The global economic system is shifting to a model of fragmentation. Economic governance is increasingly defined by multipolarity, political alignment and the growing intersection of finance and national interests. Apostolos Thomadakis writes that to remain influential, the EU should actively drive institutional reform, deepen internal integration and build trusted investment corridors with like-minded partners.
Over the past three decades, globalisation has facilitated an extraordinary period of convergence. Capital, goods, people, and data flowed across borders with unprecedented speed. Supply chains were designed for cost-efficiency and scale, and institutions like the World Trade Organization and the International Monetary Fund (IMF) operated under the assumption that rules-based cooperation would be the default mode of international engagement. In this era, markets and politics were often viewed as distinct, if not entirely separate, domains. However, the global economic landscape is changing, as national interests and geopolitical rivalry increasingly blur the line between economic interdependence and political autonomy.
Capital markets are also part of this transformation. The age of convergence, in which economic cooperation and interdependence defined the global order, has given way to a period of fragmentation. No longer are markets solely driven by the principles of cost-efficiency and market logic. Today, we are witnessing an environment in which political considerations increasingly shape capital flows, investment decisions and the organisation of global supply chains. Economic policies are no longer solely about market fundamentals but also about national security, strategic autonomy and ideological alignments.
Strategic rivalry, particularly between the US and China, stands at the heart of this transformation. Policies like the US Inflation Reduction Act, with its focus on subsidies and reshoring incentives, are pulling investment back to North America, especially in industries such as clean energy and manufacturing.
This shift is increasingly underpinned by a resurgence of tariffs and trade restrictions, including the imposition of steep duties on Chinese electric vehicles, solar panels, and semiconductors. In response, the EU has adopted measures like the Net-Zero Industry Act to protect its industrial base from leakage and to assert its autonomy in the face of growing protectionism. At the same time, China’s actions, such as imposing export controls on rare earths and critical minerals, reveal a broader shift toward self-reliance and economic statecraft, particularly in key industries that fuel technological innovation.
However, the logic of fragmentation extends far beyond the US-China rivalry. In India, the “Make in India” programme seeks to reduce reliance on Chinese industrial inputs, while ASEAN nations are positioning themselves as alternative hubs within a fractured supply chain landscape. In Europe, post-Brexit tensions, particularly regarding the clearing of euro-denominated swaps, reveal how geopolitical shifts and regulatory decisions have exposed the continent’s dependence on non-EU infrastructures, despite significant efforts to develop domestic capabilities. Across regions, tariffs, local content requirements and export controls are increasingly being used not only to protect domestic industries but also to shape the direction of capital and technology flows.
This trend is also reshaping the direction of capital flows. Cross-border investments are increasingly influenced by security alignments, climate policy and digital sovereignty. New financial partnerships are emerging, such as the India-Middle East-Europe Economic Corridor, which suggests a shift towards alliance-based investment rather than adherence to traditional global multilateralism. We are also witnessing the rise of alternative frameworks and institutions, from BRICS expansion to the exploration of non-dollar trade settlements, as well as the creation of regional development banks and local currency initiatives.
This new era of fragmentation is not merely geopolitical but also institutional. While institutions like the World Bank and the IMF retain relevance, their consensus has begun to fray. The recent capital restructuring of the World Bank and the ongoing debates surrounding IMF quotas underscore the challenges facing these bodies in an increasingly multipolar world. In parallel, emerging alternatives are gaining ground, as seen in the increasing influence of regional financial arrangements, the experimentation with central bank digital currencies in China and India and the development of regional investment and trade corridors.
What is at stake for the EU?
The shift from convergence to fragmentation is redefining the foundations of global capital markets. As strategic competition, geopolitical rivalry, and security concerns increasingly shape economic relations, the EU must not simply adapt – it must lead. In a world where finance follows flags as much as fundamentals, Europe’s ability to remain an influential economic actor will depend on its capacity to reconcile openness with resilience, and integration with strategic autonomy.
Moving forward, the EU must strengthen the coherence of its internal capital market by accelerating the Savings and Investments Union agenda, with a focus on ensuring consistent enforcement and supervision across member states, returning to principles-based legislation, simplifying cross-border investment, deepening market liquidity, promoting affordable and sizeable funded pension and long-term savings schemes, and fostering innovation in strategic sectors such as clean tech and digital infrastructure.
Externally, the EU should promote a values-based approach to capital partnerships – one that balances geopolitical realities with its commitment to multilateralism, sustainability and the rule of law. This means building trusted investment corridors with like-minded partners in Africa, the Indo-Pacific, and the Americas, while playing a proactive role in reshaping global financial governance to reflect a more multipolar order.
Finally, strategic clarity and institutional reform will be essential. The EU must be able to speak and act with greater unity in international economic forums, leveraging its regulatory power (Brussels effect) to shape global norms while avoiding internal fragmentation. As financial and political logics continue to converge, Europe’s ability to remain a credible, sovereign economic power will hinge on its willingness to act strategically by bridging the gap between economic interdependence and geopolitical reality.
The EU cannot afford to be a bystander in the new geography of capital. It must become a system-shaper, not merely subject to the pressures of others.
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- This blog post represents the views of its author(s), not the position of LSE Business Review or the London School of Economics and Political Science.
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