Eurasia Group's weekly selection of essential reading for the political risk junkie -- presented in no particular order. As always, feel free to give us your feedback or selections @EurasiaGroup  or @IanBremmer.

China has been all over the news this week, with the New York Times hacking episode dominating headlines. But recent stories related to China venture much further than cyberspace. This week's must-reads has a China theme.

Must-reads

1. "The resource race: China dips toes in Arctic waters"
Christoph Seidler, Spiegel Online

This piece outlines China's new ventures to the Arctic -- and how China's diplomatic tactics are shifting.

2. "China's love affair with cars chokes city air"
Louise Walt, Associated Press

Over the last decade, the automobile industry has skyrocketed in China. Last year, 13 million cars were sold. But what kind of environmental impact will such a rapid shift have?

3. "Making room" 
The Economist

In 2010, there were roughly 4,000 cities with populations of 100,000 or more. (China had about 400 of those). But between 2010 and 2050, the UN anticipates that the world's urban population will double. This piece reviews a new book by Shlomo Angel called Planet of Cities -- the book predicts how future urbanization will play out. Here's an interesting rule of thumb: usually, a country's biggest cities break down such that the largest city has twice the population of the second largest, three times that of the third largest...etc.

4. "Chinese labour pool begins to drain"
Jamil Anderlini and Ed Crooks, Financial Times

China's working age population unexpectedly shrank last year -- a trend that wasn't meant to begin until later this decade. What do China's shifting demographics mean for the economy?

5. "Mexico: the new China"
Chris Anderson, The New York Times

Is cheaper always better? This piece highlights some of the advantages of using Mexican manufacturing from an American business perspective. Anderson argues that it allows for more product evolution, innovation, and customization -- and Chinese labor is getting less and less cheap.

Note: Today is the eighth in a series of posts that detail Eurasia Group's Top Risks for 2013

The dangers emanating from the ongoing shadow war with Iran are greater than many observers believe. This struggle has consisted of several components, including a cycle of mutual killings and cyber attacks. While there is no hard proof, it is a reasonable assumption that Israel and Iran (or at least some officials in Iran) are responsible. The final theater is the ongoing proxy war in Syria.

In early 2013, the West will also become engaged in an effort to negotiate a solution to the standoff over Iran's nuclear program. Western countries, led by the U.S., would very much like a peaceful resolution, while Iran sorely needs relief from stiff economic sanctions. Talks will be intensive but on balance the talks will probably fail by late spring. The Iranian elite have an almost existential commitment to the nuclear program, while Supreme Leader Ali Khamenei possesses a deep seated enmity for the U.S.

As a result, the West and Iran will probably return to escalating sanctions and shadow war, with two drivers boosting the ferocity of that struggle. First, the Iranian regime will feel compelled to show resolve and retaliate in the face of new sanctions. Second, the regime faces a period of profound economic weakness, though it will not collapse. But weak governments are prone to lashing out, both to rally domestic support and to portray an image of strength.

These new drivers will likely intensify the shadow war and could lead to new fronts. The chance of miscalculation and overreaction on both sides would rise, especially in the face of provocations such as a successful assassination plot in the U.S. similar to the alleged attempt against the Saudi ambassador in October 2011 or an episode such as the 2008 swarming of U.S. Navy frigates by Revolutionary Guard boats.

Iran's nuclear program is the second area of concern in 2013. Israeli rhetoric will remain at a high pitch, but is intended to increase diplomatic leverage and economic sanctions. Still, the probability of an Israeli attack in 2013 is low because Iran's nuclear program is unlikely to pose an imminent threat this year. Also, Israel can inflict only limited damage on Iran's nuclear facilities and there will be a lack of consensus among its political leaders about the wisdom of a strike. Polling also shows the Israeli public firmly opposes unilateral action. Finally, the U.S. would likely attack only if Iran tries to acquire a nuclear weapon and that is unlikely.

There are, however, a number of worrying scenarios. Developments at the Fordo enrichment facility make up one. Iran will have enough medium-enriched uranium to make a bomb by early summer, but weekly IAEA inspections leave enough time for detection and action. The central question is whether the Israeli government will trust the U.S. or strike on its own. Israel is unlikely to attack, but this dilemma slightly boosts the chance of Israeli strikes during 2013 (to roughly 20 percent).

A scenario involving a detectable Iranian breakout would probably elicit a U.S. attack. Yet Tehran has been very cautious and slow. Iran probably wants to become a latent nuclear power; that is, the world knows it could develop a bomb quickly. But Iran's threat perception will become more dire this year,  making an irrational dash to a bomb, and a U.S. attack, slightly more likely.

Next week, we'll profile Risk #9: India

Note: Today is the seventh in a series of posts that detail Eurasia Group's Top Risks for 2013

East Asia's geopolitical stability will continue to deteriorate this year. Countries such as the Philippines, Vietnam, and Japan will take tougher stances on territorial disputes with China and seek to involve Washington more closely in these issues. But China's new government will find it difficult to compromise and may even take more forceful positions given its need to consolidate internal support and channel growing nationalism. Meanwhile, the US will continue to enhance engagement with Asian partners -- particularly on the economic side -- which will raise skepticism in Beijing.

The most worrying concern during the early part of 2013 will be the Senkaku/Diaoyu islands, claimed by both China and Japan. Tensions surrounding the islands spiked in late 2012 following the Japanese central government's decision to purchase several of them from their private owners. The growing presence of Chinese ships and aircraft in surrounding waters is stoking nationalist sentiments in Japan and increasing the risk of a clash that could quickly escalate and ensnare the world's three biggest economies in an ugly dispute.

In 2013, regional governments will lean toward political considerations more than economic ones. In Japan, a new government led by the Liberal Democratic Party (LDP) Prime Minister Shinzo Abe will become more assertive on foreign policy issues. The LDP was able to capitalize on nationalist sentiments in its campaign, and Abe will carry through with some of his promises in 2013 by establishing a more assertive national security and foreign policy posture. Abe will also bolster the U.S.-Japan security alliance and likely commit Japan to joining the Trans-Pacific Partnership (TPP) negotiations. China will regard such moves as confrontational.

Meanwhile, Beijing's appetite for compromise will be limited. China's political transition will make it more difficult for Beijing to be flexible on foreign policy issues. The country's new leaders will need to consolidate internal support. Moreover, growing middle-class expectations and concern over the state's control of information are expected to encourage a more nationalistic foreign policy. If Beijing faces a foreign policy test, the incoming administration might feel the need to demonstrate its foreign policy mettle and avoid being seen as capitulating to outside interests.

Policies toward Asia from the U.S. will not change much: The rebalancing of its attention toward the region will continue, with more substance on the economic than on the strategic side. In particular Washington's trade negotiators will focus on negotiations for the TPP talks.

The South China Sea will be another hotspot. There has been relatively little tension there in recent months, but that calm is unlikely to continue. Vietnam and the Philippines, in particular, will maintain their aggressive postures toward China. Neither country has an interest in provoking a military conflict, but domestic politics make it difficult to back down without a perceived (even if minor) but unlikely concession from Beijing.

Later this week, we'll profile Risk #8: Iran

On the face of it, Davos doesn't seem to make much sense. For business and political leaders who are increasingly mistrusted by the public, cloistering themselves in a luxurious mountain redoubt for a week seems like a good way to sharpen the perception that they are far removed from the interests and concerns of their constituents. And in a world of ever-proliferating global forums -- TED and Google Zeitgeist for the techies, Clinton Global Initiative for the high-minded policy and business types, the list goes on -- the World Economic Forum (WEF) has a bit of an identity problem. Aside from the invigorating alpine freshness, the good skiing, and the chance to meet Charlize Theron, is there any reason to come here? And does what happens here still matter at all?

Yes. For why, see my Foreign Policy piece here on why Davos is more than just a ski camp.

Note: Today is the sixth in a series of posts that detail Eurasia Group's Top Risks for 2013

While the immediate crisis has subsided, risk still emanates from Europe in 2013. First, the process of institution-building to address the flaws of the eurozone structure will continue to be halting, especially in light of major elections in Italy and Germany. And second, many eurozone countries face recession or stagnation, which could test the eurozone structure in new ways.

To be clear, as in 2012, the risk of a eurozone break up is minimal, primarily because the European Central Bank has made clear it will do whatever it takes to preserve the euro. But the muddle-through approach presents risks in 2013, just as it did in 2012.

Germany heads to the polls in September. While Chancellor Angela Merkel has gained the strong backing of the German public for her handling of the eurozone crisis, the current government will be loath to contemplate any major new institutional or funding moves that might upset the careful balance she has struck. The most pressing concerns are policies allowing the direct recapitalization of eurozone banks and the building of an ambitious fiscal and banking union.

Italy holds elections on February 24-25 in which anti-austerity and populist parties could win more seats. Such a government would likely struggle to provide political stability, the reform drive could suffer, and financing costs could again rise.

Beyond the political calendar, a number of factors could test the temporary eurozone equilibrium. If France fails to hit budget deficit targets, President Francois Hollande's government will probably have to enact additional spending cuts and some tax hikes. Spanish Prime Minister Mariano Rajoy is unlikely to ask for financial assistance from the eurozone's new permanent bailout fund absent market pressure. But should that pressure arise, Spain would ostensibly have to agree to reform commitments stipulated by the ECB's agreement to purchase the country's bonds in the secondary market. Those commitments are likely to be met with resistance in hard-hit Spain, putting the ECB in a quandary: If Spain refuses to meet the conditions, does the ECB loosen its requirements, potentially encouraging moral hazard in other member states, or does it insist on reforms and potentially withhold assistance that could cause a new conflagration in the eurozone?

Later this week, we'll profile Risk #7: East Asian geopolitics.

Note: Today is the fifth in a series of posts that detail Eurasia Group's Top Risks for 2013.

There are now three big unfolding stories for international politics and the global economy: China's rise, Middle East turmoil, and the redesign of Europe. The three countries with the most to lose from these trends are, respectively, Japan, Israel, and Britain. These three also happen to be America's most reliable allies in the world's three most important regions.

China's expansion leaves Japan in a tough spot. The broadening and deepening of China's consumer market creates opportunities for Japanese companies, but Beijing's new assertiveness, particularly on territorial disputes involving Japan, is fueling nationalist anger inside both countries. The risk is not that the two countries will exchange fire, but that emerging frictions will undermine the exchange of everything else, reversing the momentum in a commercial relationship that's crucial for Japan's economy and its companies.

Israel's worries bear more directly on the country's national security. Syria's civil war has already generated unrest in Lebanon. As international pressure over Iran's nuclear program intensifies, the risk is rising that Tehran will lash out in unpredictable ways, including at Israel via proxies like Lebanon's Hezbollah. In addition, Arab governments, eager to safeguard their popularity at home, will look to satisfy public demand for a harder line on Israel. The Muslim Brotherhood government in Egypt may prove less likely in 2013 to serve as a reliable diplomatic partner in resolving disputes with Hamas. Political officials in Turkey and Jordan, traditionally friendlier toward Israel, face internal pressures of their own to keep their distance. And though Washington will act as ultimate guarantor of Israel's security, the Obama administration will continue the U.S. pivot toward Asia, spending less political capital and fewer resources to help resolve the various conflicts along Israel's borders.

In Britain, David Cameron's government faces growing pressure to hold a referendum on the country's future in the European Union. A plurality of British voters now favor exit, and Tory politicians worry that if they hedge on the question, the increasingly popular UK Independence Party will grab a sizable share of their vote. If Britain eventually lands outside the EU, it will pay a significant price. Abandoning partners that buy half of Britain's exports will come at a cost, and dozens of bilateral trade deals would have to be renegotiated. Outside the EU, Britain would also lose much of its international clout. Even if Britain remains a member, its unwillingness to help shape the eurozone redesign and engage on new financial regulations will leave London as a taker rather than a maker of the new rules of the European game.

Washington's renewed focus on reducing spending will force the architects of U.S. foreign policy to lean more heavily on steady friends to help advance and defend U.S. interests around the world -- at a moment when these three most important allies have serious problems of their own.

On Monday, we'll profile Risk #6: Europe.

Note: Today is the fourth in a series of posts that detail Eurasia Group's Top Risks for 2013.

With the votes counted and the cliff averted, 2013 ought to be a year of substantial legislative accomplishment. Term limits ensure that President Obama can afford to be bolder than a first-term president in offering up concessions in exchange for tangible policy achievements. Republicans, eager for better vote results in 2014 and 2016, should be ready to prove they can get positive things done. The U.S. economy looks set for stronger growth. On energy (the shale revolution) and trade (the Trans-Pacific and Trans-Atlantic deals), there are game-changing possibilities to be had. On immigration, the two parties have incentives for cooperation, and both Democrats and Republicans have said that entitlement and tax reform are needed to boost long-term, sustainable growth.

Unfortunately, we can expect another year of zero-sum partisan combat. Elected officials from the two parties are now appealing to increasingly separate constituencies with quite different values on questions of budget and borrowing. A significant number of House Republicans worry more over primary challenges within their reliably conservative districts than about damage to their party's national brand. Democrats, in turn, have seized on issues like immigration reform and women's health issues to deepen their support with groups they believe Republicans are alienating. Obama says he will not negotiate over the debt ceiling. House Speaker John Boehner vows to never again negotiate privately with Obama.

Add volatility elsewhere in the world and the conviction among many investors that the U.S. remains the safest port in any storm, and complacency has begun to take root in Washington over the need to correct chronic imbalances. Borrowing costs remain low, leaving bond markets with less power to discipline elected officials than at almost any time in recent U.S. history. Absent substantial market pressure, U.S. politicians now have little incentive to risk pain by cutting spending and raising taxes in ways that would substantially reduce the federal debt.

A battle over the debt limit and government spending begins in February. Should Washington not produce a deal in time, the U.S. government would shut down, significant automatic spending cuts would take effect, and the government would default on its debts for the first time. The two sides will eventually have to find a way out of the impasse, but political and market volatility is unavoidable.

Compared with more volatile emerging markets, the downside from even worst-case U.S. scenarios is limited. But in a year when political compromise might have turbocharged growth, that opportunity is likely to be wasted.

On Friday, we'll profile Risk #5: the JIBs -- Japan, Israel, and Britain.

Note: Today is the third in a series of posts that detail Eurasia Group's Top Risks for 2013.

The Middle East will enter a new phase in 2013. Arab Spring will give way to Arab Summer, as the region faces a series of increasingly complicated overlapping conflicts. As Americans and Europeans resist deeper involvement, rivalries among Saudi Arabia, Iran, and Turkey, competition for influence between Sunni and Shia, a lack of economic progress, and a resurgence of militant groups will each heighten tensions.

Syria remains the central arena of conflict, as Shia powers -- Iran and Lebanese Hezbollah -- on the one side, and Sunni states -- Turkey, Saudi Arabia and Qatar -- on the other compete for leverage. Jihadists have also entered the fray, and turmoil has spilled across the country's borders into Lebanon, Turkey, Jordan, and Iraq.

Emerging conflicts elsewhere are less obvious. Egypt, Tunisia, and Morocco now have moderate Islamist governments. In Jordan and Kuwait, Islamist opposition groups threaten the governing dominance of secular administrations. But while the words and actions of mainstream parties like Egypt's Muslim Brotherhood and Tunisia's Ennahda make headlines in the West, the more serious risk comes from militant organizations that threaten the ability of new leaders to govern and maintain security.

Fueling this trend is the reality that, across the region, new leaders are trying to consolidate power and build popularity at a time when complicated economic problems demand solutions that will make large numbers of people angry. New governments in Tunisia, Libya, Egypt, and Yemen will last only if they can deliver tangible economic progress for an increasingly frustrated and impatient public.

The risk that a Salafist or jihadist group can exploit these frustrations to seize power in 2013 is low, but groups like al Qaeda in the Islamic Maghreb, al Qaeda in the Arabian Peninsula, al-Shabab, and smaller affiliates continue to attract support and new followers by using resentments against local regimes to foster anger at America and the West. 

But Iraq may become 2013's newest hotspot. Sunni-Shia tensions are growing, and none of Syria's neighbors is more vulnerable to the threats created inside that country by radical Wahhabi clerics, often with Saudi or Qatari support, now fueling the emergence of an increasingly radicalized and militarily experienced Salafist movement. The Kurdish regional government is becoming more aggressive in promoting its energy development agenda at Baghdad's expense, and Sunni-led violence inside the country might well encourage Iraq's Shia-led government to forge closer ties with Tehran, antagonizing the governments of Saudi Arabia and Turkey.

The Obama administration wants to focus on domestic challenges and an ongoing foreign policy shift toward Asia. But regional rivalries are heating up, and Americans and Europeans will only add to the uncertainty by keeping their distance -- in hopes that they don't get burned. 

On Wednesday, we'll profile Risk #4: Washington Politics.