World Economic Forum warns of economic risks from global financial fragmentation

DAVOS: A new report from the World Economic Forum warns that escalating geopolitical tensions are leading to a fragmentation of the global financial system, which poses significant risks to both global prosperity and human advancement.

According to the report titled *Navigating Global Financial System Fragmentation*, prepared in collaboration with the US management consulting firm Oliver Wyman, the economic repercussions of such fragmentation could surpass the costs incurred during the Covid-19 pandemic and the 2008 global financial crisis.

The rise in fragmentation is attributed to an increasing number of countries leveraging global trading and financial frameworks to bolster their geopolitical standing, notably through a combination of industrial policies, sanctions, and other economic tools. The London Stock Exchange Group (LSEG) reports a staggering 370 percent increase in sanctions since 2017, alongside a significant rise in global subsidies during this period.

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The potential impact on global GDP from this fragmentation is significant, with estimates suggesting a reduction of between $0.6 trillion and, in extreme scenarios, up to $5.7 trillion (€5.47 trillion), equating to a 5 percent decrease. The expected decline in cross-border capital flows and trade is likely to be the primary cause of this economic downturn, compounded by reduced economic efficiency.

Furthermore, global inflation could rise by more than 5% under high fragmentation conditions. The WEF report highlights the critical need for economic strategies that prioritize sustainable development, global cooperation, and resilience.

This approach would enable nations to safeguard their sovereignty and national security in a more sustainable manner while mitigating the adverse economic effects of fragmentation. Matthew Blake, head of the World Economic Forum’s Centre for Financial and Monetary Systems, commented, “The potential costs of fragmentation on the global economy are staggering. Leaders have a crucial opportunity to protect the global financial system through principled strategies.”