Tectonic shifts will shape international relations in the new year. The growing susceptibility of anxious voters to seemingly simple answers to the great challenges of our time—most evident in the 2024 US presidential election—carries the risk of concocting a toxic mixture of populism and overstretched public finances. In this context, the international community risks an accelerated retreat from rules-based cooperation and global institutions. Existential threats, particularly from climate change, would be overshadowed by attacks on, and conflicts over, the already weakened multilateral architecture. Already, major powers are pursuing assertively their (narrowly defined) national interests, while showing less and less commitment to overarching principles, global public goods, and coordinated approaches, all of which are essential to sustaining, for generations to come, more than 8 billion people on this planet.
Geopolitical realignments
A key moment in this unfolding global realignment will come on 20 January 2025. The nationalist ‘America first’ approach of the 47th US president and his reliance on tariffs as an instrument of political coercion will fragment global institutions and contribute to strategic efforts to render established principles, rules, and agreements ineffective. This potential for destructive success stems, in large part, from the simultaneous weakening of countries that are (still) committed to multilateralism and the primacy of the rule of law as the cornerstone of international cooperation.
During President Donald Trump’s first term in office, the New York Times was still able to bestow the title of ‘Reluctant Leader of the West’ on German Chancellor Angela Merkel. But today’s G7 lacks a counterweight. Canada’s government has lost its lustre and faces an election defeat in 2025. Japan is beset by corruption scandals and the UK government, despite a comfortable parliamentary majority, fails to inspire confidence. The European Union has become rudderless at its centre. France and Germany are entering the new year paralysed by budgetary impasses and deep domestic crises of confidence. Meanwhile, the new US president can count on more than implicit support from the six EU countries with hard-right parties in government, including Italy, giving Washington the opportunity to exploit intra-European divisions.
The change of power in the US will accelerate the broader erosion of international norms and institutions triggered by Russia and China. These three countries, all permanent members of the UN Security Council, are now united in their congruence of objectives to weaken international resistance to the increasing frequency of violations of established rules, including attacks on the most sacrosanct principle of territorial integrity, as enshrined in Article 2(4) of the UN Charter. Russia is fighting for the eastern regions in Ukraine, while the world’s two strongest countries are making territorial claims to countries and territories outside their borders. Strategically, the three capitals aim at replacing the inherited liberal order with one based on political, economic, and military power.
Crisis of credibility
This crisis of credibility, which has influenced the outcome of the US election and political developments in other industrialised countries, reflects the perceived inability of democratic parties to address seriously the issues that matter most to voters and, when necessary, to resolve them even in the face of partisan opposition. It is exacerbated by growing fiscal pressures from demands related to green transitions, defence, ageing societies, migration, and potential reconstruction costs for war-torn and climate-affected countries. Public debt has already reached unsustainable levels: among advanced economies, gross government debt exceeds 100 per cent of gross domestic product in Japan, Singapore, Greece, Italy, the US, France, Canada, Belgium, Spain, and the UK, while real growth has decelerated to a weighted average rate of around two per cent in 2024. Even fiscally conservative countries, such as Germany, are struggling with an investment backlog that has undermined growth and confidence, culminating—as predicted earlier in these pages—in the implosion of its coalition government and snap elections in February 2025.
Against this backdrop, the democratic parties face what may be their last chance over the next few years. Voters want clarity of direction, honesty in choices, pragmatism in approaches, and sustainable solutions to pressing problems. History is full of examples where the failure of the political centre to tackle challenges with courage and vision has opened the door to extremist parties that use simple slogans to feed fears—and, ultimately, do great harm even to their own voters. Defending Western ideals and values requires a renewed political narrative, modernised welfare states, and adherence to the principles of macro-fiscal, socio-economic, and environmental sustainability.
Germany and France, in particular, have a responsibility to define this political vision. The success or failure of these two countries in overcoming the political impasse created by the failure to adopt a budget for 2025 will have a direct impact on the EU and its global role as a model for a post-nationalist, rules-based order. Political developments in the run-up to the holiday season do not bode well and cast doubt on the ability of the political élites to manage the situation. Overcoming the self-imposed blockade at the heart of the democratic centre, in order to demonstrate the capacity to act again (thereby contributing to the restoration of political and economic stability and offering a medium-term perspective to households, businesses, and international partners), is an obligation that goes beyond lost decades of fair-weather politics.
The year of institutions
Geopolitical and fiscal pressures, combined with rapid technological innovation, will therefore make 2025 a pivotal year for public institutions. To avoid being caught between rising budgetary demands and shrinking fiscal space, governments—whether in Berlin, Paris, or elsewhere—will need to focus on modernising their public administrations and enabling them to work with the private sector as true partners, nurture properly the tender shoots of economic growth, enable state institutions to manage welfare states efficiently (and in line with real needs), and help to curb the upward trend of unemployment. If governments cannot do more, they must do better.
The litmus test will be their ability to design, communicate, and implement reforms that set policy direction, prioritise public spending, and tackle bureaucratic inefficiencies. They will need to focus on policies to harness the momentum of green and digital technologies, while investing in education and workforce development to prepare citizens for future challenges and opportunities. In these efforts, political stability depends on tackling inequality, improving access to housing, expanding healthcare, and protecting the vulnerable. Achieving these goals will require courage and vision, but they will help to mitigate social unrest and strengthen democratic legitimacy in the face of growing scepticism and polarisation.
The strengthening of public institutions in 2025 can (and must) transform an era of conflict and upheaval into a time of opportunity and new beginnings. While nationalism and fragmentation undermine multilateral progress, visionary leadership based on cooperation, equity, and sustainability can create a counter-narrative with the potential to help to secure a stable and prosperous future. Failure to act decisively, however, will open the political floodgates to the fragmentation of the global economy into competing blocs, with policies focused on short-term gains that pose incalculable risks to long-term stability and enormous costs to future budgets.
The economic context
Economic forecasts for 2025 underline this urgency. Currency volatility will increase as a result of current developments and geopolitical conflicts. This will have a negative impact on global growth, which is likely to slow further as a result of rising tariffs, the emergence of new supply chain bottlenecks and the acceleration of de-globalisation (i.e., less cross-border trade and foreign direct investment). In response, inflation will rise again, forcing central banks to halt or reverse the recent easing of monetary policy. This would be particularly the case if public debt ratios continue to rise to levels associated with heightened crisis risks. Labour markets will come under pressure from ongoing wage-price spirals, which will exacerbate the effects from technological and demographic changes. Emerging economies, in particular, are likely to be hit hard by global risk aversion, capital outflows, currency depreciation, and rising borrowing costs. These factors will complicate their fiscal consolidation processes (with the risk of political instability if they fail). On a more positive note, innovation in the energy sector and investment in renewables should increase significantly, leading to lower energy prices, a reversal of fossil fuel dependency, and greater energy security in many parts of the world.
Ultimately, 2025 will be defined by the stability and adaptability of institutions—either as a turning point towards greater resilience or as the start of an ultimately irreversible descent into a fragmented, post-liberal order. While the window of opportunity appears to be closing ever more rapidly, the new year still offers (just) enough time and opportunity to develop substantive policy responses to the increasingly pressing challenges. The looming tectonic shifts will leave cracks in which to sow the seeds that can grow into effective and sustainable responses to existential challenges. Good examples have great power, particularly when faced with strong headwinds and rough seas, when the outlook is uncertain and navigation difficult. In the end, voters will respond positively to effective and affordable policy proposals and solutions that promote inclusive and sustainable growth and offer security and prospects—especially in times when the counter-narrative becomes both a political reality and a cautionary tale.
Jan-Peter Olters
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