Many of those who attended this year’s meeting of the World Economic Forum in Davos were struck by the jubilant mood of the CEOs in attendance. It was hard to reconcile the optimism of these business leaders with the short-term and long-term economic uncertainty caused by the war in Ukraine.

To be sure, there are grounds for cautious optimism, like China’s 180-degree turn on its draconian zero-COVID strategy. Soon, the country could see a huge wave of “revenge spending,” driven by pent-up demand from consumers who have spent much of the past three years in lockdown and now have the equivalent of trillions of dollars in savings to spend. Many have pinned their hopes for a global recovery on this scenario, hoping that Chinese shoppers can boost growth and push oil prices back to $100 a barrel. But regardless of what happens in China, India continues to enjoy strong growth, aided by purchases of discounted Russian oil.

Europeans, for their part, seem thrilled by over-confident forecasts that the continent’s economy will not fall into recession in 2023 – or at least not a bad one. Even Italy has revised upward its growth estimates and is now expected to grow by 0.6% this year. Given that climate change is at the top of the European Union’s policy agenda, it is ironic that global warming seems to have saved Europe from the gas shortages and price spikes that many analysts had predicted.

Many Europeans might also argue that the United States is more at risk of a significant recession, given that the full effect of the Federal Reserve’s aggressive interest-rate hikes will not be felt until later this year. They would be half right, as the US would need a healthy dose of luck to bring down inflation to the Fed’s 2% target without a major downturn. At the same time, European policymakers seem scared that the clean-energy subsidies included in the US Inflation Reduction Act will siphon off much-needed investment from the continent.

But whatever economic growth these countries experience is contingent on the war in Ukraine. With no endgame in sight, the war could severely destabilize the global economy, causing both short-term and long-term disruptions.

For example, suppose that Russian President Vladimir Putin becomes exhausted and desperate enough to use battlefield nuclear weapons. In that case, all bets are off, and a global stock market crash would be all but certain. But China’s likely response remains far less clear. If Chinese President Xi Jinping denounced Putin for using nuclear weapons but at the same time continued to buy Russian oil and commodities, the West would be forced to impose secondary sanctions on the countries enabling the Russian war machine – namely, India and China.

While it is difficult to quantify the long-term growth effects of today’s heightened geopolitical tensions, the International Monetary Fund estimates that deglobalization could shrink global GDP by 7%, perhaps even more if combined with technological decoupling. The net-zero transition, already a herculean challenge, will be far more difficult to accomplish in a fragmented global economy.

Meanwhile, defense spending, which many already expected to rise by at least 1% of global GDP over the next ten years, will probably increase further. While US President Joe Biden has repeatedly said that he will not start World War III over Ukraine, a second Cold War, which seems far more likely, would be awful as well, even if we discount the growing risk of regional nuclear wars and nuclear terrorism. Whatever one thinks of the benefits of globalization, we will miss one of its primary benefits: international stability.

The Ukrainian people understandably want to restore their pre-invasion borders and receive NATO guarantees of future security and hundreds of billions of dollars in reconstruction aid, as well as bring war-crime charges against Putin and his cronies. They are clearly not going to be cowed by Putin’s nuclear threats. But Germany’s reluctance to provide Ukraine with modern tanks suggests that Western leaders, in general, are uncomfortable with the prospect of NATO directly engaging in war with Russia.

The West’s plan, at least for now, seems to be to supply Ukraine with enough equipment to help it regain some of its territory (but not so much that Putin lashes out), or at least force a stalemate. While economic sanctions are a key part of the Western strategy, it would be utterly naïve to think that sanctions alone could end the war. The only place where sanctions helped produce regime change in modern times is South Africa in the 1980s and early 1990s. Back then, the world was largely united against South African apartheid. But that is not the case with the war in Ukraine.

Russia’s invasion caused an inflationary spike that affected the entire world. But at this point, an escalation will likely have a deflationary effect in the short term, as consumers and markets will panic. Long-term growth prospects do not look promising either, as the balkanization of the global economy will likely exacerbate uncertainty.

It is certainly possible (albeit unlikely) that Putin’s regime will implode and that whoever succeeds him will seek peace. It is also possible that Russia will stick to its plan of re-colonizing Ukraine and that it will eventually become a de facto Chinese economic colony. There are many other possible outcomes, but an early return to peace in Europe is not yet one of them. The world’s business leaders may have forgotten about Ukraine, but they will not be able to ignore it.

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly (Princeton University Press, 2011) and author of The Curse of Cash (Princeton University Press, 2016).

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