Fiscal Chains: The Disruptive Geoeconomics of Austerity and Underinvestment

Pálma Polyák

Trade wars and growing fragmentation are transforming the global economy. Discussions of these tensions often inadvertently jump to cost-competitiveness and related instruments like subsidies, or tariffs. This reflects a view of world trade as a seamless marketplace: if the price is right, demand materializes. However, the level of import demand has always been deeply political. Fiscal spending and public investment are often overlooked as key factors. This project focuses on fiscal policy shocks and their geoeconomic consequences, applying an international political economy perspective to the growth models paradigm. It maps the interdependence of demand regimes following the global financial crisis. The US government stepped in to boost growth, while households underwent painful deleveraging. China implemented major investment-heavy fiscal stimulus packages. Europe meanwhile emerged as the unlikely spoiler of world trade and a drag on global growth, adopting Germany's austerity and export-reliance. Analyzing historical cases and current trade flows, the study finds that closing Europe's demand gap through public investment would be a positive-sum way to stabilize trade relations while strengthening domestic economies.