Could Turkey be nearing a resolution of its Kurdish problem? The March 21 ceasefire announcement from Abdullah Ocalan, the jailed leader of the Kurdistan Workers' Party (PKK), has certainly raised hopes of a resolution. The optimism, however, masks significant obstacles, not least of which is the fact that Prime Minister Recep Tayyip Erdogan faces structural incentives that could undermine his motivation to pursue peace as strongly and urgently as might be wished. The process could easily breakdown amid recrimination and a return to violence.
Turkey's Justice and Development Party (AKP)-led government and the PKK have been negotiating for several months. The authorities have allowed some members of the pro-Kurdish Peace and Democracy Party (BDP) to visit Ocalan in jail and communicate his position to the rest of the PKK's leadership, and the broad outlines of a deal are slowly emerging. The PKK will gradually pull back its nearly 2,000 armed militants operating in Turkish territory. In the meantime, the AKP and the BDP will start negotiations on a new constitution and revisions to Turkey's legal framework needed to ensure equal treatment for Kurds. The final stage would be the normalization of relations. Both sides will continue to maintain momentum by making small-scale concessions, though significant steps will have to wait until the PKK has fully withdrawn from Turkish territory.
For both sides, a ceasefire offers significant potential benefits and little downside, at least in the near term. The Turkish population is more inclined to consider a peace deal than at any time in the past few decades. Erdogan would reap considerable electoral benefit from resolving the long-standing violence and tension (though there would be little fallout if the deal were to break down). The BDP would gain electorally for improving, even if only marginally, Turkey's legislative framework regarding the Kurdish minority. The PKK leadership would avoid fighting on two fronts simultaneously given developments in northern Syria-while also giving their militants time to recover from the effects of the violent 2012 campaign in south-eastern Turkey. And then there are more intangible factors: The PKK leaders are thought to be tired of life on the run, and Ocalan too is believed to be angling for house arrest rather than jail.
But despite the momentum and the benefits from a ceasefire, peace could founder on one of several issues. While the mood in the country is promising, there is a wide gap between Kurdish demands and what the government can realistically concede ahead of the upcoming elections. There is also a very real danger that some factions in the PKK and the broader Kurdish movement may feel betrayed by the final deal between the government and Ocalan. That disappointment could trigger a resumption of PKK insurgency.
The most immediate challenge, though, will be implementing the PKK's withdrawal without violence, particularly given that a law assuring their safety appears unlikely at this point. The Turkish military as well as nationalist groups will find it very difficult to allow armed PKK militants to simply leave for safety in northern Iraq. And the PKK will not consider giving up their weapons, especially given the situation in Syria.
Finally, there are concerns about the process. Neither the government nor the Kurdish nationalists have any real experience in handling peace talks and the compressed time frame of less than one year to withdraw troops and write a new constitution significantly increases the complexity. Similar developments in other parts of the world took many years to complete and there is no guarantee that either side will be able to manage any potential moments of tension.
Naz Masraff is an analyst with Eurasia Group's Europe practice.
With a surprising and inconclusive election result and no clear route to a government almost two weeks later, Italian politics appear to have returned to what passes for normalcy there. Despite the near-term uncertainty, three things do seem clear. First, new elections are likely to take place between six months and a year from now. Second, voters are fed up with tax-heavy fiscal consolidation and structural reforms. Third, Italians have had their fill of a corrupt and gerontocratic political class, as demonstrated by the success of comedian Beppe Grillo's anti-party, anti-corruption Five Star Movement (M5S).
Despite the movement's negative portrayal in the media, Grillo's M5S could be the breath of fresh air that Italian politics badly needs if -- and it's a big if -- it can make a constructive contribution to dialog in the parliament. It is true that M5S's feud with the domestic media, crude skewering of established politicians, and potentially disastrous economic views have raised concerns from foreign policymakers and market participants. For example, Grillo personally supports a referendum on euro membership and has discussed restructuring the public debt or delaying interest payments. Officially, the Five Star Movement also hopes to roll-back the Biagi law, a liberalizing labor market reform, and renationalize the telephone network, among other economically questionable proposals.
But the movement has also been treated unfairly by international commentators. Comparisons to populist, far-right groups are just wrong. The M5S is not racist, violent, nationalist, or anti-democratic. Moreover, some of its economic proposals, especially where competition policy and reducing the state bureaucracy are concerned, are sensible. And while M5S's newly-elected parliamentarians may be inexperienced, they are also younger, more educated, and include more women than most other parties. These qualities make the movement more representative of modern Italy than many of their opponents.
But in the near-term, Italian politics will be dominated by efforts to form a government. Pier Luigi Bersani, the leader of the "Italy Common Good" coalition, gets the first crack at forming a cabinet thanks to his coalition's majority in the lower house (it failed to secure a senate majority, though). Bersani hopes to persuade the "Grillini" to support an eight point legislative plan, though Grillo has only agreed to evaluate each bill independently. The markets and the Italian public seem to understand that economic reforms are on hold for now, but both are hoping for political reforms.
Should Grillo allow political reform to move forward -- especially to the flawed electoral system -- the public will likely reward the Five Star Movement when Italy returns to the polls. (A new president must first be chosen, while electoral reform and cutting the number of parliamentarians and their salaries, as Bersani has proposed, would take several months.) A more cynical electoral strategy would be to hamstring any attempt at change, perhaps forcing Bersani to turn to Berlusconi and the center-right for a grand coalition. That strategy may allow the Grillini to capitalize on public disgust when new elections are called, but it is unclear how voters will respond if M5S adopts such an intransigent approach.
Whatever M5S does, even greater uncertainty will probably surround the next elections. Inaccurate polling, and perhaps a new voting system, will again make seat counts difficult to predict. And because markets will demand more than just political housekeeping, the stakes are almost certain to be higher. But the election could also provide an opportunity to finally move on from the dysfunctional, bipolar politics of the Second Republic, and that would be no small achievement.
Peter Ceretti is a researcher with Eurasia Group's Europe practice
FABIO MUZZI/AFP/Getty Images
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.
Sean Gallup/Getty Images
Today, The Call presents our top risks for 2013. Click HERE for Eurasia Group's complete report.
1. Emerging markets -- The era of emerging market abundance is
finished. As the United States and Europe slowly regain their economic footing, the
political risk focus will return to the emerging market world, where
differences among the largest players will become more obvious. Slower growth
and rising expectations from larger and more demanding middle classes will
create public pressure on governments, meaning that emerging markets -- including
the increasingly suspect BRICs -- should no longer be treated as an asset class
for outsized growth. Consideration instead should shift toward which
developing country governments have enough political capital to remain on track
to a more advanced stage of development.
2. China vs. information -- China's new leadership faces many challenges in 2013, most importantly the state's growing inability to control the flow of ideas and information across borders and within the country. Until now Beijing has been largely effective in isolating online discourse to focus on discrete issues without culminating in real challenges to the government's decision-making or policy. But every corruption scandal and example of official malfeasance makes the next event more difficult to navigate, and the risk is that a broad-based social movement for change will gain momentum in China in 2013, distracting the government from its domestic and foreign policy priorities and potentially weakening investor confidence in the stability of the mainland market.
3. Arab Summer -- We are far beyond the Arab Spring, and an Arab Winter, where dictators rebound and consolidate power, has not materialized. Instead we are approaching an Arab Summer, whereby the region will witness radicalized movements -- both sectarian and Islamist -- playing a much more important role. As outside powers look to avoid direct involvement in the region's risks, local powers -- Iran, Turkey, Saudi Arabia and others -- will compete for influence and play out their rivalries. At the center of this lies Syria, whose civil war now has implications that extend far beyond the humanitarian. Syria has become a proxy conflict for Shiite and Sunni powers, as well as a magnet for jihadists, increasing the geopolitical risk overall and sparking further insecurity throughout the region, most notably in Iraq, Jordan, and Turkey.
4. United States -- Every silver lining has a dark cloud. While the fiscal cliff was averted, the process by which the deal was reached casts a large shadow over hopes that the election might create a more conducive environment for cooperation, and dysfunctional American politics will weigh on both the U.S. economic recovery and President Obama's legislative agenda. This is not about a politically induced new recession, let alone a major financial crisis. But political uncertainty over corporate taxes and a series of noisy brinkmanship episodes will generate a modest but real drag on growth.
5. JIBs (Japan, Israel, Britain) -- These are the three current global trends that matter most: China is rising, the Middle East is exploding, and Europe is muddling through. Set against a G-zero backdrop, the structural losers of these trends are the JIBs (Japan, Israel and Britain): countries influenced most directly and problematically by changes now underway in the geopolitical order. All three countries are now in a similar position for three reasons: their special relationships with the United States are no longer quite as important; they sit just outside the major geopolitical changes underway, without the means to play a constructive role; and key domestic constraints in all three countries (political, social, historic, and otherwise) make it particularly difficult for them to respond effectively to the challenges posed by a shifting global order.
6. Europe -- There will be no grand implosion, but the muddle-through approach to crisis management carries risks of its own. The eurozone is headed for neither breakup nor resolution, and in 2013 the risks shift from a threat of financial crisis to a loss of momentum in creating the institutional and policy frameworks for a redesigned union. The weak economic outlook and the politics of crisis-fighting will also remain sources of uncertainty. Simultaneously, euro-skepticism is on the rise and resistance to reforms is increasing in the face of protracted austerity and few prospects for an economic turnaround.
7. Asian geopolitics -- In 2013, geopolitical risk will continue growing in East Asia in a new and potentially more dangerous way. Facing increased nationalism in China and Japan, the United States will look to play a larger role, giving oxygen to the hedging strategies of many regional states seeking closer American ties. Territorial disputes over the East China and South China Seas will also create new friction, and at risk overall is East Asia's decades-long distinction as a zone where positive-sum commerce and economics trumps zero-sum geopolitical tension.
8. Iran -- The significant risk in Iran this year is not the one everyone's thinking about. A strike on the country's nuclear program is unlikely, but biting sanctions, other forms of international pressure, and leadership tensions make Iran less predictable and heighten the stakes of an ongoing shadow conflict with Israel and the United States -- one with the potential to rattle markets and put upward pressure on oil prices.
9. India -- India in 2013 will be one of the prime examples of the intrusion of political factors into what had until recently been seen as a long-term economic success story. The country's dysfunctional politics and looming elections feed the risk of an economic shock, and in 2013 the ability of the government to implement robust economic policies will decline even further, perpetuating India's "stalling or falling" outlook.
10. South Africa -- In aggregate growth terms, Africa as a whole looks to be on a trajectory to continue its recent position of positive performance. But in South Africa -- one of the continent's largest and most sophisticated economies -- the outlook is far less rosy. Populism, spearheaded by the ruling ANC party, is on the rise, and it is hard to see any real movement on labor, education, and budgetary reforms. Coming retrenchments in mining will almost certainly spur another bout of labor unrest, which has the potential to spread into other sectors as well. Taken together, all these factors increase the risk of further credit downgrades.
In addition to these, Eurasia Group's red herrings for 2013 include:
The geopolitics of energy -- 2013 isn't the year to get overly concerned about geopolitical risk spiking energy prices. For one thing, most of the Middle East risk in the coming year isn't about energy -- it's about everything else -- and the energy revolution happening in the Western Hemisphere will be a boon for consumers across the globe.
Global protectionism -- The G-20 can afford to agree on protectionism because there's less of a threat here than meets the eye. The trend in fact is toward hints of competitive trade liberalization, especially within the European Union, which is generating a strong internal consensus on the need for a new major transatlantic economic cooperation package.
Radicalism in the developed world -- Many fear the growing gap between rich and poor will instigate class warfare and cause significant instability across the developed world. We think not. For much the same reason that emerging markets are the top risk this year, it's the underlying stability of advanced industrialized democracies that will come through in 2013.
European separatism -- There is no doubt that there are very real separatist pressures building in Catalonia and in Scotland, and national unity remains fragile in Belgium. However -- as much as we all would love to watch Barca field its own team in the World Cup -- there is almost no chance that any of these issues will grow into an actual crisis leading to separation in 2013.
? - North Korea -- Sometimes, you just can't know what's happening, and with North Korea in 2013 that's really the case. In the face of a sudden leadership transition in the world's most totalitarian state -- now run by an untested 28-year-old -- it's almost impossible to assess whether North Korea is becoming more stable. All signs point to the country remaining a perilous bet, but what causes trouble and when? It's hard not to lose sleep over it, but at the same time working harder to assess what exactly is going bump in the night doesn't feel very purposeful. Sorry.
Over the next three weeks, we'll be posting more ideas and information on each of these risks.
SAJJAD HUSSAIN/AFP/Getty Images
By Carsten Nickel
It's a trick not every political leader can pull off: put some 420 billion euro on the European table to protect Europe's weakest economies from default and remain your country's most popular politician. That's what Angela Merkel has managed. Despite having made unpopular concessions to Greece only a few days earlier, delegates of her Christian Democratic Union (CDU) re-elected her as party leader with close to 98 percent support last week. Her public approval ratings remain north of 60 percent, and the trust that German voters have in Merkel's management of the eurozone crisis puts the Chancellor and her party in a strong position ahead of general elections next September.
The reason behind these impressive figures is that Merkel's mix of strong commitment to Europe on the one hand and the push for structural reform in southern Europe on the other exactly reflects the policy preferences of the average German voter. Divert too far from this path to the right, as Merkel's junior coalition partner, the Liberals, attempted in some regional election campaigns last year, and German voters will punish you for your lack of European solidarity. Step too far to the left, like opposition Social Democrats (SPD) have tried with calls for Eurobonds and a debt redemption fund, and voters lose trust in your ability to defend the German taxpayers' interests. In the middle stands Merkel. Her calm, approachable persona and her centrist incrementalism have persuaded German voters that two conflicting goals can be achieved: Save Europe and limit the financial burden on Berlin.
With strategic clarity, Merkel has also drawn the right conclusions from the decline of her former coalition partner, the SPD. Social Democrats still suffer from the disappointment caused by the supply-side reforms introduced under former Chancellor Gerhard Schroeder during the early 2000s. The party's vote share has halved over the last 15 years. In response, Merkel maintains a centrist political position, enabling her to form coalitions with the Liberals, the SPD, or potentially even the Greens. And by offering little opportunity to attack her along the clear-cut lines of left-right politics, Merkel makes sure that traditional SPD voters do not return to the polls anytime soon, denying the party an easy way out of its misery.
Ahead of the 2013 elections, Merkel is therefore unlikely to come under pressure to depart from her current policies. The negative result is that silver-bullet solutions for the eurozone crisis remain unlikely and structural problems such as intra-eurozone imbalances will not be addressed. On the upside, investors in Germany will find it reassuring that the country's high-productivity export model is unlikely to be challenged by calls for demand-side policies. German companies will therefore remain in a strong position to compete for market share in emerging economies across the globe. In Berlin, meanwhile, only one politician wins: Angela Merkel.Carsten Nickel is an analyst in Eurasia Group's Europe practice.
Sean Gallup/Getty Images
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.
1. "Al Qaeda 3.0:
Terrorism's Emergent New Power Bases"
Bruce Riedel, The Daily Beast
In a world where international governance is breaking down, leaders are focused more on domestic than on foreign policy challenges. This trend extends to al Qaeda, an organization transitioning from global to local goals.
2. "India's African ‘Safari'"
Sudha Ramachandran, The Diplomat
We hear a lot about the US and China's conflicting investment approaches in Africa, but there's precious little written on Africa's fourth largest trading partner: India. With trade increasing by a factor of 17 over the last decade, India-Africa relations are becoming much more interesting.
3. "How Crash Cover-Up
Altered China's Succession"
Jonathan Ansfield, New York Times
How will Beijing's leadership manage the challenges that come with an era of more open information? What will the rest of us learn about the Chinese leadership's taste in cars, clothes and once-hidden power politics?
4. "Merkel's mastery of
Michael Fry, The Scotsman
Is Angela Merkel the most talented politician in the world? Her domestic political tactics shed light on her policies with regard to the Eurozone and beyond.
5. "A free-trade agreement
David Ignatius, The Washington Post
Though still on the drawing board, the Trans-Pacific Partnership has far-reaching security and economic implications for North America and the Asia Pacific region. Progress on an Atlantic equivalent seems beyond the horizon. But is an ‘economic NATO' already in the planning stages?
6. "The mother of all
worst-case assumptions about Iran"
Stephen M. Walt, Foreign Policy
Would a nuclear Iran carry "shattering geopolitical significance?" This piece overstates its case at times, but it's a question that demands consideration.
The Weekly Bonus:
"Floating Housing (And
Golf Courses) For Post-Climate-Change Island Paradises"
Co.EXIST blog, Fast Company
In a G-Zero world, don't expect political leaders to tackle climate change. An ineffectual climate summit meeting in Doha this week makes that all the more obvious. If climate change continues unabated, the Maldives will end up underwater. The government knows it, hosting a cabinet meeting on the ocean floor in full scuba gear in 2009, and inquiring about land purchases abroad. But even the most daunting risks come with opportunities, however whimsical they may seem.
By Stephanie Haffner
Since the start of Europe's sovereign debt crisis, tension has risen in the eurozone as a result of the growing economic divide between the group's northern and southern members. The response to the debt crisis was an ugly trade: Northern countries financed southern debts, but in turn imposed harsh austerity and economic reforms. The policies, however, have triggered ongoing protests that could morph into rising resentment from populations in southern EU member states, and extremism.
The belief in Berlin, Helsinki, and other northern European capitals is that austerity will eventually lead to competitiveness, fiscal sustainability, and growth for southern economies as well as the EU as a whole. So far these hopes remain unfulfilled. In fact, continued austerity will spur increasing resentment and a growing divide that could boost the popularity of extremist parties and threaten the European project. This dynamic will be helped along by a looming identity crisis for mainstream political parties in Europe's southern states, where distinctions between the left and right have begun to blur as sovereignty is further undermined and spending cuts drive domestic policies.
Assuming responsibility for southern debt has allowed Europe's northern countries to essentially take control of fiscal policy throughout the EU. This result has eroded the sovereignty of southern European countries, and that process will be further exacerbated by increased policy centralization at the EU level and the move toward fiscal mutualization. As the eurozone's monetary union is strengthened, fiscal instruments (such as Eurobonds/bills) that rely on pooling fiscal risk with greater burden-sharing could end up being exchanged for even more centralized control of economic policy. And new EU legislation, such as the so called two-pack and six-pack, which give national budgetary oversight power to the European Commission, will permanently lock in austerity
Centralized policymaking at the EU level will further exacerbate the political imbalances between the EU's northern and southern members. The northern states' growing role as the policymakers of the EU means that the south will lose the ability to significantly influence EU-level policies. The traditional democratic deficit that exists between the European Parliament and European citizens is thereby transformed into a deficit between southern European citizens and northern European governments, which is arguably a far more critical divide.
But there is a way to avoid such a mess. Economic integration is clearly necessary to resolve the crisis, but politicians are lagging in their efforts to present a long-term vision for Europe's political and economic future as a union. Policymakers should consider shifting their narrative from one that emphasizes oppressive austerity to one that highlights the importance of solidarity and political integration. This goal may require a new treaty to address the lack of political representation and democratic accountability that has come to characterize much of the current response to the crisis. But the failure to address these important issues will not only diminish the voice of southern Europe and its citizens, but could also heighten the risk of a breakdown in the European experiment.
Stephanie Haffner is a researcher with Eurasia Group's Europe practice.
Vladimir Rys/Getty Images
By Naz Masraff
With civil war in Syria, turmoil in Gaza, Arab Spring aftershocks, and the still simmering conflict over Iran's nuclear program competing for headlines, it's easy for outsiders to overlook another of the region's most intractable ethnic conflicts-Turkey's internal battle with Kurdish separatists. This story deserves attention, because it remains the primary security threat inside the region's most politically modern and economically dynamic country.
First, some background. In 2010, Turkey began secret talks with the Kurdistan Workers' Party, a militant group better known by its acronym PKK. But in the run-up to June 2011 elections, Prime Minister Recep Tayyip Erdogan brought them to a halt. Erdogan's Justice and Development Party (AKP) won those elections, securing nearly half the popular vote and a third successive term in power, and the newly emboldened prime minister has since adopted a relentlessly hardline attitude on Kurdish questions with a pledge to use Turkey's military to crush the PKK.
Since the beginning of 2011, several thousand Kurdish nationalists have been arrested on charges of PKK membership. In October, public prosecutors in Ankara launched a judicial investigation into the pro-Kurdish Peace and Democracy Party (BDP).
In July, the PKK launched a new phase in its
28-year insurgency, intensifying attacks on Turkey's security forces and
working to create "no go" zones in designated areas in the mountains
near Turkey's border with Iraq. The stated goal is to intensify pressure on
Turkey's government to introduce greater Kurdish language rights and to cede
many of the powers of the central government to local Kurdish authorities in
southeast Turkey in a process Kurdish nationalists call ‘democratic autonomy.'
The PKK scored territorial gains in August and early September and have held on to some of them, and it's clear that the PKK is now stronger than at any time since the 1990s.
Military activity has slowed since mid-October when the mountain passes along its main infiltration and supply routes became blocked with snow. But the PKK then continued its progress by launching a series of hunger strikes inside Turkish prisons, beginning in September with 63 Kurdish inmates. The number of hunger strikers quickly grew to nearly 700 people, including seven members of parliament. Strikers demanded an end to the ban on the use of Kurdish language in courts and as the primary language used by teachers in schools in the predominantly Kurdish southeast. They also called for respect for Kurds' democratic rights and an end to the isolation of PKK founder Abdullah Ocalan, who has been incarcerated on the prison island of Imrali since 1999. In late October, Kurdish nationalist organizations began staging protest rallies across the country, triggering clashes between demonstrators and police, and fights between ethnic Kurds and Turkish ultranationalists in western Turkey. Turkish media, wary of antagonizing the government, downplayed the growing violence-though a few incidents injured too many people to ignore.
Turkey's government was slow to react, at least publicly, and downplayed the strikes. Speaking in October during a visit to Germany, Erdogan insisted that only one of the hunger strikes was authentic and that others were mainly "for show."
Behind the scenes, however, Turkish officials knew they had a growing problem to contain. The PKK now appears to have won concessions on the right of Kurds to defend themselves in court in their native language-that's expected to be adopted in parliament soon-and a step has been taken to eliminate Ocalan's isolation, in part by granting his family a visit. This brought an appeal from Ocalan to halt the hunger strikes, and on Sunday, they came to an end.
Yet, the risk of violence continues, and the turmoil in Syria has complicated matters further. Syrian forces have withdrawn from Kurdish areas in northern Syria, creating a de facto autonomous Kurdish regime over the past few months, and PKK leaders can exploit this power vacuum. For the moment, Turkish authorities want to avoid direct military involvement in Syria's troubles, but a sustained wave of PKK attacks on Turkey's security forces from inside Syria might still change their minds.
If the longer-term underlying issues fueling Kurdish separatism can be resolved, it is only with a comprehensive political process. Yet, Turkey's government -- like governments around the world -- is unwilling to negotiate with militants while they continue to launch attacks. This is particularly the case as Turks may go to the polls as many as four times in the next three years, including for a referendum on the constitution, as well as for local, presidential, and parliamentary elections. On the eve of these polls, the government is likely to adopt increasingly nationalistic rhetoric, shying away from taking steps to resolve the Kurdish issue through democratic means.
In short, the hunger strikes have ended, and the protests may die down. But there will be no peace in Turkey's southeast until the two sides can compromise their way toward a lasting political settlement.
By Stephen Majors
The global community is focused on the EU's efforts to implement the fiscal union that its currency union now demands, but ambitious eurocrats are quietly pursuing an even more fundamental change for the bloc: a truly common foreign and security policy. This lofty dream remains an unlikely prospect, but the painstaking process of European institution-building in response to the ongoing debt crisis is chipping away at obstacles that may once have been immovable.
Brussels' efforts to implement the Common Foreign and Security Policy (CFSP) and the Common Security and Defense Policy (CSDP) are closely tied to the far more high-profile efforts to achieve fiscal and banking union. The fiscal union that few considered possible just a few short years ago now appears to be the only way to save the euro, though it may takes years to emerge. The relinquishing of sovereignty this will require from member states provides the potential foundation for a collective security policy.
The global political and economic environment is also helping encourage consideration of a common foreign policy. European countries are on the verge of becoming security-takers instead of security-makers. European officials -- perhaps surprised by former Secretary of Defense Robert Gates' candor when he said European states were not pulling their weight in NATO -- concede the facts. In part, the issue is driven by economic stagnation. European countries had started to reduce defense spending even before the debt crisis, which has simply compounded the economic challenge. And the trend is expected to continue. By 2050, according to a projection from HSBC economists, Europe will only have five economies in the top 20, compared to eight today, illustrating the decline in the prominence of individual European countries. Collective security would be a logical way to address those concerns, if (and it's a big if) the political issues can be resolved. The EU could be a force to be reckoned with; it has more than 500 million people (far larger than the U.S., but smaller than China or India).
The evolving geopolitical environment provides another impetus for collective European security. The US is reorienting its security approach with its pivot to Asia in response to China's rise, and Europe feels less secure and less favored by the U.S. The Balkans crisis of the 1990s set in motion the move toward a collective foreign policy and Europe's leaders do not want to again find themselves unable to respond to vital security needs. The debate in Europe now revolves around whether EU member states will rally around the CSDP, or whether NATO will retain its primacy in the continent's security affairs. It is difficult to imagine how NATO could co-exist alongside a strong collective EU security body, should it come to fruition. But as Gates' comments illustrated, NATO is already fraying.
The EU is in the process of centralizing its foreign policy, albeit with a focus on soft power that avoids the thorniest concerns over sovereignty. The EU's External Action Service (the EU equivalent to the US State Department) already maintains delegations in 130 countries. The CFSP currently runs more than 20 missions abroad ranging from an anti-piracy mission in the Horn of Africa (Operation Atalanta) to the training of police forces (EUPOL) in Afghanistan. Catherine Ashton, the EU's high representative for foreign affairs and security policy, has an important role in many international negotiations, from Syria to the nuclear talks with Iran. The EU has also levied sanctions against Iran for its nuclear program, and is considering whether to go further with additional penalties. But many member states maintain their own missions in parallel to the EU, and turf wars abound. And of course, sending European troops into combat under a European flag is many, many years away.
Beyond the external forces that support the logic of the CSDP, internal politics within the EU also present some advantages. Germany, as the continent's economic power, has only been willing to disburse funds in favor of struggling EU economies after those states agree to cede sovereignty on economic issues, which has driven institution-building on the European level. And given its unique history in Europe, Germany itself is willing to cede sovereignty on security issues-in fact, it is only willing to project power abroad in the context of collective EU decision-making. France and the UK, conversely, would be most opposed to foreign policy integration. Notably, though, these two European powers have already begun cooperating with each other on military matters.
A truly unified European security policy is perhaps the grandest political experiment of them all. But it is a measure of Europe's evolution over the last couple of years that what once appeared to be a utopian EU dream now sounds almost feasible.
Stephen Majors is an editor with Eurasia Group. He recently completed the European Union Visitors Program fellowship in Brussels.
Sean Gallup/Getty Images
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 Famke Krumbmüller
The Dutch have long been one of the eurozone's and the EU's most reliable members. Since the introduction of the euro in 2000, the country has easily met EU economic targets for the maximum allowable budget deficit (3 percent of GDP) and national debt (60 percent of GDP), generally turning in better numbers than even Germany. That policy position has been supported by broad consensus among political parties and the general population. But in a timely reminder that the politics of austerity are tough, even for fiscally conservative countries, the Dutch political system is now wracked by some of the same tensions that are roiling politics in the EU's peripheral members. The Netherlands faces important general elections in early September as a consequence of failed budgetary talks. The Socialist Party is polling well with a populist policy platform that resists ongoing fiscal austerity, with possible implications for broader management of the EU's ongoing crisis.
In the early days of the eurozone's predicament, the Dutch were in the forefront of the drive for austerity. In September 2011, the minority coalition government led by Prime Minister Mark Rutte slashed €18 billion from the budget. And when the economy slid into recession in spring 2012, the government was forced to cut another €12.4 billion in spending. But Rutte's coalition made up of the People's Party for Freedom and Democracy (VVD) and the Christian Democratic Appeal (CDA) with parliamentary support from far right Party of Freedom (PVV) collapsed at the end of April when Geert Wilders, the PVV's leader, withdrew its support. He claimed that the budget cuts would hurt growth, purchasing power, and the elderly, a populist tactic designed to attract voters fed up with further austerity. A broad coalition of five parties (including the VVD and the CDA) passed the budget shortly after Wilder's defection, but the minority coalition's collapse echoed the messy politics of austerity that are playing out across the EU's peripheral countries and which provide an opportunity for parties at the extremes of the political spectrum to gain ground.
The next challenge comes with the 12 September elections. So far it looks as though the politics of austerity are favoring the leftist Socialist Party, which is leading in the polls after winning support from Labor Party (PvdA) voters disenchanted with their party's backing of the pro-austerity Rutte government on European issues. The Socialists are running on a platform that rejects the EU-imposed austerity measures and any further transfer of sovereignty. The party argues for policies that favor growth and social agendas. At the other end of the political spectrum, the PVV continues to maintain solid support with its anti-European platform that includes a euro exit. Together these two fringe parties currently have support from about one-third of voters. Both parties (but especially the PVV) have populist tendencies and aim to capitalize on Dutch voters' disenchantment with austerity and any discomfort with financial support for peripheral countries that provides few obvious domestic benefits.
The next Dutch government will continue to be pro-European and support sound public finances, but voter concerns will make it more difficult for it to justify continuing hardship for the sake of the EU. This outcome is likely because the Dutch political system features a number of small centrist parties that will always be needed to build a ruling coalition. That dynamic will likely ameliorate any dramatic shift in policy. As a result, public finances will return to health, but perhaps not on Germany's and the European Commission's preferred time line, and Berlin may lose the support of what has been a close ally in the drive for austerity. Nonetheless, strong supranational supervision will remain a precondition for further financial or monetary policy integration, in part to ensure that Germany and France do not break their own rules. But the next Dutch government will find it difficult to secure domestic support for any further transfer of sovereignty to the EU. The Socialists' increasing popularity will also encourage a debate on the social consequences of the eurozone crisis and the European project in general.
JERRY LAMPEN/AFP/Getty Images
By Naz Masraff
The recent move to breathe new life into Turkey's stalled EU accession process is unlikely to have much effect beyond providing Ankara with a minor domestic and international public relations boost. On 17 May, Turkey's EU minister and chief negotiator Egemen Bagis and European Commissioner for Enlargement Stefan Fule launched what they dubbed a positive agenda for EU-Turkish relations. The agenda introduces new mechanisms for communication, including specific working groups, intended to accelerate Turkey's compliance with the acquis communitaire in eight chapters, including two that are blocked for political reasons. But the efforts are insufficient to counter the underlying structural problems impeding Turkey's now long-stalled EU accession.
Turkish authorities have not opened any new chapters of the EU acquis since 2010; talks on 18 of the 34 chapters cannot move ahead because of political issues and open ones cannot be provisionally closed. An important obstacle continues to be Turkey's failure to move on politically difficult reforms needed to bring the country's laws in line with European standards, especially on the judiciary and fundamental rights. Bagis's statements suggesting that Turkey would be in full compliance with the EU acquis by 2014 are largely political rhetoric with little substance.
Cyprus is a huge stumbling block. U.N. Secretary-General Ban Ki-moon has decided not to call a follow-up international conference on Cyprus because there has been no advance since the January talks on the issue. This makes it impossible for the conflict to be resolved before July, when the Republic of Cyprus (RoC) government assumes the EU presidency. Turkey will freeze its relations with the EU presidency for six months in protest, though contacts with the European Commission and the European Parliament will continue.
The RoC's exploration for hydrocarbons in the eastern Mediterranean has exacerbated its contentious relations with Turkey. Turkey claims some areas included in the RoC's new licensing round for further explorations extend onto Turkey's continental shelf, and that any revenues must be shared with the Turkish Republic of Northern Cyprus (TRNC). While the dispute is not likely to escalate into a military conflict, Turkey may continue its gunboat diplomacy, further intensifying tensions. Turkey is now also considering fallback options including pressing other Muslim states to recognize the TRNC.
The new agenda may not result in major advances on EU accession, but it will give the Turkish government some advantages. Ankara can secure public recognition from the EU and boost its domestic popularity even when minor steps are taken. The effort also has bureaucratic advantages, providing another way for both the Turkish Ministry for EU Affairs and the European Commission's Turkey desk, the largest desk operating under the Directorate-General for Enlargement, to justify their existence.
Naz Masraff is an associate with Eurasia Group's Europe Practice.
By Carsten Nickel
Since the onset of Europe's crisis, Angela Merkel's step-by-step approach to managing reform of the eurozone has attracted much criticism, and her government's resistance to a systemic solution to the crisis has clearly failed to calm markets. For now, no one with real political influence in Berlin is willing to consider any strategic "Plan B" that includes a Greek departure from the eurozone. But when it comes to Greece, Merkel's insistence on "looking no further ahead than the headlights allow us to see" might actually prove to be a blessing.
The risk is rising, but it's still premature to expect an imminent "Grexit" from the eurozone. Call it incrementalism or muddling through, but we might be set for many months of more of the same. It's simply too early to determine yet where Greece, Germany, and the eurozone are headed, in part because Merkel is more flexible and pragmatic than her government's seemingly relentless insistence on front-loaded austerity suggests.
If and when it becomes inevitable, the Germans will offer concessions to keep Greece in the club. As a measure of Merkel's flexibility, consider how many agenda items now under discussion appeared to have been ruled out months ago: Talk of a European growth agenda will launch at the Brussels summit in late May, and the Bundesbank has now hinted that it could accept a German inflation rate slightly higher than the eurozone average as part of a macroeconomic adjustment process. Once Greek elections are behind us, Germany might well offer concessions on the timing of the Greek bail-out program.
Berlin calculates that a combination of eleventh-hour German flexibility and rising Greek fear of the potentially catastrophic consequences of Euro exit will persuade Greek voters to back a government that will accept the central German demand: That European financial help will continue to depend on Greece's willingness to push forward with structural (and painful) reforms.
Think of it as a political trade-off in German politics: To win domestic support for further assistance to southern Europe, Merkel needs assurance from other governments that structural reforms will move forward, assuring German voters that future crises are much less likely. With that reassurance, there is room for Merkel to compromise, even on important details.
Making things easier, Merkel's support within Germany remains strong. Foreign press and the opposition have cast recent local election losses for Merkel's Christian Democrats as a protest against her management of the eurozone crisis. But a hugely popular regional prime minister and the rise of the Pirate Party had much more to do with these results than anything to do with the euro, and members of Merkel's party are still prepared to accept compromise as the outcome of European negotiations. She remains the most popular politician in Germany, and despite public outrage over Mediterranean profligacy, there is still no German majority calling for the Greeks to leave.
None of this can keep Greece in the eurozone forever. Greece's future will be decided by Greeks. But Germans don't believe that an imminent Greek exit is inevitable -- and neither should we.
Carsten Nickel is an analyst in Eurasia Group's Europe practice.
By Antonio Barroso and Mujtaba Rahman
Francois Hollande's May 6 victory in one of France's tightest presidential elections ever will have few implications for the EU's management of the eurozone crisis. Hollande is taking shape as a pragmatist who will follow reason on the European front, as signaled by the candidates he's likely to put in important positions in France's new government.
The president-elect claims he has already selected the new prime minister, who will be revealed on May 15 after Hollande takes office. Socialist Party (PS) leader Martine Aubry and long-time socialist politician Jean-Marc Ayrault are the most likely candidates, although a surprise choice (for example Hollande's campaign director Pierre Moscovici) is not completely out of the running. Aubry's selection -- who the majority of the French left support, according to opinion polls -- would hint at a more leftist course for Hollande's government. Ayrault's nomination, however, would imply policy pragmatism. The former minority leader in the National Assembly would likely be better able to build consensus among the many leftist factions in parliament, especially if the government must adjust policies to match the challenging economic situation.
Michel Sapin, a socialist, is frequently mentioned as the candidate most likely to take the crucial post of finance minister. Sapin, who has already served as finance minister, is a close ally of the president-elect and helped draft Hollande's economic program. Another possible choice is Jerome Cahuzac, a socialist former president of parliament's finance committee who actively supports austerity and deficit reduction. Both men would make a good finance minister, given their experience and their commitment to a balanced budget.
But Hollande's victory will not fundamentally change how the EU is managing the ongoing eurozone crisis, though there will likely be some changes around the margins. Hollande's desire to introduce some focus on growth in the fiscal compact is easy for German Chancellor Angela Merkel to accept and there are already tentative signs that Berlin will support such efforts. Hollande's objective of securing a capital increase for the European Investment Bank (EIB) also is unlikely to prove controversial. But the biggest obstacle to growth -- moving away from regressive agricultural payments toward greater use of structural adjustment funds in the EU budget -- is actually more difficult for France to overcome than it is for Germany. Also, Hollande's pledge to seek a change in the European Central Bank's mandate is a non-starter. Such a change requires all 27 member states to agree, but it will face stiff opposition in Germany, where it is perceived as a French strategy to inflate away debt.
Antonio Barroso and Mujtaba Rahman are analysts in Eurasia Group's Europe practice.
By Carsten Nickel
"It's not for Germany to decide for the whole of Europe," Francois Hollande, the socialist candidate favored to win the presidential run-off, reminded Chancellor Angela Merkel on French TV last week. Gone seem the days of the "Merkozy" era when Merkel decided that austerity was the way forward out of the euro crisis -- and President Nicolas Sarkozy followed suit. With much of Europe caught in recession and political opposition from Paris on the rise, the question is: Is the austerity doctrine coming under pressure in Germany? The answer is: Probably not.
A growth-versus-austerity debate has already kicked off in Germany and is set to further intensify over the next few weeks. The second round of the French elections, Greek parliamentary elections, and elections in the German federal state of Schleswig-Holstein -- all held on May 6 -- will amplify the pressure on Merkel. After Hollande's strong display in the first round of the French presidential elections, the German Social Democratic Party (SPD) congratulated its French counterpart and told Merkel that it would delay the ratification of her prestige project, the European fiscal compact, because it was lacking the growth component demanded by Hollande. The chancellor, notoriously inclined to political U-turns, quickly began proclaiming growth-enhancing policies as the "second pillar" of her eurozone strategy. German commentators saw her encircled by advocates of fiscal expansion.
But the current noise should not be overestimated. Germany's overall preference for fiscal prudence is likely to prevail because of two factors. The first is the political weakness of the opposition, providing Merkel with a strategically comfortable position at the center of German politics. The second is the country's coordinated market economy, which prioritizes supply-side adjustments to limit wage restraint; expansionary policies would abet inflation and wage growth.
Social Democrats might perform well in the upcoming state elections, but the party's program regarding the euro crisis remains shallow, while public support for expansionary policies stays weak. Moreover, voters have not forgotten that it was former chancellor Gerhard Schroeder's SPD government that introduced the supply-side reforms to Germany, which Merkel now wants to prescribe to the rest of Europe. Meanwhile, the rise of the internet activists' Pirate Party diminishes the chances for a coalition of SPD and Greens after the 2013 Bundestag elections. And the chronic weaknesses of Merkel's coalition partner, as well as her own high personal approval ratings, provide her with much political leverage.
Merkel will pragmatically co-opt growth rhetoric over the next few weeks, and the opposition might delay ratification of the fiscal compact, both of which the SPD will sell as a success. But the party will not demand substantial growth-enhancing policies in return for their support of the compact in the Bundestag, and Merkel has already spelled out what her agenda for growth looks like: Enact labor market reforms, increase the pension eligibility age, and liberalize your economies, she told European partners. Not quite the expansionary policies many German commentators saw forthcoming.
Germany's coordinated market economy is behind its recent economic success and its resistance to spend. In key sectors such as the automotive industry, organized workers and employers bargain without political interference. Firms offer generous welfare schemes and job security, receiving highly skilled manual workers and-crucially-wage restraint in return. Germany's answer to rising competition from Asia has been to increase productivity in a coordinated effort. With Germans unwilling to see their export surpluses as a key factor behind the eurozone's woes, their preference for austerity is here to stay.
Carsten Nickel is an analyst with Eurasia Group's Europe practice.
Jesco Denzel/Bundesregierung-Pool via Getty Images
By Antonio Barroso
With the survival of "Merkozy" at stake, German Chancellor Angela Merkel has inserted herself into the French presidential election on behalf of her eurozone partner, President Nicolas Sarkozy. It's not just because a Francois Hollande victory would make finding a new pithy nickname for the German-French duopoly difficult (though it would be a challenge -- "Hollmerk?" "Merkande?") Or because it has become trendy for like-minded political figures to support each other in races across national boundaries within the EU.
Merkel views the preservation of her partnership with Sarkozy as an important element in the timely resolution of the eurozone crisis, despite their rocky start, numerous disagreements, and natural rivalry. The devil that Merkel now knows well, and has spent considerable capital cultivating, is preferable to the devil she doesn't know, and can only speculate about -- a socialist who, while pro-European, has bashed the financial sector, disparaged austerity, and promised to maintain social spending. There are too many uncertainties in a Hollande presidency for Merkel to sit idly by in Berlin as Sarkozy continues to trail significantly in the polls ahead of the April 22 first-round vote.
That's why Merkel has actively stumped for Sarkozy, tying German conservatism to its French counterpart. The alliance between the German and French leaders is not just a personal bond, forged through the crucible of the eurozone crisis. Merkel believes she now has a partner in Sarkozy who shares her beliefs about the currency bloc -- and will push those interests (which also happen to be Germany's interests) in Brussels. After all of the painstaking negotiations and one-on-one meetings, she's not about to start all over again.
Hollande's political party, his campaign statements, and the fragility of the eurozone have many observers worried that a Hollande presidency would put France -- and the eurozone -- into greater danger. Some view Merkel's visible and vocal support of Sarkozy as validation of this viewpoint. But there are a few reasons why a Merkel-Hollande partnership would not be the market-rattling, eurozone-damaging outcome that many predict.
As wary as Hollande might be about austerity, or about the German model, his ability to take the EU in his ideal policy direction is limited. Why? Because the markets are on Merkel's side. Hollande only has so much room to maneuver before the markets punish France with higher borrowing costs, which would in turn threaten the integrity of the eurozone's bailout fund and its continuing efforts to prevent contagion. The pro-European Hollande does not want to preside over a new ugly chapter in the eurozone crisis.
It's also important to distinguish between what is campaign fodder and how Hollande would govern. Yes, Hollande has criticized the fiscal pact that Sarkozy, along with 24 other European leaders, agreed to in order to harmonize budgetary policies in member nations. But when Sarkozy is making his ability to lead France during an economic crisis a central campaign issue, Hollande has to find a way to distinguish himself. Hollande also can't proclaim the virtues of austerity -- and what is inherently a conservative fiscal policy -- as the leader of France's socialist party. Under the pressure of governing one of the eurozone's two major players, Hollande's policies are unlikely to differ drastically from Sarkozy's.
So is Merkel expending too much energy to stump for her favored candidate? Not necessarily. Hollande's socialist leanings, his reluctance to alienate his core voters, and his lack of a personal relationship with Merkel all suggest that decision-making between the two powers, and the eurozone as a whole, would be slower with Hollande as president. These ingredients are also the makings of a difficult personal relationship between the two leaders. And if there is one thing that markets have taught the eurozone, it is that dawdling in decision-making can be nearly as painful as making the wrong decision. The importance of Merkel's ability to pick up the phone, call Paris, and hear a familiar voice on the other end of the line should not be discounted. She doesn't have the luxury of time to cultivate another ally in the Elysee Palace.
Antonio Barroso is an analyst in Eurasia Group's Europe practice.
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Davos 2012 -- jam-packed, exciting. A bargain? Not quite. But did the rewards outweigh the costs for attendees? Given the extraordinary time commitment and expense folks go through to attend, is Davos worthwhile?
In my opinion -- definitely yes. Here's why.
1. Davos gives me the chance to meet with pre-vetted folks in fields I don't know particularly well...but need to. Anyone looking for insight on these subjects would otherwise have to invest too much time to figure out who the true experts are, and how to reach out to them. I know who I really rate in thinking about global politics, and when I have questions or want to bounce an idea off a few people, there's no problem. But what about subjects that aren't my forte? What about food scarcity? Or climate change? Urbanization? Microfinance? Gender inequality? If you're interested in pattern recognition, systems thinking, and getting out of your box, Davos is a virtually unparalleled opportunity. Anyone with a global element to their work can benefit immensely from this type of exposure.
2. Davos is not just about finding experts in fields that aren't your specialty. You're also with top folks in your own field, and the audience is global and experienced. So you need to bring your A-game. Last year, Niall Ferguson, Ken Rogoff and I squared off at dinner in front of 50 CEOs on global rebalancing. This year it was global security, and I spoke alongside Richard Haass, John Chipman and Yan Xuetong. The audience has heard the top voices before, and they're a decidedly skeptical bunch; there's not much scope for misstep. Needless to say, it's an exciting opportunity that Davos provides.
3. If you're in a global field, you can pack six weeks' worth of meetings into five days. Just the breadth of people in attendance from governments, corporations and NGOs across the world -- I'm not somebody who likes to live out of a suitcase and spend my life on an airplane. That means picking and choosing your trips. Davos allows me to consolidate, and skip those extra couple visits to the major financial and industrial capitals and instead spend an extra week on the ground in China, or a frontier market I've been meaning to visit.
Bottom line: this little snowy town is as alluring as the incredible people who make the trek to get out there. It's a real chicken-or-the-egg affair, where people go because...people go.
On to my Davos 2012 awards.
Boris Johnson. On Thursday, the mayor of London gave a fantastic address on behalf of the London 2012 Olympic Games. One of the highlights: Johnson quipped that London's murder rate is one-quarter of New York's. It was perhaps the most well received Davos speech I have ever attended.
Best new theme:
While it is not exactly new, state capitalism seemed to finally catch fire in the Davos debate this year. In light of developed economies' woes and emerging markets' resilience to the financial crisis, state capitalism is receiving a serious look (even though it is by no means a viable alternative to free market capitalism). At Davos, David Cameron addressed state capitalism directly, explaining how Western leaders need to actively combat it and stand up for what he has been calling ‘popular capitalism' in his recent speeches. And it didn't hurt that The Economist topic du jour was state capitalism going into last week too.
I have to admit it -- the Google party really did steal the show. The ‘green' dance floor that measured the watts exerted by those brave enough to dance was a highlight. Every year at Davos, Googlers really seem to make up for lost time spent in the library throughout their youth.
Senator Saxby Chambliss (R-Ga.). Chambliss is completely old school, and he understands the polls and the pols alike -- when I chatted with him, it was plain to see why he's so popular in Georgia. More on our meeting in my previous post.
Thank you, Azeri government. Awfully kind. See my earlier post.
Davos outperformer (country):
Brazil took the cake. They were taking the lead sponsorship for the first time at Davos and nailed it. Between World Cup and Olympics chatter on top of promising fundamentals when it comes to infrastructure build-up and stable governance, the Brazilians were the delegation to beat. Honorable mentions: Indonesia and Turkey. Both delegations had a strong technocratic presence in Davos and focused on attracting investment.
Davos outperformer (company):
McKinsey was the best represented company in Davos -- they are consistently the best attended, and Rik Kirkland had thought leaders streaming into the Seehof Hotel for intelligent conversations on key global issues in droves. It was so busy that there was even a camera set up in...a shower. (Gotta scrub those videos. Or perhaps Rik is moonlighting...)
Davos underperformer (country):
Russia. They did their best to dodge questions and kept the heavy hitters away. If Putin's too busy for debates, he's clearly too busy to attend Davos. Nouriel Roubini and I both used the conference to announce Russia shouldn't be a BRIC -- the response was very positive.
Davos underperformer (person):
Mick Jagger. Lots of folks were star struck, but he looked out of his element.
The best entrance probably belongs to Bill Gates, for its understated quality. He enters softly, softly, and suddenly he's there and his presence speaks for itself. He would probably be the last person in the conference to showboat, despite probably mattering more than anyone else there.
Steve Roach, definitely, as he escaped Davos protestors at an Open Davos event. More on that in an earlier piece of mine.
FABRICE COFFRINI/AFP/Getty Images
On Friday night, I co-keynoted the annual NYSE dinner with my friend, Morgan Stanley economist and Yale lecturer Steve Roach. It was a convivial group of about 40 CEOs, big listed companies, mostly American and European. Even against backdrop of a failing merger with deutsche bourse, the event went very well. Steve arrived, a little late, and quite shaken. He had just participated in an Open Forum event, a program that runs parallel with the WEF at Davos. He knew there might be trouble when he saw all the police outside. There were about 150 anarchists demonstrating, organized around the high school auditorium (it seats 1,000), who immediately started chanting and yelling -- and rushed the stage towards the end of the event. Security hustled him out the back, downstairs, through the kitchen, and into the dark…where he sped off. You have to give Steve credit -- he rallied pretty well within his friendlier confines of the Hotel Belvedere. But this was a Davos first.
Later that night, I went to the Google party, where all eyes were on the dance floor. Google had installed a "green dance floor" that showed how many watts were being created by the thumping Davos troops. Two points on that. 1. It's not entirely clear to me that this was a group you want to be boogieing down in front of, and 2. That has to be the most farcical pseudo green display since Vice President Gore offset the emissions from his 20-room Nashville mansion. It was a fun party though.
The party also let me spend some time with Circle of Blue co-founder and director J. Carl Ganter, who leads an organization filled with some of the smartest folks on global water scarcity/impact that you'll find. I always try to link up with them for a few moments to pick their brain on a topic that stands to take on increasing importance in the years to come. That's the great thing about Davos: It's a reasonably good bet that pretty much anybody you bump into on an abstruse topic is one of the best in their field. There was a sizable Circle of Blue cohort in attendance, wearing little silver/blue pins on their blazers (the only ones I consistently noticed doing that other than the Japanese delegation), and they always seemed to be moving together in a coordinated clump. At the Google party, though, Ganter's shirt was completely soaked. Not exactly the display I expected from the water scarcity folk.
Saturday morning, I had a host of CEO meetings lined up back-to-back, with a table reserved at the "forum lounge" for the occasion. It was a week of productivity in 2 1/2 hours -- that's the single biggest draw that Davos consistently provides and the most important reason people come. The 30 minute meeting is the standard at Davos; an hour tends to be looked at with suspicion. But for the folks with too many handlers, that can mean 15+ meetings in a day, which seems pretty inhumane.
Saturday night was the big banquet. But my annual tradition is to grab a small group of friends that look at global politics…and head up the funicular to a cozy little restaurant overlooking the village. Rule #1: Casual dress. And rule #2: If you mention a book you've written or are writing, you do a shot. I love that rule. Many fell victim before we headed back down for the after party once the banquet was winding down. And in a strange twist of fate, getting stuck on the funicular had all the elements of a horror movie -- but without the grisly finish. It was a welcome opportunity to share a last quiet conversation before the bustle of the after party and a long trip home. Davos -- exhausting yet exhilarating as always.
Last night, I had dinner with Muhtar Kent, CEO of Coca-Cola, and other guests -- a small, and refreshingly international crowd. I ended up sitting next to Saxby Chambliss, Republican Senator from Georgia and Vice Chair of the Senate Select Committee on Intelligence. His insight came without the dose of partisanship that I might have expected -- he didn't ask my inclination politically and didn't seem like it particularly mattered to him. He's been coming for over a decade to Davos…and consistently sees much less divide between Democrats and Republicans compared to the prevailing U.S. versus international view on the subject. It's a really constructive approach to the summit that can be extrapolated beyond domestic U.S. politics. Sound analysis and forward-looking consensus always beat the preconceived notions that everyone brings to the table.
far as the broader conversation went, it's important to note how spirited discussions
on Iran were. It certainly seems like the
consensus was the Middle East is the big risk coming out of the summit. It is a very precarious issue, to be sure,
and deserves attention. But a confluence
of factors gives it even more of the spotlight, specifically here in
Davos. The Israelis talk a great game,
and stay on message -- Iranian nuclear progress has cycled into the news
consistently in years past, and they help feed it. Yet coverage rarely spills over into 'boy who
cried wolf' territory that could be used to discredit the threat the next time
it flares up. On the flip side, few from
the Arab world want to talk, and those who do aren't particularly
representative. And on to other actors: among Europeans, there's a lot of
handwringing. China doesn't have much of
a dog in the fight (so sell oil). But at least they generally admit it --
whereas the Russians just bluster.
In other interesting news: Cameron denounced state capitalism at his plenary. State capitalism wasn't really on the radar last year, but it has gained significant traction. Active questions for western powers are sticking: Can it --and should it --be combatted? And how? One of the big dangers of 'combatting' state capitalism is the possibility of slipping into an attempt to beat the Chinese at their own game, promoting protectionism and subsidies in what could trigger damaging trade tensions and backfire for all players involved. Reforming industrial policy, however, is smart. The United States has an impressive State Department, but its Commerce Department? Not so much. (Interestingly, Japan is just the opposite. The Ministry of Foreign Affairs is weak, but METI is strong). This distinction is not an especially acute problem, that is, until the U.S. economic statecraft policy takes root and the focus shifts to China. Then this weakness is a structural one.
And tidbits from people-watching and resultant observations:
-There is a big Japanese delegation -- they all wear their Davos Japan pins. They hang together, like their new government. I sense a bit of skepticism on the recent American pivot towards Asia. Is it lasting? What does it mean in reality? It's an interesting issue that I'd like to look into more.
-Americans here see through Newt's surge. Last night at dinner? Perhaps 1/20 Americans thought Newt could snag the nomination -- and their hearts weren't in it. But that didn't stop Martin Wolf at the FT from betting me a dinner that Gingrich gets the GOP nod. I would have done a 2 for 1 deal on this one and still loved my odds.
-It's been interesting to see the effect of social media on Davos itself, in real time, as a traditionally insular summit gets recorded through the lens of countless thought leaders, CEOs, and government officials who share events in real time. And I'm not just talking about the amusing results on twitter. It is a decidedly more open forum than it has been historically, as people recognize there is more buzz, and more diverse outlets for information -- and a broader global community receiving it.
When I got to my Davos hotel room, I was greeted by two gifts. One was to be expected: greetings from the CEO of Nestle along with boxed chocolates. Thoroughly Swiss and thoroughly appreciated.
The second? The most politically controversial gift I have ever received.
The Heydar Aliyev Foundation, run by Azerbaijan's First Lady Mehriban Aliyeva, supplied guests with a CD set, dubbed the Voices of Garabagh. It wasn't until I opened up the package and read on that I saw what it was driving at. It was a statement regarding the Garabagh region between Azerbaijan and Armenia, delivered from a starkly one-sided point of view:
"Unfortunately the conflict ignited as a result of unfair territorial claims brought against Azerbaijan. The occupation by Armenian invaders of Garabagh… [has] turned the bright representatives of the Mugham art into internally displaced people… grief, sorrow, and melancholy is being felt today in their performance."
The package was giftwrapped in cellophane, so it was sure to be missed by any personnel intent on keeping such subjective perspective out of the hotel rooms. You have to hand it to this Azeri organization for so craftily injecting their thoughts into the summit. The takeaway: Davos truly is the biggest annual global political event -- and you can't underestimate how far actors will go to get their message heard on the global stage.
There are, of course, more technological and readily available avenues for communication that are boosting the reach and immediacy of messages around the world. This is a theme I'll continue to discuss in conjunction with global democratic trends.
Mugham melancholia notwithstanding, I have yet to make time for the CD itself -- Davos has done its best to keep me busy. And I'll do my best to keep you posted.
PHILIPPE WOJAZER/AFP/Getty Images
Last night, I had the privilege of moderating a World Economic Forum dinner panel entitled, "The Future of Democracy," asking the following broad question that left ample room for debate: "How are established and nascent democracies being reformed and shaped to meet the challenges of the 21st century?"
The topic and a great group of panelists -- including Professor Timothy Garton Ash (U.K.), Archbishop Thabo Cecil Makgoba (South Africa), Kenneth Roth (U.S.), Amira Yahyaoui (Tunisia), and Jean-Francois Copé (France) -- made it easy for me to facilitate a spirited discussion. It largely revolved around one important theme: determining to what extent anti-democratic tendencies are on the rise globally.
Europe was an area of particular interest, where this threat broke down into two main categories: the disintegration of democratic institutions under the watch of Viktor Orban in Hungary, and a more general anti-immigration far right populism throughout Europe. There was general consensus that the threats to democracy don't extend as far as consolidated democracies like France, but with austerity in the equation for the foreseeable future, the periphery is poised to see this threat grow. An interesting debate arose between the Economist senior editor, who didn't see any of this as significantly anti-democratic, and Timothy Garton Ash, who certainly did.
It's interesting to examine this in countries that are bastions of democratic values and juxtapose it with tendencies in authoritarian states. Take the perceived trend in the other direction in Russia, for example, as we see the middle class publicly speak out and air its grievances.
Davos generally has a Western bent, with an underlying mentality that its customs and ideals will win out. Even with this in mind, there was a lot of talk about avoiding hypocrisy and the importance for Europe and the United States to get their own houses in order democratically before they champion these values abroad. This criticism was especially pointed with regard to the U.S., as people highlighted issues of wealth disparity and corporate influence on politics as areas where democracy seems to be eroding.
There was not as much on the role of technology as I would have liked, nor on the treatment of populations as consumers rather than citizens. But I tried to incorporate these trends into a broader question that I asked the entire audience. Given the following three trends, I asked, is the global environment becoming more supportive of democracy?
1. Exponential technology boosting communication avenues and the greater immediacy and availability of information
2. Volatility and the economic disparity of wealth
3. Challenges to an outmoded western model of international governance
I didn't take a formal poll, but responses came back roughly as follows:
Where do I stand? I'm mixed, perhaps with a toe in the "less favorable" camp.
The first day at Davos took its toll on me. A civilized 8 a.m. start, but then it was full tilt until 10 p.m., bouncing from one event to another. And I turned in early, which won't be an option from here on out. After all, the can't-miss evening events come tonight and tomorrow.
We've talked about the need for new models of global governance as we explore this transition period at a forward-looking Davos summit. Let's delve deeper and unpack the trend toward regionalism that we're already seeing, as highlighted in the WEF's Global Agenda Council report.
As I've discussed, old institutions are increasingly ineffectual when it comes to supplying global leadership. We have institutions that are relics from the post-WWII era -- including the IMF and the U.N. -- that haven't kept up with the evolving threats they are tasked with addressing. More recently, G20 collaboration among world leaders proved fleeting, limited to financial crisis response.
At the same time that institutions are waning, a global power vacuum is undermining the ability for any nation or durable alliance of nations to set the international agenda on their terms. Diminishing international coordination of all kinds comes precisely when the need for it is at a premium, with more challenges that transcend borders than ever before: climate change, cyber-threats, and the proliferation of nuclear weapons, to name a few.
So how do these global trends tie into a rise of regionalism?
We're witnessing a sweeping return to geography as a primary organizing principle for international politics. A nation's regional placement will increasingly determine its friends and enemies, trading partners, and policy objectives. Countries are already gelling in new ways on a regional level -- or at least attempting to -- as they fill the void left by global institutions with more granular coordination within limited spheres of influence. This will extend beyond nations to institutions, as regional bodies pick up some of the slack from their obsolete global counterparts. They will be organized in their region's self-image, promoting and reflecting narrower interests that contribute to the ascendancy of neighborhood governance.
But this isn't just sliced and diced global governance in keeping with the old model. We won't merely see localized globalization, where the free flow of information, goods, and people plays out regionally instead of globally. More importantly, we'll see how the degree of cohesion in each region -- and what exactly these nations cohere around -- will differ around the world.
Some groupings are more formalized -- the European Union is the most formal and mature integration of states. There's significant institutional capacity at a regional level. Others will be more informally arranged, such as Eurasia, where sheer power dynamics drive cohesion. This is also a more coercive arrangement, where Russia acts as a local hegemon that imposes integration on unwitting neighbors that may or may not benefit but don't always have the capacity to hedge against it.
Likewise, the rallying points that produce coordination of all stripes -- formal or informal, voluntary or coercive -- will be different all over. Every region will have a unique mix of security, energy, economic, political, cultural, and religious concerns that inform the process. We see the Middle East operating largely along sectarian lines, with the Arab League and GCC serving as regional forums and Sunni-Shia conflicts informing regional politics. The EU coheres more along economic and political lines. Asia splits between two opposing trends: economic integration with China, and political/security integration between the United States and China's neighbors as they look to offset it. Eurasian states integrate with energy and security at the heart of it.
The rise of regionalism isn't a good development for the broader challenges that global institutions can't handle in the first place. After all, even the most integrated region cannot address climate change without a broader coalition of support. Bottom line: regional governance beats none at all. But it will leave a mess of important problems unsolved.
Ian Bremmer is president of Eurasia Group and author of End of the Free Market: Who Wins the War Between States and Corporations?
As this summit is shaping up as a debate about the future rather than a reaction to crises of the past decade, there is a fundamental area of tension for Davos. For more than 40 years, the World Economic Forum has reflected a world order dominated by elites of the developed world, championing a system of globalization -- a system that has been driven and informed by their values and priorities and their economic and political frameworks.
That global system no longer functions. It has been crumbling slowly, and the events of 9/11 and the financial crisis distracted us from this overarching trend, decades in the making. So at Davos, the world's former architects will do their best to repair an old car and add a new paint job: they will seek models that they hope will still allow their values, priorities, and institutions to hold sway. But in a world with so many important global players with such diverse values and systems, the world will need new models altogether. If and when they come, in order to reflect a very different balance of power, they will have to be a significant departure from the system of today.
This is an era of growing pains (hello, #GZero) where the old system doesn't work, but those in a position of authority have a stake in dragging their feet. To the extent that reality is resisted, new models are likely to be more haphazard, less effective, and take longer to emerge. It's been extremely interesting to watch this debate play out already at Davos this year. I'm going to do my best to keep it at the forefront of discussion.
So what can we expect? We'll see folks at Davos who are looking for a new way of reaching the same goals -- namely, globalization, open markets, and democracy. But the retention of the same goals will prove an obstacle in and of itself. The real question is going to be what values -- and ultimately which of these fundamental pillars -- is the developed world prepared to compromise on, or even sacrifice, to gain sufficient global cooperation. Some of this is about cash, on issues from climate change (the clash over footing the bill between developed and developing countries) to competitiveness in the eurozone (as the core and periphery struggle over the nature of moves toward fiscal union). But mostly, the balance of power is about the powerbrokers themselves: determining who makes the rules, who sets the agenda, and who prioritizes.
So as this overarching trend plays out, what does it spell for the foreseeable future? Global governance will continue to dissolve -- and nations and institutions will pick up some of the slack on a regional level. More on the rise of regionalism to come. Stay tuned...
Ian Bremmer is president of Eurasia Group and author of End of the Free Market: Who Wins the War Between States and Corporations?
FABRICE COFFRINI/AFP/Getty Images
I'm headed to Davos tomorrow for the annual meeting of the World Economic Forum, where the discussion is sure to be provocative -- and a bit more forward-looking than in recent years. Since the financial crisis first shook the global economy in 2008, these summits have focused mainly on the meltdown's market impact and its implications for policymakers. As aftershocks ripple across the eurozone, its troubles will remain a high priority topic. There just isn't much new to say about them -- though there will be much speculation on how short-term solutions play out. The forecast is for more muddle-through as Europe's leaders take halting, painful steps toward austerity and closer fiscal union.
But on a more macro level, we'll see plenty of willingness here to change the tune. I wouldn't quite call this the first recovery summit, but we're seeing signs of life in the U.S. economy, solid growth numbers in China, and we've put a cap on the security-driven 9/11 era with the killing of bin Laden, the crippling of al Qaeda, the end of the Iraq War, and a scheduled troop drawdown from Afghanistan.
So if global politics are no longer consumed with responses to 9/11 on the security side and the financial crisis on the economic front, this year's gathering will have room to address broader drivers of international governance and the global balance of power in years to come. Thus the Davos theme: "The Great Transformation: Shaping New Models." I look forward to getting plenty of perspective from my work as moderator for several upcoming discussion panels and to unpacking this idea piece by piece in posts to come.
To kick off, let's unveil the themes sure to be most hotly debated. The growing gap between rich and poor will play a huge role. The issue already stands to provide the U.S. 2012 elections with both text and subtext, and an Occupy Davos movement will soon echo through the summit press coverage. How this divide compares to other sources of global tension -- sectarian divides, nationalistic ones, and the demographics of age and immigration -- will make for charged debate. The future of democracy versus its various alternatives will also take center stage, along with juxtaposition of the relative merits of free market and state capitalist economic models. A discussion of the Arab Spring's impact on the state of democracy -- or perhaps just the stability of states in general -- is sure to surface.
And, yes, Europe's travails will cling to the top of the charts, though the eurozone itself will survive 2012 in one piece. I strongly suspect we'll see positive signs from the meetings here, probably in the form of some announcement of (incremental) support for the periphery and a modest upswing in optimism that the Greeks make it through their next funding deadline on March 20. We can expect a lot more market volatility. We're not headed for a cure, but nor are we headed over a cliff. That alone will give us plenty to discuss.
Then we'll leave Davos as we arrived -- with a new set of urgent questions that defy simple answers.
BTW, I can't forget to thank Newt Gingrich for stirring the political pot with that win in South Carolina. I fully expect shrewd questions about this from befuddled foreign friends. I only hope I can provide some semi-satisfying answers.
Ian Bremmer is president of Eurasia Group and author of End of the Free Market: Who Wins the War Between States and Corporations?
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Today, we turn to risk #3 in our series of posts on Eurasia Group's Top Risks for 2012 and answer the most common questions we've gotten about it.
Here's a summary:
Eurozone- The Muddle is the Risk. In Europe, it's not the breakup of the eurozone we need to fear in 2012 but a reactive, incremental approach to crisis management that will fail to satisfy investors and could push events beyond the control of political officials. The uncertainty and volatility we saw in 2011 has only just begun.
Q- Why can't European leaders solve this problem? Isn't it simply a question of collective political will?
A- There are many reasons why a grand bargain-style comprehensive fix is not going to happen. First, there is no common understanding of why this crisis is happening. Some say that the so-called peripheral countries -- Greece, Ireland, Portugal and Spain -- have failed to live within their means and now need Europe's stronger economies to bail them out. Others say that the divide between debtor and creditor nations has gotten too wide, and that countries like Germany, which has the second largest trade surplus in the world after China, are part of the problem. Still others say that the eurozone was doomed from the beginning by a governance system that allows for a common monetary policy but separate fiscal policies for each of its 17 members.
And it's in the interests of these players to disagree about the nature of the problem, because no one wants the lion's share of responsibility for solving it. Peripherals don't want core countries telling them how much to tax and spend. Core countries don't want to have to bail out less competitive economies. The European Central Bank (ECB) doesn't want to promise to backstop these problems for fear that it is mixing fiscal and monetary policy functions, and that any help it provides will allow governments to delay or avoid much needed structural reforms.
This is why the various leaders will do just enough this year to keep things from completely falling apart, but not much more. Peripheral countries will swallow the medicine of austerity, but they will continue to demand that sacrifice be shared. German Chancellor Angela Merkel's government will do enough to keep Europe intact, but not so much that her party's coalition partners and German taxpayers believe she has put Germany on the hook to bail out spendthrift countries whenever they get in trouble. The ECB will claim that its mandate does not include a guarantee against eurozone failure while working behind the scenes to help struggling governments stay afloat.
Finally, this is a complex problem, one that requires systemic changes to the eurozone itself. These changes will have to be negotiated and will take considerable time to implement. Much more than a few months.
Q- Then why are you confident that the eurozone won't simply collapse? If long-term confidence isn't restored, isn't it possible that markets will sink some eurozone members and break up the whole game?
A- That's a risk, but only a small one for 2012. No European government wants to see the euro go away. The single currency has allowed Germany to run up those large surpluses without the currency pressures they would face without it. The Greeks know that if the country leaves the euro, the value of its new currency would fall quickly -- while any debts it agreed to pay would still be denominated in euros. Default would wipe away some of the debt, but Greece can't walk away from all of its sovereign and corporate obligations. More than 70 percent of Greeks tell pollsters that they support their country's continued membership in the eurozone. And let's not forget that countries across Europe have invested tremendous hope and pride in the larger European idea. That's a hard thing to measure, but it's a crucial factor in Europe's cohesion.
Q- What's so dangerous about more "muddle through?"
A- There is going to be more market volatility in Europe this year,
and growth across the eurozone will be painfully slow. Recession appears likely. Slower
growth will make problems tougher to resolve, because all of the key
negotiators will face greater pressure at home to drive a hard bargain with
other governments and institutions. That's true for the core countries and the
peripherals, particularly on issues that require ratification by domestic
parliaments or public support expressed in a referendum. Adoption of the
so-called European Stability Mechanism,
essentially a crisis fund for governments in trouble, and establishment of a
more tightly coordinated area-wide fiscal policy are the most obvious examples.
The broader risk is that half-measures will allow the eurozone to stumble along without its leaders ever really tackling the underlying problems. The peripheral countries need to change their behavior. Getting Greece back on its feet and restoring confidence in the balance sheets of larger countries is also crucial and will demand more than the incremental solutions currently in play-especially if its debt stock is to be made sustainable. But market confidence in the eurozone's long-term stability can't be fully restored without fundamental change to the design of the entire system.
Next up, the U.S. risk that no one is talking about. Yet.
Antoine Antoniol/Getty Images
Today, The Call presents our top risks for 2012. Click HERE for Eurasia Group's complete report.
1. The End of the 9/11 Era -- It was a truism of globalization: economics drives markets, and national security drives geopolitics. No longer. Following the 2008 financial crisis, the killing of Osama bin Laden, the withdrawal of U.S. troops from Iraq, and an end date for the war in Afghanistan, politics and economics will overlap almost entirely in 2012. Political officials around the world will worry mainly over economic risks -- the eurozone crisis, the strength of U.S. recovery, and China's evolving role in the global economy in 2012. Market players, in turn, are anxious mainly about political decisions, especially those that will be made in Europe, America, and China this year, as shortsighted leadership from virtually all the major geopolitical players generates policy stalemate and uncertainty.
2. G-Zero and the Middle East -- The inability/unwillingness of major powers to bolster the region's balance of force will generate greater turbulence across North Africa and the Middle East as unresolved religious, sectarian, and ethnic tensions threaten more unrest. The lack of a viable regional security framework, continuing protests, autocracies at risk, and enormous challenges facing newly democratic regimes will add to the potential turmoil. As this dynamic plays out in Syria, Egypt, Iraq, Libya, Yemen and Bahrain, regional heavyweights -- Saudi Arabia, Iran, and Turkey -- will generate friction as they vie for proxy influence.
3. Eurozone: the rollercoaster ride rolls on -- In Europe, it's not the breakup of the Eurozone we need to fear in 2012 but the "reactive incrementalism" that could spin beyond the control of political officials. The uncertainty and volatility we saw in 2011 has only just begun.
4. United States: right after elections -- Once the votes are counted in November, lawmakers will take up the $5 trillion worth of tax and savings decisions that must be taken in the final nine weeks of the year. Investors face uncertainty about their taxes and government contracts as well as about the broader impact of lawmakers' choices on economic growth.
5. North Korea: implosion or explosion -- The world's most opaque nuclear-armed state enters a year of uncertainty as the battle for power and influence within the regime gathers force.
6 - Pakistan: turmoil, spillover -- The end of the 9/11 era threatens neglect of other hotspots, and none is more combustible than Pakistan, a terrorism-plagued, nuclear-armed power burdened with an unpopular civilian government, a meddlesome military, politically motivated judges and an increasingly dangerous security environment. The expected withdrawal of thousands of U.S. troops from Afghanistan this year will fuel regional competition for new influence.
7. China: trouble in the neighborhood -- The Obama administration's recent emphasis on Asia will embolden China's neighbors to take more assertive positions with Beijing. Rising nationalism in China, its ongoing political transition, and the leadership's unwillingness -- perhaps inability -- to resolve internal debates about the country's role in the world suggest Beijing is especially likely to meet provocation with provocation in months to come with both naval and economic muscle.
8. Egypt: a transition in trouble -- Egypt faces the risk of political disintegration this year as anger builds between military and civilian political forces, both Islamist and secular. Egypt's base-line stability, its economic recovery, and its broader regional influence will suffer.
9. South Africa: populism ascendant -- The struggle for leadership of the ruling African National Congress will slow the pace of both policy and economic growth at a time when the eurozone crisis already weighs heavily on South Africa's trade and currency.
10. Venezuela: a no-win election -- The country's big political story this year is October's presidential election, which incumbent Hugo Chavez, if healthy enough for a vigorous campaign, is likely to narrowly win. But the outlook for economic and political stability is bad no matter the election result. Should Chavez die or abandon the race, the deep fissures between the Chavista movement and the opposition could stoke violence.
In addition, Eurasia Group identifies four red herrings, the big stories we don't believe will happen in 2012.
Fallout from the 2012 political transitions -- In 2012, we'll see political transitions in the U.S., China, Russia, and France, countries that together represent nearly half of global GDP and four-fifths of the UN Security Council. But there's surprisingly little at stake in the outcomes for geopolitics and the global economy.
This is probably the single most overrated risk of 2012. The political will to
maintain the eurozone remains strong among all the major political parties in
the core Eurozone states, almost across the board in the European periphery
and, just as importantly, among eurocrats in the ever-growing European
bureaucracy. And there's no effective political mechanism for a Eurozone
China's hard landing -- There are signs of overheated growth in China, but the state has the tools and resources to manage short-term trouble, and it will pull out every stop to prevent a serious slowdown, especially during a major political transition.
Mayan apocalypse -- Just isn't happening. And if it does, well, sorry.
Over the next three weeks, we'll be posting more ideas and information on each of these risks.
By David F. Gordon
Efforts to resolve the European debt crisis are dominating the G-20 summit, with European leaders scheduling emergency meetings late into the night in a desperate attempt to prevent the situation from worsening. Despite last week's announcement that there was a plan to address the crisis, however, Europe's "muddle through" approach is likely to endure. Moves toward a true fiscal union will be elusive, leaving Europe with several more years of poor economic performance and an increasingly inward-oriented focus. Indeed, in the next few years, Europe is poised to become a less capable and less willing partner of the U.S, and reduced U.S-Europe coordination will hasten the power shift from the West to emerging markets.
Europe's crisis has thrust the decades-long process of regional integration into reverse: The crisis will forge closer ties among eurozone countries, but at the expense of broad European unity. The key element of European integration will no longer be the 27 members of the EU, but the 17-or fewer-countries of the European Monetary Union (EMU). And because EMU countries tend to follow less liberal investment, trade, and labor policies than EU members outside the eurozone, this shift means that Europe could begin to close its doors, with regional trade increasingly limited to the eurozone. The U.S and the EU have the largest bilateral trade relationship in the world; a downsizing of that relationship would have ripple effects across the still-recovering U.S. economy.
Likewise, the push for austerity will squeeze European military budgets and reduce European leaders' inclination to engage militarily abroad. Military interoperability between the U.S. and its European allies will wane, and NATO's New Strategic Concept, adopted with much fanfare less than a year ago, will fall to the wayside. This year's intervention in Libya, in which the U.S. ostensibly maintained a supporting rather than leading role, will therefore prove to be the exception. (Even that operation underscored Europe's decreasing ability to project force, as NATO equipment and technology shortages necessitated direct U.S. involvement in military action.)
Strategically, Europe's inward orientation will stymie transatlantic cooperation vis-à-vis China and other emerging powers. Nowhere is this better illustrated than in the speculation about a Chinese rescue of the eurozone: though nothing is likely this week, China may eventually offer limited assistance, either bilaterally or through a multilateral group centered on the BRICs or the G-20, and either approach would strengthen Beijing's hand. A bilateral deal would include concessions to Beijing, such as the IMF revising its voting structure to give large, emerging markets more clout or Europe granting China market economy status. And a multilateral approach would allow Beijing to partner with countries that share its desire to alter the international economic order. These alliances would pay dividends for Beijing in the future, as China and its counterparts bargain for more representation in international economic institutions. But for the U.S., such an outcome would challenge its efforts to incorporate developing economies into the political, economic, and security architecture that has underpinned the international system since World War II. And failure to do so risks friction and even upheaval as the world shifts from a unipolar to a new global order -- one in which the U.S. is only first among equals.
David F. Gordon is Eurasia Group's head of research and director of global macro analysis. This post was adapted from his recent testimony before the Senate Foreign Relations Committee.
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The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.