By David Sloan, Anjalika Bardalai, and Sasha Riser-Kositsky
India's low-key Prime Minister Manmohan Singh has revealed unexpected backbone, but his renewed vigor may come too late to for India to avoid a ratings downgrade or save his unpopular government. After years of limited and haphazard progress on structural changes to the economy, the prime minister, in conjunction with the new Minister of Finance P. Chidambaram, has successfully leveraged the looming threat of a sovereign downgrade to reassume control -- at least for now -- over India's economic policy-making. At the pair's urging, India's Cabinet Committee on Economic Affairs on September 14 approved 51 percent FDI in multi-brand retail, allowed foreign airlines to buy 49 percent stakes in Indian carriers, and raised the FDI cap in broadcasting services from 49 percent to 75 percent. Those long-awaited announcements came just one day after a cabinet committee also approved an unexpectedly large price increase for diesel.
The decision prompted a quick revolt by the second-largest party in the ruling United Progressive Alliance (UPA) coalition. Mamata Banerjee, the firebrand leader of the West Bengal-based Trinamool Congress (TMC), announced on September 18 that the TMC was withdrawing from the government after Singh ignored her demands to roll back both the diesel price hike and FDI liberalization.
But the TMC's departure will not stop those measures from going ahead. The TMC's move leaves the UPA even further from a simple majority in the Lok Sabha, but the government says it still has enough support from other regional parties to survive any possible confidence vote, at least in the near-term. The UPA's ability to maintain the outside support of a number of regional parties -- especially the Samajwadi Party (SP), which holds power in India's largest state, Uttar Pradesh, and has 22 members of parliament in the Lok Sabha -- is crucial to the coalition's future. Although the SP has previously turned down ministerial positions and is likely to do so again in the now-inevitable cabinet shuffle, New Delhi will offer the state government significant financial incentives as an inducement. Still, the SP, along with the TMC a huge winner in recent state elections, expects that early national polls would significantly expand its parliamentary representation.
As such, while the government is likely to survive for now, the TMC's exit underscores the fragility of the Congress-led UPA coalition and increases the chances for early national elections. If the SP and the main opposition Bharatiya Janata Party can resolve their internal leadership squabbles, they might support any TMC initiative to force early national elections. Otherwise, the UPA government is likely to limp along until the end of its five year term in mid-2014.
Despite the political firestorm, the government is unwilling to risk the reputational damage of backtracking again on FDI liberalization, as it did last December after initially approving FDI in multi-brand retail. But the prospects for further reforms have diminished as a result of the political turmoil. Any liberalization of FDI rules in pensions and insurance that would require legislative action is out of consideration, while implementation of the Direct Taxes Code and the Goods and Services Tax, which would require a constitutional amendment, is extremely unlikely. And while the government will move ahead with fiscal consolidation later this month, the window for new and deeper changes closes as national elections approach. Following the election, the prospects for reform are even bleaker as an even more divided, dysfunctional coalition government is likely to assume power.
David Sloan is head of Eurasia Group's Asia practice, Anjalika Bardalai is an analyst in the Asia practice, and Sasha Riser-Kositsky is a researcher in the Asia practice.
By Famke Krumbmüller
The results of the closely watched Dutch elections are broadly positive, signaling a shift toward centrist policies, and making it unlikely that the new government will throw up roadblocks to management of the ongoing eurozone crisis. Pre-vote concerns that a government led by the Socialist Party (SP) could have weakened the Netherlands' support of the conservative northern camp led by Germany are now moot.
The People's Party for Freedom and Democracy (VVD -- also known as the liberals) secured a strong plurality in the lower house with 41 seats, up 10 from the previous parliament and the largest number of seats the party has ever controlled. The Labor party (PVDA) took second place with 39 seats (up nine). The Socialists (SP) remained steady at 15 seats, but most other parties saw their seat tallies decline sharply. The far right Party for Freedom (PVV) headed by the flamboyant Geert Wilder lost nine seats, down to 15, the centrist Christian Democratic Appeal (CDA) lost eight seats for a total of 13, and the Green Left took three seats (down seven). The centrist Democrats 66 (D66) boosted their total by two, taking 12 seats in the new parliament.
The results likely make formation of a new government easier than had been anticipated. The expectation prior to the vote had been that one of the three major parties (VVD, SP, or the PVDA) would negotiate support from centrist parties to stitch together a working majority. Mark Rutte's VVD is likely to again form the basis of a coalition, but it will have to work with the PVDA in order to govern. But the VVD may add one or two other smaller parties in an effort to make legislative approval in the senate easier. A VVD-PVDA coalition would control 80 of 150 seats in the lower house, but only 30 of 75 seats in the senate. The CDA and D66 are the probable candidates, with the CDA somewhat more likely given that its 11 upper house seats would secure a comfortable majority in the senate. But the CDA's reduced vote tally has eroded its negotiating leverage and one option is that a VVD-PVDA coalition negotiates CDA support in the senate only, rather than formally bringing it into the government. That scenario -- with only two parties in the coalition -- would make policymaking simpler, though a third party may reduce tensions between Labor and the Liberals.
The key signpost for future policy trends will be the cabinet formation process. Both Rutte (VVD) and Diederik Samsom (PVDA) know they need to form a stable government as quickly as possible, but the two parties must also work through a potentially acrimonious policy agreement process. In the end, future policy is likely to be somewhat more balanced between the left and right than it currently is and the next government could have the political wherewithal to approve needed and painful domestic healthcare and housing reforms. Nonetheless, with Rutte in line to return as prime minister, a high degree of continuity is likely. A long government formation process (which is common in the Netherlands) could be a signal of tensions though, and the agreement will signal how stable such coalition will be. Rutte's likely return as prime minister also signals that the coalition government will be pro-European and that it is likely to support ongoing fiscal rectitude, though the PVDA may push for some measures to stimulate growth.
Famke Krumbmüller is an associate with Eurasia Group's Europe practice.
By Michal Meidan and Carsten Nickel
There are many reasons why China's economy has begun to cool, but the dramatic slowdown within the European Union, China's largest trade partner, is among the most important. Fears for Europe's growth and stability weigh heavily in Beijing, and China's risk-averse leaders are willing to invest in Europe's recovery.
But Beijing won't risk throwing good money after bad with substantial bailouts for risky peripherals like Spain, Italy or Greece. That would play badly inside China, where public perception that government is bailing out wealthy Europeans during a slowdown at home wouldn't play well. Greek haircuts earlier this year left Chinese investors with huge losses, and to invest in the European Financial Stability Facility (Europe's current bailout fund) is to form closer ties with meddlesome bureaucrats in Brussels.
Instead, China is increasing its direct investment in Germany, still Europe's economic engine, and, by extension, in Berlin's ability to manage crises and restore the continent's growth. That's good news for German Chancellor Angela Merkel, who sees the strategic importance of improving relations with the world's other leading manufacturing-dependent surplus economy. China has become Germany's third-largest export market behind France and the United States, and with demand among Germany's neighbors unlikely to increase anytime soon, German manufacturers will grow increasingly dependent on China and its markets.
Economic ties between China and Germany began to tighten following the onset of the financial crisis in 2008 as demand generated by the Chinese stimulus plan became an important source of Germany's recovery. Closer ties with German automakers and producers of renewable energy help Chinese firms develop new technologies and climb the value chain.
is a downside for Germany. Expanded commercial ties will force Merkel's
government to contend with domestic concerns that China's labor practices fall
far short of acceptable standards and that German companies doing new business
in China will have their intellectual property stolen. But Chinese purchases of
German Bunds will help Merkel ease domestic fears that German support for
Eurozone weaklings will sap the country's strength. That's why Merkel's once
vocal criticism of China's human rights record has all but disappeared -- and why Berlin,
unlike European institutions in Brussels, has yet to demand equal access to Chinese
That's crucial for China. Beijing will continue to pay lip service to its ties with EU institutions, but growing ties between Beijing and Berlin will complicate Brussels' efforts to develop a common foreign and trade policy toward China, increasing Beijing's bargaining power with individual European partners.
Today, when China's leaders look toward Europe's core, they see a weakened France, a marginalized Britain, and a rising Germany. By betting on Berlin, China is hoping that Germany will use its increasingly decisive role in EU decision-making to provide China with market economy status, and the commercial advantages that come with it, and even to help lift Europe's arms embargo on Beijing. For its part, Germany is hoping ties with China can boost growth at a moment when it's badly needed.
For the moment, it's an increasingly profitable partnership.
Michal Meidan is an analyst in Eurasia Group's Asia practice. Carsten Nickel is an analyst in the firm's Europe practice.
Sean Gallup/Getty Images
By Mujtaba Rahman and Willis Sparks
It's not easy to unseat an incumbent U.S. president. In 80 years, only Ronald Reagan (1980) and Bill Clinton (1992) have done it, and while it's too soon to say how close the current race will be, it's clear that Republican challenger Mitt Romney lacks the ease, warmth, and charisma of these two remarkable political talents. Mitt Romney needs a boost.
Given that U.S. economic data points to a recovery that doesn't appear on the verge of either a surge or a sharp reversal, the most obvious risk for the Obama campaign is a substantial market meltdown in Europe in September or October, one that sends Wall Street into a tailspin and generates consumer and investor fears that the U.S. economy is again headed in the wrong direction. Though Europe's markets may well endure a rough ride this fall, a substantial meltdown is unlikely. But given the likely timing, it's a risk that both candidates are thinking about.
For now, President Obama is winning. Despite historically high unemployment and continued consumer anxiety over the state and direction of the U.S. economy, current polling in the states likeliest to decide the election gives President Obama several credible paths to victory. Judging by their spending habits, the two campaigns and their allies believe the race will be decided in Ohio, Florida, Virginia, North Carolina, Colorado, Nevada, Iowa, New Hampshire, and perhaps Wisconsin. Romney will have to win six or seven of these nine states to earn the 270 electoral votes needed to win, and only in North Carolina does he enter the fall with a clear lead.
Given the country's intense current partisanship, party faithful on both sides are likely to vote in large numbers this November, and the outcome of a close election will depend on the choices of genuinely independent voters, a group that represents about 10 percent of those likely to cast ballots. This is, by definition, the least ideological segment of the U.S. electorate, and these voters are most likely to vote based on perception of the president's competence and on confidence in his leadership rather than on fidelity to a defined set of social and political values. That is why, though he remains the favorite, President Obama remains vulnerable to external events over which he has little direct influence.
Which brings us to Europe. The autumn to-do list facing Eurozone leaders is daunting. They must agree on another broadly unpopular bailout for Greece, manage volatility in Spain and Italy, and create a credible new Eurozone-wide bank supervisor to make future crises both less likely and less costly to manage when they occur. They must also agree on a concrete and detailed plan to address the Eurozone's original design flaws, and they must do all this with jittery investors watching their every move.
Why is the fall likely to be an especially volatile time? Greece will return to center stage in September, given the additional financing needs that have been created by poor growth, a bureaucracy slow to implement promised reforms, and the possible extension of fiscal targets. Creditor countries are not eager to help, and they may demand that Greece's government enact reforms before help is provided, leaving Greek officials caught between an increasingly angry public and the expectations of those who can help. In the meanwhile, warnings from creditors -- designed to keep pressure on Greek officials -- will keep markets on edge. Also in September, we can expect a ruling from Germany's constitutional court on whether the Eurozone's proposed bail-out fund-the center piece of Eurozone leaders' response to the crisis-is legal.
Then there is the trouble in Spain. Current yields on Spanish debt reflect market expectation that the European Central Bank (ECB) stands ready to backstop Spain. That's an overly optimistic assessment, because ECB President Mario Draghi has detailed the pre-conditions for the bank's help, and those conditions have not yet been met. To satisfy Draghi's requests, the Spanish government must first make use of sovereign-backed bailout mechanisms in conjunction with a reform program. But unless and until market pressures force him to, Spanish Premier Mariano Rajoy is unlikely to ask for help, increasing the risk of market turmoil.
Also this fall, the European Commission is due to propose plans for a single pan-Eurozone supervisor, part of a deal agreed by Germany in June that will pave the way for direct recapitalization of Spanish banks instead of an indirect path through Spain's government. But many controversial issues remain, not least the separation of national from EU-wide supervisory powers and a decision on whether all Eurozone banks will be covered or whether some countries, especially France and Germany, can negotiate exemptions. Without this measure of reassurance, lenders may again drive rates dangerously high.
Even if agreements on all these issues are reached with a minimum of friction, there is no guarantee that the creation of a supervisor will be enough to shore up vulnerable banks, provoking new anxieties and more market pressure on the bloc's weaker economies.
Will all these potential problems generate enough fear in September and October to send European, and then U.S. markets, reeling? Probably not. But the risk is real, and the timing is ominous. You can be sure that the Obama and Romney campaigns will be watching closely.
Mujtaba Rahman is an analyst in Eurasia Group's Europe practice. Willis Sparks is an analyst in the firm's Global Macro and United States practices.
Scott Olson/Getty Images
By Mark Rosenberg
South African politics is broiling. The exceptional violence surrounding the wildcat strike at Lonmin's Marikana platinum mine -- where police killed 34 strikers and 10 people died in an inter-union clash -- reflects poorly on the leadership of President Jacob Zuma, who is up for re-election as head of the ruling African National Congress (ANC). By weakening Zuma's allies and strengthening his foes, the Marikana incident and its aftermath make Zuma's hold on the ANC presidency-and thus the presidency of South Africa-extremely tenuous.
The most immediate political victim of Marikana is the National Union of Mineworkers (NUM), the largest affiliate of the powerful Congress of South African Trade Unions (COSATU). The violence at Marikana began with clashes between members of the NUM and the splinter Association of Mineworkers and Construction Union (AMCU), which has exploited discontent over NUM-negotiated wages and its perceived coziness with management to make significant inroads into the NUM's membership rolls throughout the platinum industry. Meanwhile, the NUM has faced similar criticisms from COSATU's acerbic Secretary General Zwelinzima Vavi, who has accused the union of favoring management and higher-skilled workers over its rank-and-file. The NUM, for its part, has accused Vavi of sowing dissension in its ranks, and its leaders have been at the forefront of a politically-driven effort to replace Vavi at COSATU's upcoming elective conference in September. Given Marikana -- where the NUM was utterly unable to contain the situation -- Vavi's criticisms will reverberate within COSATU, whose leaders are freshly focused on preventing the kind of union splintering which has struck the NUM. As a result, the NUM's influence in the federation -- and thus its challenge to Vavi's leadership -- will be weakened.
This damages Zuma, who is close to the NUM and has actively pushed for Vavi -- a former ally and now vocal Zuma critic -- to be replaced. Vavi's likely re-election will probably deprive Zuma of COSATU's endorsement heading into the ANC's December elective conference in Mangaung. COSATU is in a "governing alliance" with the ANC, and many of its 1.8 million members are also members of the ruling party: Its rejection of Zuma (whom the labor federation forcefully endorsed in 2007) will not only cost the incumbent votes, but it will also highlight Zuma's weakness among his erstwhile base. Indeed, the COSATU conference may well spur anti-Zuma factions to push Deputy President Kgalema Motlanthe into a more explicit challenge to the party's leadership. Motlanthe -- who is closer to Vavi and favored by the ANC's more statist elements -- is Zuma's most viable challenger, though he has thus far been reluctant to take on Zuma directly.
Zuma's hold on the ANC presidency is also threatened by direct political fallout from Marikana. The fact that Zuma ordered police to bring the Lonmin strike under control has exposed him to accusations of being aligned with (mostly white-owned) mining companies and of complicity in the miners' deaths. Leading the anti-Zuma charge is Julius Malema, the expelled ANC Youth League leader and populist demagogue. While Malema has no official influence in the ANC election, he is still viewed sympathetically by the party's "nationalist" faction and its youth wing. More broadly, the incident reinforces the impression that Zuma is a leader who is not in control of his government or his party. His consensus style of leadership is not suitable for containing ANC factionalism or the rise in popular discontent among many of the ANC's core supporters, opening a window to potential challengers such as Motlanthe at Manguang in December.
Mark Rosenberg is an analyst in Eurasia Group’s Africa practice.
STEPHANE DE SAKUTIN/AFP/GettyImages
By Heather Berkman and Risa Grais-Targow
The state of Hugo Chávez's health has prompted plenty of speculation and debate across Washington and among the Venezuelan president's universe of Twitter followers, but for some of his regional friends, the stakes are particularly high. For the past decade, Chávez's Petrocaribe program, which provides heavily discounted Venezuelan oil and finances a slew of infrastructure projects around the region-has helped a handful of Central American and Caribbean leaders avoid the kinds of tough economic choices that drive angry citizens into the streets. Yet, with the approach of elections in October, Chávez now faces some tough challenges-to the state of his country's own finances and to his ability to sustain both his political and personal strength.
Dominican Republic, the loss of help from Venezuela would put the new Danilo Medina administration in a
tough spot, particularly since Chávez's patronage allowed the outgoing Leonel
Fernandez administration to avoid painful belt-tightening, in particular, by
bailing out the state-owned electricity company and keeping money flowing to
privately owned generators who threatened to shut off the lights. If Chávez
exits and Petrocaribe is cut off next year, Medina's government will have to
finally force consumers to pay for their electricity (or at least stop stealing
it), and tap domestic financial markets or turn to international creditors to
avoid leaving its people in the dark. Access to foreign financial markets can
probably help the new government keep the lights on, but that will leave
Medina's government with less of the financial capital it needs to begin
building its political capital.
For Nicaragua, the loss of Venezuelan aid would be much more serious. By some estimates, Venezuelan support amounts to 7-8 percent of Nicaragua's GDP, a sum that has allowed President Daniel Ortega to subsidize electricity rates and public transportation, boost public sector wages, and finance lots of popular social programs. Ortega has few other friends he can turn to. US and European donors have scaled back aid amid accusations of electoral fraud and concerns that Ortega is running roughshod over Nicaragua's fragile democratic institutions. Without help from his friend in Caracas, Ortega would probably have to make conciliatory moves toward skeptics in Washington and seek additional help from the multilaterals.
But, of course, no government would be harder hit by the loss of Chávez than the one in Cuba, where billions of dollars in infrastructure investment and 115,000 bpd of Venezuelan oil help the Castro regime go slow on economic reform while keeping a tight lid on demands for new political freedoms. With the collapse of its Soviet benefactor in 1991, Cuba entered what state officials still call the "special period," a time of extreme hardship and anxiety that brought the Castros as close to the abyss as they have ever been. The brothers are now in their 80s, and a replay of that era would almost certainly yield unprecedented pressure for change.
Since beginning a process of gradual liberalization in 2010, Raul Castro has taken two steps forward and one step back in his bid to cut public payrolls and allow for limited private enterprise. Without money from Venezuela, however, the Castro regime would likely be forced to push the pace of economic liberalization, making it more difficult to contain demands for political reform.
Venezuelan opposition leader Henrique Capriles has warned that his administration would end preferential oil deals for Chávez's friends, which he estimates will save Venezuela about $6.7 billion per year. The Cuban government continues to hope that oil discoveries of its own in the waters around the island might ease the need for a foreign patron, but early exploratory wells have come up dry. Even if Cuba discovers significant amounts of recoverable oil, it will take years for production to come online. That may be more time than Chávez has left.
Though a physically robust Chávez would probably win in October, he has undergone three cancer operations in the past year, and we can't know how long he might be strong enough to govern. We can say with confidence, however, that Venezuela cannot afford its president's generosity indefinitely-and, of course, that no man lives forever.
Heather Berkman and Risa Grais-Targow are analysts in Eurasia Group's Latin America practice.
JUAN BARRETO/AFP/Getty Images
By Hani Sabra
Egyptian President Mohamed Morsy's sacking of the intelligence chief and other powerful security figures in the wake of an attack on Egyptian border police gave him some short term credibility. He wisely used that political capital to sideline the two most powerful members of the Supreme Council of the Armed Forces (SCAF) and cancel amendments to the interim constitution that gave SCAF legislative power. On paper, Morsy is now the most powerful person in Egypt. But claims the move is an important step toward civilian ascendency in Egypt misread both the military's ongoing strength and the motivations of the SCAF's new senior members.
A closer look at the firings reveals the limits of Morsy's power. Remember that Morsy did not elevate junior officers to fill the positions opened up by sacking SCAF head Field Marshal Hussein Tantawi and army chief of staff General Sami Enan. His appointments were in fact conservative and he chose other top military men to fill the vacated posts. More importantly, Morsy would never have been able to sideline Enan and Tantawi without the support of other military leaders. That step was the Brotherhood's greatest tactical success; it was able to build strong enough links with some members of SCAF, exploiting personal differences and opportunism rather than ideology.
Senior members of the military want to benefit financially from their positions and are not a force for secularism as some observers allege. Morsy was able to convince some commanders, such as the new Minister of Defense Abdel Fattah el Sisi, that it would be better for them to tie their fortunes to the Muslim Brotherhood rather than the old guard (Tantawi and Enan were closely associated with Hosni Mubarak's regime). Morsy will need to nurture these relationships; if they feel threatened, senior officers remain powerful enough to cause the president real problems. As a result, the seesawing battle for ascendancy between the Brotherhood and the military will go on.
Hani Sabra is an analyst in Eurasia Group's Middle East Practice.
Mark Wilson/Getty Images
By Ayham Kamel
Iranian leaders believe more and more that Western and Arab involvement in the uprising against Syrian President Bashar al Assad is designed to weaken the Islamic Republic. Tehran feels threatened by the so-called Sunni Triangle's (Turkey, Qatar, and Saudi Arabia) support for Syrian rebels, which Iran views as a complement to sanctions that aim to limit its regional influence and prestige. The United States's alliance with these countries makes it more difficult to resolve any disagreements over Syria. In this context, Iran finds supporting Assad -- at least in the near term -- as the best worst option. This policy isn't new, but the parameters of what Tehran is willing to provide have expanded.
The audacious bombing of the National Security Council in Damascus on 18 July probably represented a watershed moment in Iranian thinking about the uprising in Syria. The "nuclear" option, dispatching units of the Iranian Revolutionary Guard Corps to assist Assad's weakened forces, is very unlikely -- it would likely trigger a so-called Chapter 7 UN resolution authorizing Western military intervention or provide enough impetus to inspire a coalition of the willing. But Tehran, now more than ever, is willing to do more to help Syria's embattled president.
First, the Iranian regime is likely to divert perhaps tens of millions of euros to help Assad counteract the flight of foreign reserves. It views support of Assad as important enough to justify the diversion of scarce reserves despite the increasing domestic economic pain caused by international sanctions. Second, Iran is likely to boost its provisions of arms and intelligence to the Assad regime. It has so far been reluctant to provide a large amount of support out of fear that doing so would play into the Syrian opposition's efforts to divide the regime's base on sectarian grounds. As the threat to the Assad regime has grown, that calculus has changed. Finally, Hezbollah forces have a great deal of fighting experience that would be valuable to Assad. However, the regime will likely dispatch them in a covert manner to avoid destabilizing the Lebanese government.
Iran, for now, may have an unrealistic view of Assad's chances of staying in power, and of its own ability to influence the outcome. It is likely that Iran will eventually reduce or eliminate its assistance to Assad as the latter's position grows increasingly untenable. Biting sanctions, declining oil revenues, rampant inflation, and dwindling foreign reserves will force Iran to focus internally. In the long run, the Islamic Republic will not be able to afford supporting a sinking Syrian regime either financially or diplomatically.
Ayham Kamel is an analyst in Eurasia Group's Middle East practice.
The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.