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Profits, Bubbles, and Debts

The global economic landscape features rapidly changing scenes and moods. Donald Trump’s tariff war seems to have stabilised, but challenges and truces have become the norm between the United States and China; in Europe, the search for new trade agreements is intertwined with the start of a powerful rearmament; expectations raised by epochal technological innovations such as artificial intelligence are attracting hundreds of billions in investment and, with the same fervour, fuelling fears of a bubble that will pulverise investors if it bursts; the muscular posture of the United States reveals its senility in its wavering and grotesque movements, in the paralysis of shutdowns, and in the decline of the dollar, while gold reaches unthinkable heights.

Optimism and pessimism alternate, between fabulous profits and huge debt exposures from which unexpected crashes emerge — and all this in the accelerated and violent times of the crisis in the world order. An editorial in the Financial Times describes the global economy as kaleidoscopic and recommends a sceptical view: look at the markets as they truly are — resilient, lucky, and fragile all at once.

Poisons and antidotes

The IMF’s April reports, presented ten days after Trump’s liberation day and its double-digit tariffs against everyone, were steeped in disappointment and uncertainty. In the October reports, moderate optimism about the cycle [World Economic Outlook (WEO)] is accompanied by fears of that beneath the calm surface, the ground is shifting. [Global Financial Stability Report (GFSR)]. The pace of global trade expansion in 2025 rose from 1.7% in the April estimate to 3.6%. Global output growth, which fell below 3% in April, has picked up to 3.2%, but remains below the pre-pandemic decade average of 3.7%. The biggest correction is in China, from 4.0% to 4.8%, more than double that of the US (2.0%) and four times that of the Eurozone (1.2%). Russia’s war economy may have reached its limit at 0.6%, after recording growth of 4.3% in 2024.

The IMF explains why US tariffs have been less disastrous than expected: there have been several exemptions; most countries have suffered from US protectionism while avoiding retaliation; the system has remained largely open; the private sector has been agile in creating large imported stocks in advance and resetting supply chains; importers absorbed part of the tariffs to delay their impact on consumers; the depreciated dollar alleviated the cost of debt for emerging countries; large technological investments supported demand and stock markets; and Germany adopted a strong fiscal expansion. But core inflation has worsened in the US, and the labour market is tight, partly due to the ignoble expulsion of over two million immigrants.

The hidden risks of non-banks

According to chief economist Pierre-Olivier Gourinchas, it is premature to make a definitive assessment of the effects of tariffs, which will take time to unfold. The WEO draws a parallel between the timing of the tariff shock and that of Brexit: The Brexit experience is a case in point. Measures of uncertainty rose sharply before the 2016 referendum. Business investment continued to grow in the period immediately following the UK’s withdrawal from the European Union and started to fall steadily only beginning in 2018. Kristalina Georgieva, managing director of the IMF, does not rule out that a flood of goods previously destined for the US market could trigger a second round of tariff hikes. But Gourinchas is optimistic, perhaps overly so: he paints a scenario in which global growth could add, in the short term, one percentage point to the forecast, thanks to trade agreements (0.4%), a return to pre-existing tariffs (0.3%) and an increase in global productivity, facilitated by artificial intelligence (0.4%).

The Monetary and Capital Markets Department has traditionally played the role of Cassandra within the IMF. It has to uncover the risks lurking in development and finance. It points to three major ones.

The first is the hypertrophy of so-called non-banks, institutions like insurance companies, investment funds, private equity, and pension funds — which perform banking functions (loans, investments, business mediation), but without collecting deposits, and are therefore not subject to the rules and supervision applicable to banks. Today, non-banks hold half of global financial assets and account for half of the daily turnover of the foreign exchange market. They have developed close links with the banking system, particularly since the global financial crisis, meaning that any negative developments affecting them have repercussions on banks. The IMF warns that American and European credit institutions currently have exposures to non-banks amounting to $4.5 trillion and that a significant number of banks have exposures to non-bank intermediaries that exceed their Tier 1 capital.

Bubbles and debt

A second major risk comes from the rush in the stock markets for technology stocks, which today account for 35% of the capitalisation of the top 500 companies, a share similar to that of the dot-com bubble, the Internet bubble that grew in the 1990s and burst in 2000. The IMF notes that today’s stock markets are less overvalued than they were then and that the capital involved is — for better or worse — much more concentrated, with 33% of the total in the hands of the Magnificent Seven high-tech companies, all with trillion-dollar capitalisations. In an article in The Economist, Gita Gopinath, former chief economist at the IMF and now at Harvard, calculates that a market correction similar to the dot-com crash would wipe out $20 trillion of American household wealth, equivalent to 70% of GDP, and burn through $15 trillion of wealth globally. Jeff Bezos, boss of Amazon and The Washington Post, rejects the parallel with speculative bubbles; the current one is an industrial bubble, sustained by massive productive investments in artificial intelligence.

The third major risk concerns fiscal imbalances and public debt, to which the IMF devotes a specific report. Globally, debt will exceed 100% of GDP by 2029, the highest level since 1948. In advanced countries, it is driven by the United States, which will increase its debt-to-GDP ratio by 21 points (from 122% to 143%) between 2024 and 2030. In this regard, America First will refer to the level of its debt. Among emerging economies, China will lead the field, with an increase of 28 points (from 88% to 116%, according to conservative calculations by the Fiscal Monitor). In the Eurozone, the debt-to-GDP ratio will grow by only 5 points (from 87% to 92%), and this time it will be the spendthrift countries of fifteen years ago that will put the brakes on: while France will increase its debt by 16 GDP points (from 113% to 129%) and Germany by 10 points (from 64% to 74%), Italy will increase by only 2 points (from 135% to 137%); Greece will fall by 25 (from 155% to 130%), Spain by 9 (from 102% to 93%), Portugal by 18 (from 95% to 77%), and Ireland by 11 (from 39% to 28%). Are these estimates consistent with European commitments to rearmament? Who will foot the bill? Or are these figures a sign of an anticipated coming to fruition of Mario Draghi’s agenda, which could lower the debt-to-GDP ratio by accelerating growth in the denominator?

International Monetary Fund and Draghi’s agenda

In June 2025, Georgieva addressed the Eurogroup, urging it to implement the Draghi and Letta reports, with which Europe has defined a strategic agenda. For Europe — she said — it is very simple: either Europe acts or Europe risks getting sidelined. Relative decline would not happen in a flash, it would creep in, but that would not make it less real. There is no time for delay. Georgieva summarised Europe’s lag in the single market: for every €100 of added value produced in EU countries, only €20 of goods cross internal borders, while in the United States, for every $100 of added value, $45 of goods cross State borders. A crucial reason for this lag is the low level of concentration: one in five workers in the EU is employed in a company with fewer than ten employees, twice the proportion in the United States.

In early October, Georgieva, presenting the first indications of the IMF reports in Washington, returned to the sense of urgency of strategic action: And to my beloved, native Europe, some tough love: enough lofty rhetoric on how to lift competitiveness — you know what must be done. It’s time for action. This was followed by a number of proposals. Among the most important were the appointment of a single market czar, implying that the Commission is not up to the task; the creation of an energy union; and catch up with the private sector dynamism of the US.

Lagarde and the international euro

The urgency of the European strategic agenda has pushed Christine Lagarde to the forefront. At the International Monetary Policy Conference held at the end of September at the Bank of Finland, she pointed out that US tariffs have made it necessary to raise the role of the internal market in European strategy, which has so far been neglected in favour of the global market. The tariff war has made it necessary for all the powers affected to find new trading partners and expand their internal markets. The removal of internal barriers is central to Draghi’s report; in this context, European rearmament can be a driving force for industrial policy as well as European defence. Draghi clarified his thesis on bad debt and good debt: it is not just a question of debt for consumption or investment; today, in certain sectors, good debt is no longer feasible at the national level because such investments, made in isolation, cannot achieve the scale necessary to increase productivity and justify the debt. The development of the single market, strategic investments, good debt, and industrial policy are facets of the same continental prism and complement the extensive trade agreements and the role of the euro as an international currency.

At the Business France event on October 7th in Paris, Lagarde delivered a speech of rare vehemence. The lack of depth in the European capital market is a millstone around the neck of European strategy and this is the frustration that many of you feel today. In a way, we are ‘innocent bystanders’ of political decisions made in Washington and of portfolio allocation decisions made worldwide, which we don’t have much influence over. It is not a sustainable position. We cannot remain a passive safe haven, absorbing the shocks created elsewhere. We need to be a currency that shapes its own destiny. The day forward is to strengthen the international role of the euro, so that we move from being ‘in between’ to being a full international currency.

Debt and international currency

The governor of the Bank of France, François Villeroy de Galhau, agrees with Lagarde’s line: This must be Europe’s moment — and the euro’s moment. It is now or never: emerging currencies will not wait for us. But for Villeroy, the process must be accelerated with the development of safe assets, i.e., with the Union’s debt offering, which will be a catalyst for the international role of the euro. On this point, however, Lagarde disagrees. Her objection is clear: Our financial system even struggles to channel our savings into productive investment. More than €11.5 trillion of household savings are still held as deposits, equivalent to one-third of total liquid assets. In this setting, instead of stimulating growth, safe-haven inflows risk pushing the euro up and leaving [European] exporters with higher costs.

The urgency to seize the moment, which he considers favourable, motivates Villeroy. This is putting the cart before the horse, Lagarde objects. European savings and foreign capital should be directed into the Union’s capital market, not the debt market, unless it is for defence purposes. In addition, trade agreements and arrangements are needed to invoice trade in euros. Furthermore, there are other levers to accelerate the global euro: the ECB’s digital euro, the ECB’s swap networks, which guarantee liquidity to partners in times of crisis, and the institutional integrity of the Central Bank.

The comparison with the state of siege suffered by the Fed is clear.

Lotta Comunista, October 2025

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