Global Financial System Fractures Under Geopolitical Pressure, Warns 2025 Geneva Report

The global financial system is experiencing significant fragmentation driven by escalating geopolitical tensions, according to a critical 2025 Geneva Report. Published by the Brookings Institution on October 20, 2025, the report highlights a concerning reversal of decades of economic integration. This trend is poised to usher in an era of higher costs, increased instability, and diminished effectiveness of international sanctions, as detailed by the Brookings Institution.

weforum.org reported, Key drivers behind this fragmentation include Russia's ongoing invasion of Ukraine, the intensifying rivalry between the United States and China, and the proliferation of tariffs, as noted by the report's co-authors. The World Economic Forum also reported on July 3, 2025, that US-China trade barriers are a primary factor contributing to this systemic shift.

A particularly stark indicator of this fracturing is the changing landscape of foreign direct investment (FDI). The 2025 Geneva Report reveals that FDI is increasingly concentrated within specific geopolitical blocs, especially in industries deemed strategic, such as semiconductors. This observation is supported by an IMF analysis from April 2023, which indicated a growing alignment of FDI flows with geopolitical ties.

brookings.edu noted, This shift threatens to undermine the benefits of financial integration, which traditionally allowed countries to share risks, borrow more affordably, and allocate production efficiently across borders, according to the Brookings Institution. The International Monetary Fund (IMF) has consistently warned that such fragmentation could lead to substantial reductions in global economic output.

Emerging market and developing economies (EMDEs) are particularly vulnerable to these developments, facing potential reductions in investment inflows and higher borrowing costs, the Geneva Report emphasizes. The IMF further elaborated on April 14, 2025, that heightened geopolitical risks disproportionately impact asset prices and financial stability in EMDEs.

imf.org reported, The report underscores that the cooperative international order that fostered decades of economic integration is now giving way to a more fragmented landscape. This transition is redrawing trade, investment, and financial linkages along strategic lines, as observed by the Brookings Institution. The World Economic Forum, in January 2025, also noted that economic statecraft and rising multipolarity are significant trends contributing to this fragmentation.

Ultimately, the 2025 Geneva Report calls for urgent pragmatic approaches to safeguard economic stability and cooperation amidst these rising tensions. It suggests that recommitting to multilateralism and strengthening international institutions are crucial steps to mitigate the adverse effects of this fragmentation, according to the Brookings Institution.

• weforum.org noted, Historical Context of Integration and Fragmentation: For decades, the global economy experienced significant integration, with trade and FDI expanding rapidly, particularly after the end of the Cold War. This era saw global trade as a share of world GDP more than double from 25% in 1960 to 56% recently, as highlighted by a May 2023 analysis from Bert Hofman. However, the 2007-2008 global financial crisis marked a turning point, slowing hyper-globalization and leading to a rethinking of its benefits and vulnerabilities.

• Key Geopolitical Drivers and Their Impact: The fragmentation is primarily fueled by major geopolitical events. Russia's invasion of Ukraine in 2022 led to Russia pivoting away from Western finance, halving its external liabilities, the Geneva Report notes. Simultaneously, the US-China rivalry has intensified, with China gradually reducing its exposure to US assets and advanced economies deepening ties with allies while pulling back from China. The World Economic Forum reported on July 3, 2025, that US tariffs on Chinese goods have more than doubled, significantly disrupting cross-border financial flows.

• brookings.edu reported, Economic Consequences of Fragmentation: The fracturing of the global financial system carries severe economic implications. The 2025 Geneva Report warns of higher borrowing costs, slower international payments, and the costly duplication of financial systems. The IMF estimated in August 2023 that increased trade restrictions alone could reduce global economic output by as much as 7% over the long term, equivalent to $7.4 trillion. Furthermore, the World Economic Forum projected in July 2025 that global growth could slow to 2.3% due to rising trade barriers.

• Impact on Foreign Direct Investment (FDI): Foreign direct investment is increasingly being reshaped by geopolitical alignment. Since 2018, coinciding with renewed trade tensions between the US and China, geopolitical factors have become more influential in FDI flows, leading to concentration within aligned countries, particularly in strategic sectors like semiconductors, according to an IMF chapter from April 2023. This trend has seen global FDI decline from 3.3% of GDP in the 2000s to 1.3% between 2018 and 2022, as reported by the World Bank in May 2023.

• imf.org noted, Vulnerability of Emerging Markets and Developing Economies (EMDEs): EMDEs are disproportionately affected by this fragmentation. They rely heavily on investment from Western countries, and geopolitical divides could lead to reduced inflows and higher borrowing costs, the Brookings Institution stated on October 20, 2025. The IMF noted on April 14, 2025, that sovereign risk premiums for EMDEs increase significantly more than for advanced economies following geopolitical events, making them more susceptible to financial shocks.

• Challenges to Global Financial Safety Nets and Institutions: The report highlights that new geopolitical fault lines risk weakening the global financial safety net and complicating crisis coordination. Multilateral institutions like the IMF and G20 could struggle to coordinate effective responses during crises if political divides hinder cooperation, according to the Brookings Institution. The IMF-World Bank meetings in October 2025 also reflected a world grappling with slower growth and greater uncertainty, testing the limits of international cooperation.

• weforum.org reported, Policy Recommendations for a Fragmented World: To counter these trends, the 2025 Geneva Report recommends a recommitment to multilateralism and strengthening cooperation across countries. It suggests that multilateral institutions should empower emerging economies with greater voice and voting power. Additionally, the report advises exercising caution in economic statecraft, using sanctions carefully to avoid undermining trust in global systems, and improving cross-border data sharing and debt restructuring transparency.