore gradually become social fragmentation.

This is perhaps the most dangerous long-term consequence of the current geopolitical cycle.

USA versus Europe: a different way to look at the numbers

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United States vs. Europe: The Macro Picture

Economic Growth

United States: The IMF projects approximately 2.4% GDP growth in 2026.

Euro Area: The IMF projects approximately 0.9% GDP growth in 2026.

The United States therefore maintains a significant short-term growth advantage.

Productivity

United States: Higher productivity growth, supported by technology, innovation, investment and a highly dynamic private sector.

Europe: Productivity remains a structural challenge, particularly because of weaker investment, demographic ageing and regulatory fragmentation.

Technology

United States: Global leadership in artificial intelligence, software, semiconductors, digital platforms and venture capital.

Europe: Strong scientific and industrial capabilities, but still facing a significant gap in scaling technology companies and attracting technology investment.

Capital Markets

United States: The world’s deepest and most liquid capital markets, with exceptional access to private and public capital.

Europe: Sophisticated financial markets, but more fragmented across countries and less integrated than the US financial system.

Public Debt

United States: General government debt is projected at approximately 125.8% of GDP in 2026, according to the IMF.

Europe: Public debt varies significantly between countries, with several major economies facing important fiscal constraints.

Fiscal Deficit

United States: The fiscal deficit remains exceptionally high, at approximately 7–7.5% of GDP.

Europe: Fiscal policy is generally more constrained by European fiscal rules, although defence and energy expenditure are creating additional pressure.

Defence Spending

United States: Defence spending remains structurally high and represents a major component of federal expenditure.

Europe: Defence spending is rising rapidly, with EU defence expenditure projected to reach approximately €454 billion in 2026.

Energy

United States: Greater energy independence provides an important strategic advantage.

Europe: Energy security remains a significant economic issue following the reduction in dependence on Russian energy.

Demographics

United States: Demographic trends are more favourable than in most European economies.

Europe: Rapid population ageing represents a major long-term challenge for pensions, healthcare, labour supply and public finances.

Currency

United States: The US dollar remains the world’s dominant reserve and international transaction currency.

Europe: The euro remains the world’s second major international currency and an important reserve asset.

Political Environment

United States: High political polarisation creates uncertainty around fiscal, trade and regulatory policy.

Europe: Political fragmentation between member states can make coordinated economic policy more difficult.

Trade Policy

United States: Increasingly protectionist, with tariffs becoming an important component of economic policy.

Europe: More traditionally committed to rules-based international trade, although increasingly focused on strategic autonomy and economic security.

The key conclusion

The United States currently has the advantage in growth, technology, productivity and capital markets.

Europe has significant advantages in accumulated wealth, industrial capacity, the size of its consumer market and the potential for a new investment cycle driven by defence, energy, infrastructure and technology.

The important question is therefore not simply who is stronger today.

It is who can transform today’s geopolitical pressures into tomorrow’s productivity and economic growth.

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The United States clearly retains important advantages.

But Europe has characteristics that should not be underestimated:

a large integrated consumer market, significant accumulated wealth, strong industrial capabilities, sophisticated financial institutions and the euro.

The current weakness may therefore also represent an opportunity.

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Europe may have an opportunity

The recent resilience of European financial markets is worth watching carefully.

Reuters reported on August 21 that the STOXX 600 was approaching record highs, European equities were attracting fresh capital and the euro had recovered strongly from its June lows. European valuations also remained significantly below those of Wall Street.

This does not mean Europe has solved its structural problems.

It means investors may increasingly distinguish between economic weakness and asset valuation.

That distinction matters.

A slower-growing economy can still produce attractive investments if valuations, cash flows and structural opportunities are favourable.

Europe’s defence transformation could also create a new industrial cycle.

Defence, energy infrastructure, cybersecurity, semiconductors, artificial intelligence, electrification and strategic manufacturing may become increasingly important areas of European investment.

The challenge is to convert geopolitical necessity into productivity-enhancing investment.

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The financial system is becoming geopolitical

For international finance, this is perhaps the most important conclusion.

The traditional financial analysis focused on:

* profitability;

* leverage;

* liquidity;

* interest rates;

* currencies;

* credit risk;

* market risk.

Today, another layer is increasingly necessary:

geopolitical risk.

Investors and financial institutions increasingly need to understand:

* sanctions;

* jurisdictions;

* beneficial ownership;

* cross-border flows;

* supply-chain exposure;

* energy dependence;

* political stability;

* regulatory fragmentation;

* and the possibility of sudden restrictions on capital movements.

The boundary between financial risk and geopolitical risk is becoming increasingly difficult to define.

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What comes next?

I believe the world is moving toward a system of strategic economic blocs.

Globalisation is not disappearing.

But it is changing.

Companies will continue to trade internationally.

Capital will continue to cross borders.

Technology will continue to connect markets.

But governments will increasingly ask a different question:

Is this economic relationship also strategically safe?

That question will influence investment, supply chains, energy, banking and financial regulation.

The consequence will be a more expensive form of globalisation.

Not necessarily less globalisation.

But more fragmented, more regulated and more politically conditioned globalisation.

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My perspective

After more than 40 years in finance, I would not describe the current environment simply as an American crisis or a European crisis.

It is a Western economic adjustment to a new geopolitical reality.

The United States has greater growth potential, technological leadership and deeper capital markets.

Europe has lower growth but substantial accumulated wealth, industrial capabilities and an opportunity to transform its security spending into a new investment cycle.

Neither model is without serious vulnerabilities.

The real danger is that geopolitical confrontation becomes so dominant that governments begin to treat economic efficiency as secondary.

That would be a mistake.

Security is essential.

But so are productivity, investment, innovation, fiscal discipline and social cohesion.

And this is where I believe the return of Donald Trump deserves particular attention.

Trump did not create the structural weaknesses of the Western economies. But his administration has added a significant layer of uncertainty to an already fragile economic and geopolitical environment.

Tariffs, pressure on allies, changing trade rules and a more transactional approach to international relations have made long-term economic planning more difficult.

The evidence emerging from investment flows suggests that this uncertainty is already influencing corporate decisions.

The paradox is striking.

The United States remains the world’s most powerful economic and financial system.

Europe remains one of the world’s largest economic blocs.

Yet both are now allocating increasing economic resources to managing geopolitical risk.

The defining challenge of the next decade will therefore not be America versus Europe.

It will be whether the Western economies can simultaneously rebuild:

growth, productivity, fiscal credibility, energy security, technological leadership and social cohesion.

The countries and companies that succeed will not necessarily be those that choose between economics and geopolitics.

They will be those that understand that, in the new global economy, the two have become inseparable.

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Roberto Balbino

International Finance & Banking Executive | Founder & CEO, Fintech SCB

This article represents the author’s professional perspective and is intended as an independent macroeconomic analysis, not as investment advice.