EUROPE BETWEEN BRITISH REARMAMENT, NEW TRADE BARRIERS, AND SELECTIVE CREDIT – Cristina Di Silvio

From Linear Globalization to Systemic Fragmentation

The European economy has entered a phase in which the traditional categories of the business cycle, economic fluctuations, and global demand are no longer sufficient to explain the dynamics of growth. For more than three decades, market integration, the expansion of global value chains, declining transport costs, and trade liberalization fostered the idea of a largely linear globalization, in which open markets, productive specialization, and capital mobility appeared to constitute the almost natural foundation of increasing prosperity.

That representation has now been profoundly disrupted. Geopolitical tensions, strategic competition among major powers, the crisis of multilateral trade, the regionalization of supply chains, concerns over supply security, the politicization of energy, technological dependence, and the renewed centrality of defence as an industrial sector are reshaping the grammar of European growth. The key question is no longer simply how much the economy will grow, but where growth will occur, through which production networks, under which strategic constraints, within what financial conditions, and in relation to which geopolitical blocs.

The International Monetary Fund has repeatedly highlighted the risks associated with geoeconomic fragmentation, the volatility of trade policies, and the resurgence of protectionist and selective measures, while the World Trade Organization has warned that trade fragmentation, fuelled by geopolitical tensions, may reduce economic opportunities, financial resources, and the capacity for inclusive development. The crucial point is that the international economy is no longer governed solely by the logic of efficiency, but by an increasingly close combination of efficiency, security, control, resilience, and power.

Within this context, the distinction between economics and geopolitics is gradually narrowing. Economic instruments are increasingly employed for strategic purposes, while security decisions generate industrial, employment, financial, and commercial consequences. European growth is therefore taking shape within a less neutral, more selective, and more politically driven environment, in which the position of a country or a firm depends not only on productivity but also on its ability to integrate into supply chains regarded as strategically significant.

British Rearmament as Industrial Policy

The United Kingdom’s new cycle of defence investment represents one of the clearest examples of this transformation. The Strategic Defence Review 2025 does more than redefine the country’s military posture; it explicitly links national security to economic growth, industrial capacity, technological innovation, and the creation of highly skilled employment. The commitment to increase defence spending to 2.5% of GDP by 2027, with the ambition of reaching 3% during the following parliamentary term, subject to fiscal and economic conditions, signals a significant paradigm shift: defence is no longer viewed merely as an item of public expenditure but is once again presented as a strategic pillar of national competitiveness.

This process should not be interpreted solely as a response to Russia’s aggression against Ukraine, NATO’s strengthening, or the instability of the international environment. It should also be understood as an explicit form of industrial policy, directing public demand, research funding, procurement, dual-use technologies, infrastructure investment, and professional skills towards an industrial complex encompassing aerospace, shipbuilding, electronics, cybersecurity, artificial intelligence, autonomous systems, secure communications, sensor technologies, logistics, and advanced manufacturing.

From this perspective, defence performs both an anti-cyclical and a selective function. It is anti-cyclical because public demand can sustain high-technology sectors even when private demand weakens. It is selective because it does not distribute resources uniformly across the productive system but instead prioritizes supply chains considered essential for national security and strategic positioning. Industrial policy is therefore no longer conceived merely as support for production but increasingly as the construction of sovereign—or semi-sovereign—capabilities in sectors where external dependence is perceived as a strategic vulnerability.

The British case is particularly significant for continental Europe because it illustrates how the return of defence reshapes the relationship between the state and the market. Markets are not replaced but strategically directed; competition is not eliminated but channelled towards national priorities; innovation is generated not only by private demand but also through public investment in complex technological systems. Rearmament, in this sense, is not merely a military decision but also a technology of economic reorganization.

New Trade Barriers and the Fragmentation of Global Flows

At the same time, the European Union is strengthening its regulatory, customs, and enforcement instruments governing trade with third-country economies, particularly concerning e-commerce and low-value goods imported through non-EU digital platforms. The proposed removal of the €150 customs duty exemption for low-value consignments, justified by the rapid growth of direct imports to European consumers and by the need to ensure product safety, regulatory compliance, sustainability, and fair competition, represents an emblematic development in this new phase.

Here again, the issue extends far beyond customs policy. The low-value parcel entering the European market is no longer merely an inexpensive consumer good; it is the final node of an often opaque global supply chain involving digital platforms, micro-transactions, taxation, product safety, consumer protection, competition with European businesses, environmental sustainability, customs enforcement, and the administrative capacity of Member States. Commercial and customs law thus becomes an indirect instrument of industrial policy.

Trade fragmentation is no longer expressed solely through the traditional mechanisms of high tariffs or declared trade wars. It increasingly operates through enhanced inspections, regulatory requirements, origin traceability, conformity assessments, disclosure obligations, sector-specific restrictions, environmental standards, anti-subsidy measures, and trade defence instruments. Contemporary barriers are not always visible tariff walls; they are often regulatory thresholds, administrative procedures, compliance obligations, or technical standards that alter the economic attractiveness of international trade.

The macroeconomic impact of these policies should not necessarily be interpreted as an immediate and concentrated shock but rather as a diffuse and differentiated pressure affecting prices, logistics networks, business margins, and consumer behaviour. Low-cost goods, which for years supported part of European consumption amid wage stagnation and constrained disposable income, have become the focal point of tensions between price accessibility, the protection of the internal market, and economic security.

In this context, Europe faces a delicate balancing act. On the one hand, it must avoid becoming merely a passive destination market for inexpensive products originating from production systems subject to weaker regulatory standards or supported by non-equivalent industrial models. On the other hand, it must ensure that protecting the internal market does not result in regressive price increases for consumers or a further contraction of household consumption. Trade policy thus becomes a form of governance over economic vulnerability.

The Credit Cycle as a Structural Variable

From a financial perspective, the euro area continues to operate in an environment where monetary policy, despite entering a phase of gradual normalization following the previous period of restrictive interest rates, produces differentiated effects across countries, sectors, and categories of firms. The ECB’s Economic Bulletin and Bank Lending Survey show that financing conditions remain a crucial transmission channel of monetary policy and that the interaction between loan demand, credit standards, risk perception, and access to finance continues to shape firms’ investment capacity.

The cost of capital is therefore gradually losing its purely cyclical character and assuming a more structural configuration. The issue is no longer simply whether interest rates are relatively high or low, but rather that access to credit increasingly depends on sectoral characteristics, firms’ financial strength, their integration into strategic value chains, the presence of public demand, the bankability of investment projects, and their ability to demonstrate resilience to geopolitical, energy, and commercial shocks.

Businesses primarily dependent on private demand, domestic consumption, and price competition are therefore becoming more vulnerable than firms operating in sectors supported by public investment, security policies, digital transformation, energy, infrastructure, defence, or strategically significant technologies. In other words, credit is no longer merely a mechanism for financing growth; it is becoming an instrument for selecting growth.

This transformation generates a more uneven economic geography. Firms operating in strategically significant sectors may benefit from stronger public support, stable contracts, dedicated investment, and improved financing prospects, whereas firms in mature, fragmented, or consumption-dependent sectors may find themselves squeezed between persistently elevated financing costs, external competitive pressures, and shrinking profit margins. Credit tightening therefore no longer affects the economy uniformly but instead amplifies the divide between sectors supported by strategic priorities and those left primarily exposed to private market forces.

Fragmentation as the New Normal of the Global Economy

The interaction between rearmament, new trade barriers, and selective credit contributes to the emergence of an economic system in which fragmentation no longer represents a temporary deviation but an ordinary structural condition. Geopolitical risk is now embedded in asset prices, financing costs, corporate location decisions, investment strategies, industrial planning, and supply-chain assessments.

This does not mean that globalization is disappearing; rather, it is changing form. The world is not returning either to closed national economies or to nineteenth-century protectionism. Instead, it is entering a phase of segmented globalization, in which international trade continues but is increasingly filtered through strategic alliances, regulatory standards, geopolitical risks, technological controls, economic security measures, and selective industrial policies. Global value chains are no longer merely chains of efficiency; they have become chains of vulnerability.

Within this emerging order, growth is no longer automatically distributed through the mechanisms of trade liberalization. Instead, it concentrates where technological capabilities, strategic protection, access to capital, public demand, and integration into essential value chains are present. Fragmentation therefore creates winners and losers not only among states but also within them—across sectors, territories, and firms.

For Europe, this evolution is particularly complex because a significant share of its prosperity has been built upon international trade, relatively affordable energy, geopolitical stability under the American security umbrella, and the possibility of partially separating economic policy from security policy. Mario Draghi’s Report on European Competitiveness clearly identifies the challenge: many of the external conditions that sustained European growth after the Cold War are weakening, while Europe must simultaneously confront innovation gaps, elevated energy costs, strategic dependencies, and the need for massive investment.

Implications for Europe and Italy

For Europe—and particularly for Italy—this scenario requires a profound redefinition of the relationship between economic policy and potential growth. Growth can no longer be conceived as the spontaneous outcome of global demand or as the automatic return to normality after periods of disruption. It increasingly depends on the interaction between industrial policy, economic security, access to capital, administrative capacity, technological innovation, and geopolitical positioning.

Italy occupies an inherently ambivalent position. On the one hand, it possesses advanced manufacturing sectors, integrated industrial supply chains, and internationally competitive capabilities in aerospace, mechanical engineering, defence, components manufacturing, shipbuilding, and several dual-use technologies. On the other hand, its productive system remains dominated by small and medium-sized enterprises that are often undercapitalized, highly dependent on bank lending, and particularly vulnerable to rising financing costs, weaker demand, and market fragmentation.

The new geography of growth may therefore widen the gap between firms capable of integrating into strategic European value chains and those that remain exposed to price competition, commercial instability, and selective credit conditions. European and national economic policy can no longer be limited to stabilizing the business cycle; it must instead create the conditions enabling a much broader share of the productive system to access innovation, capital, skills, digital transformation, and sustainably regulated markets.

The challenge is fundamentally political before it is technical. If fragmentation has become the new normal, competitiveness can no longer be understood simply as cost reduction. It increasingly depends on safeguarding essential capabilities, reducing critical dependencies, strengthening strategic autonomy, protecting the internal market without suffocating it, financing long-term investment, and transforming public demand into a driver of innovation rather than protected rent-seeking.

The Future of the European Economy

The European economy is gradually evolving towards a configuration in which the traditional analytical categories of business cycles and economic fluctuations are losing explanatory power relative to the structural dynamics of security, finance, trade, and geopolitical positioning. Growth can no longer be interpreted as a linear process driven by global demand but rather as the unstable outcome of an evolving balance among financial constraints, industrial policy choices, the reconfiguration of global value chains, and the fragmentation of the international order.

Within this context, the return of defence as a macroeconomic driver, the increasing politicization of international trade, and the transformation of the cost of capital into a structural variable should not be regarded as isolated phenomena but as mutually reinforcing elements of a new economic order currently taking shape. Europe now operates within an environment that is less integrated, more selective, and more exposed to strategic competition, where the distribution of growth increasingly depends on the ability of states, firms, and regions to position themselves within technologically and geopolitically significant value chains.

This transformation implies a profound redefinition of economic policy. It is no longer sufficient merely to stabilize the business cycle, temporarily support aggregate demand, or await the return of frictionless globalization. Instead, governments must permanently manage uncertainty, strengthen competitiveness, safeguard strategic autonomy without drifting into autarky, direct investment towards long-term priorities, protect essential supply chains, and reduce the inequalities generated by an increasingly segmented pattern of growth.

Fragmentation is no longer the exception within the global economic system. It has become its new language. And if Europe wishes to remain an economic actor rather than merely a destination market, it must learn to speak that language without abandoning its enduring commitment to integration, cohesion, and the democratic governance of economic growth.

Bibliography

Blackwill, R. D., & Harris, J. M. (2016). War by Other Means: Geoeconomics and Statecraft. Harvard University Press.

Draghi, M. (2024). The Future of European Competitiveness. European Commission.

European Central Bank. (2025). Economic Bulletin. Frankfurt: European Central Bank.

European Central Bank. (2025). Euro Area Bank Lending Survey. Frankfurt: European Central Bank.

European Commission. (2025). A Comprehensive EU Toolbox for Safe and Sustainable E-commerce. Brussels: European Commission.

International Monetary Fund. (2025). World Economic Outlook. Washington, DC: International Monetary Fund.

UK Government. (2025). The Strategic Defence Review 2025: Making Britain Safer, Secure at Home, Strong Abroad. London: HM Government.

World Trade Organization. (2024). World Trade Report 2024. Geneva: World Trade Organization.