Looking ahead into 2026: How to tackle the age of systemic crisis

The Dean of the Agora Strategy Institute, Ambassador (rtd.) Dr Peter Ammon, extends his greetings and best wishes for 2026 on behalf of all the Agora Strategy Team and shares his perspective on the year ahead. These reflections draw on the Institute’s comprehensive Annual Risk Report, which you can find enclosed to this letter.

Dear members and friends of the Agora Strategy Institute:

The year 2025 was marked by shockingly deep divisions within what was once called “The West”. We saw escalating conflicts and immense human suffering in many parts of the world. At the same time, we witnessed the beginning of an economic and social revolution driven by the search for Artificial General Intelligence — a revolution that carries enormous promise, but also potentially new risks for all of humankind.

Clearly, an era has come to an end — an era that lasted for the three decades that followed the end of the Cold War.

These were, on balance, good years. Globally, they were years of relative peace and brought many countries an unprecedented degree of prosperity and freedom. But today, at the beginning of 2026, it looks as if the great project of spreading democracy and economic freedom across the globe is fading:

The World Trade Organization, once created to secure a legal framework for free trade worldwide, is now little more than a shadow of its former self.

The United Nations — which two decades ago proclaimed the responsibility of the international community to protect all those whose human rights are violated — appears paralyzed. All three of its most powerful members – the United States, Russia, and China – have now openly expressed territorial ambitions vis-à-vis other states or territories.

What we once hoped would be a unifying global objective — the protection of the environment and the Earth’s climate — is increasingly denounced as a path toward de-industrialisation. Development programs are being cut everywhere, not only in the United States.

The dream of a future global order based on universal human rights, upheld and enforced by America and its allies, has died in the plains of Helmand in Afghanistan and in the trenches of the Donbass.

A New World Order Emerging

So, what will define the geopolitical landscape in 2026?

We may be witnessing the early contours of a new, Hobbesian world order — one in which opportunistic deal-making replaces principles and where power increasingly overrides rules. This is likely to lead to a concentration of trade and investment within regional groupings, each centered around the EU, USMCA, China, and others respectively. Latest trade figures already corroborate this trend towards regionalisation of economic cooperation.

Liberal ideas and the global rule of international law, however, are falling victim to raw power politics. Authoritarian and populist movements are advancing across North and South America, Asia, and many European states.

Geopolitics today increasingly resembles the great-power rivalry of the nineteenth century and the first half of the twentieth century — an era when might was assumed to make right and when personal relations between leaders counted for more than shared values did.

This is a dangerous situation: If we do not play our cards well, Europe’s future could be shaped by ideological confrontation with America, military conflict with Russia, and economic warfare with China.

The year 2026 may well be the moment when the contours of this future become clearer.

The End of Pax Americana

The most important place to look is Washington.

The era of Pax Americana — not perfect in every detail, but stable enough to let us sleep at night and to guarantee the ground rules of global capitalism — is over. There is a simple reason for this:

At the end of the Second World War, the United States accounted for roughly half of global GDP. Today, despite its continued technological prowess and dominance of financial markets, it represents only about a quarter.

Both the U.S. trade deficit and fiscal deficit are exploding and depend on the willingness of outsiders to finance them. Already today, the interest Washington has to pay on its national debt exceeds its enormous military budget of almost one trillion dollars per year.

The United States can neither afford to remain the policeman of the world, nor — after two lost wars in Afghanistan and Iraq — is the American taxpayer willing to foot the bill in blood and treasure for a U.S.-led global international order.

This is not a return to the American isolationism of the early twentieth century. President Donald Trump does not shy away from the use of military force abroad and continues to cultivate his image as an international deal-maker. The bombing of Islamist groups in northern Nigeria over Christmas marked his sixth bombing campaign in 2025.

But what has disappeared is the claim that the United States uses its military power for the greater good of spreading democracy or enforcing international law.

Trump’s bombastic style is largely a smokescreen for the decline of America’s ambition to shape a future world order. His diplomacy and military actions serve one declared goal only: American self-interest.

The recently published National Security Strategy merely confirms in writing what has already become a visible trend in recent years — with roots that clearly predate Trump’s current presidency.  This trend will not disappear even if the next U.S. President is a Democrat.

America’s Fiscal Strategy and Its Limits

When taking office, Trump recognized — as any businessman would — that the U.S. fiscal trajectory was heading toward a financial abyss.

With this background, it was obvious for him to cut government expenditures, including foreign aid and social programs that would not hurt his core electorate. On the revenue side, he pushed for higher government income through massive tariffs and by forcing international partners to promise substantial financial transfers to the United States.

In many ways, this follows the old recipe applied by Washington after the Second World War to reduce America’s war debt at the time: allowing inflation to erode the debt‘s real value, stimulating growth to increase tax revenues, and using financial repression — meaning effectively transferring wealth from savers to the state through artificially low interest rates.

All these three elements are visible today again:

The Federal Reserve ended quantitative tightening in December and resumed buying U.S. government debt at a rate of roughly 40 billion dollars per month — effectively monetary financing of state debt, aka printing money. Inflation, already around three percent, can be expected to rise further.

Economic growth, which reached an impressive 4.3 percent in the third quarter of last year, may push beyond 3 percent in 2026 because of continued deficit spending, more deregulation, and an expected new wave of foreign direct investment squeezed from allies whose security depends on U.S. support.

Also, Trump will be able to replace the current Chairman of the Federal Reserve in May with someone who stands for significantly lower interest rates. However, there is risk involved: Should markets lose confidence in the independence of the Fed, this could turn into a serious own goal.

Most economists agree that even this aggressive pro-growth strategy will not suffice to keep the U.S. fiscal deficit under control. Trump also knows that using the option of runaway inflation to devalue government debt could mean political suicide.

Unconventional Levers

Trump may therefore resort to new and unconventional levers.

First, Trump is betting heavily on artificial intelligence as the next engine of growth. Already today, it is estimated that around 1.5 percentage points of America’s annual growth stem from AI-related investment. So far, however, massive spending on data centers has not translated into commensurate productivity gains. Some observers fear that overinvestment in AI could cause a stock-market correction in 2026.

Second, Trump will defend the “exorbitant privilege” of the US-Dollar globally. American global financial dominance has become an explicit policy objective. The recently published National Security Strategy openly sets the target of U.S. control over global financial markets.

To this end, the Heritage Foundation — which drafted a master plan for a Trump presidency, Project 2025 — has floated the idea of pressuring allies to buy U.S. Treasuries at very low or zero interest in exchange for continued military protection.

And you may recall the debate earlier this year around Section 899 of the Big Beautiful Bill, which would have imposed new taxes on foreign investors repatriating profits. Although this provision ultimately died in the Senate, it revealed the direction of thinking in Washington.

Third, the United States wants to become the global capital of cryptocurrencies. Stablecoins, endorsed by the Genius Act, may help suppress long-term interest rates — crucial for heavily indebted American households. Treasury Secretary Scott Bessent predicts the stablecoin market could reach three trillion dollars by 2030, much of it held by foreigners. Since issuers must back these coins largely with U.S. Treasuries, this would increase demand thereof and absorb a significant share of global savings, thus further entrenching U.S. global financial dominance.

Economic Warfare and Chinese Choke Points

Economic warfare is likely to become the preferred instrument of geopolitical competition, often substituting for boots on the ground.

The tariff war Trump launched in April (“Liberation Day”) has turned out be less severe than initially feared, although hard data are still awaited and the statistical evidence of the effects the tariffs have remains thin so far.

At the same time, both the United States and China are deliberately building economic choke points to give them leverage over their trading partners. Today, these include rare earth minerals, batteries, pharmaceuticals, and advanced semiconductors — especially high-end Nvidia chips. Tomorrow, the choke points may lie elsewhere. To immunize itself against political and economic blackmail, the European Union must identify its strengths across all sectors and find ways to weaponize them, should it become necessary.

China’s economic strategy remains deeply mercantilist. Instead of rebalancing toward domestic consumption, Beijing continues to pursue dominance across entire industrial value chains. The result is a massive Chinese trade surplus of roughly one trillion dollars in 2025, achieved largely at Europe’s expense.

It is also worth noting that in 2025, China negotiated with the United States on tariffs far more forcefully than the Europeans did. While European governments largely accommodated U.S. demands, Beijing confronted Washington head-on with export restrictions on rare earths and other materials on which it has almost a monopoly. It succeeded in pushing threatened tariffs down from 145 percent to levels Chinese exporters could absorb.

Germany at a Crossroads

Where does this leave Europe — and Germany in particular?

Germany’s post-war economic success rested on export-led growth. For decades, national savings exceeded domestic investment, making persistent trade surpluses essential. Excess savings were exported to finance foreign demand, turning Germany into the largest creditor nation in the world.

This model functioned as long as global markets remained open and predictable. Today, Germany is witnessing the erosion of traditional export markets — the United States, China, and, for different reasons, Russia. In addition, German industry is now facing what many have begun to call a Second China Shock: Chinese firms are aggressively entering global market in sectors that form the very core of German industrial strength.

China artificially boosts its exports also through an undervalued currency — by an estimated 18 to 20 percent — and it has become increasingly clear that China will not rebalance its deeply lopsided economy from exports to home consumption through persuasion alone. Rebalancing will only occur through confrontation, whether economic or political.

It becomes obvious that Brussels cannot allow China to swallow the remaining industrial base of the European Union.

The EU has attempted to respond to the challenge from the United States and China by negotiating new trade agreements, notably with Mercosur and India, but it is doubtful that these markets can compensate for demand lost from traditional partners.

In this critical moment, Germany has abandoned one of the pillars of its post-crisis economic policy: the so-called debt brake. Introduced after the financial crisis to enshrine fiscal discipline in the country’s constitution, it has now been effectively suspended to allow large-scale investment in infrastructure, defense, and climate transformation.

The strategic challenge Germany faces now is to replace demand lost on its traditional export markets by spending on domestic investment. But this can only succeed if it is accompanied by serious deregulation. Without reducing regulatory complexity, public investment will crowd out rather than crowd in private capital.

It therefore is a serious signal that German business leaders are complaining about regulatory overreach by the state and the European Commission and demand more deregulation. The new German government has given reform a high priority on its political agenda. However, vested interests make deregulation difficult everywhere.

Consequences for European Investors

What does all this mean for European investors?

First, be prepared for a firework of new and unexpected initiatives from the U.S. President impacting trade and financial markets in the run-up to the mid-term elections in November.

Second, recent agreements on trade and tariffs will be potentially volatile and subject to revision as U.S. interests evolve.

Third, power is shifting from markets to politics. Industrial policy, subsidies, merger approvals, and export controls are making companies increasingly dependent on political goodwill.

Fourth, watch out carefully about your exposure to the U.S. dollar. Traditional big buyers like China are switching their reserves to gold. As Trump will not like de-dollarisation, we may see more gunboat  diplomacy.

The new chessboard: USA, China, Europe

Should President Trump lose control of the House of Representatives at the mid-term elections in November 2026, as many expect to happen, he will become a lame duck for the rest of his presidential term.

He then is also likely to lose his iron grip over the Republican Party.

The outcome of the mid-term elections will depend first of all on the state of the U.S. economy. So far, we are receiving mixed signals: The U.S. labor market appears increasingly decoupled from economic growth — a development that raises questions about the sustainability of this expansion. The U.S. economy increasingly exhibits a K-shaped trajectory: high-income households continue to accumulate wealth, while lower-income groups struggle with rising living costs. And inflation, a major concern for many Trump supporters, may rise further once the full effects of the tariffs become visible.

In such a scenario, a weakened U.S. president may resort to new diversionary initiatives in foreign policy in the run-up to the mid-term elections.

China will remain at the center of a political and economic storm. With resource-rich Russia reduced to the role of China’s junior partner, Beijing is well positioned to challenge U.S. dominance across military, technological, and financial domains — without necessarily having to resort to military means.

China’s strategy will also be shaped by domestic factors. Its leader, Xi Jinping, is preparing the ground for another presidential term in two years’ time. We should be aware that demonstrating toughness toward external actors is therefore not a tactical choice for him, but a political necessity.

Europe, meanwhile, will find it increasingly difficult to defend its position between these two giants – especially with warring Russia at its doorstep. Despite recent rearmament efforts, Europea will depend on the American nuclear umbrella for years to come and thus remain vulnerable to pressure.

If — hopefully — a peace agreement in Ukraine can be reached in 2026, the European Union will have to make good on its promise to fast-track Ukraine’s accession. War-torn Ukraine would become the major recipient of EU funds which may stir up opposition among some poorer member states. Enlargement also means bringing the EU geographically even closer to its hostile Russian neighbor, and a new Iron Curtain could rise across the continent again.

And yet, the picture is not only gloomy: Europe has overcome immense economic and political shocks before. There are substantial glimmers of hope: a possible peace in Ukraine, democratic change in Venezuela or Iran, and — if artificial intelligence delivers on its promise — the prospect of a new era of productivity and wealth creation.

If that happens, we may one day look back at early 2026 as the moment when the world changed once again — for the better.

With kind regards and best wishes

Peter Ammon