Chartbook 429 From transition to rupture: The evolution of Carney-thought 2019-2026.

“Let me be direct. We are in the midst of a rupture, not a transition.”

Though it was couched in extremely abstract terms and though he avoided any mention of Trump, Mark Carney’s speech at Davos on Tuesday was by far the most weighty reaction we have seen so far from any head of government to the crisis unleashed in the international relations of the West, by the aggression of the Trump Presidency.

The contrast to preceding speakers was striking.

Larry Fink et al in the WEF leadership avoided any mention of the most divisive issues in Euro-American relations.

Ursula von der Leyen offered a clear but mild statement of a European position. All she had to say on the topic of Trump’s threat of tariffs over Greenland was that it would be a “mistake”.

Macron was more unbuttoned - to say the least. He referred to the absurdity of being forced to threaten the US with anti-coercion measure. He described the situation as “crazy”. At one point, several of us thought we heard the President asking, under his breath, whether the whole crisis was about the size of someone’s “dick”. I wouldn’t trust my own memory but for the fact that my neighbor turned to me in amazement. I concede it may have been a hallucination brought on by the reflection of his aviator sunglasses.

Carney’s address was of a very different kind. He struck a note of appropriate seriousness and high moral temper.

It seems that every day we’re reminded that we live in an era of great power rivalry, that the rules based order is fading, that the strong can do what they can, and the weak must suffer what they must. And this aphorism of Thucydides is presented as inevitable, as the natural logic of international relations reasserting itself. And faced with this logic, there is a strong tendency for countries to go along to get along, to accommodate, to avoid trouble, to hope that compliance will buy safety. Well, it won’t.

In a dramatic flourish, he invoked the 1978 essay by Czech dissident Václav Havel entitled The Power of the Powerless, to argue that it is essential to refuse to repeat a lie, even if that may be the path of least resistance. And then, Carney went on to describe the uncomfortable modus vivendi of recent years.

For decades, countries like Canada prospered under what we called the rules-based international order. We joined its institutions, we praised its principles, we benefited from its predictability. And because of that, we could pursue values-based foreign policies under its protection. We knew the story of the international rules-based order was partially false that the strongest would exempt themselves when convenient, that trade rules were enforced asymmetrically. And we knew that international law applied with varying rigour depending on the identity of the accused or the victim. This fiction was useful, and American hegemony, in particular, helped provide public goods, open sea lanes, a stable financial system, collective security and support for frameworks for resolving disputes. So, we placed the sign in the window. We participated in the rituals, and we largely avoided calling out the gaps between rhetoric and reality. This bargain no longer works. Over the past two decades, a series of crises in finance, health, energy and geopolitics have laid bare the risks of extreme global integration. But more recently, great powers have begun using economic integration as weapons, tariffs as leverage, financial infrastructure as coercion, supply chains as vulnerabilities to be exploited. You cannot live within the lie of mutual benefit through integration, when integration becomes the source of your subordination. The multilateral institutions on which the middle powers have relied – the WTO, the UN, the COP – the architecture, the very architecture of collective problem solving are under threat. And as a result, many countries are drawing the same conclusions that they must develop greater strategic autonomy, in energy, food, critical minerals, in finance and supply chains.

Hegemons cannot continually monetize their relationships.

Allies will diversify to hedge against uncertainty.

They’ll buy insurance, increase options in order to rebuild sovereignty – sovereignty that was once grounded in rules, but will increasingly be anchored in the ability to withstand pressure.

What Carney goes on to recommend are “collective investments in resilience” which he recommended as “cheaper than everyone building their own fortresses. Shared standards reduce fragmentations. Complementarities are positive sum. And the question for middle powers like Canada is not whether to adapt to the new reality – we must. The question is whether we adapt by simply building higher walls, or whether we can do something more ambitious.”

What Carney advocates is what Alexander Stubb, the President of Finland (another regular at Davos) has termed “value-based realism”.

What does this value-based realism amount to? The following bullet points are excerpted from the speech:

• principled and pragmatic – principled in our commitment to fundamental values, sovereignty, territorial integrity, the prohibition of the use of force, except when consistent with the UN Charter, and respect for human rights, and pragmatic and recognizing that progress is often incremental, that interests diverge, that not every partner will share all of our values.

• engaging broadly, strategically with open eyes. We actively take on the world as it is, not wait around for a world we wish to be.

• We are calibrating our relationships, so their depth reflects our values, and we’re prioritizing broad engagement to maximize our influence, given and given the fluidity of the world at the moment, the risks that this poses and the stakes for what comes next.

• And we are no longer just relying on the strength of our values, but also the value of our strength.

• We are building that strength at home.

• And we are rapidly diversifying abroad. We have agreed a comprehensive strategic partnership with the EU, including joining SAFE, the European defence procurement arrangements. We have signed 12 other trade and security deals on four continents in six months. The past few days, we’ve concluded new strategic partnerships with China and Qatar. We’re negotiating free trade pacts with India, ASEAN, Thailand, Philippines and Mercosur.

• To help solve global problems, we’re pursuing variable geometry, in other words, different coalitions for different issues based on common values and interests.

• This is not naive multilateralism, nor is it relying on their institutions. It’s building coalitions that work – issues by issue, with partners who share enough common ground to act together.

• when we only negotiate bilaterally with a hegemon, we negotiate from weakness. We accept what’s offered. We compete with each other to be the most accommodating. This is not sovereignty. It’s the performance of sovereignty while accepting subordination. In a world of great power rivalry, the countries in between have a choice – compete with each other for favour, or to combine to create a third path with impact.

• We shouldn’t allow the rise of hard power to blind us to the fact that the power of legitimacy, integrity and rules will remain strong, if we choose to wield them together

• naming reality. Stop invoking rules-based international order as though it still functions as advertised. Call it what it is – a system of intensifying great power rivalry, where the most powerful pursue their interests, using economic integration as coercion.

• It means acting consistently, applying the same standards to allies and rivals. When middle powers criticize economic intimidation from one direction, but stay silent when it comes from another, we are keeping the sign in the window.

• It means building what we claim to believe in, rather than waiting for the old order to be restored. It means creating institutions and agreements that function as described.

• And diversification internationally is not just economic prudence, it’s a material foundation for honest foreign policy, because countries earn the right to principled stands by reducing their vulnerability to retaliation.

Reading this list, I find myself in agreement with much of it. “Progressive realism” was a phrase I ended up with in my book Deluge.

But what struck me as more interesting is that we have heard many of the elements of Carney’s vision before, from Carney himself. In particular, I am thinking of the last speech he gave as Governor of the Bank of England at Jackson Hole in August 2019 under the title: “The growing challenges for monetary policy in the current international monetary and financial system”

Like 2016, August 2019 was a moment under the long shadow of Trump 1.0. But in the setting of Jackson Hole and in his capacity as central banker, Carney took more space to elaborate a structural vision of tensions that already then were clearly building within the international order.

Interestingly, Carney in 2019 also offered a hierarchy and timeline for action.

In the short term, central bankers must play the cards they have been dealt as best they can.

That means using the full flexibility in flexible inflation targeting. To retain the essential credibility of their frameworks, this is best done transparently with central bankers explaining their reasons for targeting specific trade-offs between price stability and output volatility. More broadly, central banks need to develop a better shared understanding of the scale of global risks and their consequences for monetary policy. We cannot all export our way out of these challenges. In a global liquidity trap, there are gains from coordination, and other policies – particularly fiscal – have clear roles to play. And acting earlier and more forcefully will increase their effectiveness.

Think of these points as illustrations of Carney’s point in the 2026 Davos lecture that individual insurance is possible, but expensive. It is expensive because it ignores spillover effects.

In the medium term, policymakers need to reshuffle the deck. That is, we need to improve the structure of the current International Monetary and Financial System (IMFS). That requires ensuring that the institutions at the heart of market-based finance, particularly open-ended funds, are resilient throughout the global financial cycle. It requires better surveillance of cross border spillovers to guide macroprudential and, in extremis, capital flow management measures. And it underscores the premium on re-building an adequate global financial safety net.

And then came the more basic structural analysis:

Risks are building, and they are structural.

According to Carney in 2019 these risks were to do with a basic asymmetry in the global economy, which Carney in an earlier speech in 2019 illustrated with the following slide:

Whereas the world economy is increasingly multipolar, the global financial system remains obstinately dollar-centered.

In the longer term, we need to change the game. There should be no illusions that the IMFS can be reformed overnight or that market forces are likely to force a rapid switch of reserve assets.4 But equally blithe acceptance of the status quo is misguided.

So, already in 2019, under the shadow of Trump 1.0, but driven above all by structural change in the world economy, Carney had concluded that a wind of change was blowing. It was time to prepare for a world beyond American hegemony. Intelligent policy consisted in anticipating this break and shaping a new type of order. And the new model that he had in mind in 2019 already anticipated the variable geometry, plurilateral model he advocated for in Davos yesterday. This from 2019:

When change comes, it shouldn’t be to swap one currency hegemon for another. Any unipolar system is unsuited to a multi-polar world. We would do well to think through every opportunity, including those presented by new technologies, to create a more balanced and effective system.

As Carney pointed out, there has only been one shift in global monetary regime in modern economic history and in the interwar period. It went disastrously wrong. The 1920s with a gold-currency exchange anchored mainly on the dollar and sterling, was a disaster. This led Carney to the conclusion that:

When it comes to the supply of reserve currencies, coordination problems are larger when there are fewer issuers than when there is either a monopoly or many issuers. While the rise of the Renminbi may over time provide a second best solution to the current problems with the IMFS, first best would be to build a multipolar system. The main advantage of a multipolar IMFS is diversification. Multiple reserve currencies would increase the supply of safe assets, alleviating the downward pressures on the global equilibrium interest rate that an asymmetric system can exert. And with many countries issuing global safe assets in competition with each other, the safety premium they receive should fall.40 A more diversified IMFS would also reduce spillovers from the core and by so doing lower the synchronisation of trade and financial cycles. That would in turn reduce the fragilities in the system, and increase the sustainability of capital flows, pushing up the equilibrium interest rate. While the likelihood of a multipolar IMFS might seem distant at present, technological developments provide the potential for such a world to emerge. Such a platform would be based on the virtual rather than the physical.

The continuities between the model Carney was developing in 2019 and his remarks in Davos this week are obvious.

But, returning to Carney’s calmer reflections in 2019 also brings to the fore the force of the decisive line he delivered on Tuesday:

“We are in the midst of a rupture, not a transition.”

---

I love writing the newsletter. Can’t wait to get back to even more active posting in 2026 when the book is done. In the mean time, if you fancy buying me a coffee once a month, you know what to do. Chartbook will keep on coming in any case.