Even if the wars end, the world will pay

The election of Donald Trump could make 2025 a pivotal year for the wars in Gaza and Ukraine, given that the president-to-be of the world's leading superpower has pledged to put an end to both.

Even if he succeeds, though, the economic consequences of these conflicts will be long-lasting, and his dealmaking won't necessarily make them better.

The two wars are already among the worst human tragedies of the 21st century. Probably more than 180,000 combatants and 40,000 civilians have perished, including thousands of children. In addition, so-called indirect deaths of Palestinians—from starvation and disease—likely exceed 60,000. Millions more have been driven from their homes, perhaps never to return. The rubble in Gaza alone could take years to clear away. The geopolitical repercussions are hard to predict—as the sudden collapse of the Assad regime in Syria eloquently demonstrates.

Yet so far global stock markets don't seem concerned. At the end of November, a Bloomberg index of global equities was up about 25% since Russia invaded Ukraine on 24 February 2022, and 32% since Hamas attacked Israel on 7 October 2023.

Markets don't seem worried about wars

Why so sanguine? Wars have winners and losers. Ukraine's economy has shrunk significantly; Gaza's has collapsed. The cutoff from cheap Russian gas has slammed European consumers and manufacturers, especially in Germany, where industrial giants such as Volkswagen AG and Thyssenkrupp AG are warning they may be forced to slash production and workers. But US liquefied natural gas companies have ramped up exports to Europe, and defense companies like Germany's Rheinmetall AG have seen their stock prices soar on expectations of surging orders and earnings.

In the final tally, for countries outside the war zone the net output effect of both wars could be very small: A calculator developed by Germany's Kiel Institute for the World Economy, using historical data on more than 150 conflicts since 1870, estimates a cumulative loss of about $300 billion, or just 0.25% of the countries' combined annual gross domestic product. In practice, with its large defense industry and ample energy supplies, the US might even gain.

That said, not all output is created equal. There's a difference between producing steel to make buildings and missiles to obliterate them. "GDP is not a good measure in countries at war," says Sergei Guriev, dean of London Business School and former chief economist at the European Bank for Reconstruction and Development. "Producing tanks to get burned up in Ukraine doesn't improve quality of life."

More tanks, fewer cars

Also, output doesn't come close to capturing the whole economic picture. The return of war to Europe and the Middle East will have long-term effects on the finances of the governments that buy the materials and pay the soldiers. 

So much for the "peace dividend," the idea that the fall of the Soviet Union would usher in a more harmonious era in which governments could spend less on their militaries and more on nice things such as lowering taxes or expanding social benefits.

"Russia has built up enormous capacity in making weapons. It would be naive to think they won't keep using those capabilities," says Jonathan Federle, a research fellow at the Kiel Institute. "This presents a persistent security threat."

The European Union in particular will have to ramp up spending to strengthen its militaries and its capacity to produce armaments—something EU leaders have set as a top priority for 2025. Bloomberg Intelligence estimates that by 2034 the necessary spending could add as much as $2.8 trillion to the sovereign debts of European NATO members—further stretching already precarious finances and limiting their ability to respond to other economic shocks. 

Then there are the potential costs of rebuilding Ukraine, most recently estimated at almost $500 billion by the World Bank.

Granted, such efforts may have an upside. If the EU reaches an agreement on how to provide for its common defense, the enhanced unity and security could make it a more attractive destination for much-needed private investment. "I could even imagine some kind of defense dividend," Federle says.

Much, however, will depend on Trump. If he strikes deals that achieve independence for Ukraine and some semblance of peace for Palestinians, he could enhance global security. If his negotiating approach amounts to accommodating Russian President Vladimir Putin's designs on Ukraine or Israel's permanent occupation of Gaza and annexation of the West Bank, then the result could be fragile and costly.

"How the conflicts end matters," Guriev says. "If anyone sees the outcome as good for the aggressors, that increases the risk of further aggression."

A Russia-controlled Ukraine would present Europe with the challenge of absorbing more refugees and defending against further aggression, at a cost many times that of defending Ukraine alone. Moscow also could wreak havoc by exporting weaponry—empowering, for example, the Houthi militia in Yemen to shut down access to the Suez Canal, a key maritime trade route.

If China were emboldened to invade Taiwan, the disruption to the global economy would be much greater. The US might be compelled to bolster its military to respond to multiple threats at once—a costly proposition at a time when the government's debts are already growing at an unsustainable pace.

If those are the hazards of a bad peace, a continuation of these conflicts presents its own risks. In addition to the ever-increasing human toll, wars are dangerous generators of radical uncertainty. The speed with which Islamist rebels have overrun Syria illustrates the potential for the unexpected. 

The longer the fighting goes on, the greater the chances that some extreme event—say, Russia hitting the wrong part of a Ukrainian nuclear facility, or the Middle East war expanding to threaten global oil supplies—will freak markets out to the point it affects the real economy. In such a scenario, few countries would escape the repercussions.

"I don't think that in the 21st century, you can find a democratic politician or corporate CEO who thinks, 'Oh, these wars are good for me,'" Guriev says. "Everybody wants them to end."

Mark Whitehouse. Sketch: TBS